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Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
Answers To End Of Chapter Learning Aids
Marketing Applications
1 You and your two roommates are starting a pet grooming service to help put
yourselves through college. There are two other well-established pet services in your
area. Should you set your price higher or lower than that of the competition? Justify
your answer.
Students could consider two key factors: value provided and perceptions of quality.
2 One roommate believes the most important objective in setting prices for the new pet
grooming business is to generate a large profit while keeping an eye on your
competitors’ prices; the other roommate believes it is important to maximize sales
and set prices according to what your customers expect to pay. Who is right and
why?
This question focuses on pricing strategies with particular objectives. For the
pet-grooming business, students must determine whether a profit-oriented or a
sales-oriented strategy is more appropriate. To make this determination, students need to
decide which orientation allows them to meet their overall objective of helping put
themselves through college.
3 Assume you have decided to buy an advertisement in the local newspaper to
publicize your new pet grooming service. The cost of the ad is $1,000. You have
© 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 1
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
decided to charge $40 for a dog grooming, and your variable cost are $20 for each
dog. How many dogs do you have to groom to break even on the cost of the ad?
What is your break-even point if you charge $60 per dog?
This exercise allows students to gain experience performing break-even analyses, which
require three key pieces of information: (1) the price of the service, (2) the fixed costs,
and (3) the variable costs. In this scenario, the price is what the groomers charge, the
fixed cost is the cost of the newspaper advertisement, and the variable cost is the variable
cost per grooming each dog.
4 The local newspaper ad isn’t helping much; so you decide to post your services on
an auction site, where customers can bid for your services. What should the starting
price of the auction be?
5 Is there a difference between a $5,900 Loro Piana vicuña sweater and a $150
cashmere sweater from L.L. Bean? Have you ever purchased a higher-priced product
or service because you thought the quality was better than that of a similar,
lower-priced product or service? What was the product or service? Do you believe
you made a rational choice?
There might be a difference between the $5900 sweater and the $150 sweater; the
manufacturers may use different materials, production methods, and distribution
methods.
6 A soft drink manufacturer opened a new manufacturing plant in the Mid-East. The
total fixed costs are $100 million. It plans to sell soft drinks for $6.00 for a package
© 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 2
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
of 10 12-ounce cans to retailers. Its variable costs for the ingredients are $4.00 per
package. Calculate the break-even volume. What would happen to the break-even
point if the fixed costs decreased to $50 million, or the variable costs decreased to $3
due to declines in commodity costs? What would the break-even be if the firm
wanted to make $20 million?
The break even volume can be calculated by dividing $100 million (the fixed costs) by the
contribution per unit ($6.00 - $4.00). This would give the soft drink manufacturer a
break-even volume of 50 million units.
7 On your weekly grocery shopping trip, you notice that the price of spaghetti has
gone up 50 cents a pound. How will this price increase affect the demand for
spaghetti sauce, rice, and Parmesan cheese? Explain your answer in terms of the
price elasticity of demand.
8 How do pricing strategies vary across markets that are characterized by
monopolistic, oligopolistic, monopolistic competition, and pure competition?
Students must consider the difference between market types and the effect those
differences have on pricing strategies.
© 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
9 Suppose you are in the market for a new Sharp LCD television. You see one
advertised at a locally owned store for $300 less than it costs at HHGregg. The
salesperson at the local store tells you that the television came from another retailer
in the next state that had too many units of that model. Explain who benefits and
who is harmed from such a gray market transaction: you, Sharp, HHGregg, the local
store?
10 Has the Internet helped lower the price of some types of merchandise? Justify your
answer.
11 Imagine that a pharmaceutical company has just developed a cure to a major fatal
disease. Because the firm is the only one even close to a cure for this disease, price is
inelastic, meaning it could virtually charge any price and people would pay. Discuss
the ethical implications of choosing a price.
Net Savvy
1 Several different pricing models can be found on the Internet. Each model appeals to
different customer groups. Go to www.eBay.com and try to buy this book. What
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 4
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
pricing options and prices are available? Do you believe that everyone will choose
the least expensive option? Why or why not? Now go to www.Amazon.com. Is there
more than one price available for this book? If so, what are those prices? Are
different versions available? If you had to buy another copy of this book, where
would you buy it, and why would you buy it there?
Some students may have purchased this book from one of these sites, but the question
asks them to examine the price differences more closely and in an analytical sense
12 Prices can vary, depending on the market being served and the novelty of the
products. Shapeways allows anyone to upload a design and get it 3D printed. The
best designs then are available to other customers to have printed in a variety of
materials. Go to https://www.youtube.com/v/qJuTM0Y7U1k and learn more about
Shapeways. Then go to its website, www.shapeways.com, and search for "Inception"
and click on the design by the user roessnakhan. Note the difference in prices of the
item to be printed in plastic versus metal. Now go to Amazon and search for
"Inception Totem" and note the prices for a similar metal totem. How does the price
of the item vary between Shape-ways and Amazon? What would account for these
differences in price? Why would a consumer purchase the product from Shapeways
instead of Amazon? How is Shapeways communicating value?
Chapter Case Study: Planet Fitness: Pricing For Success
1 What benefits do customers receive in return for the sacrifices they make when
buying a membership at Planet Fitness?
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 5
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
2 How does this benefit–sacrifice ratio give Planet Fitness a competitive advantage in
its industry?
3 Given its price strategy, why is it essential for Planet Fitness to continually attract
new members? Do its high-end pricing competitors face the same need? Why or why
not?
Additional Teaching Tips
This chapter introduces students to the economic influence of setting prices.
Students often find these concepts difficult to grasp. Also introduced are the 5 Cs of
pricing, company objectives and strategy implications, and break-even point
calculations.
The 5 Cs of pricing are critical for students to understand. Students often don’t
realize that other factors other than cost factors influence the pricing strategy.
Reviewing the five Cs of pricing and having students come up with examples will
help to enhance understanding of these concepts.
It is important for students to also understand that there may be other objectives other
than maximizing profit margin. Amazon.com in its first years purposely used a
competitor –oriented approach and sacrificed profit loss. The company was ridiculed by
other dot-coms until Amazon.com revealed their strategy: To have households identify
with the brand name. By pricing products and shipping low, it would increase usage of
the site. Thus, the strategy was to sacrifice profits to have Amazon.com become the
market leader and the household brand name recognition for online purchases.
The break-even point graph is often difficult for students to understand unless they have
had an economics course. Instructors will need to weigh the importance of teaching the
graph, the BEP formula, or both. Sometime will need to be spent by the instructor
explaining the graph. It is wise to give students a BEP problem such as the one listed in
© 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6
Chapter 14 - Pricing Concepts for Establishing Value Marketing 5th
the application problems and have them graph it if the instructor chooses to also teach the
dynamics of the graph.
Should students need additional help in pricing, turn to the testing materials and select
some multiple choice BEP and pricing concept (equilibrium, profit, loss, fixed cost,
variable costs) types of problems and create a worksheet where students can either work
on it independently or in small groups in the class. Often, students can help each other in
understanding these concepts and small groups are recommended. Online Tip: Have
students develop a marketing related word problem using BEP analysis. Have them post
it to the discussion board. Have other learners solve the problem. Have the student that
created the word problem come back and give feedback. You may want to pair students
up as partners in the online environment.
Remember to review the Newsletter for Instructors and its accompanied PowerPoint
presentation, which integrates examples and discussion from the newsletter. Each
newsletter contains over ten article abstracts on hot topics, plus a selection of current
commercials and videos for you to use with your class. The newsletter also includes a
guide that explains where the articles, commercials, and videos best fit in your Marketing
course.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 7
