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Chapter-by-chapter aids: Chapter 16
Instructor's Manual to Accompany Essentials of Marketing IV-16-1
CHAPTER 16: PRICING OBJECTIVES AND POLICIES
CHAPTER 16 – COMMENTS ON QUESTIONS AND PROBLEMS
16- 1. See Exhibit 16-1 and section “Price Has Many Strategy Dimensions.” Using an example, this
question can be used to review the whole chapter.
demand curve (to set the price) that reflects expected customer reaction to the total mix under
consideration. Of course, the marketing mix ought to be compatible with the target market
selected – that is, the whole marketing strategy should be compatible. The selection among
A sales-oriented objective, on the other hand, would tend to orient all of the strategy planning
toward sales growth. This might lead to the selection of "mass markets" and the development
of appropriate marketing mixes. It might also lead the marketing people to recommend a
Status quo-oriented objectives might lead to relatively static or conservative strategies – the
appropriate ones depending on the nature of competition. At the very least, it is likely that price
would be de-emphasized – because price decisions are easily copied. Further, aggressive
16- 3. A one-price policy is most appropriate because there are thousands of different items and
there is usually very little personal sales contact. Personal contact by a responsible party is
necessary for a flexible price policy – because somebody in authority must adjust prices. In a
16- 4. A skimming policy would probably be associated with a profit-maximizing objective. A
penetration pricing policy might be also. The latter, alternately, might be associated with an
expansion of market share based on some other objective that is not concerned with short-
term profitability.
a. Skimming, as there are many people in each community who wish to be “first” with such
items, and price competition will follow quickly.
b. One could argue in either direction here. In favor of penetration, there is a large potential
market and probably no “elite” market (at least the short-term use of the drug is less
expensive than the long-term habit of smoking). Further, competition and lower prices
are likely to follow if the patents do not prohibit competition. Either way, it is likely to be
important to establish the patch as “the” brand so that it is what consumers ask for and
what doctors prescribe. Further, some consumers will be more inclined to try the product
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
IV-16-2 Perreault, Cannon, & McCarthy
c. Probably skimming, as some real “fans” will value having their own DVD of the movie
much more so than the general public. Over time, the price can be lowered and the
opportunity may not be very long, especially if popularity depends on the current fad.
d. Probably skimming. However, this depends on how unique the toy is, and how quickly
competitors can introduce imitations. Successful new toys are usually copied very
quickly. Children want the “popular brand;” thus, the demand for a hit toy tends to be
different markets. In a sense, the greater the fluctuations in exchange rates among different
markets, the greater the need for flexible pricing. Otherwise, customers in a country where
prices are (relatively) low may make excess purchases (perhaps obtaining greater quantity
The issue here is that a firm may end up with different prices for the same product in different
countries (at least relative to other price levels in that country) because of changes in the
wants to set a price in a foreign market based on its domestic price may find it difficult because
that would mean constantly changing the price (in either one market or both) depending on the
exchange rate.
when consumption is irregular – such as with toys and jewelry – not production. When
production is irregular – as in agriculture – prices may be lower close to the production period
16- 7. Assume 360 days per year for simplicity:
a.
36%1%
10
360 =×
b.
72%1%
5
360 =×
c. 0 (there is no discount for paying early, so it is smart to wait and pay only when the bill is
due).
example illustrates, intermediaries may not adhere to a manufacturer's list price. In that case,
Alcoa gave its wholesalers a price reduction – but most of them did not pass it along to
customers! This same problem is common with consumer products – especially if it is a "high
certain that the price reduction gets passed along to the customer. There is a point here that is
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter-by-chapter aids: Chapter 16
Instructor's Manual to Accompany Essentials of Marketing IV-16-3
not discussed in the text, but which you might want to raise in class: when intermediaries are
offered a price discount, they will almost always take it. They are in business to make a profit –
and they are inclined to take advantage of special opportunities. Similarly, consumers often are
especially when sales increased but relatively few of the purchasers asked for the "refund.”
When that happens, it lowers the cost per buyer to the producer of the rebate program.
rates were included in her delivered price. Perhaps she could even negotiate for transportation
by contract carriers. Other suppliers might be able to meet her delivered price, but the buyer's
not. The seller who is willing to do so may get business she would not otherwise obtain.
company's pricing objective and other pricing policies. The geographic pricing policy ought to
be compatible with the total price structure. Competitors' practices and customs in the industry
also are important.
a. A chemical by-product might be sold F.O.B. a local warehouse, or even F.O.B. delivered,
if small quantities were involved. In larger quantities from the producer, F.O.B. plant
might be used – however, if there is much competition in the market, freight might be
allowed from the nearest plant. In as much as no fixed costs are charged to the product,
b. Candy bars might be sold F.O.B. delivered at the same price throughout the country – to
permit identical retail prices.
c. and d. Auto parts are heavy and might be sold F.O.B. the factory, or some freight allowed if
the company were trying to expand its market. The same might be true of tricycles. Or, it
16-11. Such a producer might lose heavily by this ruling – as many small producers might locate in
outlying areas and be able to undercut his delivered price, which by law would have to include
all transportation costs. They might have few or no economies of scale, but still be able to offer
16-12. The purpose here is to encourage students to re-think the idea that lowering price is the only
way to increase customer value! It should be no surprise that many students think that way–too
many executives fall into the same trap. Rather than take the time to come up with a creative
marketing mix that does a better job of meeting the needs of some target market, they just
Starbucks sells isn’t the same as what others are selling. Not everyone will pay the higher
price, but people who want something “special” will. Students will give a variety of different
examples here and it is important to emphasize that they don’t need to agree with each other’s
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
Chapter-by-chapter aids: Chapter 16
Instructor's Manual to Accompany Essentials of Marketing IV-16-5
DISCUSSION OF COMPUTER-AIDED PROBLEM 16: CASH DISCOUNTS
In this problem, a wholesaler is thinking about changing the cash discount terms he offers his retailer-
customers. The discount terms – originally set when interest rates were much higher – are now "too
good" a deal for the retailers. The manager wants to evaluate the effect on his total revenue of different
discount arrangements. The student analyzes changes in the cash discount period and discount rate to
see how the terms might affect the total value of discounts that the wholesaler offers his customers.
Technical note: the spreadsheet uses the term "approximate effective interest rate.” Strictly speaking, a
buyer would not be "borrowing" the full invoice amount, but rather the invoice amount minus the cash
discount amount. Some students may raise this point – especially if they have seen it in a finance course.
The text discussion does not get into this nuance – because it simply complicates the issue and does not
alter the basic point. This makes it easier to understand. While it would be easy enough to program the
more detailed analysis for the computer, the spreadsheet uses the analysis approach as it is presented in
the text – for consistency and so students can "check" answers for themselves. If a student raises this
distinction, you can go into the detail or not as you wish. But, either way, you can keep from getting
bogged down on that issue by noting that it does not make a major difference here – and that is why the
spreadsheet labels the effective interest rate as "approximate."
The initial spreadsheet for the problem is given below:
P L U S - Spreadsheet
Situation
Cash Discount Percent
3.00
*
Days to Pay to Get Cash Discount
10
*
Days to Pay Net Invoice Value
30
*
Days per Year
365
*
Approximate Effective Interest Rate
54.75
Average Monthly Invoice Face Amount
900.00
*
Number of Customers
120
*
Percent Who Take Cash Discount
50.00
*
Total Face Value of Invoices (Gross Sales)
108000.00
Total of Monthly Cash Discounts
1620.00
Net Sales (Gross Sales Minus Cash Discounts)
106380.00
Ratio of Total Discounts to Total Face Value
0.0150
Answers to Computer-Aided Problem 16:
a. The total monthly cash discount is now $2,916.00 – given that 90 percent of the customers take the
discount. The spreadsheet for this scenario is given below:
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
IV-16-6 Perreault, Cannon, & McCarthy
P L U S - Spreadsheet
Situation
Cash Discount Percent
3.00
*
Days to Pay to Get Cash Discount
10
*
Days to Pay Net Invoice Value
30
*
Days per Year
365
*
Approximate Effective Interest Rate
54.75
Average Monthly Invoice Face Amount
900.00
*
Number of Customers
120
*
Percent Who Take Cash Discount
90.00
*
Total Face Value of Invoices (Gross Sales)
108000.00
Total of Monthly Cash Discounts
2916.00
Net Sales (Gross Sales Minus Cash Discounts)
105084.00
Ratio of Total Discounts to Total Face Value
0.0270
b. If Tulkin changes the terms, the "effective interest" would be 24.3 percent. With these terms, buyers
would get a smaller discount for paying early – and if they didn't pay early, they would need to pay
the full amount sooner. Thus, it appears that fewer buyers would be likely to take the cash discount.
The spreadsheet for this scenario is given below.
P L U S - Spreadsheet
Situation
Cash Discount Percent
1.00
*
Days to Pay to Get Cash Discount
5
*
Days to Pay Net Invoice Value
20
*
Days per Year
365
*
Approximate Effective Interest Rate
24.33
Average Monthly Invoice Face Amount
900.00
*
Number of Customers
120
*
Percent Who Take Cash Discount
90.00
*
Total Face Value of Invoices (Gross Sales)
108000.00
Total of Monthly Cash Discounts
972.00
Net Sales (Gross Sales Minus Cash Discounts)
107028.00
Ratio of Total Discounts to Total Face Value
0.0090
c. If Tulkin changes the terms to 2/10, net 30, the "effective interest" would be 36.5 percent. The
change would reduce Tulkin's total monthly cash discount amount from $2,916 to $1,188 – but it
would also reduce his gross sales and his net sales. Specifically, net sales would drop from
$105,084 to $97,812. While a precise answer to how this drop might affect profit would depend
on his actual markup, in general it appears that the change would be negative. The spreadsheet
showing the current situation (in a. above) provides the point of comparison for this analysis. The
spreadsheet for the 2/10, net 30 situation showing a loss of 10 customers and 60 percent of the
remainder taking the discount is as follows:
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter-by-chapter aids: Chapter 16
P L U S - Spreadsheet
Situation
Cash Discount Percent
2.00
*
Days to Pay to Get Cash Discount
10
*
Days to Pay Net Invoice Value
30
*
Days per Year
365
*
Approximate Effective Interest Rate
36.50
Average Monthly Invoice Face Amount
900.00
*
Number of Customers
110
*
Percent Who Take Cash Discount
60.00
*
Total Face Value of Invoices (Gross Sales)
99000.00
Total of Monthly Cash Discounts
1188.00
Net Sales (Gross Sales Minus Cash Discounts)
97812.00
Ratio of Total Discounts to Total Face Value
0.0120
This table compares 2/10 with the current 3/10 situation.
Situation: A pricing consultant has suggested that your firm set a premium price for the paper shredding
machines it sells through office equipment stores—but that there be a $20 mail-in rebate with each unit.
The consultant says his research shows that, when an office shredder wears out, it’s usually the
administrative assistant who is sent to buy a replacement. The consultant says that many of these buyers
will pick your firm’s shredder, in spite of the higher price, so that they can pocket the rebate. At the end of
his report he says, “This is an accepted way to motivate the decision maker. Think about all those
Part IV
If the class decides that the behavior is unethical, next move to the question of whether the company that
markets the paper shredders is acting unethically. The AMA Statement of Ethics (Exhibit 1-7) indicates
that “Marketers should be aware of how their behavior may influence or impact on the behavior of others
in organizational relationships.” If the seller sets up the rebate to encourage unethical behavior on the
part of an administrative assistant, then the pricing practice appears to have the motive of promoting
unethical behavior (by the AMA Statement of Ethics) at customer organizations. This may raise the
The Marketing Plan Coach software on the text website includes a sample marketing plan for Hillside
Veterinary Clinic. Look through the “Marketing Strategy” section.
a. A veterinary clinic located in another town gives its customers a 10 percent discount on their next
vet bill if they refer a new pet owner to the clinic. Do you think that this would be a good idea for
Hillside? Does it fit with Hillside’s strategy?
b. The same clinic offered customers a sort of cumulative discount – an end-of-year refund if their
Arguments might be made on both sides of question a. On the one hand, referrals fit with HVC’s
hometown-oriented strategy (as reflected in the many community events it supports and participates in).
With this type of positioning, the clinic would hope to get many referrals. While a discount might increase
the number of referrals, there is a flipside. Customers (in small towns like HVC serves) may view referring
neighbors to a good vet simply a friendly gesture. They may feel uncomfortable receiving a reward for the
referral and this could reduce the value of the discount.
Question b refers to a cumulative quantity discount. These are more common in business markets than in
consumer markets. Typically, these types of programs are used to encourage loyalty to a particular
supplier – especially when competitors are seen as very similar. Once a customer builds a relationship
with a particular veterinarian and clinic, loyalty is likely to be high even without such incentives. In
addition, such a program is unlikely to encourage additional spending – since veterinary expenses are not
typically optional. Thus, a cumulative discount may not have the desired effect. Instead, a customer might
Chapter-by-chapter aids: Chapter 16
CHAPTER 16 – SUMMARY OF CONNECT HOMEWORK EXERCISES
Question 1: Pricing and Legislation
Question Type: Click And Drag
Learning Objectives: 16.6
Topic: Legality of pricing policies
AACSB: Reflective thinking
Bloom’s: Remember
Question 2: Pricing Objectives
Question Type: Click And Drag
Learning Objectives: 16.1
Topic: Objectives should guide strategy planning for price
AACSB: Reflective thinking
Chapter-by-chapter aids: Chapter 16
