END OF CHAPTER MATERIAL
Discussion Questions
9.1. Name and describe the two types of value-based pricing methods. (AACSB:
Communication)
Answer:
There are two types of value-based pricing: good-value pricing and value-added
pricing. Good-value pricing strategies offer just the right combination of quality and good
9.2. Name and describe the four types of markets and the challenges they pose with respect to
setting prices. (AACSB: Communication)
Answer:
Economists recognize four types of markets, each presenting a different pricing challenge.
Under pure competition, the market consists of many buyers and sellers trading in a uniform
commodity, such as wheat, copper, or financial securities. No single buyer or seller has
much effect on the going market price. In a purely competitive market, marketing research,
9.3. What is captive-product pricing? What is this pricing tactic called in the case of services?
Give examples. (AACSB: Communication; Reflective Thinking)
Answer:
Companies that make products that must be used along with a main product are using
captive-product pricing. Examples of captive products are razor blade cartridges, video
games, printer cartridges, single-serve coffee pods, and e-books. Producers of the main
9.4. Name and describe the two broad new product pricing strategies. When would each be
appropriate? (AACSB: Communication)
Answer:
Companies bringing out a new product face the challenge of setting prices for the first time.
Many companies that invent new products set high initial prices to “skim” revenues layer by
layer from the market, a strategy called market-skimming pricing (or price skimming).
Rather than setting a high initial price to skim off small but profitable market segments, some
companies use market-penetration pricing. They set a low initial price in order to
penetrate the market quickly and deeply—to attract a large number of buyers quickly and
9.5. Compare and contrast price discounts and allowances, describing the types of each.
(AACSB: Communication)
Answer:
Most companies adjust their basic price to reward customers for certain responses, such as
One form of discount is a cash discount, a price reduction to buyers who pay their bills
promptly. A typical example is “2/10, net 30,” which means that although payment is due
Allowances are another type of reduction from the list price. For example, trade-in
Critical Thinking Exercises
9.6. If you’ve ever traveled to another country, such as Germany, you may have noticed that
the price on a product is the total amount you actually pay when you check out. That is,
no sales tax is added to the purchase price at the checkout as it is in the United States.
That is because many countries impose a Value Added Tax (VAT). In a small group,
research value added taxes and debate whether such taxes benefit consumers. Do
marketers support or dislike these types of taxes? (AACSB: Communication; Reflective
Thinking)
Answer:
A value added tax is a consumption tax in which taxes on goods and services are collected at
every step along the supply chain. Economists believe that consumers bear the cost of the
9.7. In a small group, research the legal requirements regarding orders resulting from an
online pricing mistake. Must sellers honor such orders? Write a report of what you
learned. Then describe an example of an online pricing glitch and summarize what the
company did to respond to the glitch. (AACSB: Communication; Reflective Thinking)
Answer:
Most companies have a “Terms and Use” section that states the policy when dealing with
online pricing errors. For example Walmart’s says, “Pricing errors may occur on the Walmart
Walmart’s recent online price glitches— erroneous prices accidentally posted on the Web—is
just one in a string of Web price glitches haunting sellers. The error led to very low prices for
regularly higher-priced items such as treadmills, televisions, and computer monitors, with
some priced under $10. Word spread quickly through social media and consumers rushed to
9.8. Bridgestone Corporation, the world’s largest tire and rubber producer, recently agreed to
plead guilty to price-fixing along with 25 other automotive suppliers. What is
price-fixing? Discuss other recent examples of price-fixing. (AACSB: Communication;
Reflective Thinking)
Answer:
Federal legislation on price-fixing states that sellers must set prices without talking to
competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per se—that is,
the government does not accept any excuses for price-fixing. As such, companies found
guilty of these practices can receive heavy fines. The case of Apple is described in the
Minicases and Applications
Online, Mobile, and Social Media Marketing: Online Price Tracking
Got your eye on a new 32-inch Samsung television? Well, you better not purchase it in
December—that’s when the price was highest on Amazon.com ($500 versus $400 in November
or February). Most consumers know that prices fluctuate throughout the year, but did you know
they even fluctuate hourly? You probably can’t keep up with that, but there’s an app that can.
Camel is a tool that tracks Amazon’s prices for consumers and sends alerts when a price hits the
sweet spot. This app allows users to import entire Amazon wishlists and to set desired price
levels at which emails or tweets are sent to inform them of the prices. All of this is free. Camel
makes its money from an unlikely partner—Amazon—which funnels price data directly to
Camel. Camel is a member of Amazon’s Affiliate program, kicking back 8.5 percent of sales for
each customer Camel refers. It would seem that Amazon would want customers to buy when
prices are higher, not lower. But the online behemoth sees this as a way to keep the bargain
hunters happy while realizing more profitability from less price-sensitive customers. This is an
improvement over Amazon’s earlier pricing tactics, which charged different customers different
prices based on their buying behavior.
9.9. Go to http://us.camelcamelcamel.com/ and set up a free account. Track 10 products that
interest you. Did any of the products reach your desired price? Write a report on the
usefulness of this type of app for consumers. (AACSB: Communication; Use of IT)
Answer:
Students’ reactions will vary depending on the products they tracked and the desired prices
9.10. Camel is not the only Amazon tracking or online price-tracking application. Find and
describe an example of another online price-tracking tool for consumers. (AACSB:
Communication; Use of IT)
Answer:
Students’ answers will vary. There are other Amazon price tracking apps (see
www.dealdump.com/article/amazon_price_tracking_tools) for descriptions of The Tracktor,
Marketing Ethics: Psychology of Mobile Payments
Consumers love to play games on their mobile devices, and Japanese consumers seem to be the
most passionate. Mobile game publishers in Japan have mastered the art of getting as much
revenue as possible from players—some earning more than $4 million per day. The makers of
Puzzle & Dragons have seemingly cracked the revenue code by using the psychology of mobile
payments to squeeze more revenue by encouraging players to play longer. One Puzzle &
Dragons secret was to issue its own virtual currency, called magic stones, so consumers don’t
feel like they are spending real money for chances to enhance play. Then the game offers a little
reward at the end with a reminder of what is lost if the player doesn’t take the offer. Limited-time
sales offer monsters to use in battle for just a few magic stones, and if players run out of space,
the game reminds them that they will lose their monsters if they don’t purchase more space. All
the while, mathematicians and statisticians work behind the scenes to track game play and make
it easier or more challenging to keep players engaged and spending. One expert called Puzzle &
Dragons “truly diabolical” in convincing players to pay and play more. These and other game
producers’ tactics have propelled Japan’s game revenue alone to exceed revenue from all apps in
the United States.
9.11. Is it ethical for game producers to use game-playing data to encourage consumers to
spend more? Explain why or why not. (AACSB: Communication; Ethical Reasoning)
Answer:
Students’ responses will vary. Even though the manipulation of the mobile games seems
unethical, players must like it or else they would not keep playing. So some students may
9.12. Is this similar to the “freemium” model used by many U.S. game producers? Explain the
“freemium” model and discuss examples of games that use this model. (AACSB:
Communication; Reflective Thinking; Ethical Reasoning)
Answer:
Many mobile games use the “freemium” model, which allows consumer free access to the
Marketing by the Numbers: Breakeven on Price Reduction
Abercrombie & Fitch, once the favorite of loyal teens, is considering lowering prices on all items
it sells in an effort to win them back after several years of sales declines. A&F’s total sales were
$4 billion last year, but they have been declining in the face of a weak economy and an
intensively competitive retail environment. Price reductions are often effective in increasing
sales, but marketers need to analyze how much sales must go up before a price reduction pays off
and increases revenue enough to make the it worth doing. Refer to Appendix 3: Marketing by the
Numbers to answer the following questions.
9.13. Assuming A&F’s gross profit margin is 60 percent and cost of goods sold represents the
only variable cost, by how much must sales increase to maintain the same gross profit
margin in terms of absolute dollars if A&F lowers prices by 10 percent? (AACSB:
Communication; Analytical Reasoning)
Answer:
Since it is assumed that cost of goods sold represent the only variable costs, students can
analyze this problem similarly to the one using contribution analysis. Since price decreases
Current total gross profit = gross profit margin sales
Though we do not know individual prices, we can base our analyses on 100% or price =
Old New (reduced 10% )
Price $1.00 per unit $0.90 per unit
As can be seen, a 10% reduction in price resulted in a decrease of the gross profit margin
New gross margin new sales level = original gross margin
So,
Thus, the absolute increase in sales to break even on a 10% reduction in price equals
9.14. By what percentage must costs decrease if A&F wants to maintain the gross margin
percentage of 60 percent? (AACSB: Communication; Analytical Reasoning)
Answer:
price cost
Gross margin percentage = ——————
price
so,
Cost = price (price GM%)
Using the analysis above where we set price = $1.00 per unit, the new price becomes $0.90 per
unit. If we want to maintain the 60% gross profit margin, then the new cost per unit must be:
Percentage changes are always calculated by dividing the change (new – old) by the original
value (old):
So,