978-0134292663 Chapter 10 Lecture Notes Part 1

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Part 3: Develop the Value Proposition for the Customer

Chapter 10

Price: What Is the Value Proposition Worth?

I. CHAPTER OVERVIEW

The chapter begins by asking the question, “What is price?” At first glance, students may think

the question has an obvious answer—the number printed on the price sticker. However, as

students explore this chapter, they will discover that price is a whole lot more. Price is a

function of demand, costs, revenue, and the environment. Pricing can be monetary or

non-monetary. Pricing decisions lead to specific pricing strategies and tactics, discussed in the

chapter. Students also learn about the psychological aspect of pricing, as well as legal, and

ethical aspects of pricing.

II. CHAPTER OBJECTIVES

1. Explain the importance of pricing and how marketers set objectives for their pricing

strategies.

2. Describe how marketers use costs, demands, revenue and the pricing environment to

make pricing decisions.

3. Understand key pricing strategies and tactics.

4. Understand the opportunities for Internet pricing strategies.

5. Describe the psychological, legal, and ethical aspects of pricing.

III. CHAPTER OUTLINE

►MARKETING MOMENT INTRODUCTION

Tell students their job is to buy the “best” Oriental rug. One rug is priced at $800 while another is

priced at $1000. Which one is the best? How did they make that decision? This is an excellent

time to introduce the concept of price as an extrinsic cue and the price/quality relationship.

p. 289 REAL PEOPLE, REAL CHOICES—

HERE’S MY PROBLEM AT CONVERSE COLLEGE

In 2013, the administration of Converse College, a private

master’s university located in South Carolina, realized that

escalating tuition costs were creating serious problems for current

and potential students. Betsy and her staff decided to take a

serious look at the College’s pricing model. Their objective was

threefold: (1) address the affordability concerns of private higher

education within the marketplace, (2) recapture a greater portion

of the middle class market that was feeling priced out of the

private college experience, and (3) develop a more sustainable

Part 3: Develop the Value Proposition for the Customer

and transparent operating model for the college. Betsy launched a

strategic enrollment planning process that involved extensive

research to guide data-driven decisions. The working group

identified possible solutions to the high-tuition dilemma.

1. Reset tuition to a significantly lower price for traditional

undergraduate students.

2. Freeze tuition for each incoming student from the time she

matriculated until she graduated.

3. Provide students with a Loan Repayment Program (LRP).

The vignette ends by asking the student which option he/she

would choose.

Betsy chose Option #1

p. 292

1. “YES, BUT WHAT DOES IT COST?”

The question of what to charge for a product is a central part of

marketing decision making.

1.1 What Is Price?

Price is the assignment of value, or the amount the consumer

must exchange to receive the offering or product. Payment may

be in the form of money, goods, services, favors, votes, or

anything else that has value to the other party. Bitcoin is the most

popular and fastest-growing digital currency.

Other non-monetary costs often are important to marketers. It is

also important to consider an opportunity cost, or the value of

something that is given up to obtain something else.

Exhibit: Digital

Currencies:

Bitcoin

Figure 10.1

Process:

Elements of Price

Planning

p. 293 1.2 Step 1: Develop Pricing Objectives

The first crucial step in price planning is to develop pricing

objectives. These must support the broader objectives of the firm,

such as maximizing shareholder value, as well as its overall

marketing objectives, such as increasing market share.

p. 293

p. 294

1.2.1 Profit Objectives

Often a firm’s overall objectives relate to a certain level of profit

it hopes to realize. This is usually the case in B2B marketing.

When pricing strategies are determined by profit objectives, the

focus is on a target level of profit growth or a desired net profit

margin. A profit objective is important to firms that believe profit

is what motivates shareholders and bankers to invest in a

company.

1.2.2 Sales or Market Share Objectives

However, lowering prices is not always necessary to increase

market share. If a company’s product has a competitive

advantage, keeping the price at the same level as other firms may

Figure 10.2

Process: Pricing

Objectives

Exhibit: Virgin

Chapter 10: Price: What is the Value Proposition Worth?

satisfy sales objectives.

1.2.3 Competitive Effect Objectives

Sometimes strategists design the pricing plan to dilute the

competition’s marketing efforts. In these cases, a firm may

deliberately try to preempt or reduce the impact of a rival’s

pricing changes.

Australia

p. 295 ►METRICS MOMENT

Market share is the percentage of a market (defined in terms of

either sales units or revenue) accounted for by a specific firm,

product lines, or brands. Market share is quoted within the context

of a particular set of competitors.

Applying the Metrics

 ● Pick any industry and identify the main competitors—

this can be any type of product or service line of your choice

as long as there are several easily identified competing brands

(Hint: Publicly traded firms are easier to research then

privately held firms.) Do a little research to find out how their

market shares stack up.



● Then, for the same firms, take a look at their most recent

reported profits. Based on your findings, does a higher market

share translate into a better profit picture?

Exhibit:

Autoslash

p. 295 1.2.4 Customer Satisfaction Objectives

Many quality-focused firms believe that profits result from

making customer satisfaction the primary objective. These firms

believe that by focusing solely on short-term profits, a company

loses sight of keeping customers for the long term.

p. 295 1.2.5 Image Enhancement Objectives

Consumers often use price to make inferences about the quality of

a product. In fact, marketers know that price is often an important

means of communicating not only quality but also image to

prospective customers. The image enhancement function of

pricing is particularly important with prestige products (or

luxury products), which have a high price and appeal to

status-conscious consumers.

p. 296

2. COSTS, DEMAND, REVENUE, AND THE PRICING

ENVIRONMENT

2.1 Step 2: Estimate Demand

The second step in price planning is to estimate demand. Demand

refers to customers’ desires for a product: How much of a product

are they willing to buy as the price of the product goes up or

down?

Figure 10.3

Process: Factors

in Price Setting

Part 3: Develop the Value Proposition for the Customer

p. 296 2.1.1 Demand Curves

Economists use a graph of a demand curve to illustrate the effect

of price on the quantity demanded of a product. The demand

curve, which can be a curved or straight line, shows the quantity

of a product that customers will buy in a market during a period at

various prices if all other factors remain the same.

The demand curve for most goods (Left side of Figure 10.2)

slopes downward and to the right. As the price of the product goes

up (P1 to P2), the number of units that customers are willing to

buy goes down (Q1 to Q2). If prices decrease, customers will buy

more. This is the law of demand. For example, if the price of

bananas goes up, customers will probably buy fewer of them.

There are, however, exceptions to this typical price–quantity

relationship. In fact, there are situations in which (otherwise sane)

people desire a product more as it increases in price. For prestige

products such as luxury cars or jewelry, a price hike may actually

result in an increase in the quantity consumers demand because

they see the product as more valuable. In such cases, the demand

curve slopes upward. The higher-price/higher-demand

relationship has its limits. If the firm increases the price too much,

(say from P2 to P1) making the product unaffordable for all but a

few buyers, demand will begin to decrease.

Figure 10.4

Snapshot:

Demand Curves

for Normal and

Prestige Products

p. 297

p. 298

2.1.2 Shifts in Demand

The demand curves we have shown assume that all factors other

than price stay the same. However, what if they do not? What if

the company improves the product? What happens when there is a

glitzy new advertising campaign that turns a product into a

“must-have” for many people? What if stealthy paparazzi catch

Brad Pitt using the product at home? Any of these things could

cause an upward shift of the demand curve. An upward shift in the

demand curve means that at any given price, demand is greater

than before the shift occurs.

Demand curves may also shift downward.

Figure 10.5

Snapshot: Shift

in the Demand

Curve

Table 10.1

Estimating

Demand for

Pizza

p. 298 2.1.3 Estimate Demand

Marketers predict total demand first by identifying the number of

buyers or potential buyers for their product and then multiplying

that estimate times the average amount each member of the target

market is likely to purchase.

Once the marketer estimates total demand, the next step is to

Chapter 10: Price: What is the Value Proposition Worth?

predict what the company’s market share is likely to be. The

company’s estimated demand is then its share of the whole

market. Such projections need to take into consideration other

factors that might affect demand, such as new competitors

entering the market, the state of the economy, and changing

customer tastes.

p. 298

p. 299

2.1.4 Price Elasticity of Demand

Marketers also need to know how their customers are likely to

react to a price change. In particular, it is critical to understand

whether a change in price will have a large or a small impact on

demand.

Price elasticity of demand is a measure of the sensitivity of

customers to changes in price. The word elasticity indicates that

changes in price usually cause demand to stretch or retract like a

rubber band. Some customers are very sensitive to changes in

price, and a change in price results in a substantial change in the

quantity demanded. In such instances, we have a case of elastic

demand. In other situations, we describe a change in price that

has little or no effect on the quantity that consumers are willing to

buy as inelastic demand.

When demand is elastic, changes in price and in total revenues

work in opposite directions. If the price is increased, revenues

decrease. If the price is decreased, total revenues increase.

In some instances, demand is inelastic so that a change in price

results in little or no change in demand. When demand is

inelastic, price and revenue changes are in the same direction; that

is, increases in price result in increases in total revenue, while

decreases in price result in decreases in total revenue.

Elasticity of demand for a product often differs for different price

levels and with different percentages of change.

As a rule, businesses can determine the actual price elasticity only

after they have tested a pricing decision and calculated the

resulting demand. To estimate what demand is likely to be at

different prices for new or existing products, marketers often do

research.

Other factors can affect price elasticity and sales. Consider the

availability of substitute goods or services. If a product has a

close substitute, its demand will be elastic; that is, a change in

price will result in a change in demand, as consumers move to

buy the substitute product. Marketers of products with close

Figure 10.6

Snapshot: Price

Elasticity of

Demand

Figure 10.7

Snapshot:

Price-Elastic and

Price-Inelastic

Demand

Part 3: Develop the Value Proposition for the Customer

p. 300

substitutes are less likely to compete on price because they

recognize that doing so could result in less profit as consumers

switch from one brand to another.

Changes in prices of other products also affect the demand for an

item, a phenomenon we label cross-elasticity of demand. When

products are substitutes for each other, an increase in the price of

one will increase the demand for the other. For example, if the

price of bananas goes up, consumers may instead buy more

strawberries, blueberries, or apples. However, when products are

complements—that is, when one product is essential to the use of

a second—an increase in the price of one decreases the demand

for the second.

p. 300

2.2 Step 3: Determine Costs

Estimating demand helps marketers determine possible prices to

charge for a product. It tells them how much of the product they

think they will be able to sell at different prices. Knowing this

brings them to the third step in determining a product’s price:

making sure the price will cover costs. Before marketers can

determine price, they must understand the relationship of cost,

demand, and revenue for their product.

p. 300

p. 301

p. 302

2.2.1 Variable and Fixed Costs

First, a firm incurs variable costs—the per-unit costs of

production that will fluctuate depending on how many units or

individual products a firm produces. Variable costs can go down

with higher levels of production but do not always do so.

Fixed costs are costs that do not vary with the number of units

produced—the costs that remain the same whether the firm

produces 1,000 bookcases this month or only 10. Fixed costs

include rent or the cost of owning and maintaining the factory,

utilities to heat or cool the factory, and the costs of equipment

such as hammers, saws, and paint sprayers used in the production

of the product.

Average fixed cost is the fixed cost per unit produced, that is, the

total fixed costs divided by the number of units produced.

Although total fixed costs remain the same no matter how many

units are produced, the average fixed cost will decrease as the

number of units produced increases. As we produce more and

more units, average fixed costs go down, and so does the price we

must charge to cover fixed costs.

In the long term, total fixed costs may change.

Figure 10.8

Snapshot:

Variable Costs at

Different Levels

of Production

Chapter 10: Price: What is the Value Proposition Worth?

p. 302 Combining variable costs and fixed costs yields total costs for a

given level of production. As a company produces more and more

of a product, both average fixed costs and average variable costs

may decrease. Average total costs may decrease, too, up to a

point. As output continues to increase, average variable costs may

start to increase. These variable costs ultimately rise faster than

average fixed costs decline, resulting in an increase to average

total cost. As total cost fluctuates with differing levels of

production, the price that producers have to charge to cover those

costs changes accordingly. Therefore, marketers need to calculate

the minimum price necessary to cover all costs—the break-even

price.

p. 302

p. 303

2.2.2 Break-Even Analysis

Break-even analysis is a technique marketers use to examine the

relationship between cost and price and to determine what sales

volume must be reached at a given price before the company will

completely cover its total cost and past which it will begin making

a profit. Simply put, the break-even point is the point at with the

company does not lose any money and does not make any profit.

A break-even analysis allows marketers to identify how many

units of a product they will have to sell at a given price to be

profitable.

To determine the break-even point, the firm first needs to

calculate the contribution per unit, or the difference between the

prices the firm charges for a product (the revenue per unit) and the

variable costs. This figure is the amount the firm has after paying

for the goods that contribute to meeting the fixed costs of

production.

Often a firm will set a profit goal, which is the dollar profit figure

it desires to earn. The break-even point may be calculated with

that dollar goal included in the figures.

Sometimes the target return or profit goal is expressed as a

percentage of sales. For example, a firm may say that it wants to

make a profit of at least 10 percent on sales. In such cases, this

profit is added to the variable cost in calculating the break-even

point.

Break-even analysis does not provide an easy answer for pricing

decisions. It provides answers about how many units the firm

must sell to break even and to make a profit, but without knowing

whether demand will equal the quantity at that price, companies

can make big mistakes. It is, therefore, useful for marketers to

estimate the demand for their product and then perform a

Figure 10.9

Snapshot:

Break-Even

Analysis

Assuming a Price

of $100

Part 3: Develop the Value Proposition for the Customer

marginal analysis.

p. 304 2.2.3 Markups and Margins: Pricing through the Channel

So far, we have talked about costs simply from the manufacturer’s

perspective. However, in reality, most products are not sold

directly to the consumers or business buyers of the product.

Instead, a manufacturer sells to a wholesaler, distributor, or jobber

who in turn sells to a retailer who finally sells the product to the

ultimate consumer. Setting prices means considering all of these

steps.

Each member of the channel of distribution buys a product for a

certain amount and adds a markup amount to create the price at

which they will sell a product. This markup amount is the gross

margin, also referred to as the retailer margin or the wholesaler

margin. The margin must be great enough to cover the fixed costs

of the retailer or wholesaler and leave an amount for a profit.

When a manufacturer sets a price, he or she must consider these

margins. Many times, a manufacturer builds its pricing structure

around list prices. A list price, which we also refer to as a

manufacturer’s suggested retail price (MSRP), is the price that

the manufacturer sets as the appropriate price for the end

consumer to pay.

Vertical integration is the combining of manufacturing

operations with channels of distribution under a single ownership

to reduce costs and increase profits.

Figure 10.10

Snapshot:

Markups through

the Channel

Exhibit:

Progressive

p. 305 2.3 Step 4: Evaluate The Pricing Environment

Marketers look at factors in the firm’s external environment when

they make pricing decisions. The fourth step in developing pricing

strategies is to examine and evaluate the pricing environment.

Only then can marketers set a price that not only covers costs but

also provides a competitive advantage—a price that meets the

needs of customers better than the competition.

p. 305

p. 306

2.3.1 The Economy

Broad economic trends tend to direct pricing strategies. The

business cycle, inflation, economic growth, and consumer

confidence all help to determine whether one pricing strategy or

another will succeed.

During recessions, consumers grow more price sensitive. Many

firms find it necessary to cut prices to levels at which costs are

covered but the company does not make a profit to keep factories

in operation.

Inflation may give marketers cause to either increase or decrease

Exhibit:

ForceFlex

Garbage Bag ad

Exhibit: P&G

Chapter 10: Price: What is the Value Proposition Worth?

prices. First, inflation gets customers used to price increases. They

may remain insensitive to price increases, even when inflation

goes away, allowing marketers to make real price increases. In

periods of recession, inflation may cause marketers to lower

prices and temporarily sacrifice profits in order to maintain sales

levels.

Pampers

p. 306 2.3.2 The Competition

Marketers try to anticipate how the competition will respond to

their pricing actions. It is not always a good idea to fight the

competition with lower prices. Pricing wars can change

consumers’ perceptions of what is a “fair” price, leaving them

unwilling to buy at previous price levels.

Generally, firms that do business in an oligopoly (in which the

market has few sellers and many buyers) are more likely to adopt

status quo pricing objectives in which the pricing of all

competitors is similar. Avoiding price competition allows all

players in the industry to remain profitable.

Firms in a purely competitive market have little opportunity to

raise or lower prices. Price is directly influenced by supply and

demand.

p. 306

p. 307

2.3.3 Government Regulation

Governments in the United States and other countries develop two

different types of regulations, which have an effect on pricing.

First, a large number of regulations increase the costs of

production. Regulations for health care, environmental protection,

occupational safety, and highway safety, just to mention a few,

cause the costs of producing many products to increase. Other

regulations of specific industries such as those imposed by the

Food and Drug Administration (FD) on the production of food

and pharmaceuticals increase the costs of developing and

producing those products. In addition, some regulations directly

address prices.

2.3.4 Consumer Trends

Consumer trends also can strongly influence prices. Culture and

demographics determine how consumers think and behave and so

these factors have a large impact on all marketing decisions.

2.3.5 The International Environment

The marketing environment often varies widely from country to

country. This can have important consequences in developing

pricing strategies.

p. 308 3. IDENTIFY STRATEGIES AND TACTICS TO PRICE

THE PRODUCT

Figure 10.11

Snapshot: Pricing

Part 3: Develop the Value Proposition for the Customer

p. 308

In modern business, there seldom is any one-and-only,

now-and-forever, and best pricing strategy. Like playing a game

of chess, making pricing moves and countermoves requires

thinking two and three moves ahead.

3.1 Step 5: Choose a Pricing Strategy

The next step in price planning is to choose a pricing strategy.

3.2 Pricing Strategies Based on Cost

Marketing planners often choose cost-based strategies because

they are simple to calculate and relatively risk free. They promise

that the price will at least cover the costs the company incurs in

producing and marketing the product.

Cost-based pricing methods have drawbacks, however. They do

not consider such factors as the nature of the target market,

demand, competition, the product life cycle, and the product’s

image. The calculations for setting the price may be simple and

straightforward but accurate cost estimating may prove difficult.

The most common cost-based approach to pricing a product is

cost-plus pricing in which the marketer totals all the costs for the

product and then adds an amount (or marks up the cost of the

item) to arrive at the selling price. Many marketers use cost-plus

pricing because of its simplicity—users need only estimate the

unit cost and add the markup. To calculate cost-plus pricing,

marketers usually calculate either a markup on cost or a markup

on selling price. Keystoning is a retail pricing strategy in which the

retailer doubles the cost of the item (100 percent markup) to determine

the price.

Strategies and

Tactics

p. 309

3.2.1 Pricing Strategies Based on Demand

Demand-based pricing</keyterm> means that the firm bases the

selling price on an estimate of volume or quantity that it can sell

in different markets at different prices. Firms must determine how

much product they can sell in each market and at what price.

Today, firms find that they can be more successful if they match

price with demand using a <keyterm id=”ch11term19″

linkend=”gloss11_019″ preference=”0″ role=”strong”>target

costing</keyterm> process. <endnoteref label=”9″

olinkend=”ch11endnoteset09″/> They first determine the price at

which customers would be willing to buy the product and then

works backward to design the product in such a way that it can

produce and sell the product at a profit.

Figure 10.12

Snapshot: Target

Costing Using a

Jeans Example

Chapter 10: Price: What is the Value Proposition Worth?

p. 309

With target costing, firms first use marketing research to identify

the quality and functionality needed to satisfy attractive market

segments and what price they are willing to pay before the

product is designed. The next step is to determine what margin

retailers and dealers require as well as the profit margin the

company requires. Based on this information, managers can

calculate the target cost—the maximum it will cost the firm to

manufacture the product. If the firm can meet customer quality

and functionality requirements and control costs to meet the

required price, it will manufacture the product.

Yield management pricing, another type of demand-based

pricing, is a pricing strategy used by airlines, hotels, and cruise

lines. Firms charge different prices to different customers in order

to manage capacity while maximizing revenue. This strategy

works because different customers have different sensitivities to

price. The goal of yield management pricing is to accurately

predict the proportion of customers who fall into each category

and allocate the percentage of the airline or hotel’s capacity

accordingly so that no product goes unsold.

p. 310 3.2.2 Pricing Strategies Based on the Competition

Sometimes a firm’s pricing strategy involves pricing its wares

near, at, above, or below the competition. A price leadership

strategy, which usually is the rule in an industry dominated by few

firms and called an oligopoly, may be in the best interest of all

firms because it minimizes price competition. Price leadership

strategies are popular because they provide an acceptable and

legal way for firms to agree on prices without ever talking with

each other.

p. 311

3.2.3 Pricing Strategies Based on Customers’ Needs

When firms develop pricing strategies that cater to customers,

they are less concerned with short-term results than with keeping

customers for the long term.

Firms that practice value pricing or everyday low pricing

(EDLP), develop a pricing strategy that promises ultimate value

to consumers. What this means is that, in the customer’s eyes, the

price is justified by what they receive.

When firms base price strategies solely or mainly on cost, they

are operating under the old production orientation and not a

customer orientation. Value-based pricing begins with customer,

then considers the competition, and then determines the best

pricing strategy.

Exhibit: Priceline

p. 311 3.2.4 New Product Pricing

When a product is new to the market or when there is no

Part 3: Develop the Value Proposition for the Customer

p. 311

p. 312

established industry price norm, marketers may use a skimming

price strategy, a penetration pricing strategy, or trial pricing when

they first introduce the item to the market.

Setting a skimming price means that the firm charges a high,

premium price for its new product with the intention of reducing

it in future response to market pressure.

If a product is highly desirable and it offers unique benefits,

demand is price inelastic during the introductory stage of the

product life cycle, allowing a company to recover

research-and-development and promotion costs. When rival

products enter the market, the price is lowered in order for the

firm to remain competitive. Firms focusing on profit objectives in

developing their pricing strategies often set skimming prices for

new products.

A skimming price is more likely to succeed if the product

provides some important benefits to the target market that make

customers feel they must have it no matter what the cost.

For a skimming price to be successful there should also be little

chance that competition can get into the market quickly. In

addition, the market should consist of several customer segments

with different levels of price sensitivity.

Penetration pricing</keyterm> is the opposite of skimming

pricing. In this situation, the company prices a new product very

low to sell more in a short time and gain market share early on.

One reason marketers use penetration pricing is to discourage

competitors from entering the market. The firm first out with a

new product has an important advantage. Experience shows that a

pioneering brand often is able to maintain dominant market share

for long periods. Penetration pricing may act as a

<emphasis>barrier-to-entry</emphasis> for competitors if the

prices the market will bear are so low that the company will not

be able to recover development and manufacturing costs.

Trial pricing</keyterm> means that a new product carries a low

price for a limited time to generate a high level of customer

interest. Unlike penetration pricing, in which the company

maintains the low price, in this case it increases the trial price

after the introductory period. The idea is to win customer

acceptance first and make profits later.

Chapter 10: Price: What is the Value Proposition Worth?

p. 312 3.2.5 Price Segmentation

Price segmentation is the practice of charging different prices to

different market segments for the same product. Peak load

pricing is a pricing plan that sets prices higher during periods

with higher demand. Surge pricing is a pricing plan that raises

prices of a product as demand goes up and lowers it as demand

slides.

Bottom of the pyramid pricing is innovative pricing that will

appeal to consumers with the lowest incomes by brands that wish

to get a foothold in bottom of the pyramid countries.

p. 312 3.3 Step 6: Develop Pricing Tactics

Once marketers have developed pricing strategies, the last step in

price planning is to implement them. The methods companies use

to set their strategies in motion are their pricing tactics.

p. 313 3.3.1 Pricing for Individual Products

The way marketers present a product’s price to a market can make

a big difference. The following are examples:

Two-part pricing requires two separate types of payments to

purchase the product. Payment pricing makes the consumer think

the price is “do-able” by breaking up the total price into smaller

amounts payable over time. Decoy pricing is a pricing strategy

whereby a seller offers at least three similar products; two have

comparable but more expensive prices and one of these two is less

attractive to buyers, thus causing more buyers to buy the higher

priced more attractive item.

Exhibit: Dank

Furniture

►Marketing Moment In-Class Activity

Ask students to think of examples of products (besides cars) that use payment pricing. Who is the

target market (people who may not be able to afford the product)? Are there any ethical concerns

to this tactic? How would you advertise the price?

p. 313 3.3.2 Pricing for Multiple Products

A firm may sell several products that consumers typically buy at

one time. Price bundling means selling two or more goods or

services as a single package for one price—a price that is often

less than the total price of the items if bought individually.

Captive pricing is a pricing tactic a firm uses when it has two

products that work only when used together. The firm sells one

item at a very low price and then makes its profit on the second

high-margin item.

Marketing Moment In-Class Activity

Ask students to identify how fast food restaurants use product bundling? (Example: Happy Meal)

Are there any ethical concerns (i.e., people eating more because they ‘get a deal’)?

p. 314 3.3.3 Distribution-Based Pricing

Distribution-based pricing is a tactic that establishes how firms

Exhibit: The Art

of Shaving

Part 3: Develop the Value Proposition for the Customer

p. 314

handle the cost of shipping products to customers near as well as

far.

F.O.B. pricing is a tactic used in business-to-business marketing.

<para>Often

a company states a price as <emphasis>F.O.B.

factory</emphasis> or <emphasis>F.O.B. delivered</emphasis>.

F.O.B. stands for “free on board,” which means the supplier pays

to have the product loaded onto a truck or some other carrier. Also

—and this is important—<emphasis>title passes to the

buyer</emphasis> at the F.O.B. location. F.O.B. factory or

<keyterm id=”ch11term29″ linkend=”gloss11_028″

preference=”0″ role=”strong”>F.O.B. origin pricing</keyterm>

means that the cost of transporting the product from the factory to

the customer’s location is the responsibility of the customer.

<keyterm id=”ch11term30″ linkend=”gloss11_029″

preference=”0″ role=”strong”>F.O.B. delivered

pricing</keyterm> means that the seller pays both the cost of

loading and the cost of transporting to the customer, amounts it

includes in the selling price.

International Delivery Pricing Terms of Sale

CIF (cost, insurance, freight) is used for ocean

shipments. It means the seller quotes a price for the

goods (including insurance), all transportation, and

miscellaneous charges to the point of debarkation from

the vessel.

CFR (cost and freight) means the quoted price covers

the goods and the cost of transportation to the named

point of debarkation but the buyer must pay the cost of

insurance. This term is typically used only for ocean

shipments.

CIP (carriage and insurance paid to) and CPT (carriage

paid to) include the same provisions as CIF and CFR.

However, they are used for shipment by modes other

than water.

When a firm uses <keyterm id=”ch11term32″

linkend=”gloss11_031″ preference=”0″ role=”strong”>uniform

delivered pricing</keyterm>, it adds an average shipping cost to

the price, no matter what the distance from the manufacturer’s

plant—within reason.

Freight absorption pricing</keyterm> means the seller takes on

part or all of the cost of shipping. This policy works well for

high-ticket items, for which the cost of shipping is a negligible

Chapter 10: Price: What is the Value Proposition Worth?

part of the sales price and the profit margin.

p. 314

p. 315

3.3.4 Discounting for Channel Members

A list price, also referred to as a suggested retail price, is the

price that the manufacturer sets as the appropriate price for the

end consumer to pay. In pricing for members of the channel,

marketers recognize that retailers and wholesalers have costs to

cover and profit targets to reach as well. They often begin with the

list price and then use a number of discounting tactics to

implement pricing to members of the channel of distribution.

Such tactics include the following:

Trade or functional

discounts:</title><para><inst> </inst>Because the

channel members perform selling, credit, storage, and

transportation services that the manufacturer would

otherwise have to provide, manufacturers normally

offer <keyterm id=”ch11term35″

linkend=”gloss11_034″ preference=”0″

role=”strong”>trade or functional

discounts</keyterm> to channel intermediaries. These

discounts are usually set percentage discounts off the

suggested retail or list price for each channel level.

Quantity discounts:</title><para><inst> </inst>To

encourage larger purchases from distribution channel

partners or from large organizational customers,

marketers may offer <keyterm id=”ch11term36″

linkend=”gloss11_035″ preference=”0″

role=”strong”>quantity discounts</keyterm>, or

reduced prices for purchases of larger quantities.

<emphasis>Cumulative quantity

discounts</emphasis> are based on a total quantity

bought within a specified time, often a year/. They

encourage a buyer to stick with a single seller instead

of moving from one supplier to another. Cumulative

quantity discounts often take the form of

<emphasis>rebates</emphasis>, in which case the

firm sends the buyer a rebate check at the end of the

discount period or, alternatively, gives the buyer credit

against future orders. <emphasis>Non-cumulative

quantity discounts</emphasis> are based only on the

quantity purchased with each individual order and

encourage larger single orders but do little to tie the

buyer and the seller together.

Cash discounts:</title><para><inst> </inst>Many

firms try to entice their customers to pay their bills

quickly by offering cash discounts.

Seasonal

Part 3: Develop the Value Proposition for the Customer

discounts:</title><para><inst> </inst><emphasis>Season

al discounts</emphasis> are price reductions offered only

during certain times of the year.

p. 315

p. 316

p. 317

4. PRICING AND ELECTRONIC COMMERCE

Because sellers are connected to buyers around the globe as never

before through the Internet, corporate networks, wireless setups,

and marketers can offer deals tailored to a single person at a

single moment. Many experts suggest that technology is creating

a consumer revolution that might change pricing forever—and

perhaps create the most efficient market ever. The Internet also

enables firms that sell to other businesses (B2B firms) to change

their prices rapidly as they adapt to changing costs.

4.1 Dynamic Pricing Strategies

One of the most important opportunities the Internet offers is

<keyterm id=”ch11term37″ linkend=”gloss11_036″

preference=”0″ role=”strong”>dynamic pricing</keyterm>, in

which the seller can easily adjust the price to meet changes in the

marketplace.

4.2 Internet Price Discrimination

Internet price discrimination is an Internet pricing strategy that

charges different prices to different customers for the same

product. Is price discrimination illegal? As long as the company

doesn’t charge different prices based on a demographic

characteristic such as gender or race, it is not. Whether it is

ethical, however, is debatable.

4.3 Online Auctions

Online auctions</keyterm> allow shoppers to bid on everything

from bobbleheads to health-and-fitness equipment to a Sammy

Sosa home-run ball. Auctions provide a second Internet pricing

strategy. Perhaps the most popular auctions are the C2C auctions

such as those on eBay. The eBay auction is an <emphasis>open

auction</emphasis>, meaning that all the buyers know the highest

price bid at any point in time. On many Internet auction sites, the

seller can set a <emphasis>reserve price</emphasis>, a price

below which the item will not be sold.<link linkend=”ch11mn40″

preference=”1″/></para>

<para>A <emphasis>reverse auction</emphasis> is a tool used

by firms to manage their costs in business-to-business buying.

While in a typical auction, buyers compete to purchase a product,

in reverse auctions; sellers compete for the right to provide a

product at, hopefully, a low price.

Chapter 10: Price: What is the Value Proposition Worth?

p. 317

4.4 Freemium Pricing Strategies

A freemium strategy is a business strategy in which a product in

its most basic version is provided free of charge but the company

charges money (the premium) for upgraded versions of the

product with more features, greater functionality, or greater. The

freemium pricing strategy has been most popular in digital

offerings such as software media, games, or web services where

the cost of one additional copy of the product is negligible.

4.5 Pricing Advantages for Online Shoppers

The Internet creates unique pricing challenges for marketers

because consumers and business customers are gaining more

control over the buying process. Consumers have become more

price sensitive.

►Marketing Moment In-Class Activity

Ask if a student or someone the student knows participated in an e-bay auction. How is it

emotionally different from just going to the store and paying the price on the price tag (emotional

excitement)? How does this kind of consumer behavior exemplify the “experience economy?”

p. 317

p. 318

5. PSYCHOLOGICAL, LEGAL AND ETHICAL ASPECTS

OF PRICING

5.1 Psychological Issues in Setting Prices

Much of what we’ve said about pricing depends on economists’

notion of a customer who evaluates price in a logical, rational

manner.

5.1.1 Buyers’ Pricing Expectation

Often consumers base their perceptions of price on what they

perceive to be the customary or fair price. When the price of a

product is above or sometimes even when it is below what

consumers expect they are less willing to purchase the product.

Figure 10.13

Snapshot:

Psychological,

Legal, and

Ethical Aspects

of Pricing

►Marketing Moment In-Class Activity

Ask students to write down their “internal reference price” for products they are likely to

purchase (i.e., CD, can of pop, fast food dinner, computer, jeans, shoes). Compare prices between

students. Why are some internal reference prices consistent while others are different?

p. 318 5.1.2 Internal Reference Prices

Sometimes consumers’ perceptions of the customary price of a

product depend on their <keyterm id=”ch11term40″

linkend=”gloss11_039″ preference=”0″ role=”strong”>internal

reference price</keyterm>. That is, based on experience,

consumers have a set price or a price range in mind that they refer

to in evaluating a product’s cost.

In some cases, marketers try to influence consumers’ expectations

of what a product should cost when they use reference-pricing

strategies. For example, manufacturers may compare their price to

Part 3: Develop the Value Proposition for the Customer

competitors’ prices when they advertise. Similarly, a retailer may

display a product next to a higher-priced version of the same or a

different brand.

Two results are likely: On the one hand, if the prices (and other

characteristics) of the two products are close, the consumer will

probably feel the product quality is similar. This is an

<emphasis>assimilation effect</emphasis>. On the other hand, if

the prices of the two products are too far apart, a

<emphasis>contrast effect</emphasis> may result, in which the

customer equates the gap with a big difference in quality.

p. 319 5.1.3 Price–Quality Inferences

Consumers make price-quality inferences about a product when

they use price as a cue or an indicator of quality. If consumers are

unable to judge the quality of a product through examination or

prior experience, they usually will assume that the higher-price

product is the higher-quality product.

Brain scans show that—contrary to conventional wisdom—

consumers who buy something at a discount experience less

satisfaction than people who pay full price for the very same

thing. Researchers call this the <emphasis>price-placebo

effect</emphasis>.

p. 319

p. 320

5.2 Psychological Pricing Strategies

Setting a price is part science, part art. Marketers must understand

psychological aspects of pricing when they decide what to charge

for their products or services.

5.2.1 Odd–Even Pricing

Marketers have assumed that there is a psychological response to

odd prices that differ from the responses to even prices. Habit

may also play a role. Research on the difference in perceptions of

odd versus even prices indeed supports the argument that prices

ending in 99 rather than 00 lead to increased sales.

Some prices are set at even numbers because of necessity. Lottery

tickets and admission to sporting events are two examples. Many

luxury items such as jewelry, golf course fees, and resort

accommodations use even dollar prices to set them apart. When

prices are given with dollar signs or even the word dollar,

customers spend less.

5.2.2 Price Lining

Marketers often apply their understanding of the psychological

aspects of pricing in a practice they call <keyterm

Chapter 10: Price: What is the Value Proposition Worth?

p. 320

id=”ch11term41″ linkend=”gloss11_040″ preference=”0″

role=”strong”>price lining</keyterm>, whereby items in a

product line sell at different prices, or <emphasis>price

points</emphasis>. If you want to buy a new digital camera, you

will find that most manufacturers have one “stripped-down”

model for $100 or less. A better-quality but still moderately priced

model likely will be around $200, while a professional quality

camera with multiple lenses might set you back $1,000 or more.

Price lining provides the different ranges necessary to satisfy each

segment of the market.

For marketers this technique is a way to maximize profits. A firm

charges each customer the highest price the he is willing to pay.

5.2.3 Prestige Pricing

Sometimes luxury goods marketers use a <emphasis>prestige

pricing strategy</emphasis> that turns the typical assumption

about price-demand relationships on its head: Contrary to the

“rational” assumption that we value a product or service more as

the price goes down, in these cases, believe it or not, people tend

to buy more as the price goes up!

Use website here: www.landsend.com Lands’ End website

p. 320

p. 321

5.3 Legal and Ethical Considerations in B2C Pricing

The free enterprise system is founded on the idea that the

marketplace will regulate itself. Unfortunately, the business world

includes the greedy and unscrupulous. Government has found it

necessary to enact legislation to protect consumers and to protect

businesses from predatory rivals.

5.3.1 Deceptive Pricing Practices

Unscrupulous businesses may advertise or promote prices in a

deceptive way. The Federal Trade Commission (FTC), state

lawmakers, and private bodies such as the Better Business Bureau

have developed pricing rules and guidelines to meet the challenge.

Another deceptive pricing practice is the <keyterm

id=”ch11term42″ linkend=”gloss11_041″ preference=”0″

role=”strong”>bait-and-switch</keyterm> tactic, whereby a

retailer will advertise an item at a very low price—the

<emphasis>bait</emphasis>—to lure customers into the store.

However, it is almost impossible to buy the advertised item—

salespeople like to say (privately) that the item is “nailed to the

floor.” The salespeople do everything possible to get the

unsuspecting customers to buy a different, more expensive, item

—the <emphasis>switch</emphasis>.

Part 3: Develop the Value Proposition for the Customer

It is complicated to enforce laws against bait-and-switch tactics

because these practices are similar to the legal sales technique of

“trading up.” Simply encouraging consumers to purchase a

higher-priced item is acceptable, but it is illegal to advertise a

lower-priced item when it’s not a legitimate, <emphasis>bona

fide</emphasis> offer that is available if the customer demands it.

The FTC may determine if an ad is a bait-and-switch scheme or a

legitimate offer by checking to see if a firm refuses to show,

demonstrate, or sell the advertised product; disparages it; or

penalizes salespeople who do sell it.

p. 321

p. 322

5.3.2 Loss-Leader Pricing and Unfair Sales Acts

Some retailers advertise items at very low prices or even below

cost and are glad to sell them at that price because they know that

once in the store, customers may buy other items at regular prices.

Marketers call this <keyterm id=”ch11term43″

linkend=”gloss11_042″ preference=”0″ role=”strong”>loss leader

pricing</keyterm>; they do it to build store traffic and sales

volume.

Some states frown on loss leader practices so they have passed

legislation called <keyterm id=”ch11term44″

linkend=”gloss11_043″ preference=”0″ role=”strong”>unfair

sales acts</keyterm> (also called <emphasis>unfair trade

practices acts</emphasis>). These laws or regulations prohibit

wholesalers and retailers from selling products below cost. These

laws aim to protect small wholesalers and retailers from larger

competitors because the “big fish” have the financial resources

that allow them to offer loss leaders or products at very low prices

—they know that the smaller firms can’t match these bargain

prices.

5.3.3 Misleading Merchandising

Sometimes, the merchandising activities in the retail store are

deceptive or at least suspicious. Consumers assume that items in

an end-aisle display are being sold at a discounted price. When

retailers display regularly priced merchandise in these displays,

they may be accused of taking advantage of consumers.

5.4 Legal Issues in B2B Pricing

Some of the more significant illegal B2B pricing activities include

price discrimination, price fixing, and predatory pricing.

5.4.1 Illegal Business-to-Business Price Discrimination

The Robinson-Patman Act includes regulations against price

discrimination in interstate commerce. Price discrimination

Chapter 10: Price: What is the Value Proposition Worth?

p. 322

p. 323

regulations prevent firms from selling the same product to

different retailers and wholesalers at different prices if such

practices lessen competition.

5.4.2 Price-Fixing

Price fixing occurs when two or more companies conspire to

keep prices at a certain level. Horizontal price-fixing</emphasis>

occurs when competitors making the same product jointly

determine what price they each will charge. Sometimes

manufacturers or wholesalers attempt to force retailers to charge a

certain price for their product. When <emphasis>vertical

price-fixing</emphasis> occurs, the retailer that wants to carry the

product has to charge the “suggested” retail price.

5.4.3 Predatory Pricing

Predatory pricing</keyterm> means that a company sets a very

low price for the purpose of driving competitors out of business.

Later, when they have a monopoly, they turn around and increase

prices.

►ETHICS CHECK

Find out what other students taking this course would do and why

at www.mymktlab.com

If you were advising Uber’s executives, would you encourage

them to end the service’s surge pricing strategy to prevent the

company from losing customers who are angry about such price

hikes?

Ripped from the

Headlines:

Ethical/

Sustainable

Decisions in the

Real World

Real People, Real Choices: Here’s My Choice at Converse

Betsy chose option #1.

Part 3: Develop the Value Proposition for the Customer

IV. END-OF-CHAPTER ANSWER GUIDE

Chapter Review

 CONCEPTS: TEST YOUR KNOWLEDGE

10-1 What is price, and why is it important to a firm? What is digital

currency, such as Bitcoin?

Price is the value that customers give up or exchange to obtain a desired

product. Price not only brings revenue into the firm but it also matches

competitive offerings and often establishes an image for the firm and its

products.

Bitcoin is a difital currency alternative. The Bitcoin units are generated

by open-source software; each additional Bitcoin can enter the system

only after a sophisticated computer solves an encryption problem. This

means there are only a very limited number of them around, so some

people are trying to snatch them up. This digital currency is bought on

Bitcoin exchanges, or purchased from mobile apps that store them in a

“virtual wallet.” Bitcoins are not controlled by the U.S. Treasury.

Transactions occur from person to person, so this opens the potential for

Bitcoins to show up in illegal transactions (such as laundering drug

money).

Chapter 10: Price: What is the Value Proposition Worth?

10-2 Describe and give examples of some of the following types of pricing

objectives: profit, market share, competitive effect, customer satisfaction,

and image enhancement.

When pricing strategies are determined by profit objectives, the focus is on a target

level of profit growth or a desired net profit margin. A profit objective is important to

firms that believe profit is what motivates shareholders and bankers to invest in a

company.

Market share involves having a pricing strategy to maximize sales (either

in dollars or in units) or to increase market share.

Competitive effect objectives mean that the pricing plan is intended to

have a certain effect on the competition’s marketing efforts.

Customer satisfaction means that quality-focused firms believe that

profits result from making customer satisfaction the primary objective.

These firms believe that by focusing solely on short-term profits, a

company loses sight of keeping customers for the long term.

Image enhancement is when the consumers use price to make inferences

about the quality of a product. Marketers know that price is often an

important means of communicating not only quality but also image to

prospective customers.

Explain how the demand curves for normal products and for prestige products

differ. What are demand shifts and why are they important to

marketers? How do firms go about estimating demand? How can

marketers estimate the elasticity of demand?

Part 3: Develop the Value Proposition for the Customer

For normal products the demand curve slopes downward and to the right—as price

goes up, demand goes down. For prestige products such as luxury cars or jewelry, the

demand curve slopes upward—an increase in price may actually result in an increase

in the quantity demanded because consumers see the products as more valuable.

Demand shifts mean the quantity demanded a given price is greater (an upward shift)

or less (a downward shift). Marketing activities such as a great ad campaign can

cause an upward shift. Downward shifts may occur if a new technology is developed

or other external factors.

Marketers estimate demand by identifying the number of buyers or

potential buyers for their product and then multiplying that estimate

times the average amount each member of the target market is likely to

purchase.

Marketers often do research to determine demand at different prices,

thus estimating demand. One type of research is to ask consumers how

much they would buy at different prices. Alternatively, marketers may

conduct field studies in which they vary the price of a product in different

stores and measure how much is actually purchased.

Explain variable costs, fixed costs, average variable costs, average fixed

costs, and average total costs.

Variable costs are the costs of production tied to and vary depending

on the number of units produced. Variable costs typically include

raw materials, processed materials, component parts, and labor.

Fixed costs are the costs of production that do not change with the

number of units produced. A CEOs salary is a fixed cost.

Average variable costs are the total spent on raw materials, labor, and

so on divided by the number of items produced.

Chapter 10: Price: What is the Value Proposition Worth?

Average fixed costs (fixed costs remain the same no matter the level of

production) will decrease as the number of units produced

increases. To calculate, divide fixed costs by the number produced.

Average total costs are the total costs (the total of the fixed costs and

the variable costs for a set number of units produced) divided by

the number of units produced.

10-5 What is break-even analysis?

Break-even analysis is a method for determining the number of units that

will have to be produced and sold at a given price to break even—that is,

to neither make a profit nor suffer a loss. Marketers use break-even

analysis to help them in establishing and deciding on the price for a

product. For details on calculations, see the chapter material.

10-6 What are trade margins? How do they relate to the pricing for a

producer of goods?

So far, we have talked about costs simply from the manufacturer’s

perspective. However, in reality, most products are not sold directly to the

consumers or business buyers of the product. Instead, a manufacturer

sells to a wholesaler, distributor, or jobber who in turn sells to a retailer

who finally sells the product to the ultimate consumer. Channels of

distribution often vary in both the types and sizes of available

intermediaries and in the availability of an infrastructure to facilitate

product distribution. Often these differences can mean that trade

margins will be higher as will the cost of getting the products to

consumers.

10-7 Give an example of how the competitive environment influences prices.

What about government regulation and consumer trends? What are some

ways the global environment can influence a firm’s pricing strategies?

Part 3: Develop the Value Proposition for the Customer

Marketers try to anticipate how the competition will respond to their

pricing actions. They know that consumers’ expectations of what

constitutes a fair price largely depend on what the competition charges.

However, it is not always a good idea to fight the competition with lower

and lower prices. Pricing wars such as those in the fast-food industry can

change consumers’ perceptions of what is a “fair” price, leaving them

unwilling to buy at previous price levels.

Governments in the U.S. and other countries develop two different types

of regulations, which have an effect on pricing. First, a large number of

regulations increase the costs of production. Regulations for health care,

environmental protection, occupational safety, and highway safety, just to

mention a few, cause the costs of producing many products to increase.

Other regulations of specific industries such as those imposed by the Food

and Drug Administration (FD) on the production of food and

pharmaceuticals increase the costs of developing and producing those

products.

Consumer trends also can strongly influence prices. Culture and

demographics determine how consumers think and behave and so these

factors have a large impact on all marketing decisions. For example, an

important trend is that even well off people no longer consider it

shameful to hunt for bargains—in fact, it is becoming fashionable to

boast that you found one. As a marketing executive for a chain of

shopping malls observed, “Everybody loves to save money. It’s a badge of

honor today.” Luxury consumers are looking for prestigious brands at

low prices, though they are still willing to splurge for some high-ticket

items.

Chapter 10: Price: What is the Value Proposition Worth?

The marketing environment often varies widely from country to country.

This can have important consequences in developing pricing strategies.

Can prices be standardized for all global markets or must there be

localization in pricing? For products including most consumer goods,

unique environmental factors in different countries mean marketers

must adapt their pricing strategies.

10-8 Explain and give an example of cost-plus pricing, target costing, and yield

management pricing.

Cost-plus pricing means marketers total all the costs for the product

then add an amount to arrive at the selling price.

Target costing occurs when a firm first determines the price at which

customers would be willing to buy the product and then works

backward to design the product in such a way that it can produce

and sell the product at a profit.

Yield management pricing is a pricing strategy used by airlines, hotels,

and cruise lines. Firms charge different prices to different

customers in order to manage capacity while maximizing revenues.

For new products, when is skimming pricing more appropriate, and when is

penetration pricing the best strategy? When would trial pricing be an

effective pricing strategy?

Skimming price works best when a product is highly desirable and offers

unique benefits, demand is price inelastic during the introductory stage

of the product life cycle and if the product provides some important

benefits to the target market that make customers feel they must have the

product no matter what it costs. In addition, there must be little chance

that competitors can get into the market quickly.

Part 3: Develop the Value Proposition for the Customer

Penetration pricing is used to discourage competitors from entering the

market and because of the low price may actually be a barrier to entry

for competitors.

With trial pricing a new product carries a low price for a limited period

to attract the customer. The idea is to win customer acceptance first and

make profits later.

10-10 How do marketers customize pricing with pricing segmentation, peak

load pricing, and surge pricing? How can marketers price to meet

the need of bottom of the pyramid consumers?

Price segmentation is the practice of charging different prices to

different market segments for the same product. Peak load pricing is a

pricing plan that sets prices higher during periods with higher demand.

Surge pricing is a pricing plan that raises prices of a product as

demand goes up and lowers it as demand slides. Bottom of the pyramid

pricing is innovative pricing that will appeal to consumers with the

lowest incomes by brands that wish to get a foothold in bottom of the

pyramid countries. Marketers often use sachets to sell a small quantity

of a product such as laundry detergent which is sold at a far lower

price than an entire box. This strategy allows poor countries to buy

high quality products at affordable prices.

10-11 Explain decoy pricing. Is decoy pricing ethical?

Chapter 10: Price: What is the Value Proposition Worth?

Decoy pricing is a strategy where a seller offers at least three similar

products. Two of them have comparable but more expensive prices

than the third, and one of these two is less attractive to buyers than

the other. The result is that people will more often choose the more

attractive of the two higher priced items. As an example, think about

an electronics retailer who would like for his customers to buy a

specific, higher-priced laptop with a higher margin that will mean

more profits for him. With decoy pricing, he will offer three different

laptops—we’ll call them models A, B, and C. Model A is a

stripped-down, no-name brand laptop, much lower priced than either

model B or model C, and unlikely to attract many sales. One of the

two higher priced items, say model B, has a larger hard drive,

superior screen resolution and more RAM than model C. In this case,

model C is the decoy. When consumers compare it to model B, they

will naturally buy model B, just as the retailer wanted them to do.

Students can discuss whether this marketing strategy that leads

customer to a higher-priced item is ethical. Some could argue that

customers are free to buy the model they can afford. Others could

argue that customers are being duped into spending more money.

10-12 Explain two-part pricing, payment pricing, price bundling, captive

pricing, and distribution-based pricing tactics.

Two-part pricing requires two separate types of payments to purchase

the product. An example would be a cellular phone company that offers

customers a set number of minutes’ usage plus a per-minute rate for

extra minutes used. Two-part pricing makes sense when consumption

differs among consumers but the firm must have a base income to cover

fixed costs.

Payment pricing breaks up the total price into smaller amounts payable

over time, thus making the consumer think the price is “do-able.”

Payment pricing makes sense for a product that is high priced, that

consumers think as important, and that lasts a long time. An example

would be a car.

Part 3: Develop the Value Proposition for the Customer

Price bundling means selling two or more goods or services as a single

package for one price. From a marketing standpoint, price bundling

makes sense. If products are priced separately, then it is likely that

customer will buy some but not all the items. An example would be a

phone company now offering cable services for TV and an Internet

connection in one bill.

Captive pricing is a pricing tactic a firm uses when it has two products

that work only when used together. The firm sells one item at a very low

price and then makes its profit on the second high-margin item. An

example would be a razor and blade, neither individually is useful, but

together they have great value. Captive pricing makes sense for a

consumer necessity that can be individualized and still meet the needs of

the mass market.

Distribution-based pricing is a tactic that establishes how firms handle

the cost of shipping products to customers near as well as far. FOB

delivered pricing means the seller pay for the cost of loading and the cost

of transporting the item to the customer.

10-13 Why do marketers use trade or functional discounts, quantity

discounts, cash discounts, and seasonal discounts in pricing to

members of the channel?

Chapter 10: Price: What is the Value Proposition Worth?

In pricing for members of the channel, marketers recognize that retailers

and wholesalers have costs to cover and profit targets to reach. Thus,

they often begin with the list price and then use a number of trade or

functional discounts to implement pricing to members of the channels of

distribution. Quantity discounts are used to encourage buyers to buy

larger quantities from a single seller. Cash discounts encourage

customers to pay quickly, thus lowering the seller firm’s need for cash.

Season discounts either encourages purchase off-season to lessen the

manufacturer’s need to warehouse product or encourage purchase

in-season to counter competitive products.

10-14 What is dynamic pricing? What is discriminatory pricing? What is the

difference between the two?

Dynamic pricing can occur when the price can easily be adjusted to meet

changes in the marketplace. Internet price discrimination is an Internet

pricing strategy that charges different prices to different customers for

the same product. The Internet allows consumers to quickly comparison

shop for the very lowest price, Marketers maximize profits if they charge

each customer the most that person is willing to pay. Placing customers

into groups based on where they live, how close they are to the retailer or

a competitor, the cost of doing business in the area, or their Internet

browsing history can greatly increase profits. Some sites even offer

customers a discount if they use a mobile device.

10-15 Explain these psychological aspects of pricing: price-quality inferences,

odd-even pricing, internal reference price, price lining, and prestige

pricing.

Consumers make price-quality inferences about a product when they use

price as a cue or an indicator of quality. If consumers are unable to judge

the quality of a product through examination or prior experience, they

usually will assume that the higher-priced product is the higher-quality

product.

Part 3: Develop the Value Proposition for the Customer

Marketers use odd-even pricing when they assume that there is a

psychological response to odd prices that differs from the responses to

even prices. Research on the difference in perceptions of odd versus even

prices supports the argument that prices ending in 99 rather than 00 lead

to increased sales. Habit may play a role.

Internal reference price means, based on experience, consumers have a

set price or a price range in their mind that they refer to in evaluating a

product’s cost. The reference price may be the last price paid. It may also

be the average of all the prices they know of similar products.

Price-lining is a practice where items in a product line sell at different

prices called price points.

Sometimes luxury goods marketers use a <emphasis>prestige pricing

strategy</emphasis> that turns the typical assumption about

price-demand relationships on its head: Contrary to the “rational”

assumption that we value a product or service more as the price goes

down, in these cases, believe it or not, people tend to buy more as the

price goes up!

10-16 Explain how unethical marketers might use bait-and-switch tactics,

price-fixing, and predatory pricing. What is surge pricing?

Bait-and switch is an illegal marketing practice in which an advertised

price special is used as bait to get customers into the store when the

intention of switching them to a higher priced item.

Chapter 10: Price: What is the Value Proposition Worth?

Price fixing occurs when two or more companies conspire to keep prices

at a certain level.

Predatory pricing means the company sets a very low price for a purpose

of driving the competition out of business. This tactic could lead to

monopoly in the future.

Surge pricing occurs when a company raises the price of its product as

demand for that product goes up and then lowers it as demand goes back

down. So in times of greatest need, it costs more.

 ACTIVITIES: APPLY WHAT YOU’VE LEARNED

10-17 Creative Homework/Short Project Assume that you are an entrepreneur who

runs a bakery that sells gluten-free breads and cakes. You believe that the

current economic conditions merit an increase in the price of your baked

goods. You are concerned, however, that increasing the price might not be

profitable because you are unsure of the price elasticity of demand for

your products. Develop a plan for the measurement of price elasticity of

demand for your products. What findings would lead you to increase the

price? What findings would cause you to rethink the decision to increase

prices? Develop a presentation for your class outlining: (1) the concept of

elasticity of demand, (2) why raising prices without understanding the

elasticity would be a bad move, (3) your recommendations for

measurement, and (4) the potential impact on profits for elastic and

inelastic demand.

MyMarketingLab for answers to Assisted Graded Questions

Part 3: Develop the Value Proposition for the Customer

10-18 In Class, 10–25 Minutes for Teams For each of the following

products, determine at least three different prices that might be charged.

Then survey each of the individuals within your group to find out how

much of each product they would buy at each price point for each of the

products. For each product, calculate the price elasticity of demand to

determine whether the demand is elastic or inelastic.

Cheese pizzas per month

Movie tickets per month

Concert tickets per year

Students must think about whether or not these products have unique

benefits, are highly desirable, and are price inelastic. In addition, the

target market must feel that these products have important benefits

that they must have no matter the cost. Students must research the

market and determine if competitors are poised to enter this market.

If these conditions are met, students will recommend a skimming

strategy.

If, on the other hand, students want to gain early market share and set

a low price prohibiting competition, they might consider penetration

pricing. Students may also consider a trial pricing strategy.

10-19 Creative Homework/Short Project Assume that you have been hired as

the assistant manager of a local store that sells fresh fruits and

vegetables. As you look over the store, you notice that there are two

different displays of tomatoes. In one display, the tomatoes are priced

at $2.39 per pound, and in the other, the tomatoes are priced at $1.69

per pound. The tomatoes look very much alike. You notice that many

people are buying the $2.39 tomatoes. Write a report explaining what

is happening and give your recommendations for the store’s pricing

strategy.

Chapter 10: Price: What is the Value Proposition Worth?

Students need to review the chapter section of psychological issues in

pricing, paying particular attention to sections on internal reference

prices including the assimilation and contrast effects and price-quality

inferences. You might also want to ask the students about their buying

experience and the occasion for which they are purchasing. If students

regularly purchase tomatoes and are confident in their decisions, then

they will most likely buy the lower-priced tomatoes. However, if they

do not frequently purchase tomatoes and are not confident of their

knowledge, they may buy the higher-priced tomatoes, especially if

they are trying to impress someone. In this case, the concept of

price-quality kicks in.

10-20 For Further Research (Individual) Assume you are the owner of a local

Mexican restaurant. You are seeking ways to increase your business.

You believe that bundling items on the menu will increase the

average ticket per customer. A suggested bundle offer would include

the items below:

Item

Chips, Salsa, and Guacamole $4.00

Chicken Burrito with rice and

beans $10.50

Flan $3.00

Non-alcoholic beverage $2.50

Part 3: Develop the Value Proposition for the Customer

You are considering three different prices that you might charge for the

bundle: $14.00, $16.00, and $18.50. Design and conduct research to

determine which price will maximize profits.

Students can conduct research online to see how other restaurants bundle

products. Then they can suggest bundling strategies for the local

Mexican restaurant.

10-21 For Further research (Individual) In this chapter, we talked about how

airlines use yield management pricing to ensure that every seat is

filled on every flight, thus maximizing profits. Go to the websites of at

least two different airlines. Check the prices of a flight for each airline

approximately three weeks from “now.” Then check the prices for the

same flights in less than a week, in two months, and in six months.

Write a report on your findings and what they tell you about airline

pricing.

Yield management pricing is a pricing strategy used by airlines, hotels,

and cruise lines. Firms charge different prices to different customers

in order to manage capacity while maximizing revenues. Students can

research airline pricing by using websites like Trivago.com or

Bookbuddy.com to compare flights on several airlines.

Chapter 10: Price: What is the Value Proposition Worth?

10-22 For Further Research (Groups) Select one of the product categories

below. Identify two different firms that offer consumers a line of

product offerings in the category. For example, Dell, HP, and Apple

each market a line of laptop computers, while Hoover, Dyson, and

Bissell offer lines of vacuum cleaners. Using the Internet or by visiting

a retailer who sells your selected product, research the product lines

and pricing of the two firms. Based on your research, develop a

presentation on the price lining strategies of the two firms. Your

presentation should discuss (1) the specific price points of the product

offerings of each firm and how the price lining strategy maximizes

revenue, (2) your ideas for why the specific price points were selected,

(3) how the price lining strategies of the two firms are alike and how

they are different, and (4) possible reasons for differences in the

strategies.

Laptop computers

Vacuum cleaners

Smart T.Vs

Smartphones

The main reason for price lining is that different customers are willing

to pay different prices for the same item. For example, you may only

be willing to spend up to $500 for a new computer, whereas I am

willing to pay up to $1500 for a new computer. Therefore, a computer

brand is likely to satisfy our different desires to spend money on a

computer to the extent that a product line of computers has various

price points that match our perception of the maximum amount we

are each willing to pay.

Part 3: Develop the Value Proposition for the Customer

One key analysis for each of the different types of products in this

activity is for students to estimate the variability of desired price

points in each type—for example, how many different price points are

required to satisfy different types of consumers in the smart phone

category? Should smart phone brands offer a wide or narrow variety

of price points? Should smart phone brands offer even more price

points?

 APPLY MARKETING METRICS

Contribution analysis and break-even analysis are very popular and often

used marketing metrics. These analyses are essential to determine if

a firm’s marketing opportunity will mean a financial loss or profit.

As explained in the chapter, contribution is the difference between the

selling price per unit and the variable cost per unit. Break-even

analysis that includes contribution tells marketers how much must

be sold to break even or to earn a desired amount of profit.

Touch of Beirut Brands is a Los Angeles–based specialty manufacturer of

Lebanese specialty foods and ingredients. In the past, the firm has marketed

primarily through restaurant distributors to small mom-and-pop Lebanese

cuisine restaurants around the United States. But they’ve developed a

marketing plan to sell a combination hummus and pita slices packaged

product that is ready to eat—sort of like the famous boxed Oscar Meyer

Lunchables. They’ve branded the new product “Happy Hummus.” Outlets

will be Whole Foods and other new-age supermarkets.

The company plans to use social media to gain buzz around the new

product but will also be spending money on advertising and sales promotion

through coupons to consumers and price incentives to distributors and

retailers. Whole Foods would like to be able to sell the boxes at retail for $5.

Because the retailer typically requires a 30 percent markup, Touch of

Beirut’s price to the supermarkets will be $3.50 per box. The unit variable

costs for the product including packaging will be $1.25. The company

estimates its advertising and promotion expenses for the first year will be

$2,500,000.

Chapter 10: Price: What is the Value Proposition Worth?

10-23 What is the contribution per unit for Happy Hummus?

MyMarketingLab for answers to Assisted Graded Questions

10-24 What is the break-even volume for the first year that will cover the

planned advertising and promotion (1) in units and (2) in dollars?

MyMarketingLab for answers to Assisted Graded Questions

10-25 How many units of Happy Hummus must Touch of Beirut sell to earn a

profit of $1,000,000?

MyMarketingLab for answers to Assisted Graded Questions

10-26 Does this seem like a good business venture to you? Why or why not?

MyMarketingLab for answers to Assisted Graded Questions

 CHOICES: WHAT DO YOU THINK?

Part 3: Develop the Value Proposition for the Customer

10-27 Critical Thinking Governments sometimes provide price subsidies to

specific industries; that is, they reduce a domestic firm’s costs so that it

can sell products on the international market at a lower price. What

reasons do governments (and politicians) use for these government

subsidies? What are the benefits and disadvantages to domestic

industries in the long run? To international customers? Who would

benefit and who would lose if all price subsidies were eliminated? Do you

feel that the U.S. government should or should not use price subsidies for

some U.S. industries? Why do you feel that way?

MyMarketingLab for answers to Assisted Graded Questions

10-28 Ethics Several online stores now sell products to consumers at

different prices based on the user’s information, such as geographical

location—which determines your proximity to competitors and your

area’s average income. Although this practice, known as Internet price

discrimination, is not illegal, some would say it is unethical. Do you

believe this practice is unethical? Should this practice be illegal? If you

think the practice should be legal, should retailers be required to put a

disclaimer on their site? Explain your reasoning.

Internet price discrimination is an Internet pricing strategy that charges

different prices to different customers for the same product. However, the

Internet does allow consumers to quickly comparison shop for the very

lowest price, While marketers maximize profits by placing customers into

groups based on where they live, how close they are to the retailer or a

competitor, the cost of doing business in the area, or their Internet

browsing history, customers can find a lower prices if they wish to surf

the net. Students can debate whether price discrimination should be

illegal or it they think it is unethical.

Chapter 10: Price: What is the Value Proposition Worth?

10-29 Critical Thinking In many oligopolistic industries, firms follow a price

leadership strategy, in which an accepted industry leader sets, raises, or

lowers prices and the other firms follow. In what ways is this policy good

and bad for the industry? In what ways is this good or bad for

consumers? What is the difference between price leadership and price

fixing? Should governments allow industries to use price leadership

strategies? If not, how can they prevent it?

Oligopolistic firms can avoid price competition, which allows all players in the

industry to remain profitable. A price leadership strategy, which usually is the rule in

an oligopolistic industry dominated by a few firms, may be in the best interest of all

players because it minimizes price competition. Price leadership strategies are

popular because they provide an acceptable and legal way for firms to agree on prices

without ever talking with each others. From a consumer standpoint there are limited

firms to work with which might be viewed as good, but the negative side would be

that there are limited opportunties for cost savings since the oligoploy has a large

share of the market. Price-fixing</keyterm> occurs when two or more companies

conspire to keep prices at a certain level (there’s a good reason to avoid explicitly

working together to set rates: that’s called <emphasis>collusion</emphasis> and it’s

illegal in most cases). As far as govenrment allowing price leadership, this could lead

to varying positions from the students.

10-30 Ethics Many very successful retailers use a loss leader pricing strategy, in

which they advertise an item at a price below their cost and sell the item

at that price to get customers into their store. They feel that these

customers will continue to shop with their company and that they will

make a profit in the long run. Do you consider this an unethical practice?

Who benefits and who is hurt by such practices? Do you think the

practice should be made illegal, as some states have done? How is this

different from bait-and-switch pricing?

Part 3: Develop the Value Proposition for the Customer

Students will have varying opinions on this topic. For some, free

enterprise will be their main consideration. For others looking after the

underdog will be a priority and they will be concerned that smaller

retailers cannot afford to compete with loss-leader pricing. As different

states regulate this practice differently, no single opinion is particularly

wrong or right. The difference between loss-leader pricing and

bait-and-switch is that the latter seeks to bring customers in and sell

them a more expensive product, not the one advertised; the advertised

item is “nailed to the floor.”

10-31 Critical Thinking Some retailers have used decoy pricing to increase

the number of sales of a higher priced alternative. Describe decoy

pricing. What are some products that would be good choices for

decoy pricing? Is this practice ethical? Why or why not?

Decoy pricing is a strategy where a seller offers at least three similar

products. Two of them have comparable but more expensive prices

than the third, and one of these two is less attractive to buyers than

the other. The result is that people will more often choose the more

attractive of the two higher priced items. Computers are good

choices for decoy pricing because different models offer more

advanced benefits. The higher priced models have more memory and

are faster. This question should make for an interesting discussion, as

opinions should be plentiful as to whether decoy pricing is ethical.

Marketers know that customers can be led into purchasing

higher-priced items. On the other hand, adult consumers are not

forced into a purchase. They make purchase decisions independently

and are responsible for their decisions. Marketing to children is a

different issue.

Chapter 10: Price: What is the Value Proposition Worth?

10-32 Critical Thinking You work as a marketer for a large chain of upscale

boutique-like stores that sells all-natural and other fresh beauty products.

Your research tells you that the market won’t tolerate a price increase, so

to save money during tough times you have decided to use cheaper

ingredients from new suppliers. What, if anything, do you tell your

customers? What are some of the possible ramifications of this decision

for your business, your customers, and your suppliers? What will you do

when the market rebounds?

Students can debate the legal and ethical implications of substituting

cheaper ingredients from new suppliers in tough times. Companies build

trust with consumers and try to develop a long-standing relationship.

This is an integral part of CRM. What are the implications of changing

ingredients in cosmetics? What if customers develop allergies to the new

ingredients when they did not have any problems with the former

ingredients? What are the labeling requirements?

10-33 Critical Thinking Many firms wish to market their products to

consumers in bottom of the pyramid countries. Being successful now will

create consumer familiarity with the brand establishing a presence in the

countries for the future when the economy of the countries improves. In

addition to the ways we discussed in the chapter, what are some

innovative strategies that could be successful for firms wishing to sell one

of the following products?

1. Disposable diapers

2. Body wash

3. Toothpaste

Students can brainstorm in small groups and offer innovative ideas on

how to sell products to poor countries. One strategy is to use sachets,

individual packets that contain a small amount of a product such as

body wash or toothpaste. Diapers could be sold in smaller packages.

Part 3: Develop the Value Proposition for the Customer

 MINI-PROJECTS: LEARN BY DOING

The purpose of this mini-project is to help you become familiar with how

consumers respond to different prices by conducting a series of

pricing experiments. For this project, you should first select a

product category that students such as yourself normally purchase. It

should be a moderately expensive purchase such as athletic shoes, a

bookcase, or a piece of luggage. You should next obtain two

photographs of items in this product category or, if possible, two

actual items. The two items should not appear to be substantially

different in quality or in price.

Note: You will need to recruit separate research participants for each of the

activities listed in the next section.

10-34 Experiment 1: Reference Pricing

Place the two products together. Place a sign on one with a low price.

Place a sign on the other with a high price (about 50 percent higher

will do). Ask your research participants to evaluate the quality of

each of the items and to tell which one they would probably

purchase.

Reverse the signs and ask other research participants to evaluate the

quality of each of the items and to tell which one they would

probably purchase.

Place the two products together again. This time place a sign on one

with a moderate price. Place a sign on the other that is only a little

higher (less than 10 percent higher). Again, ask research

participants to evaluate the quality of each of the items and to tell

which one they would probably purchase.

Chapter 10: Price: What is the Value Proposition Worth?

Reverse the signs and ask other research participants to evaluate the

quality of each of the items and to tell which one they would

probably purchase.

10-35 Experiment 2: Odd–Even Pricing. For this experiment, you will only

need one of the items from experiment 1.

a. Place a sign on the item that ends in $.99 (e.g., $62.99). Ask

research participants to tell you if they think the price for the item

is very low, slightly low, moderate, slightly high, or very high. Also

ask them to evaluate the quality of the item and to tell you how

likely they would be to purchase the item.

b. This time place a sign on the item that ends in $.00 (e.g., $60.00).

Ask different research participants to tell you if they think the

price for the item is very low, slightly low, moderate, slightly high,

or very high. Also ask them to evaluate the quality of the item and

to tell you how likely they would be to purchase the item.

Develop a presentation for your class in which you discuss the results of

your experiments and what they tell you about how consumers view

prices.

This mini-project will help students understand the concepts of

psychological pricing. They will be able to test the concept of odd-even

pricing, and reference pricing; whether the concepts work or not. In

addition, they will be asked to think about pricing as it relates to quality.

The experimental nature of this project will aid in reinforcing many of

the concepts presented in the text.

V. MARKETING IN ACTION CASE: REAL CHOICES AT

DISNEY

Part 3: Develop the Value Proposition for the Customer

Summary of Case

The Walt Disney Company is “reimagining” its pricing strategy. Responding

to the ever-increasing demand for theme park tickets, especially at

peak times, Disney has implemented “demand-based pricing”

Demand-based pricing has been in use by Disney competitor,

Universal Studios, and other theme parks. The idea is to redistribute

customer demand by lowering prices during times with less demand

to encourage more sales and increase prices at times when demand is

higher to encourage customers to switch some of their visits to

lower-priced times. Under demand-based pricing, there are three

prices. “Value” tickets for Mondays through Thursdays are $95, a

reduction of $4.00. “Regular” tickets for most week-ends and

summer months are $105. “Peak” tickets for visitors during

December, spring break weeks, and July weekends are $119. The new

demand-based pricing is only for single-day passes.

The unknown is how consumers will respond to this new pricing strategy

long term. Will they see it as a more equitable system in which you

pay more at the “best” times to travel and pay less at “off” times. Of

course, consumers may perceive the new strategy as a pricing

gimmick.

Although Disney stresses that it is using the new demand-based pricing to

more efficiently manage its customer experience, this policy can also

lead to greater profits. How will consumers think of Disney and its

theme parks long term?

Suggestions for Presentation

This case could be assigned for various out-of-class or in-class discussion

activities.

Out-of-Class

Chapter 10: Price: What is the Value Proposition Worth?

Search the Internet for companies that use demand-based pricing. Describe the

psychological, legal, and ethical aspects of pricing.

Do a literature review of the history of e-books/readers. Evaluate using what you have

learned on key pricing strategies.

In-Class

Discuss in class how Disney can build on the current consumer sentiment with a future

approach to pricing that assures long term success for the brand? Evaluate from both the

monetary and nonmonetary forms discussed in this chapter.

Describe how marketers use costs, demands, and revenue to make pricing decisions.

You Make the Call

10-36 What is the decision facing Disney?

Students may come up with a number of different decisions that Disney

might make such as:

Disney wants to remain “the Happiest Place on earth”? For this reason,

The Walt Disney Company is “reimagining” its pricing strategy.

Disney stresses that demand-based pricing will more efficiently

manage its customer experience; however, this policy also leads to

greater profits. How will consumers think of Disney and its theme

parks long term?

10-37 What factors are important in understanding this decision situation?

The following factors are important in understand this decision situation:

Part 3: Develop the Value Proposition for the Customer

For many product categories, companies use a three-tier pricing system:

entry-level, mid-tier, and luxury.

Other theme parks and airlines use demand-based pricing.

Disney enjoys a reputation for providing fun and happiness.

People could seek other recreational experiences if prices are perceived to be

unfair.

Will consumers think of demand-based pricing as a gimmick?

10-38 What are the alternatives?

Students might recommend a variety of different alternatives. Some

possibilities are:

Disney can lower their prices to attract a wider market of consumers.

Disney can do focus-group research to assess how customers feel about

demand-based pricing.

Disney can implement demand-based pricing on a limited basis and evaluate

its success.

Disney should realize that competition in this market is expanding and do

extensive marketing research to determine the appropriate pricing

strategies.

10-39 What decision(s) do you recommend?

Chapter 10: Price: What is the Value Proposition Worth?

Students may focus on one or more of the alternatives developed. They

should be

encouraged to discuss which alternative actions are more critical.

10-40 What are some ways to implement your recommendations?

Students may make a variety of suggestions for implementation

depending on their recommendations. These may include specific

promotion activities, specific pricing, research activities and many

others.

 MYMARKETING LAB

Go to mymktlab.com for Auto-graded writing questions as well as the

following assisted-graded writing questions:

10-41 This chapter states, “Often consumers base their perception of price on

what they believe to be the customary or fair price.” Explain the meaning of

this statement and provide an example.

10-42 Some firms have profit as a pricing objective, while others set prices for

customer satisfaction. What are the major differences between these two?

Which is better?

WEB RESOURCES

Pearson Education, Inc.: www.mymktlab.com

Part 3: Develop the Value Proposition for the Customer

Converse College: www.converse.edu

Saturn website: www.saturn.com

Walmart website: www.walmart.com

Priceline ticket sales: www.priceline.com

iTunes website: www.apple.com/itunes

Online tickets website: www.tickets.com

Consumer Reports website: www.consumerreports.org

Better Business Bureau website: www.welcome.bbb.org

Lands End website: www.landsend.com

National Association of Trade Exchanges website: www.nate.org

Bitcoin: https://bitcoin.org/en/