Chapter 10: Price: What is the Value Proposition Worth?
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.
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.
10.3 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
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.
10.4 Explain variable costs, fixed costs, average variable costs, average fixed costs, and average
total costs.
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Chapter 10: Price: What is the Value Proposition Worth?
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.
10-5 What is break-even analysis?
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
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?
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.
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
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Chapter 10: Price: What is the Value Proposition Worth?
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.
10.9 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.
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
Surge pricing is a pricing plan that raises prices of a product as demand goes up and lowers it as
10-11 Explain decoy pricing. Is decoy pricing ethical?
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
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Chapter 10: Price: What is the Value Proposition Worth?
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
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
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
Distribution-based pricing is a tactic that establishes how firms handle the cost of shipping
10-13 Why do marketers use trade or functional discounts, quantity discounts, cash discounts, and
seasonal discounts in pricing to members of the channel?
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
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
10-15 Explain these psychological aspects of pricing: price-quality inferences, odd-even pricing, internal
reference price, price lining, and prestige pricing.
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Chapter 10: Price: What is the Value Proposition Worth?
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
Internal reference price means, based on experience, consumers have a set price or a price range in
Price-lining is a practice where items in a product line sell at different prices called price points.
Sometimes luxury goods marketers use a prestige pricing strategy that turns the typical assumption
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.
Price fixing occurs when two or more companies conspire to keep prices at a certain level.
ACTIVITIES: APPLY WHAT YOU’VE LEARNE
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
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.
a. Cheese pizzas per month
b. Movie tickets per month
c. Concert tickets per year
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Chapter 10: Price: What is the Value Proposition Worth?
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,
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.
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
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:
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.
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.
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Item Menu price
Chips, Salsa, and Guacamole $4.00
Chapter 10: Price: What is the Value Proposition Worth?
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.
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.
a. Laptop computers
b. Vacuum cleaners
c. Smart T.Vs
d. 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.
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
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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?
10-25 How many units of Happy Hummus must Touch of Beirut sell to earn a profit of $1,000,000?
10-26 Does this seem like a good business venture to you? Why or why not?
CHOICES: WHAT DO YOU THINK?
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
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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
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?
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
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
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
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Chapter 10: Price: What is the Value Proposition Worth?
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?
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
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
a. Place the two products together. Place a sign on one with a low price. Place a sign on the
b. Reverse the signs and ask other research participants to evaluate the quality of each of the
c. Place the two products together again. This time place a sign on one with a moderate price.
d. Reverse the signs and ask other research participants to evaluate the quality of each of the
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Chapter 10: Price: What is the Value Proposition Worth?
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
b. This time place a sign on the item that ends in $.00 (e.g., $60.00). Ask different research
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.
V. MARKETING IN ACTION CASE: REAL CHOICES AT DISNEY
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
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
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.
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Chapter 10: Price: What is the Value Proposition Worth?
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:
10-37 What factors are important in understanding this decision situation?
The following factors are important in understand this decision situation:
For many product categories, companies use a three-tier pricing system: entry-level, mid-tier,
and luxury.
10-38 What are the alternatives?
Students might recommend a variety of different alternatives. Some possibilities are:
10-39 What decision(s) do you recommend?
10-40 What are some ways to implement your recommendations?
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?
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