END OF CHAPTER MATERIAL
Discussion Questions
10-1 Why is finding and implementing the right pricing strategy critical to a company’s success?
(AACSB: Communication)
Answer:
Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Price is also one of the most flexible marketing mix elements. Unlike product
However, smart managers treat pricing as a key strategic tool for creating and capturing
customer value. Prices have a direct impact on a firm’s bottom line. A small percentage
10-2 Name and describe the two types of value-based pricing methods. (AACSB:
Communication)
10-3 What is cost-based pricing? How do companies use fixed and variable costs in cost-based
pricing models? (AACSB: Communication)
Answer:
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10-4 Explain the price-demand relationship. What factors must sellers consider when setting
prices in different types of markets? (AACSB: Communication)
10-5 Define price elasticity and discuss why it is important for marketers to understand this
concept. (AACSB: Communication; Reflective Thinking)
Answer:
Critical Thinking Exercises
10-6 Congratulations! You just won your state lottery and will be receiving a check for $1
million. You have always wanted to own your own business and have noticed the increase in
the number of food trucks in your local area. A new food truck with a kitchen and related
equipment costs about $100,000. Other fixed costs include salaries, gas for the truck, and
license fees and are estimated to be about $50,000 per year. You decide to offer traditional
Mediterranean cuisine. Variable costs include food and beverages estimated at $6 per platter
(meat, rice, vegetable, and pita bread). Meals will be priced at $10. Calculate the break-even
for your food truck business. After reviewing your break-even, what changes would you
consider? Is this how you want to spend your lottery winnings? (AACSB: Communication;
Reflective Thinking)
10-7 In a small group, discuss your perceptions of value and how much you are willing to pay
for the following products: automobiles, frozen dinners, jeans, and athletic shoes. Are there
differences among members of your group? Explain why those differences exist. Discuss
some examples of brands of these products that are positioned to deliver different value to
consumers. (AACSB: Communication; Reflective Thinking)
Answer:
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10-8 Your company has developed a new weight-loss breakfast shake that has proven to be
successful in the test market phase. Users have experienced an average weight loss of two
pounds per week. You hold a patent on the product. The cost to produce the shake is
relatively low, with total manufacturing costs running about $0.05 per ounce. Each shake is
eight ounces. What pricing strategy do you recommend for this product? (AACSB:
Communication; Use of IT; Reflective Thinking)
Answer:
An important consideration is that this product has a patent and likely involved considerable
research and development. This would result in a higher price in an attempt to recoup some
of the R & D costs.
APPLICATIONS AND CASES
Online, Mobile, and Social Media Marketing: Online Price Tracking
Got your eye on a new 32-inch Samsung television? Well, you better not purchase it in
December—that’s when the price was highest on Amazon.com ($500 versus $400 in November
or February). Most consumers know that prices fluctuate throughout the year, but did you know
they even fluctuate hourly? You probably can’t keep up with that, but there’s an app that can.
Camelcamelcamel is a tool that tracks Amazon’s prices for consumers and sends alerts when a
price hits the sweet spot. This app allows users to import entire Amazon wish lists and to set
desired price levels at which e-mails or tweets are sent to inform them of the prices. All of this is
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free. Camel makes its money from an unlikely partner—Amazon—which funnels price data
directly to Camel. Camel is a member of Amazon’s Affiliate program, kicking back 8.5 percent
of sales for each customer Camel refers. It would seem that Amazon would want customers to
buy when prices are higher, not lower. But the online behemoth sees this as a way to keep the
bargain hunters happy while realizing more profitability from less price-sensitive customers.
This is an improvement over Amazon’s earlier pricing tactics, which charged different customers
different prices based on their buying behavior.
10-9 Go to www.camelcamelcamel.com and set up a free account. Track 10 products that interest
you. Did any of the products reach your desired price? Write a report on the usefulness of this
type of app for consumers. (AACSB: Communication; Use of IT)
Answer:
10-10 Camel is not the only Amazon tracking or online price tracking application. Find and
describe an example of another online price tracking tool for consumers. (AACSB:
Communication; Use of IT)
Answer:
Marketing Ethics: The Cost of a Life
When loved ones are critically ill, what are families willing to pay to keep them on a path to
improved health? In 2015, Turing Pharmaceuticals found itself in the middle of a controversial
issue when it purchased an existing drug—Daraprim—from another pharmaceutical company.
Daraprim has been around for 62 years and is used to treat life-threatening parasitic infections in
AIDS and cancer patients. After acquiring Daraprim, Turing Pharmaceuticals CEO Martin
Shkreli quickly raised its price from the previous $13.50 per pill to a whopping $750 per pill.
According to CNN Money, CEO Shkreli stated, “We needed to turn a profit on this drug.” He
added the company would use the profits to research better ways to treat diseases.
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10-11 Research the Daraprim pricing issue. Is it wrong for Turing Pharmaceuticals to charge
such a high price for this medication? Support your position. (AACSB: Communication;
Ethical Reasoning)
Answer:
10-12 According to one Harvard Business Review article (see
www.hbr.org/2015/09/its-time-to-rein-in-exorbitant -pharmaceutical-prices), over the past
five years returns for the S&P Pharmaceuticals Select Industry Index have been virtually
doubled those of the broader S&P 500 (roughly 24 percent versus 12 percent annually). What
factors affect profitability in the pharmaceutical industry? Are these high profit levels a good
or bad thing? Explain.
Answer:
There are several factors contributing to the complexity of competition, impacting pricing
and profitability in the pharmaceutical industry.
1. According to the Washington Post, in 2015 prescription drug prices increased 10.9
2. Most countries regulate drug prices but the U.S. does not. Americans pay, on average,
3. Competition in the pharmaceutical industry is different than in many other industries. In
Marketing by the Numbers: Pricey Sheets
Many luxury sheets cost less than $200 to make but sell for more than $500 in retail stores. Some
cost even more—consumers pay almost $3,000 for Frett’e “Tangeri Pizzo” king-size luxury
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linens. The creators of a new brand of luxury linens, called Boll & Branch, have entered this
market and are determining the price at which to sell their sheets directly to consumers online.
They want to price their sheets lower than most brands but still want to earn an adequate margin
on sales. The sheets come in a luxurious box that can be reused to store lingerie, jewelry, or other
keepsakes. The Boll & Branch brand touts fair trade practices when sourcing its high-grade
long-staple organic cotton from India. Given the cost information below, refer to Appendix 2:
Marketing by the Numbers to answer the following questions.
Cost/King-size Set
Raw Cotton $28.00
Spinning/Weaving/Dyeing $12.00
Cut/Sew/Finishing $10.00
Material Transportation $ 3.00
Factory Fee $16.00
Inspection and Import Fees $14.00
Ocean Freight/Insurance $ 5.00
Warehousing $ 8.00
Packaging $15.00
Promotion $30.00
Customer Shipping $15.00
10-13 Given the cost per king-size sheet set above, and assuming the manufacturer has total
fixed costs of $500,000 and estimates first year sales will be 50,000 sets, determine the price
to consumers if the company desires a 40 percent margin on sales. (AACSB:
Communication; Analytical Reasoning)
Answer:
The simplest method of cost-based pricing is cost-plus pricing (or markup pricing) which
simply adds a standard markup to the cost of the product. Boll & Branch must specify
expected unit sales so that total unit costs can be determined.
10-14 If the company decides to sell through retailers instead of directly to consumers online, to
maintain the consumer price you calculated in the previous question, at what price must it
sell the product to a wholesaler who then sells it to retailers? Assume wholesalers desire a 10
percent margin and retailers get a 20 percent margin, both based on their respective selling
prices. (AACSB: Communication; Analytical Reasoning)
Answer:
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By deducting the markups for each level in the markup chain, to sell the product at retail for
$276.67, the manufacturer arrives at a price for the product to wholesalers of $201.01.
Company Case Notes
Trader Joe’s: Cheap Gourmet—Putting A Special Twist on the Price-Value Equation
Synopsis
Trader Joe’s unique price and value strategy has made it one of the nation’s fastest-growing,
most popular food stores. Trader Joe’s understands that success comes not only from what
products you offer customers or the prices you charge. It comes from offering the combination of
products and prices that produces the greatest customer value—what customers get for the prices
they pay. Trader Joe’s isn’t really a gourmet food store. Then again, it’s not a discount food store
either. It’s a bit of both. Call it “cheap gourmet.” It offers gourmet-caliber, one-of-a-kind
products at bargain prices, all served up in a festive, vacation-like atmosphere that makes
shopping fun. Trader Joe’s stocks only a limited assortment of about 2,000 specialty products.
However, the assortment is uniquely Trader Joe’s, including special concoctions of gourmet
packaged foods and sauces, ready-to-eat soups, fresh and frozen entrees, snacks, and desserts—
all free of artificial colors, flavors, and preservatives. For all this, Trader Joe’s keeps its prices
low through lean operations, a near-fanatical focus on saving money, and very low advertising
expenditures. Whatever you call it, Trader Joe’s inventive price-value positioning has earned it
an almost cult-like following of devoted customers who love what they get for the prices they
pay.
Teaching Objectives
The teaching objectives for this case are to:
1. Allow students to understand the effects of pricing as a tool for differentiation.
2. Help students understand the concept of “value” in relation to price.
3. Enable students to understand how the nature of a market and market demand affect
pricing decisions.
4. Let students examine different pricing strategies in the context of an actual company.
5. Allow students to consider the sustainability of pricing strategies.
Discussion Questions
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10-18 Under the concept of customer value-based pricing, explain Trader Joe’s success.
As outlined in the sections “High On Benefits” and “Low On Prices,” this case is built
around the components of customer-perceived value. Customer value-based pricing is
The case does not go into detail on which approach is taken (value-based or cost-based).
However, based on the information provided, Trader Joe’s most likely has a value-based
10-19 Does Trader Joe’s employ good-value pricing or value-added pricing? Explain.
Undoubtedly, there will be students arguing each of these two strategies. Supporting the case
for good-value pricing, Trader Joe’s offers just the right amount of quality and good service
One might say it is a matter of perspective as to which strategy is employed here. However,
Trader Joe’s is not positioned relative to regular goods at regular grocers but as a discount
alternative to gourmet and organic grocers. Additionally, value-added pricing enhances
10-20 Does Trader Joe’s pricing strategy truly differentiate it from the competition?
Regular grocers have stepped up their game in recent years. Walmart carries far more
gourmet, specialty, and organic items than it used to. Target’s store brands seem to echo
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10-21 Is Trader Joe’s pricing strategy sustainable? Explain.
The case doesn’t go into much detail on how Trader Joe’s can do what it does. The company
strives to create a supply chain of vendors who can make what it needs at prices that it wants
to charge. Trader Joe’s runs a very cost-conscious distribution system, and it grows slowly.
10-22 What changes—if any—would you recommend that Trader Joe’s make?
This is a tough question given the success of the company. And the things it is not doing, it
Teaching Suggestions
Start by giving students a feel for Trader Joe’s, its unique price/value equation, and how
customers feel about the place. Show the clever amateur video clip produced by a Trader Joe’s
fan (lwww.youtube.com/watch?v=OdB7GDZY3Pk&feature=related), which will make any
loyal Trader Joe’s customers in the room nod and smile. Then, go to www.traderjoes.com. Select
any location from the drop-down menu at the upper right of the page and click the “Check out
the Fearless Flyer” tab in the middle of the page. This will pull up a multipage flyer that shows
many unique Trader Joe’s products and prices. A brief visit to a fan site (such as
www.traderjoesfan.com/) might also help to show the flavor of Trader Joe’s. Once you’ve
captured the essence of the Trader Joe’s experience, you can explore the model behind the value
proposition.
This case was developed for use with Chapter 10. This case also works well with the Chapters 1
and 11.
Go to mymktlab.com for the answers to the following assisted-graded writing questions:
10-23 Why are consumers so concerned about the price of gas and why are they willing to search
out stations with lower prices? (AACSB: Communication; Reflective Thinking)
10-24 Describe the cost-plus pricing method and discuss why marketers use it even if it is not the
best method for setting prices. (AACSB: Communication; Reflective Thinking)
ADDITIONAL PROJECTS, ASSIGNMENTS, AND EXAMPLES
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Projects
1. Interview a local business about their pricing philosophy and/or strategy. Use their terms
and then apply what you have learned from them to assess their approach to those
described in the text. What are the similarities and differences? (Objective 2)
2. Use the local newspaper to compare grocery store ads for price specials. What can you
determine about the competitors’ pricing strategies? How many of the techniques from
the chapter do the organizations seem to be using? What strategy appears to be the most
successful? How did you make this judgment? (Objective 2)
3. How does Walmart make use of good-value pricing? (Objective 2)
4. Explain how companies such as Dell use cost-plus pricing. What are the competitive
disadvantages of such pricing strategies? (Objective 3)
5. Take a drive around town and look at the price of gasoline at a variety of different
stations. Use oligopolistic competition to explain what you are seeing. (Objective 3)
Small Group Assignments
1. Form students into groups of three to five. Each group should read Real Marketing 10.1:
Good Value at Spirit Airlines: Getting Less but Paying Much Less for It. Each group
should then answer the following questions and share their answers with the class.
(Objective 1)
a. Explain Spirit’s pricing strategy in your own words. Does the company employ
good-value pricing or value-added pricing? Explain.
b. How is Spirit distinguishing itself from other airlines? How does it deliver value to
consumers?
c. Is Spirit’s pricing strategy sustainable? In what economic situations? Explain.
d. What changes, if any, would you recommend that Spirit make?
2. Form students into groups of three to five. Each group should read the Real Marketing
10.2: Whole Food Market: Finding the Right Price-Value Equation. Each group should
then answer the following questions and share their answers with the class. (Objective 2)
1. What unique pricing strategy has Whole Foods adopted in the food marketplace?
2. Relative to competitors, what is Whole Foods’ market position?
3. What is the unique “customer value” that Whole Foods delivers to its patrons?
4. Will Whole Foods be able to maintain the balance it is achieving in the price-value
equation?
Individual Assignments
1. Reread the opening section of this chapter on “What Is a Price?” Imagine you are
considering purchasing a new suit for job interviews. You are considering
comparison-shopping for your new suit at Saks Fifth Avenue (a high-end department
store) and Dillard’s (a moderate department store). Discuss the overall differences in
“price” between the two establishments. (Objective 1)
2. What is “everyday low pricing?” Besides Walmart, what companies do you believe have
been able to use this pricing strategy to great success? (Objective 2)
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Think-Pair-Share
Consider the following questions, formulate an answer, pair with the student on your right, share
your thoughts with one another, and respond to questions from the instructor.
1. What is price? (Objective 1)
2. Discuss the role that customer value plays in the determination of price. (Objective 2)
3. Explain the difference between value-based, good-value, and value-adding pricing
strategies. (Objective 2)
4. What is target-profit pricing? (Objective 3)
5. Explain the demand curve. (Objective 3)
Outside Examples
1. Take a look at The Poisoned Pen (www.poisonedpen.com/), a small independent
bookstore located in Scottsdale, Arizona. Their motto is “It’s more than a bookstore, it’s
an experience.” Look around their website. Read the blog by Barbara, the owner. See
what authors are scheduled to appear and sign their books. Check out their pricing.
Experience the store, in light of its motto. Discuss The Poisoned Pen’s approach to
pricing. How are they able to remain competitive against booksellers such as
Amazon.com or Barnes & Noble? (Objective 2)
Possible Solution:
After spending some time looking around the website of The Poisoned Pen, it becomes
evident that they are certainly not a discount pricing operation. In an industry where it has
become normal to find newly released hardback books at 25 percent to 50 percent off of
2. Your text talks about Whole Foods Market, the upscale grocery retailer. You can explore
the company and products at www.wholefoodsmarket.com/. Take some time to learn
about the types of products offered and the product information provided. The website is
full of information about product lines, quality standards, safety standards, coupons, and
more. Use the store locator and find the retailer closest to you. Visit one and price the
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items of interest to you. How can they charge what they charge? How does the
information provided on the website and in the stores add value to a consumer?
(Objective 3)
Possible Solution:
Whole Foods does not sell on price. As a matter of fact, it is rather difficult to find any
reference to prices on the website, except for the items available for online ordering. As
the text points out, the company has worked to create a “nonprice” position for Whole
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