Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
1
Chapter 14
Pricing Concepts for Establishing Value
Tools for Instructors
• Brief Chapter Outline
• Learning Objectives
• Extended Chapter Outline with Teaching Tips
• Answers to End of Chapter Learning Aids
• Chapter Case Study
• Additional Teaching Tips
• Connect Activities
Brief Chapter Outline
The Five Cs of Pricing
End of Chapter Learning Aids
Chapter Case Study: Planet Fitness: Pricing for Success
Learning Objectives
LO14-1 List the four pricing orientations.
A profit-oriented pricing strategy focuses on maximizing, or at least reaching a target, profit for the
company. A sales orientation instead sets prices with the goal of increasing sales levels. With a
customer-oriented strategy determines consumers’ perceptions of value and prices accordingly.
LO14-2 Explain the relationship between price and quantity sold.
LO14-3 Explain price elasticity.
Changes in price generally affect demand; price elasticity measures the extent of this effect. It is based
on the percentage change in quantity divided by the percentage change in price. Depending on the
LO14-4 Describe how to calculate a product’s break-even point.
Because the break-even point occurs when the units sold generate just enough profit to cover the total
curves. When these curves intersect, the marketer has found the break-even point.
LO14-5 Indicate the four types of price competitive levels.
In a monopoly setting, one firm controls the market and sets the price. In an oligopolistic competitive
market, a few firms dominate and tend to set prices according to a competitor-oriented strategy.
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2
Extended Chapter Outline with Teaching Tips
I. The Five Cs of Pricing
A. Company Objectives
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1. What are the five Cs of pricing?
2. Identify the four types of company objectives.
B. Customers
1. Demand Curves and Pricing
2. Price Elasticity of Demand
3. Factors Influencing Price Elasticity of Demand
a. Income Effect
b. Substitution Effect
c. Cross-Price Elasticity
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1. What is the difference between elastic demand and inelastic demand?
Answer: Elastic demand is when relatively small changes in price will generate fairly large
2. What are the factors influencing price elasticity?
C. Costs
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
4
2 Prices can vary, depending on the market being served and the novelty of the products.
Shapeways allows anyone to upload a design and get it 3D printed. The best designs then are
available to other customers to have printed in a variety of materials. Go to
https://www.youtube.com/v/qJuTM0Y7U1k and learn more about Shapeways. Then go to its
website, www.shapeways.com, and search for "Inception" and click on the design by the
user roessnakhan. Note the difference in prices of the item to be printed in plastic versus
metal. Now go to Amazon (www.amazon.com) and search for "Inception Totem" and note the
prices for a similar metal totem. How does the price of the item vary between Shapeways and
Amazon? What would account for these differences in price? Why would a consumer
purchase the product from Shapeways instead of Amazon? How is Shapeways
communicating value?
The Inception Totems on Amazon.com are priced at a point extremely lower than on shapeways.com.
Marketing Applications
1 You and your two roommates are starting a pet grooming service to help put yourselves
through college. There are two other well-established pet services in your area. Should you
set your price higher or lower than that of the competition? Justify your answer.
Students could consider two key factors: value provided and perceptions of quality.
Whether we establish a price that is higher or lower than our competition depends on several factors,
including the type of services offered, the breadth of that service, our experience, and the perceived value
we provide. Because we are simply college students with limited experience in pet grooming, it might be
2 One roommate believes the most important objective in setting prices for your new pet
grooming business is to generate a large profit while keeping an eye on your competitors’
prices; the other roommate believes it is important to maximize sales and set prices
according to what your customers expect to pay. Who is right and why?
This question focuses on pricing strategies with particular objectives. For the pet-grooming business,
students must determine whether a profit-oriented or a sales-oriented strategy is more appropriate. To
make this determination, students need to decide which orientation allows them to meet their overall
objective of helping put themselves through college.
reputation and providing sufficient value that customers return, increase our sales, and help us take
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5
3 Assume you have decided to buy an advertisement in the local newspaper to publicize your
new pet grooming service. The cost of the ad is $1,000. You have decided to charge $40 for a
dog grooming, and your variable costs are $20 for each dog. How many dogs do you have to
groom to break even on the cost of the ad? What is your break-even point if you charge $60
per dog?
This exercise allows students to gain experience performing break-even analyses, which require three
key pieces of information: (1) the price of the service, (2) the fixed costs, and (3) the variable costs. In this
scenario, the price is what the groomers charge, the fixed cost is the cost of the newspaper
advertisement, and the variable cost is the variable cost per grooming each dog.
According to break-even analysis, the fixed cost is $1,000 for the advertisement, the variable cost is $20
4 The local newspaper ad for your pet grooming business isn’t helping much, so you decide to
post your services on an auction site, where customers can bid for your services. What
should the starting price of the auction be?
Many sellers have found that too high a starting price discourages interest in their item, while an
5 Is there a difference between a $5,900 Loro Piana vicuña sweater and a $150 cashmere
sweater from L.L. Bean? Have you ever purchased a higher-priced product or service
because you thought the quality was better than that of a similar, lower-priced product or
service? What was the product or service? Do you believe you made a rational choice?
There might be a difference between the $5,900 sweater and the $150 sweater; the manufacturers may
use different materials, production methods, and distribution methods.
Students should discuss whether or not they bought a higher-priced product or service because they
6 A soft drink manufacturer opened a new manufacturing plant in the Midwest. The total fixed
costs are $100 million. It plans to sell the drinks to retailers for $6.00 for a package of 10 12-
ounce cans. Its variable costs for the ingredients are $4.00 per package. Calculate the break-
even volume. What would happen to the break-even point if the fixed costs decreased to $50
million, or the variable costs decreased to $3.00 due to declines in commodity costs? What
would the break-even volume be if the firm wanted to make $20 million?
The break-even volume can be calculated by dividing $100 million (the fixed costs) by the contribution per
unit ($6.00 - $4.00). This would give the soft drink manufacturer a break-even volume of 50 million units.
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6
7 On your weekly grocery shopping trip, you notice that the price of spaghetti has gone up 50
cents a pound. How will this price increase affect the demand for spaghetti sauce, rice, and
Parmesan cheese? Explain your answer in terms of the price elasticity of demand.
Students should be able to apply the concepts of substitutability, complementarity, and price elasticity to
determine the demand.
Groceries (in this case spaghetti) experience price elasticity, so consumers likely will react negatively to
8 How do pricing strategies vary across markets that are characterized by monopolistic,
oligopolistic, monopolistic competition, and pure competition?
Students must consider the difference between market types and the effect those differences have on
pricing strategies.
Pricing strategies vary depending on the type of market, as follows:
9 Suppose you are in the market for a new Sharp LCD television. You see one advertised at a
locally owned store for $300 less than it costs at hhgregg. The salesperson at the local store
tells you that the television came from another retailer in the next state that had too many
units of that model. Explain who benefits and who is harmed from such a gray market
transaction: you, Sharp, hhgregg, the local store?
The customer is benefited through the lower prices. In the long term, it may tarnish the image of the
10 Has the Internet helped lower the price of some types of merchandise? Justify your answer.
