978-1259709074 Chapter 14 Part 1

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

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

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

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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

McGraw-Hill Education.

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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

McGraw-Hill Education.

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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.