978-1259709074 Chapter 14 Part 2

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

Students should be able to explain how the Internet, through things like shopping bots (TheFind.com and

11 Imagine that a pharmaceutical company has just developed a cure to a major fatal disease.

Because the firm is the only one even close to a cure for this disease, price is inelastic,

meaning it could virtually charge any price and people would pay. Discuss the ethical

implications of choosing a price.

Students should discuss the ethical argument for fair profits for the creation of valuable and sometimes

lifesaving products and the affordability of the product for the intended customer group. There is an

Quiz Yourself

1 _____ orientation explicitly invokes the concept of value such as when a firm uses a “no-haggle”

pricing structure to make the purchase process simpler and easier.

a. profit

b. sales

c. competitor

d. customer

e. market

2 The most common form of competition is _____ where many firms compete for customers in a given

market but with differentiated products.

a. oligopolistic competition

b. market saturation

c. pure competition

d. competitive parity

e. monopolistic competition

Chapter Case Study: Planet Fitness: Pricing for Success

1 What benefits do customers receive in return for the sacrifices they make when buying a

membership at Planet Fitness?

Planet Fitness promises a clean, friendly, laid-back workout environment featuring brand name

cardiovascular and strength equipment. It maintains key elements that its members want: brand-name

2 How does this benefit–sacrifice ratio give Planet Fitness a competitive advantage in its

industry?

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

scale, achieved by welcoming a high volume of members on any one day.

3 Given its price strategy, why is it essential for Planet Fitness to continually attract new

members? Do its high-end pricing competitors face the same need? Why or why not?

Due to its lower margins, Planet Fitness needs a high volume of customers in order to maintain and/or

Additional Teaching Tips

This chapter introduces students to the economic influence of setting prices. Students often find these

concepts difficult to grasp. Also introduced are the five Cs of pricing, company objectives and strategy

implications, and break-even point calculations.

The five Cs of pricing are critical for students to understand. Students often don’t realize that other factors

other than cost factors influence the pricing strategy. Reviewing the five Cs of pricing and having students

come up with examples will help to enhance understanding of these concepts.

It is important for students to also understand that there may be other objectives other than maximizing

profit margin. Amazon.com in its first years purposely used a competitor–oriented approach and

sacrificed profit loss. The company was ridiculed by other dot-coms until Amazon.com revealed their

strategy: To have households identify with the brand name. By pricing products and shipping low, it would

increase usage of the site. Thus, the strategy was to sacrifice profits to have Amazon.com become the

market leader and gain household brand name recognition for online purchases.

The break-even point graph is often difficult for students to understand unless they have had an

economics course. Instructors will need to weigh the importance of teaching the graph, the BEP formula,

or both. Some time will need to be spent by the instructor explaining the graph. It is wise to give students

a BEP problem such as the one listed in the application problems and have them graph it if the instructor

chooses to also teach the dynamics of the graph.

Should students need additional help in pricing, turn to the testing materials, select some multiple choice

BEP and pricing concept (equilibrium, profit, loss, fixed cost, variable costs) types of problems, and create

a worksheet where students can work on it either independently or in small groups in the class. Often,

students can help each other in understanding these concepts and small groups are recommended.

Online Tip: Have students develop a marketing-related word problem using BEP analysis. Have them

post it to the discussion board. Have other learners solve the problem. Have the student that created the

word problem come back and give feedback. You may want to pair students up as partners in the online

environment.

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

Connect Activities

Activity

Type

Learning Objectives 14–

Taco Bell: Pricing for Value

Video Case

The 5 Cs of Pricing

Click & Drag

U.S. Cellular: Matching Price with Perceived

Value

Video Case

Planet Fitness: Pricing for Success

Case Analysis

Pricing: SBC

Video Case

Taco Bell: Pricing for Value

▪ Activity Type: Video Case

▪ Learning Objectives: 14-01, 14-02, 14–05

▪ Difficulty: Medium

▪ Activity Summary: Explores Taco Bell’s value-based pricing initiatives. After the video ends,

students are asked questions about the video and related course concepts.

Activity

▪ Introduction: Offering quality food at a great price is nothing new to Taco Bell. Founded in 1962,

Taco Bell pioneered value-based pricing with its three-tiered menu, offering food choices for 59, 79,

and 99 cents. Taco Bell’s director of marketing discusses how value plays a key role in the firm’s

pricing strategies.

▪ Concept Review: Of the four Ps—product, price, place, and promotion—price is the most

challenging to manage, partly because it is often the least understood. Historically, managers have

treated price as an afterthought to their marketing strategies, matching competitors’ prices or, worse

yet, by adding up their costs and tacking on a desired profit to set the sales price. Prices were rarely

changed except in response to radical shifts in market conditions. Even today, pricing decisions are

often relegated to standard rules of thumb that fail to reflect our current understanding of the role of

price in the marketing mix.

▪ Video: The video is presented to the student below the introductory information. The video plays

embedded on the page, after which questions are presented.

Follow-Up Activity

Although the specific price points have changed, Taco Bell still pursues a value menu strategy today

(called the “Why Pay More?” menu), offering individual items from 89 cents to $1.59, and “Why Pay More

Deals” for $2.49 (prices as of spring 2014). Taco Bell has also tested a $1 “Cravings” menu in some

stores.

McDonald’s, though, has chosen to go in a different direction. Assign the following article, discussing a

higher-priced value menu strategy:

http://www.qsrmagazine.com/news/higher-price-point-value-menu-could-be-win

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

As a class discussion or writing prompt, ask about the issue of price-sensitive customers:

▪ Why might $1 (and less) value menus have been more important in 2009–2010 than they are today?

(Consider the economy then and now)

▪ Are there differences in the Taco Bell and McDonald’s target markets that might also lead to

differences in the strategy?

▪ Comment on this quote from the article:

Kerr says catering to the most price-sensitive guests can be both difficult and dangerous for a brand.

“At some point, operators need to ask themselves if a dollar is realistic,” she says. “Consumers

realize that prices increase, and holding on to the dollar market is not good business. It just doesn’t

make sense.”

The Five Cs of Pricing

▪ Activity Type: Click & Drag

▪ Learning Objectives: 14–01

▪ Difficulty: Medium

▪ Activity Summary: The student is asked to classify four companies’ pricing strategies according to

the pricing orientation represented.

Activity

▪ Introduction: Different firms embrace different goals. Consequently, these goals affect the pricing

strategy. Pricing of a company’s products and services should support and allow the firm to reach its

overall goals. In this activity, you will be asked to differentiate among pricing orientations.

▪ Concept Review: Each firm embraces objectives that management believes will make the firm more

successful. These specific objectives usually reflect how the firm intends to grow. Do managers want

it to grow by increasing profits, increasing sales, decreasing competition, or building customer

satisfaction? These questions are answered by a firm’s choice of pricing strategy.

Follow-Up Activity

Small group exercise:

▪ Have the students think of a futuristic, revolutionary product (a transporter is one good possibility).

▪ Ask them to design a short survey to find out how much customers are willing to pay for a ride in a

transporter (or to purchase the futuristic product of their choice).

▪ How much confidence would they have in the answers they got? Why?

A common conclusion is likely to be that customer-oriented pricing is a difficult strategy to employ for a

revolutionary product like this, because customers have neither the experience nor (in many cases) a

good reference point to use to determine the value provided. One thing the marketer can do that may

help is to suggest a reference by comparing the new product to something more familiar to the consumer

that serves a similar purpose. For example, in the case of the transporter, one comparison would be to air

travel, emphasizing the advantages of instant transportation that add value.

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

U.S. Cellular: Matching Price with Perceived Value

▪ Activity Type: Video Case

▪ Learning Objectives: 14-01, 14-02, 14-03, 14-05

▪ Difficulty: Medium

▪ Activity Summary: This case discusses pricing strategy at U.S. Cellular. After the video ends,

students are asked questions about the video and related course concepts.

Activity

▪ Introduction: U.S. Cellular is a mid-range service provider in the highly competitive cell phone

market. In this market, Verizon Wireless and AT&T are the major players. To compete, smaller firms

like U.S. Cellular must find ways to deliver greater value to their customers. However, price has a

major impact on value perceptions. In turn, value perceptions influence pricing. In 2010, U.S. Cellular

created a pricing strategy known as The Belief Plan, but it confused customers. They perceived that

the price was set too high for the value it offered. This forced U.S. Cellular to rethink its strategy.

Watch the following video to examine the many factors U.S. Cellular needs to consider when setting

price.

▪ Concept Review: Setting price is a formidable challenge for marketers. Knowing how customers

perceive value in the product or service is only one component of the five Cs of pricing. A firm’s

overall pricing orientation will depend on the company objectives. Marketers must consider

competitors and their strategies. Markets are characterized by four types of competition: monopoly,

oligopoly, pure competition, and monopolistic competition. Costs are a major element in setting price.

Channel members must also be accounted for. Prices change, and when changing prices, marketers

must be aware of the price elasticity of demand for their particular product or service. When price is

set correctly, firms reap substantial rewards. But when the price is wrong, customer response will be

swift and severe.

▪ Video: The video is presented to the student below the introductory information. The video plays

embedded on the page, after which questions are presented.

Follow-Up Activities

Discussion: Companies need to be careful when adopting innovative pricing plans; as the video case

shows, customers can become confused and be unable to see the value being offered.

One fairly recent example of a company that made this mistake is J.C. Penney. The first part of this article

offers a good summary of the pricing plan and consumers’ response:

http://www.forbes.com/sites/lauraheller/2013/02/08/mission-accomplished-jcpenney-was–the-most-

interesting-retailer-of-2012/

It’s a cautionary tale worth sharing.

Planet Fitness: Pricing for Success

▪ Activity Type: Case Analysis

▪ Learning Objectives: 14-01, 14-04, 14-05

Chapter 14 – Pricing Concepts for Establishing Value Marketing 6th

McGraw-Hill Education.

▪ Difficulty: Medium

▪ Activity Summary: This case discusses the pricing approaches that have helped Planet Fitness to

achieve success. Students are asked questions applying chapter concepts to the case.

Activity

▪ Introduction: Planet Fitness has adopted an unusual pricing strategy in the fitness market, setting

prices well below those of its major competitors. The goal of this activity is to demonstrate a creative

use of pricing to target a market segment that is not well served by competitors. This activity is

important because, according to marketing managers, pricing is one of the most difficult activities to

perform well, and it is essential to understand the factors that must be considered when choosing a

pricing strategy.

Pricing: SBC

▪ Activity Type: Video Case

▪ Learning Objectives: 14-01, 14-03, 14–04

▪ Difficulty: Hard

▪ Activity Summary: This video explains SBC’s pricing strategy. Although the company provides

products at a variety of price points, pricing focuses primarily on providing value through quality and

innovative features. After the video, students answer questions asking them to apply chapter

concepts to SBC’s strategy.

Activity

▪ Introduction: Specialized Bicycle Components, Inc. (SBC) caters to the experienced cyclist. In this

video, SBC’s brand manager explains the company’s segmentation and pricing strategy. This activity

is important because pricing is one of the most challenging tasks that marketers need to perform. An

understanding of the issues and options when pricing a product is crucial. The goal of this exercise is

to test your understanding of pricing issues and considerations by applying chapter frameworks to the

SBC example.

▪ Video: The video is presented to the student below the introductory information. The video plays

embedded on the page, after which questions are presented.