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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.
7
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
8
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9
Connect Activities
Activity
Type
Learning Objectives 14-
01
02
03
04
05
Taco Bell: Pricing for Value
Video Case
X
X
X
The 5 Cs of Pricing
Click & Drag
X
U.S. Cellular: Matching Price with Perceived
Value
Video Case
X
X
X
X
Planet Fitness: Pricing for Success
Case Analysis
X
X
X
Pricing: SBC
Video Case
X
X
X
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
12
▪ 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.
