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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Answers to End of Chapter Learning Aids
Marketing Digitally
1 Several different pricing models can be found on the Internet. Each model appeals to
different customer groups. Go to www.eBay.com and try to buy this book. What pricing
options and prices are available? Do you believe that everyone will choose the least
expensive option? Why or why not? Now go to www.Amazon.com. Is there more than one
price available for this book? If so, what are those prices? Are different versions available? If
you had to buy another copy of this book, where would you buy it, and why would you buy it
there?
Some students may have purchased this book from one of these sites, but the question asks them to
examine the price differences more closely and in an analytical sense.
1 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,
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
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
Both roommates could be right, depending on how we hope to meet our overall objective. If we chose a
profit orientation, we would need to set a particular profit goal, use advanced economic theory to create a
mathematical model to capture all the factors required to explain and predict sales, and determine a
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
According to break-even analysis, the fixed cost is $1,000 for the advertisement, the variable cost is $20
per dog groomed, and the initial price is $40. These numbers translate to a contribution per unit of dog
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?
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
There might be a difference between the $5,900 sweater and the $150 sweater; the manufacturers may
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.
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:
• Monopolistic: Product differentiation rather than strict pricing competition tends to exist. By
successfully positioning its products as different and better, a firm can command a price premium.
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
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.
Students should be able to explain how the Internet, through things like shopping bots (TheFind.com and
Bizrate.com), has made it much easier for people to shop for substitutable products, which has affected
the price elasticity of demand for such products. The Internet allows customers to seek more information
and puts downward pressure on merchandise pricing.
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
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
12 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
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
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
2 How does this benefit–sacrifice ratio give Planet Fitness a competitive advantage in its
industry?
The low-cost monthly membership makes it easy to draw new members. Because most members come
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
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McGraw-Hill Education. 5
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
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.
Connect Activities
Activity Type Learning Objectives 14-
01 02 03 04 05
Taco Bell: Pricing for Value 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,
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
Video: The video is presented to the student below the introductory information. The video plays
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
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
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?
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
Concept Review: Each firm embraces objectives that management believes will make the firm more
Follow-Up Activity
Small group exercise:
Have the students think of a futuristic, revolutionary product (a transporter is one good possibility).
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McGraw-Hill Education. 7
Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
A common conclusion is likely to be that customer-oriented pricing is a difficult strategy to employ for a
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
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
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.
It’s a cautionary tale worth sharing.
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Chapter 14 - Pricing Concepts for Establishing Value Marketing 6th
Planet Fitness: Pricing for Success
Activity Type: Case Analysis
Learning Objectives: 14-01, 14-04, 14-05
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
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
Video: The video is presented to the student below the introductory information. The video plays
embedded on the page, after which questions are presented.
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McGraw-Hill Education. 9
