978-1259709074 Chapter 14 Solutions Manual

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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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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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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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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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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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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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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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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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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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