978-1259709074 Chapter 15 Part 2

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Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

7 If you worked for a manufacturing firm located in Oregon and shipped merchandise all over

the United States, which would be more advantageous, a zone or a uniform delivered pricing

policy? Why? What if your firm were located in Kansas—would it make a difference?

With a uniform delivered pricing tactic, the shipper charges one rate, no matter where the buyer is

located. Zone pricing sets different prices depending on a geographical division of the delivery area. For

a firm in Oregon, a zone pricing might be more cost efficient. Oregon is located so far away from many

8 Coupons and rebates benefit different distribution channel members. Which would you prefer

if you were a manufacturer, a retailer, and a consumer? Why?

Coupons offer a discount on the price of a specific item when the item is purchased. Coupons can be

issued by manufacturers and retailers.

Rebates are issued by the manufacturer for a refund of a portion of the purchase price. Consumers have

to redeem the rebate after the point of sale.

9 Suppose the president of your university got together with the presidents of all the

universities in your athletic conference for lunch. They discussed what each university was

going to charge for tuition the following year. Are they in violation of federal laws? Explain

your answer.

Horizontal price fixing occurs when competitors that produce and sell competing products collude, or work

together, to control prices, effectively taking price out of the decision process for consumers. Horizontal

10 Imagine that you are the newly hired brand manager for a restaurant that is about to open.

Both the local newspaper and a gourmet food magazine recently ran articles about your new

head chef, calling her one of the best young chefs in the country. In response to these

positive reviews, the company wants to position its brand as a premium, gourmet restaurant.

Your boss asks what price you should charge for the chef’s signature filet mignon dish. Other

restaurants in the area charge around $40 for their own filet offerings. What steps might you

undertake to determine what the new price should be?

This question asks students to consider the importance of marketing research in setting. The brand

manager should conduct focus groups to determine what prices consumers would be willing to pay for the

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

11 You have been hired by a regional supermarket chain as the candy and snack buyer. Your

shelves are dominated by national firms such as Wrigley’s and Nabisco. The chain imposes a

substantial slotting fee to allow new items to be added to their stock selection. Management

reasons that it costs a lot to add and delete items, and besides, these slotting fees are a good

source of revenue. A small, minority-operated, local firm produces several potentially

interesting snack crackers and a line of gummy candy, all with natural ingredients, added

vitamins, reduced sugar, and a competitive price—and they also happen to taste great. You’d

love to give the firm a chance, but its managers claim the slotting fee is too high. Should your

firm charge slotting fees? Are slotting fees fair to the relevant shareholders—customers,

stockholders, vendors?

Slotting allowances are fees paid to retailers simply to get new products into stores or to gain more or

better shelf space for their products. Firms that demand large slotting allowances could be considered a

form of bribery with large firms able to get preferential treatment from retailers. Slotting fees help retailers

Quiz Yourself

1 A(n) _____ strategy is attractive because it attracts two distinct market segments: customers who

are not price-sensitive customers and customers who are price sensitive.

a. cost-based pricing

b. high/low pricing

c. predatory pricing

d. EDLP

e. competitor-based pricing

2 When using a market penetration strategy, as sales continue to grow, the costs continue to drop,

allowing even further reductions in the price. This is due to

a. markdowns.

b. price lining.

c. seasonal discounts.

d. improvement value.

e. experience curve effects.

Chapter Case Study: Pizza Players, Pizza Prices

1 Which pricing tactics does each company utilize? Evaluate the effectiveness of each one of these

tactics for the particular pizza chain.

Papa John’s (allows company to keep pace with competitors’ pricing)

• Quantity Discounts: order one large pizza at the regular price, get a second for just $.50.

• Price Bundling: a combination chocolate chip cookie and brownie—for $6 with the order of any

pizza.

Little Caesars (supports “underdog,” overlooked status)

• Leader Pricing: a free Hot-N-Ready lunch if the upset occurred.

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

Domino’s (supports consistency in pricing strategy)

• Markdowns: same baseline: medium cheese pizzas for around $5.99 each.

Pizza Hut (unknown effectiveness, intended to improve a recent sales slump)

• Price Bundling: buy at least one other item (e.g., breadsticks, wings, another pizza), get a

medium, one-topping pizza for just $5.

2 How might the current price wars change the pricing tactics used by the major pizza chains?

As the price wars continue, the major chains must turn their attention from the small restaurants to each

other. This will add pressure for lower prices, which will cut in to the margins of all the major pizza chains.

That will make it necessary for the competitors to find new creative pricing tactics that keep customers

happy while maintaining profits.

Additional Teaching Tips

This chapter focuses on pricing strategies, pricing tactics, and ethics of pricing. Students are introduced

to the idea of tying marketing strategy to pricing strategy to achieve a desired outcome (gain market

share, become a brand name, market bundled products, etc.). What is important for students to learn is

that the pricing must not only considered fixed cost, variable costs, and break-even-point, but it also

must take into consideration the marketing goal of the company for that product, the current dynamics of

the market place, and a focus on what their target market will pay.

Instructors should spend some time relating the pricing strategies to the marketing goal using Exhibit

15.1. Students may be under the false impression that all that pricing has to do with is maximizing profit

margin. That is true in some cases but not in others. As the Apple vs. Amazon case points out, profit can

be won through economies of scale with pricing less per unit but selling more in volume. It’s important to

point out how value and perception affect the pricing strategy as well. Why pay three times as much for a

specific brand name when there are comparable products on the market? The consumer is willing to pay

for the brand name because they perceive added value and are willing to pay for that (whether it be in

image, quality, or scarcity).

The majority of the chapter focuses on the many pricing strategies listed in the Key Terms. Instructors

may want to use the following critical thinking exercise for students. Divide the class into teams of 4 or 5.

Give each team a note card in which the instructor has written down 5 or 6 of the pricing terms. Teams

are equipped with half-sheet transparencies and markers. They are to keep their list of pricing strategies

confidential. The students work in a team to create one story problem per transparency for each of the

words. The problems must be enough that the students who will evaluate the pricing strategy are able to

determine the price. Instructors can visit each team and assist with the creation of the story problems

and/or review their story problems for presentation.

Have students include the answer at the bottom of the transparency but have students cover the answer

up when they present the problems to the rest of the class in a game/competition. One member of team 1

presents each of the story problem, teams 2, 3, 4 each compete to determine the correct pricing strategy,

and either the instructor or a volunteer keeps score. 1 point for the correct answer but teams can also

lose a point for determining the wrong answer. The team with the most points wins. Perhaps they receive

2 points on the next quiz.

Example:

I am the makers of Wii and have come out with a brand new skateboard game new to the market that

comes with an imitation board. No one else has this type of technology and the game is in high demand.

My goal is to maximize profits. What type of pricing strategy would I use?

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

Answer: Prestige pricing (not revealed until the other teams have had an opportunity to answer)

NOTE: This exercise will take some time but it does make the students critically think and apply the

pricing strategies. The instructor may want to allow the class to use their books in deciphering which

pricing strategy is being presented, though they should have pre-read the chapter and have a general

knowledge of pricing strategies before being assigned this exercise.

Online Tip: Assign each student (in confidence) a pricing strategy. Have the student develop a story

problem. Meet on the synchronous platform to present the challenge game using the same outline as

above. Have each student present their word while the other students try to evaluate what the pricing

strategy is. Instructors can also make this a team game in synchronous mode by first assigning a group

of pricing strategies to each group then competing in teams.

Connect Activities

Activity

Type

Learning Objectives 15-

Deceptive or Illegal Pricing

Click and Drag

Verizon, AT&T, Sprint, and T-Mobile Go

to War

Case Analysis

Pizza Players Pizza Prices

Case Analysis

Deceptive or Illegal Pricing

▪ Activity Type: Click and Drag

▪ Learning Objectives: 15–06

▪ Difficulty: Hard

▪ Activity Summary: Students are asked to classify five deceptive or illegal pricing actions according

to the category it represents.

Activity

▪ Introduction: Firms use many pricing tactics to try to improve their market share. Some are perfectly

legitimate and can be considered fair pricing practices, whereas others are deceptive or even illegal.

For this activity, you will need to review the types of practices associated with illegal and unethical

pricing strategies.

▪ Concept Review: Prices tend to fluctuate naturally and respond to varying market conditions.

Although we rarely see firms attempting to control the market in terms of product quality or

advertising, they often engage in pricing practices that can unfairly reduce competition or harm

consumers directly through fraud and deception. Laws and regulations at both the federal and state

levels attempt to prevent unfair pricing practices, but some are poorly enforced, and others are

difficult to prove.

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

Follow-Up Activity

Role playing: In pairs or small groups, students develop a short role-playing vignette demonstrating the

unethical pricing practices listed in the activity. The vignette can show a salesperson interacting with a

potential customer, a discussion among employees of the ethics-violating company, or a discussion

between officials from two or more companies that compete with each other. Have the groups perform

their vignettes for the class, who must guess which ethics violation is being dramatized. To make sure all

of the ethics violations are covered, you could give each group a sheet of paper identifying their assigned

violation.

Verizon, AT&T, Sprint, and T-Mobile Go to War

▪ Activity Type: Case Analysis

▪ Learning Objectives: 15-01, 15-03, 15-04, 15-06

▪ Difficulty: Hard

▪ Activity Summary: This case discusses competitive pricing strategies and tactics used by the major

cellular service providers. Students answer questions applying chapter concepts to the case.

Activity

▪ Introduction: Cell phone companies may already have all the available customers. Cellular

subscriptions have nearly topped 322 million in the United States—a rate equal to 102 percent of the

population. That is, there are more cellular subscriptions than there are people in the United States.

Examining how cell phone companies like Verizon Wireless, AT&T, Sprint, and T-Mobile grow once

they’ve run out of potential customers provides a glimpse into the value of strategic pricing.

▪ Concept Review: Firms employ pricing strategies that seem best for the particular set of

circumstances in which they find themselves. Even a single firm needs different strategies across its

products and services and over time as market conditions change. The choice of a pricing strategy

thus is specific to the product/service and target market. In contrast to long-term strategies, pricing

tactics offer short-term methods to focus on select components of the five Cs of pricing. Different

tactics can be used for the consumer and the B2B markets. Marketers need to carefully consider the

legal and ethical implications of their pricing strategies and tactics.

Follow-Up Activity

U.S. mobile providers have settled on a pricing model that is vastly different from the ones used in other

countries—which points out that there are other ways to price mobile service. In small groups, ask

students to invent an entirely new pricing model for cellular phone and data service. Would they charge a

flat fee? For usage? Should both inbound and outbound faxes and calls cost the subscriber money? How

much should manufacturers subsidize phone purchases?

Pizza Players, Pizza Prices

▪ Activity Type: Case Analysis

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

▪ Learning Objectives: 15-01, 15-02, 15-04, 15-06

▪ Difficulty: Medium

▪ Activity Summary: This case discusses pricing strategies for the major pizza retailers in the US.

Students are asked questions requiring them to apply chapter concepts to the case material.

Activity

▪ Introduction: Pizza is big business in the US; customers have plenty of options for obtaining pizza.

The case discusses pricing strategies of major and smaller pizza chains. The goal of this exercise is

to test your understanding of pricing strategies and tactics by asking you to apply your knowledge to

the pizza industry. This activity is important because pricing is one of the most challenging tasks

encountered by managers; it is essential to understand the considerations and options available in

pricing.

Follow-Up Activity

As an individual activity out of class, or as a small group in-class activity, have students visit the website

of one of the major pizza chains and check on current price promotions. What kind of pricing tactics do

these promotions represent: quantity discounts, seasonal discounts (i.e., a discount for Super Bowl

weekend or another major weekend for pizza), coupons, bundling, leader pricing, or price lining? Follow

up in class by asking students which tactics are most successful in getting them to make a purchase.