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END OF CHAPTER MATERIAL
Discussion Questions
10-1 Why is finding and implementing the right pricing strategy critical to a company’s success?
(AACSB: Communication)
Answer:
Price is the only element in the marketing mix that produces revenue; all other elements represent
costs. Price is also one of the most flexible marketing mix elements. Unlike product features and
However, smart managers treat pricing as a key strategic tool for creating and capturing customer
value. Prices have a direct impact on a firm’s bottom line. A small percentage improvement in price
10-2 Name and describe the two types of value-based pricing methods. (AACSB: Communication)
Answer: Student answers will vary based on their personal response. Refer to the MyLab for an
10-3 Two different types of costs form the total cost in setting a product price in cost-based pricing.
Explain what these two costs are and which one is the most important in determining price.
Answer:
Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling
the product plus a fair rate of return for effort and risk. There are two types of costs to determine the
10-4 Briefly explain the four types of markets companies must consider for pricing decisions. Are these
markets relevant for all types of products?
Answer: The following are the four types of markets companies must consider for pricing decisions.
1. Pure competition: The market consists of many buyers and sellers trading in a uniform
commodity. No single buyer or seller has much effect on the going market price. In a purely
2. Monopolistic competition: The market consists of many buyers and sellers who trade over a range
3. Oligopolistic competition: The market consists of a few sellers who are highly sensitive to each
4. Pure monopoly: The market consists of one seller. The seller may be a government monopoly, a
Only one out of these four market types is normally relevant to a product or service at a time. A
10-5 List and briefly explain what internal factors companies must consider for pricing decisions. How
important are these, in your opinion?
Answer:
Overall marketing strategy, objectives, and mix are some of the key internal factors. These factors are
very important because price decisions must be coordinated with product design, distribution, and
Critical Thinking Exercises
10-6 Congratulations! You just won your state lottery and will be receiving a check for $1 million. You
have always wanted to own your own business and have noticed the increase in the number of food
trucks in your local area. A new food truck with a kitchen and related equipment costs about
$100,000. Other fixed costs include salaries, gas for the truck, and license fees and are estimated to be
about $50,000 per year. You decide to offer traditional Mediterranean cuisine. Variable costs include
food and beverages estimated at $6 per platter (meat, rice, vegetable, and pita bread). Meals will be
priced at $10. Calculate the break-even for your food truck business. After reviewing your
break-even, what changes would you consider? Is this how you want to spend your lottery winnings?
(AACSB: Communication; Reflective Thinking)
Answer: Student answers will vary based on their personal response. Refer to the MyLab for an
10-7 In a small group, discuss your perceptions of value and how much you are willing to pay for the
following products: automobiles, frozen dinners, jeans, and athletic shoes. Are there differences
among members of your group? Explain why those differences exist. Discuss some examples of
brands of these products that are positioned to deliver different value to consumers. (AACSB:
Communication; Reflective Thinking)
Answer:
Students’ responses will vary. Different backgrounds, different familiarity with the products will
impact students’ feelings about value. Students’ responses will vary because perceptions of value
vary among consumers. For example, some consumers think of athletic shoes as shoes to wear when
10-8 Economic conditions can have a strong impact on a firm’s pricing strategies. In the aftermath of the
recent Great Recession, many companies adjusted prices by cutting prices or offering discounts.
Nike’s approach was somewhat different considering their value of products and customer loyalty.
Identify key factors and reflect on Nike’s approach to pricing after the recent recession.
Answer:
In the aftermath of the recent Great Recession, consumers have rethought the price-value equation.
Many consumers have tightened their belts and become more value-conscious. The most obvious
APPLICATIONS AND CASES
Online, Mobile, and Social Media Marketing: Sold Out
Even before tickets went on general sale for the Rugby World Cup 2015, tickets were being offered on the
secondary market for up to $14,000 for a $200 ticket—around 44 times the face value of the ticket. The 1
million general sale tickets were later offered for sale by ballot. The over-priced tickets were thought to
have been legitimately secured hospitality packages bought by an individual or company in the hope that
they could turn a big profit on them. At the same time, tickets for the final match of the sports competition
were being offered at around $7,000 each. Although there is no suggestion that StubHub or Viagogo, the
two resale sites in this case, had done anything illegal in hosting a third-party sale, it does illustrate the
fact that within minutes of an event’s tickets being available online, they are sold out. In many cases,
tickets are being offered even before the tickets are officially on sale, and at inflated prices. The ticket
resellers need to be fairly confident that they can secure the tickets. This is usually done with the help of
specially programmed software that they use to ensure their ticket orders get to the front of the queue,
making a huge profit for them.
10-9 Is there a ticket resale market active in your own country? How does ticketing work? Are tickets
bought directly or via agents and brokers? Write a report on the ticketing industry in your country.
(AACSB: Written and Oral Communication; Information Technology)
Answer:
Student answers will vary, but they should be able to identify the key means by which tickets are sold
10-10 Inflated ticket prices can reflect very badly on the sport, event, or celebrity, even though the
activities of resellers have nothing to do with them. Discuss how resellers could be cut out of the
market. (AACSB: Written and Oral Communication; Information Technology)
Answer:
Student answers will vary. It would appear that even printing the name of the original purchaser of the
ticket does not dissuade resellers. Some musicians and others have attempted to stop resellers is by
Marketing Ethics: The Cost of a Life
When loved ones are critically ill, what are families willing to pay to keep them on a path to improved
health? In 2015, Turing Pharmaceuticals found itself in the middle of a controversial issue when it
purchased an existing drug—Daraprim—from another pharmaceutical company. Daraprim has been
around for 62 years and is used to treat life-threatening parasitic infections in AIDS and cancer patients.
After acquiring Daraprim, Turing Pharmaceuticals CEO Martin Shkreli quickly raised its price from the
previous $13.50 per pill to a whopping $750 per pill. According to CNN Money, CEO Shkreli stated, “We
needed to turn a profit on this drug.” He added the company would use the profits to research better ways
to treat diseases.
10-11 Research the Daraprim pricing issue. Is it wrong for Turing Pharmaceuticals to charge such a high
price for this medication? Support your position. (AACSB: Communication; Ethical Reasoning)
Answer:
Most students will argue that a price hike of this magnitude on a life-saving drug is inexcusable and
difficult to justify. However, others may take the position that Turing Pharmaceuticals is maximizing
10-12 According to one Harvard Business Review article (see
www.hbr.org/2015/09/its-time-to-rein-in-exorbitant -pharmaceutical-prices), over the past five years
returns for the S&P Pharmaceuticals Select Industry Index have been virtually doubled those of the
broader S&P 500 (roughly 24 percent versus 12 percent annually). What factors affect profitability in
the pharmaceutical industry? Are these high profit levels a good or bad thing? Explain.
Answer:
The U.S. pharmaceutical industry has historically been one of the nation’s most profitable industries.
There are several factors contributing to the complexity of competition, impacting pricing and
profitability in the pharmaceutical industry.
1. According to the Washington Post, in 2015 prescription drug prices increased 10.9 percent across
2. Most countries regulate drug prices but the U.S. does not. Americans pay, on average, two to five
3. Competition in the pharmaceutical industry is different than in many other industries. In most
industries, consumers choose the product they purchase. However, in the pharmaceutical industry,
Marketing by the Numbers: Pricey Sheets
Many luxury sheets cost less than $200 to make but sell for more than $500 in retail stores. Some cost
even more—consumers pay almost $3,000 for Frett’e “Tangeri Pizzo” king-size luxury linens. The
creators of a new brand of luxury linens, called Boll & Branch, have entered this market and are
determining the price at which to sell their sheets directly to consumers online. They want to price their
sheets lower than most brands but still want to earn an adequate margin on sales. The sheets come in a
luxurious box that can be reused to store lingerie, jewelry, or other keepsakes. The Boll & Branch brand
touts fair trade practices when sourcing its high-grade long-staple organic cotton from India. Given the
cost information below, refer to Appendix 2: Marketing by the Numbers to answer the following
questions.
Cost/King-size Set
Raw Cotton $28.00
Spinning/Weaving/Dyeing $12.00
Cut/Sew/Finishing $10.00
Material Transportation $ 3.00
Factory Fee $16.00
Inspection and Import Fees $14.00
Ocean Freight/Insurance $ 5.00
Warehousing $ 8.00
Packaging $15.00
Promotion $30.00
Customer Shipping $15.00
10-13 Given the cost per king-size sheet set above, and assuming the manufacturer has total fixed costs of
$500,000 and estimates first year sales will be 50,000 sets, determine the price to consumers if the
company desires a 40 percent margin on sales. (AACSB: Communication; Analytical Reasoning)
Answer:
The simplest method of cost-based pricing is cost-plus pricing (or markup pricing) which simply adds
Cost per unit is:
Unit cost = variable cost + fixed costs/unit sales =$156 + $500,000/50,000 = $166
10-14 If the company decides to sell through retailers instead of directly to consumers online, to maintain
the consumer price you calculated in the previous question, at what price must it sell the product to a
wholesaler who then sells it to retailers? Assume wholesalers desire a 10 percent margin and retailers
get a 20 percent margin, both based on their respective selling prices. (AACSB: Communication;
Analytical Reasoning)
Answer:
By deducting the markups for each level in the markup chain, to sell the product at retail for $276.67,
Suggested retail price: $276.67
minus retail margin (20%): – $53.33
Company Case Notes
MSC Cruises: From one second-hand ship to a major world player
Synopsis
MSC started out in 1970 with one second-hand cargo ship. Today they are one of the most successful
shipping companies in the world; they are the world’s 2nd largest container shipping firm and the world’s
4th largest cruise line operator.
This case study focuses on their cruising line division, where they are aggressively expanding and looking
to double their market share over the next 10 years.
The cruise industry has essentially been reinvented over the last 25 years with worldwide cruising
passengers increasing from 4 million to 24 million per year over that time. However, the industry’s
repositioning from a form of transportation to being “the destination” means that the cruise operators have
a much broader competitive (hotels, theme parks, resorts) set to consider.
Additionally, consumers’ increased reliance upon internet research, including comparison and review
websites, has tended to increase the emphasis on price as a determinant attribution in their decision
process.
Pricing is a difficult challenge for most cruise operators. The industry’s profit margin is around 10 percent
of revenue, with only 75 percent of their total revenue from passenger ticket sales. This means that they
are reliant upon on-board sales and upselling to generate an overall profit. And like airlines and hotels,
their high capital costs mean that they need to be focused upon maximizing occupancy rates and using a
dynamic pricing system to ensure both volume and good pricing levels.
The scope of the case study, however, is much broader than pricing alone; it also extends into strategy, the
marketing environment, consumer behavior, segmentation and positioning, products and branding, and
marketing communications.
Teaching Objectives
The teaching objectives for this case study are to:
1. Review the three pricing strategy approaches outlined in the chapter (namely cost-based,
competitor-based, and value-based pricing)
2. Understand the relationship between the price mix and other marketing elements, such as
strategy, positioning, and promotion
3. Consider how the degree of a product’s competitive advantages and differentiation provide the
ability to charge a price premium
4. Consider the impact of pricing decisions on market share versus profit trade-off
5. Review the impact of internet research on the importance of price in the purchase decisions and
the subsequent impact on competitive pricing decisions
6. Consider the impact of both direct and indirect competitors when setting prices
7. Understand how firms set pricing structures and look to provide recommendations to improve
both sales and profits
Discussion Questions
10-18 Outline the competitive advantages of a cruise versus a traditional flight-resort holiday package.
Which holiday choice would you prefer? Which one would you be willing to pay a price premium for?
Hopefully some of the students will have some first-hand knowledge to add to this discussion. In the first
part of the question, the intention is to list the advantages of a cruise to the customer, which could
include:
All-inclusive holiday with transport, accommodation, meals, and entertainment included
More opportunities for socializing (due to the same passengers and planned activities)
The second part of the question relies upon opinion and preference. If the entire class has the same
preference, then the discussion could turn to other market segments: what would they prefer? And the
10-19 The ease of comparison on the internet tends to encourage price-based consumer decisions. What
do you think that MSC Cruises can do to help take the consumer’s focus off price?
This question is designed for students to consider what some of the important non-price
considerations in the consumer’s purchase decision are. Some of the possible approaches of creating
a more differentiated offering would include:
Offering unique on-board experiences and facilities
Having a unique ship design (size, structure)
Having unusual cruise itineraries or flexible options
The key point of this question is for students to understand the connection between differentiation and
10-20 Which of the three pricing strategies do you think would work best for MSC Cruises, given their
overall market share growth goals? Why?
The key part of this question is to help MSC achieve their “market share growth goals” rather than
maximizing profits, which is important to the firm given their $10-billion planned investment in new
The preferred overall approach would be competitor-based pricing, given that they want to move
from 4th to 3rd in terms of passenger market share. They have about one new ship per year coming
In high-season, it is possible that there is over-demand for some cruises, which would allow a
value-based pricing approach. However, this approach needs to be used sparingly as the industry is
Obviously, cruise operators need to recover costs (given their significant assets investment), so a
break-even pricing approach may be suitable as a minimal average price benchmark. But cost-based
10-21 Review MSC’s pricing approach of providing a relatively low up-front price but then relying upon
additional sales for profitability. Outline the strengths and weaknesses of this approach?
This question leads towards the next one. There are two aspects to consider here: to review the
pricing approach from both the consumer’s and the firm’s perspective. In addition, some students may
even consider the impact on travel agents who are key influencers in the decision.
In simple terms, from the consumer’s perspective, the initial purchase price appears affordable and
attractive. It also enables them to split the holiday cost into two components (upfront and then
From the firm’s perspective, the splitting of the costs (with a lower upfront cost) should lead to a
greater market share of passengers, but it also may lead to reduced revenue per cabin in order to win
Travel agents, as a key sales channel, are expected to have a strong knowledge of pricing and would
10-22 Do you agree with MSC’s overall approach to pricing? What proving recommendations would you
have for them?
This is somewhat an opinion-based response, but students should draw from their previous responses
When assessing the student’s revised pricing recommendations, they should be considered according
By way of further information (not in the case study), Carnival Cruise Lines (the market leader)
Teaching Suggestions
In addition to discussing the case study itself, there will be some students (or their family members) who
have been on a cruise, so they may want to share their experiences.
This case also lends itself to a discussion of what consumers look for when choosing a holiday: what are
the main decision criteria? This discussion may extend into what different market segments look for (e.g.
families, singles, honeymooners, retirees, etc.).
This discussion could also be extended into the role of internet research (e.g., Trip Advisor, videos,
YouTube), face-to-face word-of-mouth, and travel agents in the overall decision.
The class could review YouTube TV commercials for cruise lines. What are the key benefits that they
promote? Do they mention price? What sort of customers do they portray?
Finally, there are other marketing factors to draw upon to demonstrate the relation between price and
strategy, environment changes, the product life cycle, positioning, direct and indirect competitors, and so
on.
Go to mymktlab.com for the answers to the following assisted-graded writing questions:
10-23 Why are consumers so concerned about the price of gas and why are they willing to search
out stations with lower prices? (AACSB: Communication; Reflective Thinking)
10-24 Describe the cost-plus pricing method and discuss why marketers use it even if it is not the best
method for setting prices. (AACSB: Communication; Reflective Thinking)
ADDITIONAL PROJECTS, ASSIGNMENTS, AND EXAMPLES
Projects
1. Interview a local business about their pricing philosophy and/or strategy. Use their terms and then
apply what you have learned from them to assess their approach to those described in the text.
What are the similarities and differences? (Objective 2)
2. Use the local newspaper to compare grocery store ads for price specials. What can you determine
about the competitors’ pricing strategies? How many of the techniques from the chapter do the
organizations seem to be using? What strategy appears to be the most successful? How did you
make this judgment? (Objective 2)
3. How does Walmart make use of good-value pricing? (Objective 2)
4. Explain how companies such as Dell use cost-plus pricing. What are the competitive
disadvantages of such pricing strategies? (Objective 3)
5. Take a drive around town and look at the price of gasoline at a variety of different stations. Use
oligopolistic competition to explain what you are seeing. (Objective 3)
Small Group Assignments
1. Form students into groups of three to five. Each group should read Real Marketing 10.1: Good
Value at Spirit Airlines: Getting Less but Paying Much Less for It. Each group should then
answer the following questions and share their answers with the class. (Objective 1)
a. Explain Spirit’s pricing strategy in your own words. Does the company employ good-value
pricing or value-added pricing? Explain.
b. How is Spirit distinguishing itself from other airlines? How does it deliver value to
consumers?
c. Is Spirit’s pricing strategy sustainable? In what economic situations? Explain.
d. What changes, if any, would you recommend that Spirit make?
2. Form students into groups of three to five. Each group should read the Real Marketing 10.2:
Whole Food Market: Finding the Right Price-Value Equation. Each group should then answer the
following questions and share their answers with the class. (Objective 2)
1. What unique pricing strategy has Whole Foods adopted in the food marketplace?
2. Relative to competitors, what is Whole Foods’ market position?
3. What is the unique “customer value” that Whole Foods delivers to its patrons?
4. Will Whole Foods be able to maintain the balance it is achieving in the price-value equation?
Individual Assignments
1. Reread the opening section of this chapter on “What Is a Price?” Imagine you are considering
purchasing a new suit for job interviews. You are considering comparison-shopping for your new
suit at Saks Fifth Avenue (a high-end department store) and Dillard’s (a moderate department
store). Discuss the overall differences in “price” between the two establishments. (Objective 1)
2. What is “everyday low pricing?” Besides Walmart, what companies do you believe have been
able to use this pricing strategy to great success? (Objective 2)
Think-Pair-Share
Consider the following questions, formulate an answer, pair with the student on your right, share your
thoughts with one another, and respond to questions from the instructor.
1. What is price? (Objective 1)
2. Discuss the role that customer value plays in the determination of price. (Objective 2)
3. Explain the difference between value-based, good-value, and value-adding pricing strategies.
(Objective 2)
4. What is target-profit pricing? (Objective 3)
5. Explain the demand curve. (Objective 3)
Outside Examples
1. Take a look at The Poisoned Pen (www.poisonedpen.com/), a small independent bookstore
located in Scottsdale, Arizona. Their motto is “It’s more than a bookstore, it’s an experience.”
Look around their website. Read the blog by Barbara, the owner. See what authors are scheduled
to appear and sign their books. Check out their pricing. Experience the store, in light of its motto.
Discuss The Poisoned Pen’s approach to pricing. How are they able to remain competitive against
booksellers such as Amazon.com or Barnes & Noble? (Objective 2)
Possible Solution:
After spending some time looking around the website of The Poisoned Pen, it becomes evident
that they are certainly not a discount pricing operation. In an industry where it has become normal
to find newly released hardback books at 25 percent to 50 percent off of the manufacturer’s
suggested price, The Poisoned Pen does not discount. But, for their customers, this pricing
2. Your text talks about Whole Foods Market, the upscale grocery retailer. You can explore the
company and products at www.wholefoodsmarket.com/. Take some time to learn about the types
of products offered and the product information provided. The website is full of information
about product lines, quality standards, safety standards, coupons, and more. Use the store locator
and find the retailer closest to you. Visit one and price the items of interest to you. How can they
charge what they charge? How does the information provided on the website and in the stores add
value to a consumer? (Objective 3)
Possible Solution:
Whole Foods does not sell on price. As a matter of fact, it is rather difficult to find any reference
to prices on the website, except for the items available for online ordering. As the text points out,
the company has worked to create a “nonprice” position for Whole Foods products. They offer
