END OF CHAPTER MATERIAL
Discussion Questions
11-1 Name and describe the two broad new-product pricing strategies. When would each be
appropriate? (AACSB: Communication)
Answer:
Companies bringing out a new product face the challenge of setting prices for the first time.
Many companies that invent new products set high initial prices to “skim” revenues layer by
layer from the market, a strategy called market-skimming pricing (or price skimming). Market
skimming makes sense only under certain conditions. First, the product’s quality and image
Rather than setting a high initial price to skim off small but profitable market segments, some
companies use market-penetration pricing. They set a low initial price to penetrate the
market quickly and deeply—to attract a large number of buyers quickly and win a large
11-2 Define product bundle pricing. Give examples where companies have used this pricing
strategy. (AACSB: Communication; Reflective Thinking)
Answer: Student answers will vary based on their personal response. Refer to the MyLab for
11-3 What is promotional pricing, and how is it used by sellers? Give an example.
(AACSB: Communication)
Answer:
In promotional pricing, a business offers the same product or services to
different types of customers at different prices. It is designed to increase
the overall revenue and profit and tends to be used by businesses that
11-4 Discuss some situations that may prompt companies to initiate price cuts. (AACSB:
Communication)
Answer: Students can approach this in two radically different ways. On the one hand,
existing customers may make more frequent purchases and new customers may be drawn in
11-5 Prices rise when investors acquire pharmaceutical patents. Should legislation exist in order
to prevent this form of profiteering? (AACSB: Communication; Reflective Thinking)
Answer:
This is a moral issue and has attracted media attention, especially when key pharmaceutical
patents are acquired by investors who promptly inflated the cost to users in order to generate
enormous profits. A prime example was Martin Shkreli, the CEO of Turing Pharmaceuticals,
Critical Thinking Exercises
11-6 Alicia is a self-employed hair stylist who owns her own salon. She has asked you to consult
with her on how to generate more revenue. Using the price adjustment strategies discussed in the
chapter, advise Alicia on her options to increase overall sales. (AACSB: Communication;
Reflective Thinking)
Answer: Student answers will vary based on their personal response. Refer to the MyLab for
11-7 Bridgestone Corporation, the world’s largest tire and rubber producer, recently agreed to
plead guilty to price-fixing along with 25 other automotive suppliers. What is price-fixing?
Discuss other recent examples of price fixing. (AACSB: Communication; Reflective
Thinking)
Answer:
Federal legislation on price-fixing states that sellers must set prices without talking to
competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per se—that is, the
government does not accept any excuses for price-fixing. As such, companies found guilty of
11-8 Identify three online price-comparison shopping sites or apps and shop for a product you
are interested in purchasing. Compare the price ranges given at the three sites. Based on your
search, determine a “fair” price for the product. (AACSB: Communication; Use of IT;
Reflective Thinking)
Answer:
There are several online price-comparison shopping sites, such as www.BizRate.com,
Students’ responses will vary depending on the specific product chosen, but just a quick
search of a gas grill on www.NextTag.com and www.Shopzilla.com yielded prices ranging
APPLICATIONS AND CASES
Online, Mobile, and Social Media Marketing: Krazy Coupon Lady
Price-conscious consumers are all about finding the best deal. Some even make a sport of it!
Krazy couponers, Heather and Joanie, have been showcased on many national television shows
and in web and print articles. The two friends run a highly successful company that works
tirelessly to uncover the best deals, enabling families to save money. Posted on their website,
www. krazycouponlady.com, is the company mantra “You’d be krazy not to be one of us!” The
website features promotions and alerts to special pricing on products as well as coupons and
discounts to help consumers stretch their dollars. Also featured are retailers with sale-priced
merchandise, coupons, and promotions. Community members post their best deals in the brag
section.
11-9 Visit www.krazycouponlady.com and browse a deal you would consider purchasing. After
identifying the deal, conduct an online price comparison at various retailers to determine the
range of prices you would typically pay for the product. Present your conclusions. (AACSB:
Communication; Use of IT; Reflective Thinking)
Answer:
Examples will vary. One option would be purchasing Suddenly Pasta Salad on sale for $1.00
at Target. www.krazycouponlady.com provides a coupon valued at $1.00. After the consumer
11-10 Using www.krazycouponlady.com, click on Stores, Coupons, and Deals on the navigation
bar and make a list of the featured products. Identify the pricing strategy used by the retailer.
(AACSB: Communication; Use of IT; Reflective Thinking)
Answer:
Deals and offers change each week, so students’ lists will vary. Promotional pricing is used
consistently throughout the site. For example, if all Oil of Olay skin care products are on sale
Marketing Ethics: Less Bang for Your Buck
Over the past several years, careful shoppers may be spending about the same amount of money
at the grocery store but leaving the store with a lighter load in their grocery bags. Food prices on
many items have increased, and food manufacturers are facing the same challenges as
consumers. With increases in raw materials and transportation, making a profit requires a very
sharp pencil. According to Phil Lempert, editor of SupermarketGuru.com, “The reality is, if you
look at USDA projections, food is going to get more expensive. And as a result, food companies
are going to do one of two or three things: Raise prices and keep packages the same, or reduce
the quantity in the package. Or do a little of both.”
11-11 Week after week, consumers shop for many of the same groceries. At some point, the
product may be priced the same and look the same as before but with less in the package. If
consumers are not made aware of the change, is this deception? Is this different from
deceptive pricing? Explain. (AACSB: Communication; Ethical Reasoning; Reflective
Thinking)
Answer:
Companies are entitled to make a profit. When costs increase, companies must respond.
According to the Washington Post, decreasing the package size while keeping the price the
same is the least disruptive way to pass on cost increases to consumers. Some consumers feel
11-12 Develop a list of the products you buy from a grocery store, dollar store, or convenience
store where one of two things has occurred: The price has increased or the quantity in the
package has decreased. Were you aware of the changes? Explain. (AACSB: Communication;
Reflective Thinking)
Answer:
Students’ answers will vary with their experiences but will include products in the following
categories: coffee and other beverages, personal care, cosmetics, cereal, snacks, household
Marketing by the Numbers: Louis Vuitton Price Increase
One way to maintain exclusivity for a brand is to raise its price. That’s what luxury fashion and
leather goods maker Louis Vuitton did. The company did not want the brand to become
overexposed and too common, so it raised prices 10 percent and is slowing its expansion in
China. The Louis Vuitton brand is the largest contributor to the company’s $13.3 billion revenue
from its fashion and leather division, accounting for $8 billion of those sales. It might seem
counterintuitive to want to encourage fewer customers to purchase a company’s products, but
when price increases, so does the product’s contribution margin, making each sale more
profitable. Thus, sales can drop and the company can still maintain the same profitability as
before the price hike.
11-13 If the company’s original contribution margin was 40 percent, calculate the new
contribution margin if price is increased 10 percent. Refer to Appendix 2, Marketing by the
Numbers, paying attention to endnote 6 on the price change explanation in which the analysis
is done by setting price equal to $1.00. (AACSB: Communication; Analytic Reasoning)
Answer:
If we do not know the price but know the original contribution margin (in this case 40
percent), we can set the old price to $1.00/unit. If price equals $1.00, then that means the unit
contribution is $0.40/unit and variable costs are $0.60/unit. If price is increased by 10
percent, the new price is $1.10/unit. However, the variable costs do not change just because
price increases, so the unit contribution and contribution margins increase as follows:
Old New (10% increase)
Price $1.00/unit $1.10/unit
variable cost $0.60/unit $0.60/unit
= unit contribution $0.40/unit $0.50/unit
Contribution margin ($0.40/unit)/ ($0.50/unit)/($1.10/unit)
($1.00/unit)
= 0.40 = 40%
= 0.4545 = 45.45%
The 10% increase in price results in the contribution margin increasing from 40 percent to
45.45 percent.
11-14 Determine by how much sales can drop and still let the company maintain the total
contribution it had when the contribution margin was 40 percent. (AACSB: Communication;
Analytic Reasoning)
Answer:
To determine the amount by which sales can drop before profitability is impacted negatively,
The original total contribution can be calculated by multiplying the original contribution by
the original sales revenue:
Original total contribution = 0.40 × $8,000,000,000 = $3,200,000,000
So,
original total contribution $3,200,000,000
New sales = —————————— = —————— = $7,040,704,070
new contribution margin .4545
Company Case Notes
Lululemon: Indulging Customers at a Premium Price
Synopsis
Lululemon has quickly risen to the top of a bustling market that it played a major role in
defining. With approximately 400 stores around the world, Lululemon peddles its own brand of
yoga-inspired apparel with its instantly recognizable logo—an iridescent lower-case “a” that
resembles an “omega.” But far more than selling clothing, Lululemon inspires an image and a
lifestyle. The company exudes the philosophy captured by its manifesto—“We are passionate
about sweating every day and we want the world to know it. Breathing deeply, drinking water,
and getting outside also top the list of things we can’t live without.” In other words, this brand is
about active, healthy, back-to-nature lifestyles and isn’t shy about saying so. That image,
complimented by a “no discounts” credo, has a fanatically loyal customer-base willing to buy
everything Lululemon without any concern about the premium prices.
Teaching Objectives
The teaching objectives for this case are to:
1. Discuss the different aspects of price.
2. Examine the nature of establishing an image of low price.
3. Evaluate the different ways (and outcomes) for responding to price changes.
4. Consider the role that price plays in the marketing mix.
Discussion Questions
11-18 Relative to customer value, explain customers’ willingness to pay premium prices for
Lululemon’s products.
Customer-perceived value is defined by products that exhibit customer benefits that exceed
customer costs. The more that benefits exceed the costs, the greater the value. That
Lululemon charges such high prices and is so successful at doing so indicates that its loyal
customers perceive benefits that exceed those high prices. As noted in the case, the benefits
customers perceive include:
Superior materials that are comfortable and functional, enhancing whatever
activity they were designed for.
11-19 Based on principles from the chapter, explain how price affects customer perceptions of
the Lululemon brand.
Lululemon uses price points without a decimal point. Rather than pricing products at $97.99,
Lululemon prices goods at $98. This form of psychological pricing signals quality and an
11-20 Could Lululemon have achieved the same level of success had it executed an alternative
pricing strategy?
Possibly, but a different pricing strategy would have required an entirely different business
and marketing strategy. Everything they do supports the premium price. If the company had
11-21 Can Lululemon continue to succeed with the current premium-pricing strategy? Explain.
There are many premium priced luxury brands that have been around for a long time, such
as Burberry, Tiffany, and Rolls Royce. Such brands and companies share a slow-growth
Brands like Coach that exploded by marketing to the masses at some point begin to feel
growing pains. They hit a wall and slow down. Some premium brands that grew too fast even
disappear. Lululemon has pursued a fast-growth strategy. It has given rise to an entire
If Lululemon is to sustain its premium pricing strategy, it must maintain all the benefits that
its customers value. Additionally, it will likely have to enhance the benefits of the products
Teaching Suggestions
Conduct a discussion of this case built around the discussion questions. Spend some time on
Question 4, even getting a debate going if possible surrounding the issue of whether or not
Lululemon can continue to be so successful based on its pricing strategy. Then, give students five
or ten minutes to do some research on the current state of Lululemon and the challenges and
controversies that have plagued the company. Revisit Question 4 and see if the overall opinion
has changed at all.
This case was developed for use with Chapter 11. This case also works well with the first pricing
chapter (Chapter 10), the branding chapter (Chapter 8), the segmentation chapter (Chapter 7),
and the consumer behavior chapter (Chapter 5).
Go to mymktlab.com for the answers to the following Assisted-graded writing questions:
11-22 Explain how businesses implement segmented pricing and discuss conditions
necessary for success.
11-23 Any charge that is not airfare is referred to as ancillary revenue for airlines—
and they are cleaning up on it to the tune of $20 billion a year. While consumers can avoid
some fees, such as those for food, preferred seating, and wi-fi, the majority can’t avoid
baggage fees. What type of pricing strategies are airlines using? Is it ethical for airlines to
charge baggage fees?
ADDITIONAL PROJECTS, ASSIGNMENTS, AND EXAMPLES
Projects
1. Create a scenario for the use of a market-skimming strategy. Create a second for a
market-penetration strategy. (Objective 1)
2. Using the categories found in Table 11.1, find an advertisement that illustrates each of the
strategies. Demonstrate why the advertisement fits the category. (Objective 2)
3. The opening vignette deals with a unique price and value strategy. Think of two restaurants
or other services that utilize unique price and value strategies and defend your answers.
(Objective 2)
4. Product bundle pricing has the potential to bring in a lot of additional revenue. Think of three
different products that rely on product bundle pricing. (Objective 2)
Small Group Assignments
1. Form students into groups of three to five. Each group should read Real Marketing 11.1:
Dynamic Pricing: The Wonders and Woes of Real-Time Price Adjustments. Each group
should then answer the following questions and share their answers with the class. (Objective
1)
a. Based on this reading, how well do you believe that consumers actually understand how
online pricing changes based on characteristics of the individual consumer or buying
situation? Explain your answer.
b. While dynamic pricing can help sellers to optimize sales and profits by tracking
competitive pricing and making adjustments, what are the risks to the relationship with
the consumer? Can the strategy harm that relationship? How? Explain.
c. With this focus on pricing, can companies lead consumers to focus on price to the
exclusion of other factors such as customer service, convenience, and assortment? What
long-term impacts could this have on a company’s business?
2. Form students into groups of three to five. Each group should read Real Marketing 11.2:
Pharmaceutical Pricing: No Easy Answers. Each group should then answer the following
questions and share their answers with the class. (Objective 3)
a. What are some of the broader societal pricing concerns faced by companies that sell
prescription medications?
b. Pharmaceutical companies spend a tremendous amount of money advertising to
consumers who simply take the medications the physician orders. Is this ethical?
c. Do you believe that the pharmaceutical companies mentioned here price their product
offering fairly? Explain.
Individual Assignments
1. Market-skimming pricing is used many times when companies invent new products and
first introduce them to the market. Think of five “new” products that you believe are
employing a price skimming strategy. Back up your answers. (Objective 1)
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. Under what conditions does market-skimming pricing make sense? (Objective 1)
2. When can promotional pricing be unethical? (Objective 3)
3. Provide an illustration of each of the geographical pricing situations. Which is used most
often in delivering products sold via the Internet? (Objective 3)
4. What is dynamic pricing and when should a company use this strategy? (Objective 3)
5. What issues should marketers anticipate with respect to buyer reactions to price changes?
(Objective 4)
Outside Examples
1. Take a look at Zenith watches (www.zenith-watches.com). Take time to fully explore the
company and the product offering. Next, look up two or three merchants that carry the
Zenith brand. Discuss the pricing strategies you believe Zenith is employing. (Objective
1)
Possible Solution:
This question requires students to combine information from the previous chapter
(Chapter 10) and this chapter. Zenith is using a combination of pricing strategies. From
information contained in this chapter, it is clear that Zenith is employing a
2. Research GlaxoSmithKline, the pharmaceutical company. Now, go to their Web site
(www.gsk.com) to learn about the company. Pay particular attention to sections dealing
with corporate responsibility, marketing practices, and their stand on providing medicine
to underprivileged individuals and populations. Download their Corporate Responsibility
Review and read it. Discuss how GSK is attempting to walk the line between corporate
profitability and social responsibility. (Objective 4)
Possible Solution:
GlaxoSmithKline devotes much of its efforts to acting in a socially responsible manner.
Its Web site states, “Millions of poor people in both developed and developing countries
cannot obtain the medicines they need. The primary responsibility for addressing this
As you can see, there is no easy answer to where to draw the line between corporate
profitability and social welfare.