978-1305405769 Chapter 12 Part 2

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Chapter 12: Pricing Concepts and Management

CLASS EXERCISES

Class Exercise 1: Price versus Nonprice Competition

This exercise examines price and nonprice competition, pricing objectives, and factors affecting price

decisions.

Prompt for students:

Consider the following scenario and answer the questions.

Prices of personal computers continue to drop because of the following conditions:

a. Increased competition among PC makers, which operate on narrow margins.

b. Increased consumer knowledge and sophistication, which encourages more consumers to use mail–

order discount PC marketers.

c. Decreased differences in quality and performance among competitors.

d. Competition from Mac computers.

Although Dell prices are still above some of the competitors, all PC manufacturers have been cutting

prices to maintain market share.

Questions:

1. Do you think Dell should compete through price or nonprice competition? What are the advantages

and disadvantages of each approach?

2. If Dell were to continue competing on price, how might this affect other marketing mix variables?

3. If Dell drops its prices in the near future, what can you expect other PC makers to do? What kind of

competitive situation is the PC industry (oligopoly, monopolistic, pure competition)? What does

this imply for price setting?

Answers:

1. In the past, Dell has not competed on a price basis, focusing instead on distinctive product features,

2. Lower-priced products typically require more intensive distribution. Ads should emphasize price and

Chapter 12: Pricing Concepts and Management

Class Exercise 2: Demand-Related Pricing Calculations

Prompt for students:

Complete the following calculations:

Price Elasticity of Demand

Calculate the price elasticity of demand for a restaurant’s pizza under the following conditions:

Old price: $8 New price: $10

Old quantity: 1,000/month New quantity: 900/month

Total Revenue: $8,000 Total revenue: $9,000

If the new quantity sold per month were 700 (instead of 900), what would be the price elasticity of

demand?

Break-even Analysis

Assume you are selling pizzas at $8. Your fixed costs (rent, salaries, and utilities) are $4800/month. The

food costs and other variable costs are 50 percent of the selling price. What is your break-even point?

Answers:

Price Elasticity of Demand

Calculations:

Break-even Analysis

Calculations:

Chapter 12: Pricing Concepts and Management

Break-even Point = $4,800 / (0.5 x 8) = 1200 units or $9,600.

Class Exercise 3: Your Perceptions of Pricing

Prompt for students:

In this chapter, you learned about various pricing concepts that firms consider when choosing a pricing

strategy. In this exercise, you will explore your own perceptions of pricing.

Consider the following products:

• A diamond ring

• A haircut

• Plumbing services

For each product, answer the following questions:

1. What are the non-price attributes of this product?

2. How do these non-price attributes contribute to your perception of the price of the good?

3. How do organizations reinforce the focus on non-price attributes?

Answers:

Chapter 12: Pricing Concepts and Management

CHAPTER QUIZ

1. Which of the following is not a concern of the practice of price competition?

a. Emphasis on price

b. Frequent price changes

c. Price flexibility

d. Focus on product features

e. Competitors’ price

2. Which of the following products is most likely to have an elastic demand curve?

a. Gasoline

b. Electricity

c. Salt

d. Airline tickets for vacation travel

e. A textbook required for a course

3. A firm might temporarily sell products below their cost in order to

a. increase profits and revenues.

b. gain tax benefits and remove excesses.

c. raise cash or reduce market share costs.

d. match competition or generate cash flow.

e. appeal to a price sensitive market.

4. Immediately after the break-even point, a firm starts to

a. have revenue.

b. experience losses.

c. make profits.

d. decrease volume.

e. reduce costs.

Chapter 12: Pricing Concepts and Management

SEMESTER PROJECT

In this chapter, you learned the basics for understanding pricing concepts and strategies. Understanding

how to price is a difficult issue for any business. In this exercise, you will examine the elements you need

to consider in thinking about the pricing strategy for your product, you.

Step 1: Understand current competitors’ pricing. Using the career resource center and any other on–

campus resources, research the salaries of recent graduates with your degree. Then use web-based

resources and find the salary of recent graduates with your degree.

Step 2: Understand non-price attributes. Identify the criteria used to change the dynamics away from price

competition. What features of your product are attractive to the market? Which reduce price sensitivity?

Step 3: Understand supply in the marketplace. What is the level of competitive intensity in this market?

How many students have graduated from your university with your degree? How many students have

graduated with your degree in your region? How many students have graduated with your degree in the

U.S.? (Note: This information is often available from the career services center on your campus.)

Step 4: Understand demand in the marketplace. Is the number of jobs for students with your degree

increasing, decreasing, or remaining stable? What is the projected future demand for these positions?

Chapter 12: Pricing Concepts and Management

ANSWERS TO ISSUES FOR DISCUSSION AND REVIEW

1. Identify the eight stages in the process of establishing prices.

The eight stages in the process of establishing prices are as follows:

• Stage 1 is developing a pricing objective that is compatible with the organization’s overall

marketing objectives.

• Stage 2 entails assessing the target market’s evaluation of price.

• In Stage 3, marketers should examine a product’s demand and the price elasticity of demand.

• Stage 4 consists of analyzing demand, cost, and profit relationships—it is a necessary step in

estimating the economic feasibility of various price alternatives.

• Stage 5 involves evaluating competitors’ prices, which helps determine the role of price in the

marketing strategy.

• Stage 6 requires choosing a basis for setting prices.

• Stage 7 is selecting a pricing strategy, or determining the role of price in the marketing mix.

• Stage 8 involves determining the final price. This final step depends on environmental forces

and marketers’ understanding and use of a systematic approach to establishing prices.

2. How does a return on an investment pricing objective differ from an objective of increasing

market share?

3. Why must marketing objectives and pricing objectives be considered when making pricing

decisions?

4. Why should a marketer be aware of competitors’ prices?

5. Why do most demand curves demonstrate an inverse relationship between price and quantity?

6. List the characteristics of products that have inelastic demand, and give several examples of

such products.

7. Explain why optimal profits should occur when marginal cost equals marginal revenue.

By producing and selling so that marginal costs equal marginal revenue, a firm should obtain

8. Chambers Company has just gathered estimates for conducting a break-even analysis for a

new product. Variable costs are $7 a unit. The additional plant will cost $48,000. The new

product will be charged $18,000 a year for its share of general overhead. Advertising

expenditures will be $80,000, and $55,000 will be spent on distribution. If the product sells for

$12, what is the break-even point in units? What is the break-even point in dollar sales

volume?

9. What are the benefits of cost-based pricing?

10. Under what conditions is cost-plus pricing most appropriate?

11. A retailer purchases a can of soup for 24 cents and sells it for 36 cents. Calculate the markup as

a percentage of cost and as a percentage of selling price.

12. What is differential pricing? In what ways can it be achieved?

13. For what types of products would price skimming be most appropriate? For what types of

products would penetration pricing be more effective?

14. Describe bundle pricing, and give three examples using different industries.

15. Why do customers associate price with quality? When should prestige pricing be used?

16. Compare and contrast a trade discount and a quantity discount.

A trade discount is a reduction off the list price that a producer gives an intermediary for performing

17. What is the reason for using the term F.O.B.?

Chapter 12: Pricing Concepts and Management

ANSWERS TO DEVELOPING YOUR MARKETING PLAN

The information obtained from these questions should assist students in developing various aspects of

their marketing plan found in the “Interactive Marketing Plan” exercise at www.cengagebrain.com.

1. Using Table 12.1 as a guide, discuss each of the pricing objectives in the chapter. Which pricing

objectives will you use for your product? Consider the product life cycle, competition, and

product positioning for your target market during your discussion.

The chapter discusses seven different pricing objectives and the possible associated action a marketer

2. Review the various types of pricing strategies. Which of these is the most appropriate for your

product?

3. Select a basis for pricing your product (cost, demand, and/or competition). How will you know

when it is time to revise your pricing strategy?

Students’ answers will vary depending on their products.

Chapter 12: Pricing Concepts and Management

COMMENTS ON VIDEO CASE 12: PRICING AT THE FARMERS’

MARKET

Summary

This case examines the issues associated with direct selling and pricing for farmers at local markets.

Selling directly to the public enables farmers to build relationships with local shoppers and encourage

repeat buying week after week as different items are harvested. It also allows farmers to realize a larger

profit margin than if they sold to wholesalers and retailers because there are no intermediaries. In

addition, consumers are willing to pay a higher price for top-quality local products, and even more for

products that have been certified organic by a recognized authority. However, competition between

farmers, markets, and traditional grocery stores is a factor that influences pricing.

Questions for Discussion

1. In the pursuit of profits, how might Urban Farmz use a combination of cost-based, demand-

based, and competition-based pricing for the products it sells? Explain your answer.

2. Urban Farmz wants to price the organic soap at $15.95 per bar, while the soap maker prices the

same soap at $14 per bar. What perceptions do you think consumers will have of each price?

What recommendations do you have regarding this price difference?

3. Would you recommend that Urban Farmz use promotional pricing at the farmers’ markets

where it regularly sells its products? If so, which techniques would you suggest, and why?