978-1305769786 Chapter 20 Solution Manual

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DISCUSSION STARTERS

Discussion Starter 1: Psychological Pricing

ASK: Student to read the following examples, and determine the type of psychological pricing used as the

pricing strategy.

1. Customers are so used to purchasing regular cheeseburgers for $1 at fast-food restaurants that

McDonald’s maintains this price even when meat costs rise.

2. Walmart places its Great Value brand next to a competing brand that costs more to demonstrate

its value.

3. Rolex sets prices at high levels to create an image of status and exclusivity.

4. To get customers to purchase more, Carl’s Jr. offers its hamburger combination meals at a lower

price than what they would be if the items were bought individually

5. Target tries to compete against Walmart by emphasizing the fact that it offers quality products at

low prices

Answers:

Discussion Starter 2: Pay-What-You-Want Pricing

At Panera Cares Community Cafes in Missouri, Michigan, Massachusetts, and Oregon, customers are

allowed to pay whatever they think is fair for a meal. Menus at Panera Care are like regular menus except

they lack prices and instead have “suggested funding levels.” Panera’s CEO wants to create a chain of

“shared responsibility” among the customers. He believes this encourages customers who can pay a little

extra to cover meals for those that cannot afford to pay. While some have abused the pay-what-you-want

pricing strategy, the majority of customers pay the suggested amount, and 20 percent pay more than the

suggested amount.

ASK: Students what they think of this policy? What are some of the positive and negative outcomes that

could occur from this pricing policy?

Discussion Starter 3: Pricing Public Places

Financially strapped cities and states are instituting admission fees for parks and other public attractions

that formally were free. Facing budget problems, Georgia, Tennessee, and other states want to raise

admission and/or parking fees to help cover the cost of operating public attractions. California, Florida,

and Washington, among others may close some museums and parks as part of their plans to close budget

gaps.

Critics object to higher prices for state attractions. They note that tax dollars are paying for those sites and

members of the public who cannot afford the new prices will be unable to take advantage of what the sites

offer. However, proponents of the new prices argue that without increased revenue, states will be unable

with a certain product or service or otherwise on a password–protected website for classroom use.

Class Exercise 3: Basis for Pricing

Read the following examples. Determine whether each example is based on cost-plus pricing, markup

pricing, demand-based pricing, or competition-based pricing.

1. Joe’s Sandwich company determines the cost of making each sandwich and then adds a certain

dollar amount to set the final price.

2. To undercut its rivals, a new furniture company prices its products below competing brands.

3. Airlines often price their tickets higher on the weekend because more people are purchasing

tickets.

4. Costco and Sam’s Club add 14 percent of the cost to the cost of the product to set the price.

Answers:

Class Exercise 4: Revealing Customers’ Perception of Value

In this chapter, you learned about the variety of ways in which firms make pricing decisions and set

prices. In this exercise, you will explore how to get consumers to reveal what their value is for a given

good. Often consumers are not willing to share with the marketer how much they are willing to pay for a

given good. Their objective is to acquire the good giving up as little money, or other value, as possible.

The goal of the marketer is to understand value and price as close to the consumer’s value as possible.

Base your answers on the following scenario:

Your elderly neighbor has asked you to help her clean out her attic. After you are done assisting her, she

gives you a statue for helping. You thank her for the object but have no idea what it is or what it is worth.

You decide to sell it but have no idea what price to charge. How can you get the most money for the

statue?

Step 1: Brainstorm a list of possible sources of information about the value of the statue.

Step 2: Examine your list and determine how you can set a price that gets you the most value.

Step 3: Discuss how you will know you determined the right price.

SEMESTER PROJECT

In this chapter, you learned about the variety of ways in which firms set the price for their goods and

services. This is often the most difficult decision an organization can make. If you price too high, you

might not get the needed initial sales; if you price too low, you may send the wrong signal to the

marketplace. In this exercise, you will learn how to set your price for your product, you.

with a certain product or service or otherwise on a password–protected website for classroom use.

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?

Student answers will vary depending on their products.

ANSWERS TO DISCUSSION AND REVIEW QUESTIONS

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

Stage one is developing a pricing objective that dovetails with the organization’s overall objectives.

Typical pricing objectives include survival, profit, return on investment, market share, cash flow, and

maintaining the status quo. Stage two is identifying the target market’s evaluation of price. Stage

three, evaluating competitors’ prices, is helpful in determining the role of price in the marketing

strategy. Stage four is selecting a pricing strategy to serve as a guiding philosophy designed to

influence and determine pricing decisions.

Among the most common pricing strategies are differential pricing, new-product pricing, product-line

pricing, psychological pricing, professional pricing, and promotional pricing. Stage five is choosing a

method for calculating the price charged to customers. Three pricing methods are cost-based pricing

(which includes cost-plus pricing and markup pricing), demand-based pricing, and competition-based

pricing. Stage six is determining the final price.

2. How does a return on 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?

It is important that consumers consider the firm to be consistent. The marketing objectives are set in

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

those prices.

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

Cost-based pricing is simple to calculate and easy to implement.

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

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

percentage of cost and as percentage of selling price.

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with a certain product or service or otherwise on a password–protected website for classroom use.

The markup is 50 percent of cost [(36-24)/24] and 33.3 percent of selling price [(24-46)/36].

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

Differential pricing is the charging of different prices to different buyers for the same quality and

quantity of product. It can be achieved when the market consists of multiple segments which have

9. For what type of products would price skimming be most appropriate? For what type of

products would penetration pricing be more effective?

Price skimming would be most appropriate for products which have associated research and

10. Describe bundle pricing and give three examples using different industries.

Bundle pricing is the packaging together of two or more usually complementary products to be sold

11. What are the advantages and disadvantages of using everyday low prices?

An advantage is it reduces or eliminates the use of frequent short-term price reductions, thus allowing

a company to benefit from reduced promotional costs. Another advantage is that EDLP reduces losses

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

Consumers associate price with quality because of experience and because they have been socialized

13. Are price leaders a realistic approach to pricing? Explain your answer.

Price leaders should be used when competitive conditions and consumers’ actions indicate they are

COMMENTS ON THE CASES

VIDEO CASE 20.1: 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

with a certain product or service or otherwise on a password–protected website for classroom use.

2. When Under Armour prepares to set the price for a new shirt equipped with LED lights, how

much emphasis should it place on its evaluation of competitors’ prices?

Shirts with LED lights are an innovation that Under Armour is currently testing. Because this product

is so new and unique, competitors may not offer anything like it at this point. Even if competitors do

3. Would you recommend that Under Armour use cost-based pricing, demand–based pricing, or

competition-based pricing for a new shirt equipped with LED lights? Explain your answer.

Student answers will vary. Those who favor cost-based pricing may say this is a convenient way to

price a product that has not been available in the marketplace. Thus, Under Armour would first

determine its costs and then add a certain percentage or dollar amount to set the selling price—and

STRATEGIC CASE 8: NEWSPAPERS TEST PRICING FOR DIGITAL

EDITIONS

Summary

Pricing is one of the most difficult challenges facing U.S. newspapers in the 21st century. Circulation is

falling, as are advertising revenues, and digital sources of news are increasingly popular. Newspapers are

taking a long, hard look at their pricing strategies to find new ways of improving circulation revenues and

profits in the digital age. Some newspapers continue to offer news for free, on the basis that this builds

their brands online and offers extra value to readers who want to see updated news whenever it breaks.

Other newspapers are trying a paywall, allowing only paid subscribers to see online content that’s “walled

off” to prevent free access. The Wall Street Journal and Gannet newspapers like USA Today have had

some success with digital pricing.

Questions for Discussion

1. When The Wall Street Journal began charging for online access, the number of visitors to its site

dropped dramatically and slowly began rising again. What does this suggest about the price

elasticity of demand for its products?

The initial decrease in customers showed that consumers had a strong reaction to the sudden price

change and that demand was highly elastic. However, as paying for digital news became more