978-1337116800 Chapter 19 Solution Manual Part 2

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Chapter 19: Pricing Concepts

The $199 price was too low to meet costs, but the five-visit break-even pricing structure

was low enough to draw customers away from more expensive mountains, but high enough

to meet operating costs.

5. According to the video, college students respond really well when Ski Butternut takes $20

off the price of a lift ticket. College students:

a. are sensitive to price changes—they have inelastic demand.

b. are sensitive to price changes—they have elastic demand.

c. are sensitive to price changes—they have unitary elasticity.

d. are insensitive to price changes—they have elastic demand.

6. Pricing lift tickets at $25 Monday–Friday to drive customers to Ski Butternut is an

aggressive pricing structure designed to increase market share by taking mid-week skiers

away from other mountains.

a. True

b. False

7. Matt Sawyer says that Ski Butternut increases its holiday prices by five dollars because

otherwise the “quality of the experience will deteriorate.” This suggests that on holidays:

a. supply exceeds demand.

b. the equilibrium price has been reached.

c. demand exceeds supply.

d. there is unitary elasticity.

Case Assignment: Netflix

Chapter 19: Pricing Concepts

For two decades, Netflix has been the leader at providing quality at-home entertainment for

reasonable prices. Starting as a mail-order DVD rental service and transitioning with the times

and technology to an online streaming service, Netflix has always offered hours of programming

each month for less than the cost of a date night at the movies.

In 2011 and just a few months after a price increase, Netflix announced plans to focus solely

on their streaming business and to shift DVD rentals to a new business called Qwikster.

Customers were upset about the change to their user experience (they would have to use separate

websites, requiring separate logins for streaming and DVD rental) and a perceived change in

price. (The two separate services did cost the same as the combined services offered by Netflix,

but they appeared as two transactions on credit card statements.)

Amid vocal customer outrage and a four percent loss in subscriptions, Netflix quickly

reversed this decision. “Consumers value the simplicity Netflix has always offered and we

respect that,” Netflix co-founder and CEO Reed Hastings said. “There is a difference between

moving quickly—which Netflix has done very well for years—and moving too fast, which is

what we did in this case.”

Chapter 19: Pricing Concepts

By viewing their account settings and seeing their selected plan, customers were reminded

that not only did Netflix still have disc plans available, but they had streaming options to select

from if they did not want to pay $9.99/month for the standard service. Basic streaming is

$7.99/month and allows for standard-definition streaming on one screen at a time. Standard

streaming is $9.99 per month and allows for high-definition streaming on two screens at a time.

Premium streaming is $11.99 per month and allows for high-definition and ultra-high-definition

streaming on four screens at a time.

Netflix has recognized that their subscribers have a variety of needs, sometimes share their

plans with friends and family, and may need lower price options available as the standard service

price rises.

Chapter 19: Pricing Concepts

TRUE/FALSE

1. By increasing prices without making any change to their service, Netflix is asking their

customers to give up more in exchange for the same service in return.

2. For customers who decided to cancel their Netflix subscription after the price increase, the

perceived value had risen beyond the cost for the service.

3. Netflix has the largest market share in the digital entertainment streaming industry.

4. Competition from other streaming services has no impact on how Netflix determines pricing

for their service.

5. All streaming services agreeing to increase their price to $20/month would be an example of

price fixing.

MULTIPLE CHOICE

Chapter 19: Pricing Concepts

1. The nature of the demand of Netflix is __________.

a. status quo

b. elastic

c. inelastic

d. dynamic

2. To determine the best price for a product, what must be done?

a. Establish pricing goals.

b. Estimate demand, costs, and profits.

c. Choose a price strategy to determine the base price.

d. Fine-tune the base price with pricing tactics.

e. Both A and B

f. All of these

3. The shipping costs passed on to the customer for sending and receiving Netflix discs are

determined by __________ and are included in the subscription fee.

a. FOB origin pricing

b. uniform delivered pricing

c. zone pricing

d. basing-point pricing

4. When Netflix proposed shifting their disc rental services to a separate business but keeping the

price the same for customers who chose to keep both services, Netflix was offering price

__________.

a. fixing

b. leading

c. bundling

d. baiting

Chapter 19: Pricing Concepts

ANS: C

Price fixing is an agreement between two or more firms on the price they will charge for a

product. Leader pricing is a price tactic in which a product is sold near or even below cost in the

hope that shoppers will buy other items once they are in the store. Bait pricing a price tactic that

tries to get consumers into a store through false or misleading price advertising and then uses

high-pressure selling to persuade consumers to buy more expensive merchandise. Price bundling

is marketing two or more products in a single package for a special price.

PTS: 1 OBJ: LO: 19-9 TOP: AACSB: Reflective Thinking

KEY: CB&E Model: Strategy MSC: BLOOMS: Level I Knowledge

5. Netflix’s overall pricing approach is to:

a. follow a single-price tactic.

b. use a flexible pricing strategy with their telemarketing subscription sales force.

c. use price lining for their various service options.

d. use leader pricing until all other competition has gone out of business.

KEY: CB&E Model: Strategy MSC: BLOOMS: Level I Knowledge

Great Ideas for Teaching Chapter 19

Philip R. Kemp, DePaul University

Survival Barter Exercise

Survival is a group exercise in which student teams must use the barter system to gather the

necessary items in order to survive. Each group is given a list of six items on a sheet of paper or

index card with the amounts of each item they must gather to survive (see Table 1). As seen in

Table 1, a team may have the exact amount, a shortage, or an excess of goods in a category of

what they need to survive. A team with an excess of goods in a particular category can use these

excess goods to barter for other goods.

The ideal size of each student team is five or six students; one member of the team is assigned

the task of bookkeeper, and another is assigned the task of observer. At the end of the exercise,

the bookkeepers report what their teams have accumulated through the barter of excess goods.

The observers report on the dynamics that took place within the groups during the exercise One

or two students should be asked to report on the dynamics of the whole exercise as it occurs. As

Chapter 19: Pricing Concepts

shown in Table 1, each team must gather the exact same items and the same amount of each of

these items.

After the teams have been formed and the roles of bookkeeper, group observer, and overall

observer have been assigned, the class is instructed that they have 20 minutes to complete the

exercise. No additional assistance is provided by the instructor. After about 20–25 minutes, the

exercise tends to end on its own. Hint: Move the class to an open area, or arrange the room so

that desks are at one side of the room. This will eliminate any physical barriers from interfering

with the exercise.

After the exercise is over, ask each bookkeeper to give an account of the items and amounts of

each item his or her team has gathered. A matrix with teams on the top and items on the side

serves as an excellent visual aid to show the national accounts (see Table 1). The class is

informed that the only way a team can win is under the following conditions: first, they must

have gathered all the necessary items in the amounts necessary to survive (excess goods are

acceptable), no goods at the macro level can have been lost or created. Teams have been able to

gather the necessary goods in the correct amounts, but there is always some loss or gain of goods

when the national accounts are totaled.

After the national accounts have been shown, ask this question of the class: What would have

helped you to accomplish your teams’ survival in this exercise? The usual answers to this

question are the following:

• better communications

• currency or money

• knowing the value of one item in relationship to other items

• a central market

• (in some rare cases) a middleman

Chapter 19: Pricing Concepts

When more than one team member is sent out of the group, typically a central market forms (all

the teams gather in a section of the room, which looks like the trading floor of a commodities

exchange pit). Finally, the central marketplace disbands and the teams then reform. Using

diagrams on the blackboard with circles as the groups and lines with arrows as the traders, one

can show the exchange process that takes place in a barter market. Then add to the diagram the

other “runners” coming from each group. This diagram shows the formation of the central

market; one can just use a large circle around all six groups on the board. I have become so bold

as to draw these diagrams on a flip chart and just turn the pages as the observers describe the

dynamics of the exercise. These diagrams are useful to introduce and discuss the topics of

communication (promotion), central markets, and functions of middlemen. The exercise has

benefits beyond instruction:

• It is an excellent icebreaker for the first class meeting.

• It is an icebreaker for students to introduce themselves to one another.

• If class discussion is important to you, it sets the tone for the rest of the term.

• It is far superior to just passing out the syllabus and starting to lecture on a topic when the

students have not had the opportunity to read the textbook.

Table 1

Team 1

You need the following

You now have the following

3 cords of wood

1 cord of wood (–2)

200 lbs. of meat

350 lbs. of meat (+150)

6 pairs of boots

4 pairs of boots (–2)

100 bushels of wheat

150 bushels of wheat (+50)

250 lbs. of vegetables

200 lbs. of vegetables (–50)

1 cook stove

2 cook stoves (+1)

Team 2

You need the following

You now have the following

3 cords of wood

1 cord of wood (–2)

200 lbs. of meat

50 lbs. of meat (–150)

6 pairs of boots

7 pairs of boots (+1)

100 bushels of wheat

200 bushels of wheat (+100)

250 lbs. of vegetables

200 lbs. of vegetables (–50)

1 cook stove

Chapter 19: Pricing Concepts

Team 3

You need the following

You now have the following

3 cords of wood

2 cords of wood (–1)

200 lbs. of meat

250 lbs. of meat (+50)

6 pairs of boots

7 pairs of boots (+1)

100 bushels of wheat

50 bushels of wheat (–50)

250 lbs. of vegetables

200 lbs. of vegetables (–50)

1 cook stove

Team 4

You need the following

You now have the following

3 cords of wood

5 cords of wood (+2)

200 lbs. of meat

400 lbs. of meat (+200)

6 pairs of boots

5 pairs of boots (–1)

100 bushels of wheat

50 bushels of wheat (–50)

250 lbs. of vegetables

200 lbs. of vegetables (–50)

1 cook stove

0 cook stove (–1)

Team 5

You need the following

You now have the following

3 cords of wood

3 cords of wood (+1)

200 lbs. of meat

50 lbs. of meat (–150)

6 pairs of boots

9 pairs of boots (+3)

100 bushels of wheat

0 bushels of wheat (–100)

250 lbs. of vegetables

350 lbs. of vegetables (+10)

1 cook stove

2 cook stoves (+1)

Team 6

You need the following

You now have the following

3 cords of wood

5 cords of wood (+2)

200 lbs. of meat

100 lbs. of meat (–100)

6 pairs of boots

4 pairs of boots (–2)

100 bushels of wheat

150 bushels of wheat (+50)

250 lbs. of vegetables

350 lbs. of vegetables (+100)

1 cook stove

0 cook stove (–1)

Chapter 19: Pricing Concepts

National accounts (key)

Team 1

Team 2

Team 3

Team 4

Team 5

Team 6

Total

Wood

Meat

200

1200

Boots

Wheat

100

600

Veg.

250

1500

Oven

Laura Balus, Central Community College

Pricing: An Art or a Mathematical Formula?

To introduce pricing, I gather various products from my home and office. Some of these

products include grocery items, toys, office equipment, and computer software. Various products

were ordered through a mail-order catalog, and others were beauty items purchased through a

home party. All of these items are arranged on a long table at the front of the classroom. All

price tags have been removed. In preparation for this activity, I completed small recipe cards that

individually listed specifics on each product and the purchase price.

I announce to the class that I am conducting a silent auction of sorts. Each student is asked to file

by the table of products and write down what each believes to be the purchase price of each

product. When the students have returned to their seats, I divide the class into two teams. I

explain that we will play a version of the popular television game show, The Price Is Right.

Members of each team take turns at being either the game show host or the contestant. The game

show host selects one product from the table and the accompanying recipe card of information

and orally presents a brief description of the product and its many uses and benefits. Then the

price guessing begins. The contestant is given 30 seconds to randomly call out prices, with the

game show host responding with “higher” or “lower” until the correct price is announced.

The excitement increases with each round of price guessing until all of the products are used.

Guessing the correct price within 30 seconds earns each team a point. Points are tallied, and the

losing team (the team with fewer points) is asked to bring treats for the whole class.

The activity proceeds with an explanation of how pricing is indeed a game in itself. I refer to our

study of the consumer’s “black box” and how research and creativity go hand-in-hand when

establishing price. Indeed, mathematical pricing formulas are used with careful planning to cover

Chapter 19: Pricing Concepts

the cost of goods, overhead, and retain a profit. However, I further explain that a price tag should

not reflect wishful thinking. Pricing must revolve around the consumers’ innate sense of value.

I stress to the class that our silent auction resulted in quite extreme price differences between

class members, which was revealed with our game show rendition. Finally, I provide an

overview of the numerous pricing strategies commonly used in today’s marketplace, with

emphasis on how many of these strategies are intended to psychologically persuade consumers to

buy.

PART 6: Integrated Case Assignments

Marketing Miscue

6pm.Com’s $16 Million Pricing Error

Upon arrival at the 6pm.com website, customers are immediately congratulated for the smart

shopping skills that led them to the site. With brands such as Nike, Oakley, Nine West, Stride

Rite, Columbia, and Diesel at discount prices, the website is a mecca for brandaholics seeking

discounted merchandise. The online site offers products for all family members. The female

shopper in the family is enticed with casual and contemporary fashion styles, as well as top-

notch performance gear. The male shopper is presented with everything from performance to

business casual to dress-for-success attire. Parents are encouraged to avoid the hassle of taking

the kids to the store by shopping conveniently online. On 6pm.com, the promise is to have this

wonderful brand shopping experience at up to 75 percent off retail prices. This delivery promise

was well-heeded when a pricing snafu led to everything on the site being priced at $49.95.

Zappos.com

Zappos.com started as an online shoe retailer. The idea was to create a website that offered the

best shoe selection in terms of brands, styles, colors, sizes, and widths. Since the company’s

origination, the goal has broadened to one in which the company provides the best online service

in many product categories. With fast and high-quality customer service as its mantra, ten years

later the company is now comprised of ten separate companies under the Zappos Family

umbrella:

Zappos.com, Inc. (“the management company”)

Zappos IP, Inc. (“ZiP”)

Zappos Development, Inc. (“Zappos.com or ZDev”)

Zappos Merchandising, Inc. (“ZMerch”)

Zappos Fulfillment Centers, Inc. (“ZFC”)

Zappos CLT, Inc. (“ZCLT”)

Chapter 19: Pricing Concepts

Zappos Insights, Inc. (“ZInsights”)

Zappos Gift Cards, Inc. (“ZGift Cards”)

Zappos Retail, Inc. (“ZRetail”)

6pm.com, LLC (“6pm”)

The rapidity at which the company has grown is attributed in no small part to its CEO Tony

Hsieh (pronounced Shay). In 1999, Hsieh sold the company he co-founded to Microsoft for $265

million. Joining Zappos.com as an advisor and investor, Hsieh later became the company’s CEO

and helped grow the company to over $1 billion in gross merchandise sales annually. In

November 2009, Zappos.com was acquired by Amazon.com in a deal valued at $1.2 billion. The

passion for service was the common connection between Zappos.com and Amazon.com.

This passion for service is exemplified in the core values at Zappos.com:

• Deliver “wow” through Service

• Embrace and drive change

• Create fun and a little weirdness

• Be adventurous, creative, and open-minded

• Pursue growth and learning

• Build open and honest relationships with communication

• Build a positive team and family spirit

• Do more with less

• Be passionate and determined

• Be humble

Delivering on these Values at a Very High Price!

In the wee hours of a May morning in 2010, the Zappos-owned 6pm.com, e-commerce site, had

a major glitch in its pricing engine. Everything on the 6pm.com website was priced at $49.95

from midnight to 6 a.m. For example, a GPS system that normally sold for nearly $2,000 was

sold for $49.95. A pair of Bruno Magli boots that usually sold on 6pm.com for $400 sold for

$49.95. The pricing glitch affected products sold only on the 6pm .com site and not products

available on both 6pm.com and Zappos.com.

The pricing mistake was attributed to an employee error in entering data into the pricing engine.