Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 19: Pricing Concepts
21
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
22
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
23
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
24
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
25
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
26
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
27
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
28
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
1 cook stove
Chapter 19: Pricing Concepts
29
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
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
30
National accounts (key)
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Total
Wood
3
3
3
3
3
3
18
Meat
200
200
200
200
200
200
1200
Boots
6
6
6
6
6
6
36
Wheat
100
100
100
100
100
100
600
Veg.
250
250
250
250
250
250
1500
Oven
1
1
1
1
1
1
6
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
31
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
32
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
