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Chapter 19
Pricing Concepts
This chapter begins with the learning outcome summaries followed by a set of lesson plans for
instructors to use to deliver the content.
Lecture (for large sections) on page 5
Company Clips (video) on page 7
Group Work (for smaller sections) on page 9
Review and Assignments begin on page 10
Review questions
Application questions
Application exercise
Ethics Exercise
Video assignment
Case assignment
Great Ideas for Teaching Marketing from faculty around the country begin on page 25
Learning Outcomes
19-1 Discuss the importance of pricing decisions to the economy and to the individual
firm
Price means one thing to the consumer and something else to the seller. To the consumer, it is the
cost of something. To the seller, price is revenue – the primary source of profits. Price is that
which is given up in an exchange to acquire a good or service. Consumers are interested in
obtaining a “reasonable price.” “Reasonable price” really means “perceived reasonable value” at
the time of the transaction. Revenue is the price charged to customers multiplied by the number
of units sold. Managers usually strive to charge a price that will earn a fair profit
Price × Units = Revenue
19-2 List and explain a variety of pricing objectives
. To survive in today’s highly competitive marketplace, companies need pricing objectives that
are specific, attainable, and measurable. Pricing objectives are commonly classified into three
categories: profit oriented, sales oriented, and status quo. Profit-oriented pricing is based on
profit maximization, a satisfactory level of profit, or a target return on investment (ROI). The
goal of profit maximization is to generate as much revenue as possible in relation to cost. Often,
a more practical approach than profit maximization is setting prices to produce profits that will
satisfy management and stockholders. The most common profit-oriented strategy is pricing for a
specific ROI relative to a firm’s assets. The second type of pricing objective is sales oriented, and
it focuses on either maintaining a percentage share of the market or sales maximizing dollar or
unit sales. The third type of pricing objective aims to maintain the status quo by matching
competitors’ prices.
19-3 Explain the role of demand in price determination
Demand is a key determinant of price. When establishing prices, a firm must first determine
demand for its product. The quantity of a product that people will buy depends on its price.
When price is lowered, sales increase; when price is increased, the quantity demanded falls.
Marketing managers must also consider demand elasticity when setting prices. Elasticity of
demand is the degree to which the quantity demanded fluctuates with changes in price. If
consumers are sensitive to changes in price, demand is elastic; if they are insensitive to price
changes, demand is inelastic. Thus, an increase in price will result in lower sales for an elastic
product and little or no loss in sales for an inelastic product.
19-4 Understand the concepts of dynamic pricing
When competitive pressures are high, a company must know when it should raise or lower prices
to maximize its revenues. Dynamic pricing allows companies to adjust prices very quickly, often
in real time to meet demand.
19-5 Describe cost-oriented pricing strategies
The other major determinant of price is cost. Marketers use several cost-oriented pricing
strategies. To cover their own expenses and obtain a profit, wholesalers and retailers commonly
use markup pricing. Markup pricing uses the cost of buying the product from the producer, plus
amounts for profit and for expenses not otherwise accounted for. The total determines the selling
price. Another pricing strategy determines how much a firm must sell to break even
19-6 Demonstrate how the product life cycle, competition, distribution and promotion
strategies, customer demands, the Internet and extranets, and perceptions of quality
can affect price
The price of a product normally changes as it moves through the life cycle and as demand for the
product and competitive conditions change. Management often sets a high price at the
introductory stage, and the high price tends to attract competition. The competition usually drives
prices down because individual competitors lower prices to gain market share. Adequate
distribution for a new product can sometimes be obtained by offering a larger-than-usual profit
margin to wholesalers and retailers. The Internet enables consumers to compare products and
prices quickly andeasily. Price is also used as a promotional tool to attract customers. Special
low prices often attract new customers and entice existing customers to buy more. Large buyers
can extract price concessions from vendors. Such demands can squeeze the profit margins of
suppliers. Perceptions of quality can also influence pricing strategies. The proliferation of the
Internet has resulted in a huge increase in price transparency. Manufacturers find that their large
customers such as department stores often make specific pricing demands that the suppliers must
agree to. Researchers found that price promotions of higher priced, higher quality brands tend to
attract more business than do similar promotions of lower priced and lower quality brands.
19-7 Describe the procedure for setting the right price
The process of setting the right price on a product involves four major steps: (1) establishing
pricing goals; (2) estimating demand, costs, and profits; (3) choosing a price policy to help
determine a base price; and (4) fine-tuning the base price with pricing tactics. The first step in
setting the right price is to establish pricing goals. After establishing pricing goals, managers
should estimate total revenue at a variety of prices. A price strategy establishes a long-term
pricing framework for a good or service. The three main types of price policies are price
skimming, penetration pricing, and status quo pricing.
19-8 Identify the legal constraints on pricing decisions
Government regulation helps monitor four major areas of pricing: unfair trade practices, price
fixing, price discrimination, and predatory pricing. Many states have enacted unfair trade
practice acts that protect small businesses from large firms that operate efficiently on extremely
thin profit margins; the acts prohibit charging below-cost prices. The Sherman Act and the
Federal Trade Commission Act prohibit both price fixing, which is an agreement between two or
more firms on a particular price, and predatory pricing, in which a firm undercuts its competitors
with extremely low prices to drive them out of business. Finally, the Robinson–Patman Act of
1936 makes it illegal for firms to discriminate between two or more buyers in terms of price.
Predatory pricing is the practice of charging a very low price for a product with the intent of
driving competitors out of business or out of a market.
19-9 Explain how discounts, geographic pricing, and other pricing tactics can be used to
fine-tune a base price
Several techniques enable marketing managers to adjust prices within a general range in
response to changes in competition, government regulation, consumer demand, and promotional
and positioning goals. Fine-tuning a pricing includes various sorts of discounts, geographic
pricing, and other pricing strategies.
The first type of tactic gives lower prices to those who pay promptly, order a large quantity, or
perform some function for the manufacturer. Additional tactics in this category include seasonal
discounts, promotion allowances, rebates (cash refunds), zero percent financing, and free
shipping. Geographic pricing tactics—such as FOB (free on board) origin pricing, uniform
delivered pricing, zone pricing, freight absorption pricing, and basing-point pricing—are ways of
moderating the impact of shipping costs on distant customers. A variety of other pricing tactics
stimulate the demand for certain products, increase store patronage, and offer more merchandise
at specific prices. More and more customers are paying price penalties, which are extra fees for
violating the terms of a purchase contract. The perceived fairness or unfairness of a penalty may
affect some consumers’ willingness to patronize a business in the future.
Key Terms
Bait pricing Inelastic demand Promotional allowance
(trade allowance)
Base price Keystoning Quantity discount
Basing-point pricing Leader pricing (loss-leader
pricing) Rebate
Break-even analysis Market share Return on investment (ROI)
Cash discount Markup pricing Revenue
Consumer penalty Noncumulative quantity discount Seasonal discount
Cumulative quantity
discount
Odd-even pricing (psychological
pricing) Single-price tactic
Demand Penetration pricing Status quo pricing
Dynamic pricing Predatory pricing Supply
Elastic demand Price Two-part pricing
Elasticity of demand Price bundling Unfair trade practice acts
Extranet Price fixing Uniform delivered pricing
Fixed cost Price lining Value-based pricing
Flexible pricing (variable
pricing) Price skimming Variable cost
Fob origin pricing Price strategy
Freight absorption pricing Profit Zone pricing
Functional discount (trade
discount)
Lesson Plan for Lecture
Suggested Homework
The end of this chapter contains assignments on the Ski Butternut video.
This chapter’s online study tools include flashcards, visual summaries, practice quizzes, and
other resources that can be assigned or used as the basis for longer investigations into
marketing.
Lesson Plan for Video
Company Clips
Segment Summary: Ski Butternut
Ski Butternut is a ski mountain in the Berkshires dedicated to offering a great family ski value. In
this video, Matt Sawyer discusses the various ways that Ski Butternut uses pricing to drive new
business and local business to the mountain. He also discusses how correct pricing can help the
next year’s business model through season pass sales.
These teaching notes combine activities that you can assign students to prepare before class, that
you can do in class before watching the video, that you can do in class while watching the video,
and that you can assign students to complete as assignments after watching the video in class.
During the viewing portion of the teaching notes, stop the video periodically where appropriate
to ask students the questions or perform the activities listed on the grid. You may even want to
give the students the questions before starting the video and have them think about the answer
while viewing the segment. That way, students will be engaged in active rather than passive
viewing.
Pre-class Prep for You Pre-class Prep for Your Students
Preview the Company Clips video
segment for Chapter 19. This exercise
reviews concepts for LO1–LO6.
Review your lesson plan.
Stream the video HERE.
Have students review and
familiarize themselves with the
following terms and concepts:
importance of pricing decisions,
pricing objectives, demand
determinant of price, and cost
determinant of price.
Have students bring written
denitions of the above terms or
concepts to class.
Ask students to visit
http://www.skibutternut.com/ and
review its current pricing.
Video Review Exercise
Activity
Warm-up
Briefly discuss students’ findings from the Pre-class Prep activity about the Ski
Butternut website. Was pricing straightforward and easy to understand? Who is
the target market?
In-class
Preview
Discuss pricing objectives with the class. Highlight the concepts of profit
maximization, target ROI, and sales maximization.
Discuss demand determinants of price with the class. Point out how demand
and supply work together to determine price, the elasticity of demand, and
how yield management systems work.
Have copies of the Company Clips questions (below) available for students to
take notes on while viewing the video segment.
Viewing
(solutions
below)
1. How do the product, place, and promotion elements of Ski Butternut’s
marketing mix influence the pricing strategy the company has chosen?
2. Would you expect demand for Ski Butternut lift tickets to be elastic? Why,
or why not?
3. What role do the product life cycle, competition, and perceptions of
quality play in Ski Butternut’s pricing?
Follow-up
Divide students into groups of three to five and have them figure out a way to
apply a yield management system (YMS) to Ski Butternut’s business model.
Give them about five to ten minutes to come up with a solution, and, time
permitting, have them share their ideas with the class.
What type of pricing strategy does Ski Butternut employ?
Solutions for Viewing Activities
1. How do the product, place, and promotion elements of Ski Butternut’s marketing mix
influence the pricing strategy the company has chosen?
Ski Butternut offers rentals, lift tickets, and classes on its beginner-level mountain, which
is located relatively near towns in Massachusetts (compared with other mountains in the
Berkshires). These features enable Ski Butternut to price toward families and to offer great
package rates compared with other mountains.
2. Would you expect demand for Ski Butternut lift tickets to be elastic? Why, or why
not?
Matt reveals that demand for Ski Butternut is elastic when he discusses holiday rates being
higher to ensure good ski quality, which means lower prices increase demand.
3. What role do the product life cycle, competition, and perceptions of quality play in
Ski Butternut’s pricing?
Product life cycle (PLC) plays less of a role in Butternut’s pricing. Skiing is a very mature
industry, but it is challenging for new competitors to open new mountains. Existing
competition is much more of a concern for Ski Butternut, which has addressed the
simplicity of its mountain by adding terrain parks, which attract a younger audience. Ski
Butternut wants to be a family mountain that offers quality skiing for the target market, but
its pricing reflects that it is not only for families but also encourages college students to
visit Ski Butternut.
Lesson Plan for Group Work
Class Activity 1: Retail Price Comparison
To demonstrate to students the wide variation in pricing of an identical item, ask them to visit
three different stores and compare prices on similar items.
First, each student should select a category of store. Given below are some of the suggestions.
Grocery: large chain store, local chain store, convenience store
Health and beauty aids: grocery store, drugstore, discount store
Over-the-counter drugs: chain drugstore, local drugstore, discount store
Clothing: specialty store, department store, discount store
A student who chooses to investigate clothing stores could compare the price of Levi’s 501 jeans
for men at the three different types of stores. A student who chooses health and beauty aids could
compare the price of a certain brand of shampoo (same size, weight, and so on) at the three
stores. Students may come up with other categories and items of interest.
If possible, each student should select several items to compare in his or her category. For
example, in the grocery category, a student may want to compare a type of cereal, a canned soup,
and a snack item.
Students who travel home every weekend may want to compare prices between towns, which is
also a very interesting exercise.
After the investigation, ask students what factors they believe lead to the variations in prices. Is it
worthwhile for consumers to compare prices when they shop?
This assignment can lead to a very interesting discussion of price competition, non-price
competition, odd–even pricing, promotional pricing, price lining, and unit pricing.
Class Activity 2: Pricing Strategies
The goal of this exercise is to make students aware of pricing strategies used by the airline
industry.
Have your students collect price quotes for airline tickets to a city with departure dates that
are less than 7 and 14 and over 21 days from the present date. How do the prices differ?
Then have them include a Saturday night stay and no Saturday night stay. How do the
prices vary now?
Have them check the same flight schedule comparing coach, business, and first class fares.
What kind of pricing strategy is being used?
