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Chapter 11 – Pricing Products and Services
11-35
TEACHING NOTE FOR VIDEO CASE VC-11
Carmex [B]: Setting the Price of the Number One Lip Balm
Synopsis
This case describes the interesting history of Alfred Woelbing, who created the first
Carmex product in his kitchen in 1937. The case also explains how Alfred’s son, Don, helped
[Video 11-3: Carmex [B] Video Case (kerin.tv/cr8e/v11-4)]
Teaching Suggestions
One way to begin the discussion of pricing is to ask students to describe a recent
purchase. They might mention a meal in a restaurant, clothing, a book, or a ticket to a movie.
Ask them what the price was, and then ask them to explain how they think the price was
determined. Follow that discussion by asking:
1. How many of you have purchased a lip balm (e.g. Carmex, Blistex, ChapStick, etc.)?
2. What was the reason for your purchase (e.g. dry lips, chapped lips, cold sores, etc.)?
3. What was the price and how do you think it was determined?
These questions then lead to the questions posed in the case.
Answers to Questions
1. Which of the four approaches to setting a price does Carmex use for its products?
Should one approach be used exclusively?
Answers:
Carmex uses each of the four perspectives to set prices:
Chapter 11 – Pricing Products and Services
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b. Cost-oriented pricing approaches. These approaches focus on the production,
2. Why do many Carmex product prices end in 9? What type of pricing is this called?
What should happen to demand when this approach is used?
Answer:
This type of pricing is called odd-even pricing. According to Alisa Allen, Director of
3. Should cost be a factor in Carmex’s prices? What do you think is a reasonable
markup for Carmex and for its retailers?
Answers:
a. Cost as a price factor. The answer to Question 1 describes how costs related to
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4. What is the difference between and EDLP retailer and a High-Low retailer? Why
does Carmex charge them different prices?
Answers:
a. Everyday Low Price (EDLP) retailers, such a Walmart, offer consumers the lowest
price every day without discounting through promotions. High-Low retailers, such as
5. Conduct an online search of lip balm products and compare the price of a Carmex
product with three similar products from competitors. How do you think the
competitors are setting prices?
Answer:
A Google search will generate a range of prices:
Lip Balm
Price
Carmex Stick
$1.99
Blistex Stick
$1.99
Burt’s Bees Stick
$3.29
ChapStick Stick
$1.99
Epilogue
Visit or follow Carmex on Facebook or Twitter to find the latest information about
Carmex. Recent news includes (a) the introduction of a new fragrance-free healing cream to
complement its fragranced Everyday Healing Cream; (b) the Carmex ‘Half-Court Hero’ contest
(scan QR code 19-5 on page 519 to see the shot); and (c) the Legendary Lips Giveway, where
participants can register to win a complete set of Carmex lip balms. Finally, Convenience Store
News announced that Carmex Cherry Click Stick was a winner of its Best New Products Awards.
Sources: Susan Durtschi, “Best New Products Satisfy On-the-Go Needs,” Convenience Store News, November,
2013; “Carmex Introduces Everyday Healing Cream,” Wireless News, September 15, 2013; and “Lil’ Drug Store
Products Congratulates Carmex ‘Half-Court Hero’ contest Winner for His Amazing Hook Shot Benefitting Boys &
Girls Clubs of America and LeBron James Family Foundation,” Business Wire, February 11, 2013.
Chapter 11 – Pricing Products and Services
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ICA 11-1: IN-CLASS ACTIVITY
Pricing an Apple iPad Air2
Learning Objective. To have students learn the concept of the price equation as it
pertains to the price set for an Apple iPad Air2 tablet device.
Materials Needed. Copies for each student of the Price Equation for an Apple iPad Air
Handout.
Steps to Teach this ICA.
1. OPTIONAL: If this ICA is conducted during the class period, then bookmark the
following websites on your classroom computer:
2. Ask students if any of them own an Apple iPad or other tablet device such as an
Amazon Kindle or the Samsung Galaxy Tab, where they bought it, what accessories,
warranties, etc. they bought, how much they paid for it, and how they like it.
5. Give students the following mini-lecture on tablet devices and the Apple iPad Air:
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consumption (reading e-books, watching YouTube videos, etc.) and Internet usage
6. Give the students the following mini-lecture on the price equation:
“The price equation consists of all the factors that raise or lower the final price
consumers pay for a product or service. These factors include (1) any incentives
7. Pass out copies of the Price Equation for an Apple iPad Air Handout to students.
9. Have the team members identify the types of accessories they want,
incentives/discounts and allowances that they may receive, and the extra fees/charges
10. Call on 3 to 4 student teams to share their ideas about the accessories, incentives,
discounts, allowances, and extra fees/charges that may be involved when buying an
Apple iPad Air at Apple’s online store. Their ideas could include:
a. iPad Air and its Accessories: Model and finish color plus any desired
accessories, such as a protective cover, keyboard, etc.
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11. Provide teams with an overview of the expanded ICA or homework assignment:
a. Click on the Internet icon to “purchase” an Apple iPad Air from Apple. [NOTE:
[See ICA11-1PriceEquationApple.xls]
12. IN-CLASS OR HOMEWORK ASSIGNMENT. Have the teams complete the Price
Equation for an Apple iPad Handout. Again, be careful and warn students not to
purchase an Apple iPad Air. Have students identify the costs, discounts,
fees/charges, etc. for each item listed to complete the Price Equation for an Apple
iPad Air. Here are some of the accessories and options available:
a. List Prices—Apple Online Store: (NOTE: APPLE’S PRICES MAY
CHANGE TO NEW PRICES WITHOUT NOTICE.)
– Apple iPad Air Finish/Model: Black/Space Gray, 128GB, Wi-Fi + Cellular;
MSRP is $929.00.
– Network Carrier—Verizon: Assume you’re a heavy data user (video
b. Incentives/Discounts: No discounts, rebates, or other incentives are offered.
d. Extra Fees/Charges: These can include:
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– Shipping & Handling/Delivery Charges: These are based on distance from
the store/warehouse to the consumer’s residence (zip code dependent) and the
e. Price Equation: Final price = List price – (Incentives/Discounts + Allowances) +
Extra fees/charges:
Final price = List prices:
+ Apple iPad Air Black/Space Gray 128GB Wi-Fi + Cellular .........$929.00
– (Incentives/Discounts + Allowances):
+ Extra Fees/Charges:
+ AppleCare (1 year service contract) ................................................$99.00
[See ICA11-1PriceEquationApple.xls]
Marketing Lesson. The final price a consumer pays for a product or service is normally
NOT the stated list price or MSRP. It is adjusted upward or downward depending upon the
incentives, allowances, and extra fees that are applied. These adjustments are dependent upon
market conditions at the time of purchase.
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PRICE EQUATION FOR AN APPLE IPAD AIR HANDOUT
MODEL: 128GB Wi-Fi + CELLULAR—VERIZON
Chapter 11 – Pricing Products and Services
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Connect Exercises
Exercise 1: Final Price and Profit Equations
Activity Summary: In this case analysis, students utilize the price equation and apply various
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topics: Setting Prices, Profit Equation, Price Elasticity of Demand
Learning Objectives: LO 11-01: Identify the elements that make up a price.
LO 11-02: Explain what a demand curve is and the role of revenues in
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty Level: 3 Hard
Follow-Up Activity: Students find this activity to be one of the most difficult activities,
Exercise 2: Pricing Objectives
Activity Summary: In this click and drag activity, students are introduced to pricing objectives
(profit, sales revenue, market share, unit volume, survival, and social responsibility). The pricing
objectives are the drop areas for the twelve pricing examples (return on investment, return on
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topics: Pricing Strategy
AACSB: Knowledge Application
Blooms: Apply
Difficulty Level: 2 Medium
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Exercise 3: Price Elasticity of Demand
Activity Summary: In this click and drag activity, students learn about the effect that price has
on demand for products through the price elasticity of demand calculation. Students are given the
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topics: Price Elasticity of Demand
Learning Objective: LO 11-02: Explain what a demand curve is and the role of revenues in
pricing decisions.
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty Level: 3 Hard
Exercise 4: Washburn Guitars
Activity Summary: In this 10-minute video case, students learn the history of the Washburn
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topics: Price Elasticity of Demand, Pricing Strategy, Profit Equation, Break-Even Analysis,
Price Sensitivity
Learning Objective: LO 11-01: Identify the elements that make up a price.
LO 11-02: Explain what a demand curve is and the role of revenues in
pricing decisions.
LO 11-03: Explain the role of costs in pricing decisions and describe how
LO 11-04 Recognize the objectives a firm has in setting prices and the
constraints that restrict the range of prices a firm can charge.
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Exercise 5: Carmex: Setting the Price of the Number One Lip Balm
Activity Summary: In this 7-minute video, students are exposed to the history of Carmex and
the factors evaluated in setting retail prices. After watching the video, students answer five
questions related to pricing strategies.
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Setting Prices
Exercise 6: Profit-Oriented Pricing Approaches
Activity Summary: In this case analysis, students read a mini-case about an entrepreneur who is
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 11-1 Identify the elements that make up a price.
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty Level: 3 Hard
Follow-Up Activity: For additional calculation practice, instructors could provide alternate
figures for the case to allow students to perform the calculations under different financial
Exercise 7: Adjusting the List of Quoted Price
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Activity Summary: In this click and drag activity, students identify examples of pricing
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 11-05 Describe the steps taken in setting a final price.
AACSB: Knowledge Application
Blooms: Apply
Difficulty Level: 2 Medium
Follow-Up Activity: Instructors could ask students to share examples of discounts they have
experienced in the marketplace. To start the discussion, instructors could provide students with
products and ask students to recommend a special pricing adjustment for the product. In the
Marketing Analytics Exercise: Target Return-on-Investment Pricing
Activity Summary: In this analytics exercise, students are introduced to a small business owner
who owns a company that manufactures high-quality golf club bags. The owner wanted to earn a
15% return-on-investment, but fell short. Students are provided with four projections for the
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 11-01 Identify the elements that make up a price.
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty Level: 3 Hard
Follow-Up Activity: Instructors could ask students to calculate the price for the business owner
using a different profit-oriented pricing approach such as target profit pricing or target return on
Chapter 11 – Pricing Products and Services
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