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TEACHING NOTE FOR VIDEO CASE 14
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
add new products and expand the business, and that Alfred’s grandsons, Paul and Eric
Woelbing, are responsible for running Carma Laboratories, Inc. today. The primary focus of
the case is to describe how prices are set for Carmex lip balm products.
The case provides students with an opportunity to see how each of the four approaches to
pricing—demand-oriented, cost-oriented, profit-oriented, and competition-oriented—can
influence the price of a consumer product. In addition, students learn about several types of
retailers, the introduction of a new product, and the use of several forms of promotion. The
experts in the video, Kirk Hodgdon and Alisa Allen from Bolin Marketing, represent a growing
trend for agencies—personnel who offer marketing expertise in addition to the traditional
advertising and media expertise.
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 14 - Arriving at the Final Price
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b. Cost-oriented pricing approaches. These approaches focus on the production,
d. Competition-oriented pricing approaches. Because Carmex competes with Burt’s
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:
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:
Chapter 14 - Arriving at the Final Price
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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:
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:
Epilogue
Chapter 14 - Arriving at the Final Price
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TEACHING NOTE FOR APPENDIX D CASE D-14
Glitzz: Devising a Pricing Strategy1
Synopsis
Glitzz is a cleaning agent specifically formulated for precious stones, jewelry and
watches made from natural ingredients. After going out of business following its inventor’s
retirement, the inventor’s son decided to form a company to reintroduce the product in
Singapore. This case focuses on issues related to pricing Glitzz for the retail market.
Emphasis is first placed on an analysis of the company, competitors, and consumers, followed
by a breakeven analysis. As such, the case focuses on identifying factors that influence pricing
decisions and the role of cost, volume, and profit considerations in determining a price.
Teaching Suggestions
The case can be introduced to the class by asking students the following questions:
1. Have any of you used a jewelry cleaner? Have your parents?
2. What kinds of jewelry are typically cleaned?
3. Is there a “market” for this kind of product? Students will typically say “yes.” This
opening dialogue should then lead to the questions posted at the end of the case.
Answers to Questions
1. What factors influence the pricing decisions for a product such as Glitzz? Analyze
these factors and comment on the range of prices that can be set for Glitzz.
Answers:
Examine three broad categories and the variables within them: company, competitors, and
consumers:
a. Company factors. These resolve around internal aspects and dynamics of the firm,
which affect its pricing decisions, such as costs, objectives and strategy. Costs include
1 This teaching note was written by Lau Geok Theng and Amanda Ng.
Chapter 14 - Arriving at the Final Price
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b. Competitor factors. Marketers will refer to competitors’ characteristics, offerings, and
pricing strategies to determine how to get and decide its own prices. Competitors’
2. What price would you recommend for Glitzz? Why?
Answers:
Students should examine various factors in Question 1 to suggest a retail price point or a
3. What pricing strategy would you propose for Glitzz? What costs and expenses would
be involved? Given your recommended price in (2), what would be the break-even
point?
Answers:
• Students may suggest pull strategy through extensive advertising and brand building.
Such strategies may require advertising budget of $1 to 2 million.
Chapter 14 - Arriving at the Final Price
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• For example, if distribution through jewelry shop is suggested under the following:
The computation of breakeven point is as follows:
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ICA 14-1: IN-CLASS ACTIVITY
Extra Value Meal Bundle Pricing at McDonald’s
Learning Objectives. To have students (1) analyze the bundle pricing practice of a fast
food restaurant and (2) suggest the benefits of bundle pricing to customers and the company as
well as the effects on other fast-food restaurant competitors.
Nature of the Activity. To have students discuss the reasons why McDonald’s would
adopt an “Extra Value Meals” (EVM) product bundle pricing strategy.
Estimated Class Time and Teaching Suggestions. This ICA runs about 10 minutes,
which can be conducted in student teams or individually.
Materials Needed. Copies for each student of the:
• “Extra Value Meal” Bundle Pricing at McDonald’s handout.
• Why McDonald’s Uses Bundle Pricing for “Extra Value Meals” handout.
Steps to Teach this ICA.
1. OPTIONAL: You may wish to visit the local McDonald’s restaurant to write down
the prices this restaurant charges for the Big Mac®, the Quarter Pounder with
Cheese™, and the Egg McMuffin® to compare them with those listed on the “Extra
Value Meal” Bundle Pricing at McDonald’s Handout.
2. OPTIONAL: Form students into 4-person teams or have them do this ICA
individually.
3. Ask students if they are familiar with McDonald’s Extra Value Meals. Briefly
explain that they include a sandwich (either a egg, burger, chicken, or fish), a medium
fries, and a medium soft drink—all for a single price that is lower than if the three
items were purchased separately.
4. Pass out the “Extra Value Meal” Bundle Pricing at McDonald’s Handout to students.
5. Give the following background mini-lecture:
“The prices McDonald’s charges may vary by type of sandwich. Popular sandwiches,
6. Ask students why McDonald’s would use a bundle pricing strategy. Why not just sell
the items separately and charge the higher prices?
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7. Pass out the Why McDonald’s Uses Bundle Pricing for “Extra Value Meals” Handout
to students.
9. Have students individually or in teams suggest reasons why McDonald’s would use
bundle pricing based on the three factors that influence price: customer, company,
and competition. Write the reasons down on the board or a transparency made from
the Why McDonald’s Uses Bundle Pricing for “Extra Value Meals” Handout.
Typical student answers include:
• Customer Factors:
a. To get customers to buy more. This is done in two ways: (a) customers buy
additional items, such as fries, even if they weren’t intending to because the
item is only a few cents more with the EVM or (b) customers buy the larger
item, such as fries, because they would normally buy a small fry but find it’s
more profitable to buy an Extra Value Meal. Therefore, customers purchase
the large fries for slightly more on a per item cost basis, but receive the entire
meal at an aggregate cost savings. This is a form of “trade-up bundling”
according to Eppen et. al.1
b. To give customers a unique value from the product bundle. This is to
expedite the ordering process due to the myriad number of menu offerings at
restaurants like McDonald’s. For example, McDonald’s segregates its EVMs
on its menu boards both inside and at the drive-thru from the itemized listing
of sandwiches, fries, and soft drinks. Moreover, it gives each EVM a number
(e.g. the Big Mac EVM is a #1, the Quarter Pounder w/ Cheese EVM is a #2,
and the Egg McMuffin EVM is a #1—breakfast menu) to expedite customer
orders, thereby increasing the time value of the purchase experience.
• Question 1: Why not just give customers lower prices on individual
items if saving consumers money is the goal?
c. To reach the meal segment. The bundle is actually the product aimed at a
specific “meal” market segment, and the individual items are aimed at the
“niche” customer segments (a form of “aggregation bundling”).2 Also,
EVM’s are designed to target particular sandwich preferences (beef, chicken,
or fish) and time of day (breakfast and lunch/dinner).
1 Gary D. Eppen, Ward A. Hanson and R. Kipp Martin, “Bundling—New Products, New Markets, Low Risk,” Sloan Management Review,
(Summer, 1991), pp. 7-14.
2 Ibid.
Chapter 14 - Arriving at the Final Price
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• Company Factors:
a. To get customers to buy higher margin items. The highest-margin items at
fast food restaurants are soft drinks. For a $1.00 soft drink, the cost to a
restaurant is less than 25¢, with the cup costing the most. Fries are also one of
the highest-margin food items. This is a form of “margin spread bundling.”3
b. To reduce the time for transactions and order processing. This has two
benefits. First, it reduces the length of the queue, thereby reducing the time
c. To obtain additional cost efficiencies. There are additional production
efficiencies in being better able to plan orders and buying items that will see
increased volume because they are included in Extra Value Meals. This is
another aspect of “production efficiency bundling.”5
• Competition Factors:
To compete better with other fast-food restaurants. Value meals were first
introduced in the late 1980’s when Taco Bell introduced its new “value pricing”
strategy to the fast food industry. Taco Bell’s strategy was to price all of its items
under $1.00, with items such as tacos priced as low as $0.59. This shocked the
fast food industry. McDonald’s initial response to Taco Bell’s strategy was to cut
the price of its basic hamburger to $0.59.
• Question 2: Which costs more to make: a taco or a burger?
Answer: Some students will say that a taco is much less expensive to make
Marketing Lesson. McDonald’s Extra Value Meal bundle pricing strategy has been one
of the most successful pricing strategies ever devised.
3 Ibid.
4 Ibid.
5 Ibid.
Chapter 14 - Arriving at the Final Price
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“EXTRA VALUE MEALS” BUNDLE PRICING
AT MCDONALD’S HANDOUT
THE BIG MAC EXTRA VALUE MEAL (#1):
UNBUNDLED PRICE BUNDLED PRICE
(ITEMS BOUGHT (EXTRA
ITEM SEPARATELY) VALUE MEAL)
THE QUARTER POUNDER W/ CHEESE EXTRA VALUE MEAL (#2):
UNBUNDLED PRICE BUNDLED PRICE
(ITEMS BOUGHT (EXTRA
ITEM SEPARATELY) VALUE MEAL)
THE EGG MCMUFFIN EXTRA VALUE MEAL (BREAKFAST MENU #1):
UNBUNDLED PRICE BUNDLED PRICE
(ITEMS BOUGHT (EXTRA
ITEM SEPARATELY) VALUE MEAL)
• Egg McMuffin $2.99 ✓
Chapter 14 - Arriving at the Final Price
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WHY MCDONALD’S USES BUNDLE PRICING
FOR “EXTRA VALUE MEALS” HANDOUT
FACTOR
REASONS FOR BUNDLE PRICING
• Customer
• Company
• Competition
Connect Application Exercises
Chapter 14 - Arriving at the Final Price
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Application Exercise 1: 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
Learning Objective: LO 11-1 Describe the nature and importance of pricing and the approaches
used to select and approximate price level.
AACSB: Knowledge Application
Blooms: Apply
Difficulty Level: 2 Medium
Follow-Up Activity: Instructors could break students into teams to evaluate Carmex’s costs and
Application Exercise 2: Profit-Oriented Pricing Approaches
Activity Summary: In this case analysis, students read a mini-case about an entrepreneur who is
considering manufacturing reclaimed wood tables. Before he begins his business, he must
determine how much he should charge per table given his profit goals, costs, and estimated
demand. Students then answer four questions which ask students to find the equation for
price/table, calculate the price/table, and analyze the impact of a change in costs and demand.
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 11-1 Describe the nature and importance of pricing and the approaches
used to select and approximate price level.
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
Application Exercise 3: Price Adjustments
Activity Summary: In this click and drag activity, students identify examples of special pricing
adjustments. Six different adjustment types are described including quantity and seasonal
Chapter 14 - Arriving at the Final Price
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discounts, trade-in and promotional allowances, FOB origin pricing, and single-zone pricing.
Each of the discounts is described in a scenario (pool chemicals, lots of socks, bigger bling, extra
case, come and get it, and free for all) which students classify as a discount, allowance, or
geographical adjustment.
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 14-03 Identify the adjustments made to the approximate price level on
the basis of discounts, allowances, and geography.
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
Analytics Exercise 4: Marketing Analytics: 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 percent return-on-investment, but fell short. Students are provided with four projections for
the forthcoming year that they can evaluate using the interactive spreadsheet. The spreadsheet
serves as a simple operating statement with key metrics such as price, quantity sold, gross
margin, expenses, investment, and return on investment. Students are able to manipulate the data
for the price, increase in quantity sold, change in unit variable cost, and marketing expense cells
as they answer five multiple choice questions.
Tagging (Topic, Learning Objectives, AACSB, Bloom’s, Difficulty)
Topic: Pricing Strategy
Learning Objective: LO 14-01 Describe how to establish the “approximate price level” using
demand-oriented, cost-oriented, profit-oriented, and competition-oriented
approaches.
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty Level: 2 Medium
Follow-Up Activity: Instructors could ask students to calculate the price for the business owner
Chapter 14 - Arriving at the Final Price
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