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Chapter 18 Pricing Concepts 563
bots, help customers find products at the lowest price
c. Reverse auctions, which allow customers to submit the
highest price they are willing to pay is gaining popularity in
B2B purchasing
d. E-business allows prices to be flexible in response to
market conditions
Assessment check questions
8.1. What are five pricing objectives in global and online marketing? Five
8.2. Why is price stability difficult to achieve in online and global
marketing? Price stability is difficult to achieve because wars, terrorism,
economic trends, changing governments and political parties, and shifting
trade policies can all alter prices.
ANSWERS AND TEACHING NOTES TO CHAPTER EXERCISES
Chapter 18 Assurance of Learning Review
1. Distinguish between fair-trade and unfair-trade laws. As a consumer, would you support either fair-
trade or unfair-trade laws? Would your answer change if you were the owner of a small store?
Answer: Fair-trade laws let manufacturers set minimum prices for their products and require dealers to
sign contracts agreeing to those. They are state laws permitting manufacturers or wholesalers to decide
2. Give an example of each of the major categories of pricing objectives.
Answer: Pricing objectives can be classified into four major groups: profitability, volume, meeting
competition, and prestige objectives. Profitability objectives indicate that prices should be set with profits
in mind—even not-for-profit organizations have to set prices high enough to meet expenses. Volume
3. What are the major price implications of the PIMS studies? Suggest possible explanations for the
relationships the PIMS studies reveal.
Answer: Profit Impact of Market Strategies (PIMS) refers to research conducted by the Marketing
Science Institute, which concluded that two of the most important factors influencing profitability are
4. Identify each factor influencing elasticity and give a specific example of how it affects the degree of
elasticity in a good or service.
Answer: Elasticity is the measure of change in demand for a product resulting in a change in its price.
High elasticity means that even a small change in the price of a product will lead to a significant change
5. What are the practical problems in applying price theory concepts to actual pricing decisions?
Answer: Price theory is the process of evaluating and setting prices. Certain practical problems related to
6. Explain the advantages and drawbacks of using incremental-cost pricing rather than full-cost pricing.
Answer: Full-cost pricing uses all relevant variable costs in setting a product’s price, and also allocates
7. How can locating the breakeven point assist in price determination?
Answer: After the breakeven point, sufficient revenues have been obtained to cover all fixed costs. So it
8. Explain the advantage of modified breakeven analysis over the basic breakeven formula.
Answer: Marketing research helps to estimate sales at various prices, but resulting data involves human
factors such as perceptions, attitudes, and expectations. Modified breakeven analysis takes the
9. Explain how the use of yield management can result in greater revenue than other pricing strategies.
Answer: If a firm’s costs are fixed, the only way to make a profit is through higher numbers of sales
transactions. Yield management strategies vary prices based on such factors as demand, even though
10. How do pricing objectives for a global firm differ from those used generally?
Answer: To be successful internationally, a firm needs to face the challenge of setting prices in a global
environment. A firm’s global pricing must reflect its overall marketing strategy and support its broader
Projects and Teamwork Exercises
1. In small teams, categorize each of the following as a specific type of pricing objective. Suggest a
company or product likely to use each pricing objective. Compare your findings.
a. 8 percent increase in profits over the previous year
b. prices no more than 7 percent higher than prices quoted by independent dealers
c. 10 percent increase in market share
d. 12 percent return on investment (before taxes)
Chapter 18 Pricing Concepts 567
e. setting the highest prices in the product category to maintain favorable brand image
Answer: a. An 8 percent increase in profits over the previous year—profitability
b. prices no more than 7 percent higher than prices quoted by independent dealers—meeting competition
2. How are the following prices determined and what do they have in common?
a. admission to a local sporting event
b. tuition at a community college
c. local sales tax rate
d. printing of programs for a baseball stadium
e. lawn mowers
Answer:
a. admission to a local sporting event—full-cost pricing
b. tuition at a community college—full-cost pricing or cost-plus pricing
3. WebTech Development of Austin, Texas, is considering the possible introduction of a new product
proposed by its research and development staff. The firm’s marketing director estimates the product can
be marketed at a price of $70. Total fixed cost is $278,000, and average variable cost is calculated at
$48.
a. What is the breakeven point in units for the proposed product?
568 Part 7 Pricing Decisions
b. The firm’s CEO has suggested a target profit return of $214,000 for the proposed product. How many
units must be sold to both break even and achieve this target return?
Answer:
a. What is the breakeven point in units for the proposed product?
$278,000 / ($70 - $48) = 12,637 units
4. Research the price schedule at your local movie theater multiplex. Which pricing strategy accounts for
any price differentials you discover? Why don’t matinee prices constitute price discrimination against
those who don’t qualify for the discounts?
Answer: Before determining the type of strategy being used, the students must fully understand the
objectives behind pricing. If sales maximization is more important than profit maximization, the
5. How do cell phone companies make money by charging a flat rate per month for a set number of
minutes, such as $50 for 300 minutes? Can you think of a more profitable plan? Would it appeal to
consumers? Why or why not?
Answer: One of the most common ways through which cell phone companies make money is by offering
a flat rate per month for a fixed amount of time. This is such a popular strategy because they are
to other pricing strategies?
Critical-Thinking Exercises
1. Prices at amusement parks might rise if operators such as Disney and Universal Studios add new
rides. The parks also have to deal with high fuel prices. List as many things as you can think of that parks
like these offer patrons in return for their money. Which of these do you think are directly reflected in the
price of admission?
Answer: Students’ answers will vary. Rides and attractions cost money to build, run, and maintain.
Obviously the admission price reflects all of these costs. What they offer their visitors is fun and other
2. Recording artists earn only about 9 percent in royalties per CD, using a royalty base of retail price less
25 percent for packaging costs. The rest goes to the producer and to cover recording costs, promotion,
copies given away to radio stations and reviewers, and other costs such as videos. What do you think
happens to the artist’s royalties when a CD is marked down to sell faster? Consider two cases: (1) the
marked-down CD sells more copies, and (2) it sells the same number of copies as before.
In the first case, the artist might actually make more money overall. It would happen if the increase in unit
sales more than offsets the lower royalty payment per unit. This would be the case if demand is fairly
3. Some finance experts advise consumers not to worry about rising gasoline prices, the cost of which
can easily be covered by forgoing one takeout meal a month, but to worry about how high energy prices
will affect the rest of the economy. For example, each dollar-a-barrel price increase is equivalent to a $20
million-a-day “tax” on the economy. Explain what this means.
Answer: Increased taxes reduce discretionary income. Higher energy prices will act like taxes if
consumers continue to use about the same amount of energy as the total amount spent on energy would
increase, leaving less money for other consumer products. However, if consumers use less energy, the
4. Capital Motors, a car dealership, recently announced that it will rely less on high-volume strategies
such as discounts and rebates to improve its profitability. Another strategy it will employ is to sell fewer
cars to rental fleets, which eventually return the cars to Capital for sale at low auction prices. How do
these types of sales affect Capital’s profitability?
Answer: Ajax sells cars to rental fleets at lower prices than retail customers would pay. Therefore, Ajax
earns less profit on each car sold to rental fleets. In addition, when these cars are returned to Ajax, the
Ethics Exercises
You work for a major restaurant in your town. The manager is facing cost pressures from rising food
prices and says she needs to raise revenues. She decides to reduce the size of the meal portions and
use cheaper cuts of meat and fish in some entrées while holding the menu prices constant. She tells you
and other staff members not to mention the changes to customers and to deflect any questions or
complaints you hear. The descriptions in the menu will not be changed, she says, “Because the printing
costs would be too high.”
1. You know the restaurant advertises the quality of its ingredients in the local media. The menu changes
are not advertised, and it bothers you. What course of action would you take?
Answer: Student opinions will vary. They should think carefully about the consumer’s right to be informed.
Most would feel that it is unethical on the restaurant’s part to charge the same price while compromising
2. A customer mentions the chicken in the sandwich he ordered is “tough and dry” and the order seems
smaller than before. What would you do?
Chapter 18 Pricing Concepts 571
Internet Exercises
1. Price competition. Using a popular travel site, look up airfares for each of the following pairs of cities:
Baltimore to Los Angeles
Atlanta to Minneapolis
Seattle to Dallas
Chicago to Denver
Charlotte to Boston
Do some fares appear higher (on a per-mile basis) than others? Do these differences reflect how many
airlines provide nonstop service between each city pair? What about the impact on fares of so-called
discount airlines (such as Spirit Airlines)?
http://www.expedia.com
http://www.kayak.com
Answer: Before attempting this exercise, students should visit the websites mentioned in the question
and get an idea about the travel fares and connectivity (whether nonstop or with transit) between the
2. Yield management. You are planning a trip to Walt Disney World. Visit the website to price week-long
stays at various times of the year. Be sure to choose similar hotels. Which weeks are the most and least
expensive? Do the days of arrival and departure make any difference? Prepare a summary of your
findings and bring it to class so you can participate in a discussion on yield management.
http://disneyworld.disney.go.com/vacation-packages
3. Airbus and Boeing subsidies. The United States and European Union have had a long-running
dispute over allegations of improper government subsidies to commercial aircraft manufacturers (the U.S.
about Airbus and the EU about Boeing). Government subsidies may give the manufacturer a price
advantage over its competition. Both sides have filed complaints with the World Trade Organization. Go
to the WTO website and see the article link below. Write a report outlining the trade dispute and its
current status.
http://www.wto.org
http://www.reuters.com/article/2014/05/19/us-trade-aircraft-subsidies-exclusive-
idUSBREA4I03W20140519
Answer: Students first need to visit the WTO website and learn about its subsidy regulations. Keeping
Case 18.1 ScoreBig: Name Your Price for Live Events—Questions for Critical Thinking
1. Critics say event promoters are to blame for the high number of unsold tickets, because they have
continued to raise ticket prices to compensate for unsold seats until they rise out of range for most
audiences. Yet promoters feel discounts damage their brands. Can you suggest possible answers to this
pricing strategy problem?
Answer: Students’ responses may vary. One possible solution to attract more people to buy tickets would
be to offer freebies along with the tickets—maybe a coupon for clothes or shoes or even an autographed
2. Is auctioning the best way to eliminate unsold seats? Why or why not?
Answer: Student answers will vary. Most of the expenses incurred by event promoters can be recovered
Chapter 18 Pricing Concepts 573
Video Case 18.2 Ski Butternut: Great Prices for Winter Fun—Questions for Critical Thinking
1. Ski Butternut avoids pricing to meet the competition. Instead, it focuses on the value that it creates for
customers. In your opinion, why is this a successful strategy?
2. What factors might determine demand elasticity for Ski Butternut’s offerings?
COLLABORATIVE LEARNING EXERCISES
Introduction to Pricing
Purpose:
To underscore the wide range of real-world pricing approaches
Background:
Explaining pricing approaches can be somewhat dry, complicated by the real-world issue that
Relationship to Text:
Pricing Objectives and the Marketing Mix
Estimated Class Time:
About 15 minutes
Preparation/Materials:
Bring to class (or borrow from a student) a wristwatch that looks fancy, but is not from a well-
known brand (such as Timex, Rolex, or Swatch).
Exercise*:
574 Part 7 Pricing Decisions
Gather the papers, and ask a student to write the prices on the board as you read them aloud.
The prices are sure to vary widely from unbelievably cheap to highly overpriced, and will likely
include several examples of odd pricing.
Questions for Reflection:
• Why do many marketers not use a strategic approach to pricing decisions?
• How does pricing relate to brand image? Why?
* Adapted from Lewellen, Bob, “The Wristwatch Approach to Pricing,” Great Ideas for Teaching
Marketing.
Pricing Objectives
Purpose:
To understand the categories that help achieve pricing objectives.
Background:
Pricing objectives can be classified into four major groups: (1) profitability objectives, (2) volume
objectives, (3) meeting competition objectives, and (4) prestige objectives. All companies must
consider objectives of one kind or another when developing pricing strategies
Relationship to Text:
Pricing Objectives and the Marketing Mix
Estimated Class Time:
Less than 10 minutes
Preparation/Materials:
None needed
Exercise:
Give your students a list of products. Ask them to come up with a pricing strategy that would use
one or more of the categories used to understand pricing objectives.
Questions for Reflection:
• What knowledge about consumer behavior does one need to know while evolving pricing
strategies?
• Can customers be enticed into buying things they don’t want? How?
Pricing and Market Structure
Purpose:
Chapter 18 Pricing Concepts 575
To help students better understand the different categories of competition
Background:
Identifying and understanding the competitive climate plays a critical role in smart pricing
decisions. This exercise is designed to review categories of competition and to sort out potential
misunderstandings, especially regarding the difference between monopolistic competition and
monopolies.
Relationship to Text:
Price Determination in Economic Theory
Estimated Class Time:
About 10 minutes
Preparation/Materials:
None needed
Exercise:
Direct students to work with the one or two people sitting next to them to brainstorm—in five
minutes—a list of industries that compete in each of the four categories: pure competition,
monopolistic competition, oligopoly, monopoly. After five minutes, reconvene as a class and ask
Price Elasticity
Purpose:
To demonstrate how price elasticity relates to our daily lives
Background:
Relationship to Text:
The Concept of Elasticity in Pricing Strategy
Estimated Class Time:
5 to15 minutes (depending on whether or not your break the class into groups)
Preparation/Materials:
You may want to copy the scenario and the questions below for each student.
576 Part 7 Pricing Decisions
Exercise:
Ask your students how many of them drink coffee. With a little probing, you could divide them into
four groups based on whether they are light (less than 1 cup per day), medium (1 to 2 cups per
day), heavy (more than 2 cups per day), or non-coffee drinkers. (If you have less time available,
this exercise also works well as a class discussion.) Share the scenario below, write the following
questions on the board, and ask each group to try to reach a general consensus regarding their
response. Direct them to appoint a spokesperson and report back to the class after about five to
ten minutes. Compare and contrast responses among the groups.
Pricing On a Global Basis
Purpose:
To explore how pricing considerations differ across international borders
Background:
Even as globalization makes the world seem smaller, prices for similar goods and services vary
dramatically from country to country. This exercise is designed to explore the reasons behind the
differences. It works especially well if you have international students or if at least some of your
students have traveled abroad.
Relationship to Text:
Global Issues in Price Determination
Estimated Class Time:
About 10 minutes
Preparation/Materials:
None needed
Exercise:
Ask your international students (or those who have traveled) to address the prices of the following
items in other countries. Probe for information from as many places as possible and don’t hesitate
to include your own experience as well.
Chapter 18 Pricing Concepts 577
• Internet access
• Meal from McDonald’s
• PDA
• Trendy blue jeans
• Toyota Corolla
• Popular CD
• Visit to the dentist
• Gallon of gasoline
Then ask them to address how the prices compare to prices for similar products in the U.S. What
accounts for the differences? Encourage them to consider the full range of relevant factors,
