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Chapter 19 Pricing Strategies 593
several sites before buying, and price is not the only
4. Bundle pricing
a. As e-business has weakened marketers’ control over
prices, they have modified their use of the price variable
5. Strategic Implication of Marketing in the 21st Century
a. Price as part of a marketing program designed to meet a
firm’s overall organizational objectives can be a powerful
strategy rather than a source of competitive advantage
Assessment check questions
8.1. What is cannibalization? Cannibalization involves a company’s losing
8.2. What is bundle pricing? Bundle pricing involves combining a number
of goods or services together and offering them at a set price.
ANSWERS AND TEACHING NOTES TO CHAPTER EXERCISES
Chapter 19 Assurance of Learning Review
1. What is the difference between a skimming price strategy and a penetration pricing strategy? Under
which circumstances is each most likely to be used?
Answer: Skimming pricing strategies (or market-plus pricing) involve intentionally setting a relatively high
594 Part 7 Pricing Decisions
2. Why is competitive pricing risky for marketers?
Answer: Competitive pricing de-emphasizes price competition by matching other firms’ prices, then
concentrating marketing efforts on the other three elements of the marketing mix beyond price. It can
3. What is the difference between a list price and a market price?
Answer: List price is the rate normally quoted to potential buyers, and most price structures are based
4. What are allowances? How do they work?
Answer: Allowances resemble discounts by specifying deductions from list price. The major categories of
allowances are trade-ins and promotional allowances. Trade-ins are used in sales of durable goods such
5. Describe the three ways that buyers and sellers handle transportation expenses.
Answer: Buyers and sellers can handle transportation expenses in these three ways: (1) The buyer pays
all transportation charges, (2) the seller pays all transportation charges, or (3) the buyer and the seller
6. How is product-line pricing helpful to both retailers and their customers?
Answer: Product-line pricing refers to the practice of setting a limited number of prices for a selection of
merchandise. Retailers benefit because these price points allow them to define and differentiate product
7. What is the difference between loss leader and leader pricing? When do retailers use each?
Answer: Loss leaders are goods priced below cost to attract customers who may also buy regularly
priced merchandise, though at times considered illegal. Leader prices are a variation of the loss leader
8. What is the difference between a competitive bid and a negotiated price?
Answer: A competitive bid results from the process of inviting potential suppliers to quote prices on
9. Describe briefly the three traditional global pricing strategies. Give an example of a firm or product that
would be likely to adopt one of the three approaches, and explain why.
Answer: Firms use one of three export pricing strategies—a standard worldwide price, dual pricing, or
market-differentiated pricing. Standard worldwide pricing is often set regardless of target markets, so it
10. Although cannibalization generally forces price cuts, in what ways can it actually benefit a firm?
Answer: Cannibalization is a way to increase sales by lowering prices that take sales away from the
marketer’s other products or channels. It can benefit today’s firms in their online sales as they inflict price
Projects and Teamwork Exercises
1. With a classmate, create two advertisements for the same product. One advertisement should feature
a high price; the other advertisement should feature a low price. Present your advertisements to your
classmates. Record their perceptions of the price–quality relationship. Which price do most of them seem
to prefer?
2. Figure out how much it will cost to buy and own one of the following new cars from a dealership, or
select another model. What is the list price? What price could you negotiate?
a. Ford Escape hybrid
b. Toyota Camry
c. Dodge Challenger
d. Chevrolet Cruze
3. Assume that a product sells for $100 per ton and that Pittsburgh is the basing-point city for calculating
transportation charges. Shipping from Pittsburgh to a potential customer in Cincinnati costs $10 per ton.
The actual shipping costs of suppliers in three other cities are $8 per ton for Supplier A, $11 per ton for
Supplier B, and $10 per ton for Supplier C. Using this information, answer the following questions:
a. What delivered price would a salesperson for Supplier A quote to the Cincinnati customer?
b. What delivered price would a salesperson for Supplier B quote to the Cincinnati customer?
c. What delivered price would a salesperson for Supplier C quote to the Cincinnati customer?
d. How much would each supplier net (after subtracting actual shipping costs) per ton on the sale?
Answer: With respect to basing-point pricing, the price of a product includes the list price at the factory
plus freight charges from the basing-point city nearest the buyer. Thus, when the problem states that the
product sells for $100 per ton, by definition, with respect to basing-point pricing, this includes freight
4. On your own or with a classmate, visit a local supermarket to find examples of promotional pricing and
loss leaders. Note instances of both. Does the promotional pricing make you more likely to purchase a
product? Does knowing the store uses loss-leader pricing of bananas make you more inclined to buy
them? Present your findings and opinions to the class.
5. Decide on a trip you’d really like to take. Then go online to several of the travel sites—Travelocity,
Priceline.com, or others—and compare prices for your trip, including airfare, hotels, car rental, and so
forth. Does bundling the different components give you a price break? Note any coupons or promotions
for restaurants and attractions as well. Decide which trip is the best deal, and explain why.
Answer: Have students decide on a trip they would really like to take. Ask them to then go online to
several of the travel sites and compare prices for the trip, including airfares, hotels, car rental, and so
Critical-Thinking Exercises
1. When Chinese automakers recently began exporting cars, rather than focusing on developed nations
in the West, they are shipping autos to emerging markets in countries such as Algeria, Russia, Chile, and
South Africa. In these markets, even used vehicles from multinational manufacturers are relatively
scarce—and relatively expensive. The Chinese automakers, whose priority is keeping costs down rather
than design or even safety, applied a penetration-pricing strategy. A woman in Santiago, Chile, who
bought a new Chery S21 explained, “The price factor is fairly decisive. I paid $5,500 new and full. Toyota
with similar features costs around $12,000.” Why do you think Chinese automakers chose that pricing
strategy? Do you think it was successful? As Chinese regulators pressure these manufacturers to make
their cars safer, do you think they will be able to keep their prices low compared with those of the
international automakers? Why or why not?
Answer: Purchasing power of customers might have been a key motivator behind this pricing strategy.
Chapter 19 Pricing Strategies 599
2. As a consumer, would you rather shop at a store that features a sale once a month or a store that
practices everyday low pricing (EDLP)? Why?
Answer: This question calls for an opinion and responses should vary. You may want to review why
3. Under Staples’ “Easy Rebates” program, customers can submit most of their rebate applications online
for products purchased over the Internet, through the catalog, and in Staples stores. Customers may also
submit several rebates at once and receive emails about the status of their rebates at every stage.
Staples claims the rebates are processed much faster than those of other companies. Do you think the
“Easy Rebates” program will increase the number of rebates customers actually submit? Why or why
not? Do you think that other firms will follow with similar programs?
Answer: Many consumers complain about the paperwork they have to fill out to get a rebate, particularly
on larger items such as computers and kitchen appliances. Some say they fill out the paperwork only to
4. Go online to a shopping site you use regularly and note the prices for different types of products. Does
the firm use psychological pricing? Product line pricing? Note any pricing strategies you can identify. Do
any of these strategies make you prefer the site over a competitor’s site?
5. Why is competitive bidding an important factor in major purchase decisions like vehicles for a police
force, the construction of a bridge, or the manufacture of military uniforms?
Answer: Many government and organizational procurement departments determine the lowest prices
available for items that meet specifications through competitive bidding. This process consists of inviting
Ethics Exercise
The law allows companies in a variety of industries to add what many refer to as “hidden” charges to
customers’ bills. Phone bills, airline tickets, and hotel receipts often contain charges that are difficult to
identify. A visitor who stays in a hotel might be hit with a hospitality fee, a resort fee, or an automatic
gratuity, to name just a few. These charges are not taxes, and although they are itemized, it is difficult for
the average traveler to make sense of them. Most people either don’t check their bills thoroughly or are in
a hurry to check out and don’t bother to dispute the charges, which may be only a few dollars. But these
charges add up over the course of hundreds or thousands of visitors each year, and hotels are pocketing
them—legitimately.
1. Do you think adding hidden charges to hotel visitors’ bills is a smart marketing strategy? Why or why
not?
2. Visit the website of a hotel chain with which you are familiar to learn if it gives any information about
additional surcharges. If consumers were informed about the charges ahead of time, would you feel
differently about them? Why or why not?
Internet Exercises
1. Price competition. Using several online ticket sellers, look up prices for an event you would like to
attend. Are the prices comparable? What other fees are included in the price-per-ticket? Are discounts
offered for purchasing multiple tickets? Is there a loyalty program for consumers who frequent a specific
ticket seller?
http://www.ticketmaster.com
http://www.stubhub.com
2. Pricing strategies. Say you’d like to go on a Caribbean cruise. Visit the Royal Caribbean website or
other cruise websites to price cruises at various times of the year—for example, summer vacation, spring
break week, and Thanksgiving week. Which cruises are the most and least expensive? Prepare a
summary of your findings and bring it to class so you can participate in a discussion on pricing strategies.
http://www.royalcaribbean.com/findacruise
http://www.carnival.com
Answer: Students would find all the details on the website of the company. Students should analyze the
list to identify the trends in the prices. Students will find that the rates change according to the season. In
3. Bundle pricing. Using online websites for several insurance companies, look up pricing for bundling
several different types of insurance policies—for example, auto and renter’s insurance. Is there an
advantage to buying two or more different policies with the same company? What are some of the
602 Part 7 Pricing Decisions
disadvantages to consumers for bundling insurance coverage with one company? What are some of the
other factors that impact the cost of bundling insurance policies?
http://www.progressive.com
http://www.geico.com
http://www.statefarm.com
Answer: Bundle pricing for insurance would definitely be an advantage to the customer. It saves a
significant amount of money. On the other hand, companies know that when you bundle your insurance
with them, you wouldn’t look at schemes of other insurance companies. The logic behind this when you
Case 19.1 Who Needs the U.S. Penny? —Questions for Critical Thinking
1. What do you think would happen to retail prices if the United States withdrew the penny from
circulation? Why?
Answer: Students could be asked to look at the penny debate in the United States. Opinion is divided
about the impact of the penny on the economy and to retail prices, According to Robert Whaples, an
2. Some observers suggest eliminating the nickel as well, since each one costs more than 9 cents to
make and distribute. Do you agree, and why or why not? What would be the effect of such a decision on
prices?
Chapter 19 Pricing Strategies 603
Video Case 19.2 BoltBus: Ride for the Right Price—Questions for Critical Thinking
1. How does BoltBus use a combination of penetration pricing and everyday low pricing (EDLP) to
achieve its objectives?
Answer: BoltBus uses penetration pricing as a major marketing weapon by setting a low price (compared
to alternatives) for its fares. The company has done this since its launch, establishing and maintaining its
2. BoltBus is well-known for its $1 ticket sales promotion. Though it has been successful thus far, could it
ever backfire? If so, how?
Part 7 Video Case: Good, Better, Best—Questions for Critical Thinking
1. In your opinion, should Food Network try to attain prestige objectives through pricing? Why or why
not?
Answer: All signs point away from Food Network trying to attain prestige objectives with its pricing,
2. How would you classify the market structure for Food Network’s offerings (both content and tangible
goods)? Explain.
3. How might Food Network and Kohl’s use product-line pricing to expand their partnered offerings?
4. Describe the price–quality relationship of Food Network’s programming and its Kohl’s cookware
products.
Answer: The price–quality relationship of Food Network’s programming pertains both to advertisers and
to consumers. If advertisers believe that they will reach their targeted market via Food Network’s
COLLABORATIVE LEARNING EXERCISES
The Art of Pricing
Purpose:
To highlight the presence of non-mathematical factors in pricing decisions
Background:
Clearly, quantitative analysis plays a key role in pricing decisions. Most successful companies use
a range of mathematical formulas to help them cover both overhead and cost of goods, while
meeting profitability targets. However, creativity and market knowledge also play a significant role.
This exercise is designed to highlight those factors.
Relationship to Text:
Pricing Strategies
Estimated Class Time:
About 20 minutes
Preparation/Materials:
You’ll need to gather between seven and ten different products. Be sure to cover a range of
categories, and include products purchased through a variety of distributors (e.g. retail, discount
club, home parties, the Web, mail-order, etc.). Display the products on a table or desk at the front
of the room. Also, prepare a small index card for each item with a brief description of its many
uses and benefits.
Exercise*:
Choose student “hosts” (who you know are hams) for each product, and invite them to the front of
the room. Divide the rest of the class into two teams (more teams for a group of over forty
Chapter 19 Pricing Strategies 605
Questions for Reflection:
• How can a marketer influence consumer perceptions about pricing?
• What role should competition play in pricing strategy?
*This exercise was adapted from Bulas, Laura, “Pricing….An Art or a Mathematical Formula,” Great
Ideas for Teaching Marketing.
Pricing Strategies
Purpose:
To underscore the pros and cons of each key pricing strategy
Background:
Relationship to Text:
Pricing Strategies
Estimated Class Time:
About 20 minutes
Preparation/Materials:
None needed
Exercise*:
After you cover the pricing strategies, divide your class into three teams. Assign each team one of
the three strategies, and direct them to prepare an argument for why their strategy makes sense
for each of the following products:
• Educational games for children
Questions for Discussion:
• How could you monitor the success of your pricing strategy?
• Would the promotional strategy be likely to differ for each pricing strategy? If so, how? Why?
*This exercise was adapted from the text.
Personal Pricing Strategy
Purpose:
To help students internalize the key elements of pricing strategy
Background:
606 Part 7 Pricing Decisions
Students often gain a visceral understanding of pricing when they apply the strategies to
themselves and their careers. This exercise gives them an opportunity to do so, with the goal of
attaining a deeper understanding of key considerations in the pricing decision.
Relationship to Text:
Pricing Strategies
Estimated Class Time:
About 15 minutes
Preparation/Materials:
None needed
Exercise:
Help students understand that as they market themselves to employers; their salary is their price.
Give them about five minutes to determine what pricing strategy each of them should follow
(penetration, skimming, or competitive)? Why? Issues to consider (you may want to write these
on the board):
Questions for Reflection:
• What should you learn about each specific prospective employer before developing your
personal pricing strategy?
• Some marketing fields pay far more than others. For example, starting salaries in advertising
are typically much lower than those in brand management. What accounts for the differences?
What are the key trade-offs?
Penetration Pricing Strategy
Purpose:
To explore the impact of penetration pricing
Background:
Every student has valuable consumer-side experience with pricing strategies. This exercise is
designed to harness that knowledge to help students better understand the impact and
implications of penetration pricing.
Relationship to Text:
Penetration Pricing Strategy
Chapter 19 Pricing Strategies 607
Estimated Class Time:
Less than 10 minutes
Preparation/Materials:
None needed
Exercise:
Ask your class if anyone has experienced walking into a store, attracted by an especially low price
on a single item, only to walk out having spent far more than initially intended. (To trigger a lively
Questions for Reflection:
• How much does pricing impact your choice of retailer? What are the other key considerations?
• What role should the manufacturer of a product play in determining guidelines for retail
pricing? Why?
Price-Quality Relationships
Purpose:
To explore the relationship between price and quality
Background:
It is commonly believed that a lower price does not necessarily mean poor quality. At the end of
the day, consumers want value for their money without paying astronomical prices. This exercise
is designed to acquire a practical understanding of price-quality relationships.
Relationship to Text:
Price-Quality Relationships.
Estimated Class Time:
Less than 10 minutes
Preparation/Materials:
Sets of three brochures featuring different holiday packages to Mediterranean destinations
Exercise:
