468 Chapter 20: Pricing Concepts
If the new quantity sold per month were 700 (instead of 900), what would be the price elasticity of
demand?
Breakeven Analysis
Assume you are selling pizzas at $8. Your fixed costs (rent, salaries, and utilities) are $4800/month. The
food costs and other variable costs are 50 percent of the selling price. What is your break-even point?
Answers:
Price Elasticity of Demand
Price elasticity of demand is a common source of confusion among students. Conceptually, if you raise
your prices and total revenue increases, then demand is inelastic. For example, demand for heating oil in
Class Exercise 3: Your Perceptions of Pricing
Prompt for students:
In this chapter, you learned about various pricing concepts which firms consider when choosing a
pricing strategy. In this exercise, you will explore your own perceptions of pricing.
Consider the following products/services:
• A diamond ring
• A haircut
• Plumbing services
For each product, answer the following questions:
1. What are the non-price attributes of this product?
2. How do these non-price attributes contribute to your perception of the price of the good?
3. How do organizations reinforce the focus on non-price attributes?
Answers:
For each of the sections, students should focus on internal and external reference points, brand loyalty,
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CHAPTER QUIZ
1. Which of the following is not a concern of the practice of price competition?
a. Emphasis on price
b. Frequent price changes
c. Price flexibility
d. Focus on product features
e. Competitors’ price
2. Which of the following products is most likely to have an elastic demand curve?
a. Gasoline
b. Electricity
c. Salt
d. Airline tickets for vacation travel
e. A textbook required for a course
3. A firm might temporarily sell products below their cost in order to
4. Immediately after the breakeven point, a firm starts to
a. have revenue.
b. experience losses.
c. make profits.
d. decrease volume.
e. reduce costs.
470 Chapter 20: Pricing Concepts
SEMESTER PROJECT
In this chapter, you learned the basics for understanding pricing concepts and strategies. Understanding
how to price is a difficult issue for any business. In this exercise, you will examine the elements you need
to consider in thinking about the pricing strategy for your product, you.
Step 1: Understand current competitors’ pricing. Using the career resource center and any other on–
campus resources, research the salaries of recent graduates with your degree. Then use web-based
resources and find the salary of recent graduates with your degree.
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ANSWERS TO DISCUSSION AND REVIEW QUESTIONS
1. Why are pricing decisions important to an organization?
2. Compare and contrast price and nonprice competition. Describe the conditions under which
each form works best.
Both price and non-price competition are competitive means by which firms attempt to gain market
3. Why do most demand curves demonstrate an inverse relationship between price and quantity?
Most demand curves have an inverse relationship between price and quantity because the quantity
4. List the characteristics of products that have inelastic demand, and give several examples of
such products.
5. Explain why optimum profits should occur when marginal cost equals marginal revenue.
By producing and selling so that marginal costs equal marginal revenue, a firm should obtain
6. Chambers Company has just gathered estimates for conducting a breakeven analysis for a new
product. Variable costs are $7 a unit. The additional plant will cost $48,000. The new product
will be charged $18,000 a year for its share of general overhead. Advertising expenditures will
be $80,000, and $55,000 will be spent on distribution. If the product sells for $12, what is the
breakeven point in units? What is the breakeven point in dollar sales volume?
The breakeven point equals 40,200 units, or $482,400 in sales.
472 Chapter 20: Pricing Concepts
7. In what ways do other marketing mix variables affect pricing decisions?
The product marketing mix variable has an important influence on pricing decisions because price is
the value placed on what is exchanged. If the product is perceived as being of very high quality, a
8. What types of expectations may channel members have about producers’ prices? How might
these expectations affect pricing decisions?
A channel member expects to earn a profit. The amount of time required to handle the product is also
9. How do legal and regulatory forces influence pricing decisions?
The state and federal governments can affect pricing decisions through price controls, freezing prices
10. Compare and contrast a trade discount and a quantity discount.
A trade discount is a reduction off the list price that a producer gives an intermediary for performing
11. What is the reason for using the term F.O.B.?
This term relates to geographic pricing and stands for “free on board.” It is used to indicate whether
12. What are the major methods used for transfer pricing?
Transfer price—incurred when one unit in an organization sells to another—is determined by one of
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ANSWERS TO APPLICATION QUESTIONS
1. Price competition is intense in the fast-food, air travel, and personal computer industries.
Discuss a recent situation in which companies had to meet or beat a rival’s price in a price–
competitive industry. Did you benefit from this situation? Did it change your perception of the
companies and/or their products?
2. Customers’ interpretations and responses regarding a product and its price are an
important influence on marketers’ pricing decisions. Perceptions of price are affected by
the degree to which a customer is value conscious, price conscious, or prestige sensi tive.
Discuss how value consciousness, price consciousness, and prestige sensitivity influence the
buying decision process for the following products:
a. A new house.
b. Weekly groceries for a family of five.
c. An airline ticket.
d. A soft drink from a vending machine.
Value–conscious consumers are concerned about both price and quality of a product. Price–
conscious individuals strive to pay low prices. Prestige–sensitive buyers focus on purchasing
3. As discussed in this chapter, customers interpret and respond to prices in different ways,
depending on the type of product, perceptions of product quality, and the customer’s ability
to judge product quality independent of the price. Because customers lack the ability to
judge product quality, they sometimes use the price of the product as an indicator of
product quality. Thus, the price-quality relationship can influence the purchase of some
products. For each one of the following, indicate whether customers rely heavily,
moderately, or hardly at all on the price to judge the quality of the product.
474 Chapter 20: Pricing Concepts
Product
Likely response
Airfare in coach
Moderately
Appendectomy
Hardly at all
Baby food
Heavily
Cell phone service
Moderately
Cosmetics
Heavily
Dog food
Moderately
Electricity
Hardly at all
Furniture
Heavily
Gasoline
Hardly at all
Haircut
Heavily
Hotel room
Jewelry
Heavily
Tanning salon
Moderately
Used car
Moderately
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ANSWERS TO INTERNET EXERCISE
Autobytel offers car buyers a free, comprehensive website to find the invoice prices for almost all car
models. The browser can also access a listing of all the latest new–car rebates and incentives. Visit
this site at www.autobytel.com.
1. Find the lowest–priced Lexus available today, and examine its features. Which Lexus dealer
is closest to you?
2. If you wanted to purchase this Lexus, what are the lowest monthly payments you could
make over the longest time period?
3. Is this free site more credible than a “pay” site? Why or why not?
Students will have different opinions of the site. In some ways, these free site means that
476 Chapter 20: Pricing Concepts
ANSWERS TO DEVELOPING YOUR MARKETING PLAN
The information obtained from these questions should assist you in developing various aspects of your
marketing plan found in the “Interactive Marketing Plan” exercise at www.cengagebrain.com.
1. Does your company currently compete based on price or nonprice factors? Should your new
product continue with this approach?
Students’ answers will be different, as they all have chosen different companies. Students should
2. Discuss the level of elasticity of demand for your product. Is additional information needed for
you to determine its elasticity?
The elasticity of demand can be a complicated topic for students to grasp. Even after having read the
3. At various price points, calculate the break-even point for sales of your product.
The breakeven point is basically the point at which all money put into getting the business going has
4. Using Figure 20.8 as a guide, discuss the various factors that affect the pricing of your product.
Students are to use Figure 20.8 as a guide in answering this question. They should discuss the various
Chapter 20: Pricing Concepts 477
COMMENTS ON THE CASES
VIDEO CASE 20.1: PRICING RENEWABLE ENERGY PROJECTS:
THINK LONG-TERM
Summary
This case illustrates how market conditions and demand for products can influence prices for renewable
energy sources. John Miggins, a sales representative for Standard Renewable Energy in Oklahoma, tells
customers to think long-term when they’re thinking about buying renewable energy equipment for
residential or commercial use. Renewable energy sources such as wind or solar have high initial costs, but
demand continues to increase for these products. Prices are slowly declining and the market is expanding,
but Miggins warns his customers against expecting a quick return on their investment in renewable
energy equipment.
Questions for Discussion
1. When pricing its products, what external factors should Standard Renewable Energy pay
particular attention to, and why?
Standard Renewable Energy should pay close attention to market conditions, environmental
2. How are value-conscious, price–conscious, and prestige–conscious customers likely to react
to the price of a wind turbine?
Value–conscious consumers are concerned about both price and quality of a product, so they are
3. Does geographic pricing affect what business customers pay for a wind turbine they buy from
Standard Renewable Energy compared to prices paid by nonbusiness customers? Explain your
answer.
Geographic pricing refers to reductions for transportation and other costs related to the physical
478 Chapter 20: Pricing Concepts
CASE 20.2: TAKE YOU OUT TO THE BALL GAME? LET ME CHECK
THE PRICE FIRST
Summary
This case discusses the issues associated with dynamic pricing for different major league baseball games.
For example, when the Chicago White Sox play the Chicago Cubs, the Sox raise single-game ticket prices
because the cross-town rivalry attracts so many local fans. Switching to dynamic pricing enables teams to
stimulate demand during slower periods and increase revenue during periods of peak demand. Season
ticket holders and people who buy more in advance tend to get the best prices for high-demand games.
Dynamic pricing also helps teams to make last-minute adjustments based on weather or line-ups.
However, whether this will become an industry-wide practice is still under consideration.
Questions for Discussion
1. How does dynamic pricing allow a team to judge the price elasticity of demand for a
particular game and then use this information in future pricing decisions?
The case is full of examples of how baseball teams are using dynamic pricing to judge the price
2. What other marketing mix variables must teams consider when using dynamic pricing to
set ticket prices? Why?
Dynamic pricing involves promotion and distribution issues as well; the teams must be able to
3. Do you think price competition plays a role in the way baseball teams price their single-game
tickets? Explain your answer.
Price competition involves emphasizing price as an issue and matching or beating competitors’