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The rank order of prices is likely to follow:
Class Exercise 3: Revealing Customers’ Perception of Value
In this chapter, you learned about the variety of ways in which firms make pricing decisions and set
prices. In this exercise, you will explore how to get consumers to reveal what their value is for a given
good. Often consumers are not willing to share with the marketer how much they are willing to pay for a
given good. Their objective is to acquire the good giving up as little money, or other value, as possible.
The goal of the marketer is to understand value and price as close to the consumer’s value as possible.
Base your answers on the following scenario:
Your elderly neighbor has asked you to help her clean out her attic. After you are done assisting her, she
gives you a statue for helping. You thank her for the object but have no idea what it is or what it is worth.
You decide to sell it but have no idea what price to charge. How can you get the most money for the
statue?
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CHAPTER QUIZ
1. Which of the following pricing approaches is used most often by retailers?
a. Markup pricing
b. Price discrimination
c. Multiple-unit pricing
d. Return on investment
e. Price skimming
2. Some companies attempt to reduce or eliminate the use of frequent short–term price reductions by
using
a. odd-even pricing.
b. customary pricing.
c. everyday low prices.
d. price leaders.
e. reference pricing.
3. Which of the following pricing objectives is rarely operational because its achievement is difficult to
measure?
4. Many firms decide to charge various prices to individual customers for the same quality and quantity
of product, a pricing strategy known as
a. periodic discounting.
b. differential pricing.
c. prejudicial pricing.
d. psychological pricing.
e. promotional pricing.
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SEMESTER PROJECT
In this chapter, you learned about the variety of ways in which firms set the price for their goods and
services. This is often the most difficult decision an organization can make. If you price too high, you
might not get the needed initial sales; if you price too low, you may send the wrong signal to the
marketplace. In this exercise, you will learn how to set your price for your product, you.
Step 1: Understand Costs. In order to know how much to price your product, you must understand
your cost structure. To do this, you need to establish a monthly budget that will cover your expenses.
Make a list of all of your anticipated monthly expenses. Be sure to include the following categories:
• Rent
• Utilities,
Step 2: Determine a reasonable salary expectation. For any position there is a range of starting salaries.
There are many sources for learning about salaries in the area you want to work, such as career resource
centers, the library, and online. All these sources offer a variety of options for determining what is a
reasonable salary expectation.
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ANSWERS TO DISCUSSION AND REVIEW QUESTIONS
1. Identify the six stages involved in the process of establishing prices.
Stage one is developing a pricing objective that dovetails with the organization’s overall objectives.
Typical pricing objectives include survival, profit, return on investment, market share, cash flow, and
2. How does a return on investment pricing objective differ from an objective of increasing
market share?
3. Why must marketing objectives and pricing objectives be considered when making pricing
decisions?
It is important that consumers consider the firm to be consistent. The marketing objectives are set in
4. Why should a marketer be aware of competitors’ prices?
5. What are the benefits of cost-based pricing?
Cost-based pricing is simple to calculate and easy to implement.
6. Under what conditions is cost-plus pricing most appropriate?
7. A retailer purchases a can of soup for 24 cents and sells it for 36 cents. Calculate the markup as
percentage of cost and as percentage of selling price.
8. What is differential pricing? In what ways can it be achieved?
Differential pricing is the charging of different prices to different buyers for the same quality and
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9. For what type of products would price skimming be most appropriate? For what type of
products would penetration pricing be more effective?
Price skimming would be most appropriate for products which have associated research and
10. Describe bundle pricing and give three examples using different industries.
11. What are the advantages and disadvantages of using everyday low prices?
An advantage is it reduces or eliminates the use of frequent short-term price reductions, thus allowing
12. Why do customers associate price with quality? When should prestige pricing be used?
Consumers associate price with quality because of experience and because they have been socialized
13. Are price leaders a realistic approach to pricing? Explain your answer.
Price leaders should be used when competitive conditions and consumers’ actions indicate they are
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ANSWERS TO APPLICATION QUESTIONS
1. Price skimming and penetration pricing are strategies that are commonly used to set the base
price of a new product. Which strategy is more appropriate for the following products?
Explain.
a. Short airline flights between cities in Florida
b. A Blu-ray player
c. A backpack or book bag with a lifetime warranty
d. Season tickets for a newly franchised NBA basketball team
Price skimming is charging the highest possible price that buyers who most desire the product will
2. Price lining is used to set a limited number of prices for selected lines of merchandise. Visit a
few local retail stores to find examples of price lining. For what types of products and stores is
this practice most common? For what types of products and stores is price lining not typical or
feasible?
Student answers will vary based on the stores they visit and the products they find. In general, price
3. Professional pricing is used by people who have great skill in a particular field, such as doctors,
lawyers, and business consultants. Find examples (advertisements, personal contacts) that
reflect a professional pricing policy. How is the price established? Are there any restrictions on
the services performed at that price?
4. Organizations often use multiple pricing objectives. Locate an organization that uses several
pricing objectives, and discuss how this approach influences the company’s marketing mix
decisions. Are some objectives oriented toward the short term and others toward the long term?
How does the marketing environment influence these objectives?
Student answers will vary based on their organizations
5. Using the information on prestige pricing provided in the question text, identify three
prestige brands in different product categories. Compare each prestige-priced brand to
regularly priced brands in each product category and calculate the prestige price
differential. In each product category, is the price justifiable? Explain.
Student answers will vary based on the product categories and brands that they choose. Their
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ANSWERS TO INTERNET EXERCISES
T-Mobile has attempted to position itself as a low-cost cellular phone service provider. A person can
purchase a calling plan, a cellular phone, and phone accessories at its website. Visit the T-Mobile website
at www.t-mobile.com.
1. Determine the various nationwide calling rates available in your city.
2. How many different calling plans are available in your area?
3. What type of pricing strategy is T-Mobile using on its rate plans in your area?
The most common pricing strategies are differential pricing, new-product pricing, product-line
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ANSWERS TO DEVELOPING YOUR MARKETING PLAN
The information obtained from these questions should assist students in developing various aspects of
their marketing plan found in the “Interactive Marketing Plan” exercise at www.cengagebrain.com.
1. Using Table 21.1 as a guide, discuss each of the seven pricing objectives. Which pricing
objectives will you use for your product? Consider the product life cycle, competition, and
product positioning for your target market during your discussion.
Table 21.1 displays seven different pricing objectives and the possible associated action a marketer
2. Review the various types of pricing strategies in Table 21.3. Which of these is the most
appropriate for your product?
Table 21.3 shows a number of different pricing strategies. Students should review this list and review
3. Select a basis for pricing your product (cost, demand, and/or competition). How will you know
when it is time to revise your pricing strategy?
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COMMENTS ON THE CASES
VIDEO CASE 21.1: PRICING AT THE FARMERS’ MARKET
Summary
This case examines the issues associated with direct selling and pricing for farmers at local markets.
Selling directly to the public enables farmers to build relationships with local shoppers and encourage
repeat buying week after week as different items are harvested. It also allows farmers to realize a larger
profit margin than if they sold to wholesalers and retailers because there are no intermediaries. In
addition, consumers are willing to pay a higher price for top-quality local products, and even more for
products that have been certified organic by a recognized authority. However, competition between
farmers, markets, and traditional grocery stores is a factor that influences pricing.
Questions for Discussion
1. In the pursuit of profits, how might Urban Farmz use a combination of cost-based, demand-
based, and competition-based pricing for the products it sells? Explain your answer.
Encourage students to be creative. Cost-based pricing adds a dollar amount or percentage to the cost
2. Urban Farmz wants to price the organic soap at $15.95 per bar, while the soap maker prices the
same soap at $14 per bar. What perceptions do you think consumers will have of each price?
What recommendations do you have regarding this price difference?
Consumers may have different perceptions – they may believe that the Urban Farmz bar is fairly
3. Would you recommend that Urban Farmz use promotional pricing at the farmers’ markets
where it regularly sells its products? If so, which techniques would you suggest, and why?
Student answers will vary. Generally, Urban Farmz should not use promotional pricing because it
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CASE 21.2: JCP SWITCHES TO EDLP
Summary
This case looks at different pricing strategies for department store products. In 2011, department store
JCPenny was offering 590 different promotions every year, including sales, discounts, coupons, clearance
events, and other price reductions. Yet years of competing on price hadn’t done very much to boost
JCPenney’s revenue or profits. Starting in 2012, JCPenney set the price of all merchandise about 40
percent lower than the regular price charged in 2011. The company now has a new logo, new products,
and a new focus on product qualities.
Questions for Discussion
1. What is JCPenney doing to influence the target market’s evaluation of the value of its
merchandise?
JCPenny now offers “fair and square” everyday prices, which are 40 percent lower than its previous
2. How do you think competitors should respond to JCPenney’s everyday low prices? Explain
your answer.
3. Would you suggest that JCPenney reveal the markup it uses to arrive at its prices as a way to
convince customers that its everyday prices really are low?
Student answers will vary. By revealing the markup, JCPenny could show how inexpensive its
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STRATEGIC CASE 8: NEWSPAPERS TEST PRICING FOR DIGITAL
EDITIONS
Summary
Pricing is one of the most difficult challenges facing U.S. newspapers in the 21st century. Circulation is
falling, as are advertising revenues, and digital sources of news are increasingly popular. Newspapers are
taking a long, hard look at their pricing strategies to find new ways of improving circulation revenues and
profits in the digital age. Some newspapers continue to offer news for free, on the basis that this builds
their brands online and offers extra value to readers who want to see updated news whenever it breaks.
Other newspapers are trying a paywall, allowing only paid subscribers to see online content that’s “walled
off” to prevent free access. The Wall Street Journal and Gannet newspapers like USA Today have had
some success with digital pricing.
Questions for Discussion
1. When The Wall Street Journal began charging for online access, the number of visitors to its site
dropped dramatically and slowly began rising again. What does this suggest about the price
elasticity of demand for its products?
The initial decrease in customers showed that consumers had a strong reaction to the sudden price
2. Would consumers have an internal reference price for digital newspaper content? Explain your
answer.
3. What type of psychological pricing are Gannett and The Wall Street Journal using when they
offer print and digital subscriptions together for one price? What do you think of this approach
to pricing?
Psychological pricing attempts to influence a customer’s perception of price by making a product’s
4. Should Gannett and The Wall Street Journal be looking at competitors’ prices when setting
their own prices? Why or why not?
Students can argue either position. Obviously, monitoring the market is important, and it is important
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INSTRUCTIONS FOR ROLE-PLAY TEAM CASE
ROLE-PLAY TEAM CASE EXERCISE 8: CLEAN TECHNOLOGIES
INC.
This role-play team case exercise is designed to simulate actual marketing decision making in the real
world. Students take on assigned roles and then participate in a team discussion of the case.
Preparation
Break the class into teams of 5. The entire team should read the Background section.
Each student will take on a role of a particular employee within the organization. Even though all of the
roles are printed in the textbook, each student should focus on only his/her assigned role and represent
Team Meeting
Students should try to accurately represent the motivations and interests of their individual roles during a
team discussion (15-45 minutes depending on class activities). Teams should discuss each of the issues in
the case and complete any activities mentioned in the Background section.
The issues for Clean Technologies include:
• The company makes three products: Slab Clean (for industrial use), Pet Fresh (for use with
This case will require students to complete the following activities:
Class Discussion (optional)
After the team meetings, instructors may choose to have teams discuss their findings and solutions
with the class. Students may also want to talk about some of the interpersonal dynamics in their
teams and their experiences as they worked toward a solution.