Chapter 9 Pricing QUESTIONS AND ANSWERS TO END OF CHAPTER MATERIAL Hands-on…apply your knowledge Pricing Your Services Review the opening vignette for a quick process of determining a fair price for professional services on an hourly basis. Consider that you are the individual offering the professional services and review the textbook section on break-even analysis. Determine how many hours you would have to work in order to break-even if your annual fixed costs for your professional practice were $12,000 annually and variable costs for an hour of work were $25 on average. Answer: Professional services do range, so students will have a variety of answers. Once they establish their hourly fee, have them work through a break-even analysis. The one below assumes a $50 hourly fee for professional services. Break-Even Point = Fixed Costs/(Price for Service less Variable Costs) = $12,000 ($50 - $25) = 480 So once 480 hours of work, your professional practice begins earning a profit. To determine how many hours you need to work to break even, first calculate the total cost per hour. Add the fixed costs ($12,000) and the variable costs per hour ($25). Next, divide the total fixed costs by the hourly rate minus the variable costs. Assuming an hourly rate of $100, the calculation is: Video Clip...Questions Although the CONNECT video on H&R Block Canada does not explicitly discuss pricing, there is a pricing strategy at play. Watch the video and answer the following questions: - What customer-oriented pricing approach do you think H&R Block Canada is taking with its Second Look Strategy? Answer: H&R Block Canada is using a Competition Oriented Approach. By determining what other levels of service are being offered at different price, H&R Block Canada show its clients the value it adds. Remember, value to a customer is the customer’s perceived benefits over the price the customer pays. - Have you ever felt that you were not receiving value from a product or service? If so, how do you think the video appeals to Canadians feeling that way about the preparation of their tax returns? Answer: There are no set answer for this question, but continue to bring discussion to value and perceived benefits. Yes, many people feel they’re not getting value when a product or service doesn’t meet their expectations or solve their problems effectively. A video appealing to Canadians dissatisfied with tax preparation might emphasize efficiency, accuracy, and ease-of-use. It would highlight how the service saves time and reduces stress compared to traditional methods, reassuring viewers of tangible benefits and value. - Once a Canadian feels they deserve a Second Look from H&R Block Canada, what price do you believe the or she would pay to re-file their taxes? Answer: There are no set answers for this question, but you should explore different scenarios. What was the additional benefit being shown by H&R Block Canada? Would that immediately increase the value of the service? How much more value would have to be shown to switch tax preparers? A Canadian seeking a Second Look from H&R Block Canada might be willing to pay a premium for a thorough review and potential correction of their tax return. Given the value of ensuring accuracy and maximizing refunds, a reasonable price could range from $50 to $150, depending on the complexity of their tax situation and the perceived benefits of the service. Infographic ... data analysis The Accenture Perfect Promotion infographic illustrates the number of factors being considered when developing promotions and prices for companies. Consider an item you recently purchased and use the infographic to help you determine how the final price of the product was determined. Answer: This exercise will help students understand the value of trade promotions. For an item I recently purchased, such as a smartphone, factors considered in its promotion and pricing included the brand reputation, features and specifications, competitor pricing, seasonal discounts, and consumer reviews. The promotional strategy likely involved targeting key demographics, leveraging online and in-store offers, and analyzing market trends to optimize pricing and appeal. adAlyze 1. What pricing strategies has H&R Block used in this advertisement? Answer: Responses will vary from student to student. Explore their reasons. Common answers include Odd-even Pricing and Below-Market Pricing. H&R Block's advertisement utilizes a value-based pricing strategy by emphasizing the cost-effectiveness and potential savings of their tax services compared to competitors. They also incorporate promotional pricing with their "Second Look" offer, which provides a free review of previously filed returns to attract and reassure potential customers of additional value. 2. How does the ad make you feel about working for or with this company? Answer: Responses will vary from student to student. Explore their reasons. The ad likely creates a positive impression by showcasing H&R Block's commitment to value and thoroughness. It suggests that the company is dedicated to ensuring customers receive the maximum benefit from their services, which can be appealing to both potential employees and clients. The focus on customer satisfaction and proactive service enhances the company’s image as reliable and client-focused. QUESTIONS AND ANSWERS TO ONLINE ACTIVITIES: APPLYING MARKETING CONCEPTS AND PERSPECTIVES 1. How would the price equation apply to the purchase price of (a) gasoline, (b) an airline reservation, and (c) a chequing account? Answer: Item Purchased Final List Price Discounts and Allowances (–) Extra Fees (+) a. Gasoline Final price = Pump price – Cash discount b. Airline ticket Final fare = Standard coach fare – Seasonal, frequent flyer, and off-peak discounts + Premium for first class, peak hours flight c. Chequing account Service charge = Standard service charge – Discount for chequing balance over set amount + Per cheque charge based on activity 2. What would be your response to the statement, “Profit maximization is the only legitimate pricing objective for the firm”? Answer: Profit maximization is not the only legitimate pricing objective for a firm. Often, a target return objective or a long-run profit objective is set by a firm. Nonprofit goals such as unit sales objectives, market share objectives, as well as objectives influenced by feelings of social responsibility are also legitimate pricing goals. 3. Touché Toiletries, Inc., has developed an addition to its Lizardman Cologne line tentatively branded Ode d’Toade Cologne. Unit variable costs are 45 cents for a 3-ounce bottle, and heavy advertising expenditures in the first year would result in total fixed costs of $900,000. Ode d’Toade Cologne is priced at $7.50 for a 3-ounce bottle. How many bottles of Ode d’Toade must be sold to break even? Answer: BEP = Fixed Cost Unit Price – Unit Variable Cost BEP = $900,00 $7.50 – $0.45 BEP = 127,600 units 4. Suppose that marketing executives for Touché Toiletries reduced the price to $6.50 for a 3-ounce bottle of Ode d’Toade and the fixed costs were $1,100,000. Suppose further that the unit variable cost remained at 45 cents for a 3-ounce bottle. (a) How many bottles must be sold to break even? (b) What dollar profit level would Ode d’Toade achieve if 200,000 bottles were sold? Answer: a. The number of bottles needed to be sold to break even is: BEP = Fixed Cost Unit Price – Unit Variable Cost BEP = $1,100,000 $6.50 – $0.45 BEP = 181,818 units b. The profit received if 200,000 bottles were sold is: Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost = (P x Q) – [FC + (UVC x Q)] = ($6.50 x 200,000) – [1,100,000 + ($0.45 x 200,000)] = ($1,300,000) – [1,100,000 + 90,000)] Profit = $110,000 5. Under what conditions would a camera manufacturer adopt a skimming price approach for a new product? A penetration approach? Answer: a. Skimming pricing. A camera manufacturer might adopt a skimming price approach for a new product if the new product is unique and already has a significant prospective customer base. Some type of protection from competitive products such as a patent would also enhance the effectiveness of a skimming strategy. b. Penetration pricing. A penetration price approach might be adopted if the new product unit production and marketing cost fall dramatically as production volume increases and if many segments of market are price sensitive. Such a product would most likely appeal to a broad segment of the population and be positioned as a “me-too” product. 6. What are some similarities and differences between skimming pricing, prestige pricing, and above-market pricing? Answer: Skimming, prestige, and above-market pricing all involve setting a premium price for a product, hoping consumers will associate high quality with high price. Frequently, a skimming price approach is used when there are no competitively positioned products, and therefore, prices, to use as a benchmark, whereas an above-market price strategy requires a competitive reference point or price. Prestige pricing typically requires a greater subjective component than the other two methods. 7. A manufacturer of exercise equipment sets a suggested price to the consumer of $395 for a particular piece of equipment to be competitive with similar equipment. The manufacturer sells its equipment to a sporting goods wholesaler who receives 25 percent markup on wholesaler selling price and a retailer who receives 50 percent markup on retailer selling price. What demand-oriented pricing method is being used, and at what price will the manufacturer sell the equipment to the wholesaler? Answer: The pricing method is being used in this case is target pricing. Suggested retail price $395.00 – 50% of selling price $197.50 = Retailer cost and wholesaler selling price $197.50 – 25% of selling price $49.38 = Wholesaler cost and manufacturer’s sales price $148.12 QUESTIONS AND ANSWERS TO ONLINE ACTIVITIES: DISCUSSION FORUM Pharmaceutical companies are continually involved in research and development of new products. They face huge costs and long time frames when bringing new drugs to market. It can take several years and upwards of $100 million for a new drug to be successfully launched. Not only do they have to fund research and development, but field trials and marketing costs are also very high. Winning government approval is a time-consuming and expensive task. They need to convince the medical community to try out, adopt, and prescribe the drug for patients and they also need to create awareness at the consumer level so that patients will ask their doctors for the drug by name. Once in the marketplace, companies often face costly legal challenges over the safety of the drug, and while registered patents offer some protection for limited periods of time, the likelihood of a competitor launching a potentially superior product into the marketplace first is very real. This results in very high prices to consumers. Yes, some people have medical plans that cover part, and in some cases all, of the drug costs, but many simply cannot afford the drugs even though they would benefit health-wise from them. Profit margins on prescription drugs are reportedly large, but sales volumes are not necessarily high. Conversely, over-the-counter drugs, available without a doctor's prescription, have lower profit margins and typically very high sales volumes. Discuss these aspects of drug pricing with your group and sketch out your answers: 1. Recognizing that access to effective and quality medication is a real need for all consumers, should government regulate pricing and place controls on the profits that drug companies make? Answer: Government Regulation of Drug Pricing: Yes, government regulation could ensure that medications are affordable and accessible. It could help prevent excessive pricing, making essential drugs available to a broader segment of the population. 2. What do you think would be the effect on the drug industry and on consumers if the government moved towards such controls? Answer: Effects on Industry and Consumers: Price controls might lead to reduced profit margins for companies, potentially slowing innovation. However, consumers would benefit from lower drug costs and improved access to necessary treatments. 3. How would you, as the senior marketing executive in a pharmaceutical company, react to these issues? What impact would this have on your overall marketing strategy and your pricing strategy in particular? Answer: Reaction as a Marketing Executive: I would focus on emphasizing the value and effectiveness of our products while exploring cost-efficient production methods. Pricing strategies might shift towards tiered pricing or value-based pricing to align with regulations and market expectations. 4. Who or what do you feel should set drug pricing and why? Answer: Setting Drug Pricing: Ideally, a combination of government oversight and industry input should determine pricing. This ensures that prices reflect both the need for affordable access and the costs of research and development. Note: These discussions are meant to generate class discussion and a lively debate of issues raised, as well as a general review of the opening case or concepts discussed within the chapter. There are no correct or incorrect answers. QUESTIONS AND ANSWERS TO ONLINE ACTIVITIES: ANSWERS TO INTERNET EXERCISE It’s Wednesday and you just completed your midterm exams. As a reward for your hard work, a friend sent you a pair of free tickets to a popular Broadway show in New York City for 7:00 P.M. Saturday night. Check out the following online travel services to book a round-trip ticket, leaving from Toronto’s Pearson (YYZ) airport around 4:00 P.M. on Friday to New York City’s LaGuardia (LGA) airport. On Sunday, you’ll leave La Guardia around 5:00 P.M. and return to Toronto. Which of the following online services provides the cheapest fare and the fewest restrictions? See what price you can get for your airfare and don’t forget to eat at the Carnegie Deli while you’re in New York! Cheap Tickets (www.cheaptickets.ca) Flight Centre (www.flightcentre.ca) Travelocity (www.travelocity.ca) Answer: Answers will vary depending on when the assignment is done. Instructors should log on to sites to verify answers. Airline flight pricing changes frequently so student answers may not conform exactly to what is currently on the sites. To determine the cheapest airfare and fewest restrictions for your trip, you'll need to visit each website and compare the options: 1. Cheap Tickets (www.cheaptickets.ca) - Typically offers budget-friendly fares with minimal restrictions. 2. Flight Centre (www.flightcentre.ca) - Known for personalized service but may have slightly higher prices. 3. Travelocity (www.travelocity.ca) - Often provides competitive prices and detailed information on fare restrictions. Check each site for the most current prices and restrictions to find the best deal. [Note: Students were not asked to search Expedia.com or Priceline.com because they might accidentally order a ticket without meaning to do so.] BRING IT TO LIFE: VIDEO SYNOPSIS & TEACHING SUGGESTIONS H&R BLOCK CANADA and BREAK-EVEN POINTS Synopsis H&R Block Canada prepares tax returns for Canadians from more than 1200 offices across Canada. Not only do H&R Block’s tax professionals have the best training in the industry, they also use the latest technology to prepare personal, small business, corporate, U.S. and estate returns. Through its Second Look promotion, H&R Block Canada is striving to show Canadians the value of its services. Teaching Suggestions Before assigning this case, instructors should review key terms and equations defined and explained in Chapter 9: Price (P), Total Revenue (TR), Total Cost (TC), Fixed Costs (FC), Variable Costs (VC), Unit Variable Costs (UVC), and Break-Even Point (BEP). Also, review both the break-even point equation and the profit equation below. BEP = Fixed Cost Unit Price – Unit Variable Cost Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost = (P x Q) – [FC + (UVC x Q)] Furthermore, students should also be familiar with value in relation to perceived benefits. Value = Perceived Benefits Price BRING IT TO LIFE: VIDEO CASE – PRINTOUT H&R BLOCK CANADA and BREAK-EVEN POINTS Pore over historical quotes and you will find many that discuss the certainty, dread, or complexity of taxation. By April of every year, Canadians search for options and evaluate alternatives for filing their personal and business taxes. Whether they are students, professors, or business professionals, Canadians who seek help for tax preparation services have a number of different options. After careful evaluation of their alternatives, Canadians remain loyal to only a few of them. Tax preparers who have discovered the correct strategy for effective pricing have realized the lifetime value of their clients. Not only does H&R Block have an effective pricing strategy, it effectively trains the future tax preparers of Canada. Each year, more than 10,000 students enroll in H&R Block’s Income Tax School. Graduates of the school may become H&R Block employees, but they also may work for major banks, mutual fund companies, and brokerage firms in Canada. The training offered includes a written guarantee that the training is the strongest in the industry. H&R Block’s guarantee to its clients is just one element of its customer relationship management strategy and its success. Furthermore, H&R Block values students as future clients. Its tax preparation services in Canada offer student pricing offers. For example, from August 2013 through July 2014, H&R Block offered a promotion giving students Student Price Cards (SPC) valid for savings at over 100 retailers. H&R Block opened its first franchised operation in Canada in 1964 and opened its first company-owned operation in Canada the following year. This was its first venture into multichannel offerings for its clients, but definitely not its last. As the organization grew in U.S. and Canada, it also expanded into 13 foreign companies and it services Canadians home and abroad. It may seem difficult for such a large organization to keep its service offering consistent among so many locations, but H&R Block finds a way to do it. Hilary explains, “H&R Block spends a great deal of time educating its employees on the value they offer clients. Through effective training on position pricing, H&R Block employees explain the value their services offer in the context of perceived benefits in relation to price.” The value of the organization’s services increase as the benefits clients receive increase. Pricing strategy is an important element of H&R Block’s business. When determining if the prices for the services the organization offers are appropriate, H&R Block researches its competitors. This allows the company to decide if it should be offering prices at, above, or below market pricing. More importantly, H&R Block conducts research on its clients. As director of mmarketing, Hilary leads the market research efforts. She explains the rationale behind the key questions clients are asked. "We first want to understand if our clients know what price they are paying for the service. From there, we determine the price they are willing to pay for the service." What Hilary has noticed is that clients are actually willing to pay more if they receive a level of service that exceeds their expectations. "We also ask if clients are willing to pay a certain price for a service to see if it is appropriately positioned for the market." In addition to its at- and below-market pricing strategies, H&R Block also uses odd-even pricing strategies. "You will notice that some of our prices are shown below the whole dollar amount. That is just the beginning of the conversation. As I mentioned before, clients are willing to pay more for our services when they see the value-added service we offer." H&R Block’s Second Look campaign helps put the organization’s pricing strategy to the test. By attracting potential clients for a second opinion, it can illustrate the value of its professional services. Epilogue To get a sense of H&R Block’s customer experience from a customer’s perspective, consider Tony, an H&R Block client. When Tony moved into his new home, he also made a decision to change accountants. "There were a lot of individuals at work that were speaking highly of H&R Block," shares Tony. "It made sense to try them out." Going through his consumer purchase decision, Tony identified that “I did not want the hassle of doing taxes on my own.” Encouraged by work colleagues, Tony decided to investigate H&R Block as an option. His decision to go with the company over private accounting firms was finalized when he walked into the company's convenient neighbourhood office location. "There was a sandwich board in the H&R Block office," recounts Tony. "I knew right there what I was going to pay and I had the assurance that my taxes would be done accurately. I also received my money right there." Questions 1. What factors are most likely to affect the demand for the tax professional services that H&R Block Canada offers? Answer: Factors Affecting Demand for H&R Block Services: • Convenience: Location and ease of access. • Price Transparency: Clear pricing like sandwich boards. • Trust and Accuracy: Assurance of accurate tax filing. • Reputation: Positive word-of-mouth and recommendations. 2. For H&R Block Canada what are examples of (a) shifting the demand curve to the right to get a higher price for tax filing (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? Answer: Examples for H&R Block Canada: • Shifting the Demand Curve Right: Offering promotional discounts or enhanced services that increase perceived value. • Pricing Decisions Along the Curve: Adjusting prices based on service complexity or customer demand, affecting the quantity demanded at each price point. 3. Assume an H&R Block Canada location had a fixed cost of $12,000 to cover during tax filing season, and variable costs for each service of $29. What would the break-even point be for professional services of (a) 109, (b) $69, and (c) $39? Also, (d) if H&R Block Canada achieves the sales target of 2,000 units at the $129 retail price, what will its profit be? Answer: Break-Even Point Calculations: • (a) $12,000/($69 × $29) = 200 services (Break-even point) • (b) $12,000/($39 × $29) = 1,200 services • (c) $12,000/($29 × $29) = Undefined (Break-even not possible at this price) • (d) Profit at $129 for 2,000 units: Revenue = 2,000 × $129 = $258,000. Costs = 2,000 × $29 + $12,000 = $70,000. Profit = $258,000• $70,000 = $188,000. 4. Assume that H&R Block Canada opened an office to a remote part of Canada where fixed costs were cut in half to $6,000 and variable costs for each service were dropped to $19, what would be what will be the (a) new break-even point at a $129 retail price for this line of services and (b) the new profit if it produces 2,000 returns? Answer: New Office Break-Even and Profit Calculations: • (a) New Break-Even Point: $6,000/($129 × $19) = 50 services. • (b) New Profit for 2,000 Returns: Revenue = 2,000 × $129 = $258,000. Costs = 2,000 × $19 + $6,000 = $46,000. Profit = $258,000 × $46,000 = $212,000. 5. If for competitive reasons H&R Block eventually opens offices in Thailand, (a) which specific costs might be lowered and (b) what additional costs might it expect to incur? Answer: Opening in Thailand: • (a) Costs Lowered: Fixed costs might be lower due to lower rent and wages. • (b) Additional Costs: Local regulatory compliance, market entry costs, and potential higher logistics and training expenses. BRING IT TO LIFE: VIDEO CASE WORKSHEET H&R BLOCK CANADA and BREAK-EVEN POINTS Name: Section: The video shows H&R Block Canada’s Second Look promotion. Please answer the following questions once you have watched the video and read the case: 1. What factors are most likely to affect the demand for the tax professional services that H&R Block Canada offers? Answer: Factors Affecting Demand for H&R Block Services: • Price Transparency: Clear communication of costs like the Second Look promotion. • Convenience: Location and accessibility of offices. • Trust and Expertise: Reputation for accurate and reliable tax services. • Customer Assurance: Guarantees and promotions that enhance perceived value. 2. For H&R Block Canada what are examples of (a) shifting the demand curve to the right to get a higher price for a tax filing (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? Answer: Examples for H&R Block Canada: • (a) Shifting the Demand Curve Right: Offering promotions or additional services that increase perceived value, such as the Second Look guarantee. • (b) Pricing Decisions Along the Curve: Adjusting prices based on service complexity or seasonal demand, affecting the quantity of services demanded. 3. Assume an H&R Block Canada location had a fixed cost of $12,000 to cover during tax filing season, and variable costs for each service of $29. What would the break-even point be for professional services of (a) $109, (b) $69, and (c) $39? Also, (d) if H&R Block Canada achieves the sales target of 2,000 units at the $129 retail price, what will its profit be? Answer: Break-Even Point Calculations: • (a) $12,000/($109 - $29) = 120 services. • (b) $12,000/($69 - $29) = 400 services. • (c) $12,000/($39 - $29) = 1,200 services. • (d) Profit at $129 for 2,000 units: Revenue = $258,000. Costs = $58,000. Profit = $200,000. 4. Assume that H&R Block Canada opened an office to a remote part of Canada where fixed costs were cut in half to $6,000 and variable costs for each service were dropped to $19, what would be what will be the (a) new break-even point at a $129 retail price for this line of services and (b) the new profit if it produces 2,000 returns? Answer: New Office Break-Even and Profit Calculations: • (a) New Break-Even Point: $6,000/($129 - $19) = 50 services. • (b) New Profit for 2,000 Returns: Revenue = $258,000. Costs = $46,000. Profit = $212,000. 5. If for competitive reasons H&R Block eventually opens offices in Thailand, (a) which specific costs might be lowered and (b) what additional costs might it expect to incur? Answer: Opening in Thailand: • (a) Costs Lowered: Lower fixed costs such as rent and salaries. • (b) Additional Costs: Local compliance, cultural adaptation, and potentially higher training and setup costs. BRING IT TO LIFE: VIDEO CASE – ANSWERS TO QUESTIONS H&R BLOCK CANADA and BREAK-EVEN POINTS 1. What factors are most likely to affect the demand for the tax professional services that H&R Block Canada offers? Answer: a. First time tax filer. The buying factors affecting first-time tax filers are likely to be good value (good quality for the price), relatively low price, recognized brand name, and convenience. b. Existing tax filer. The buying factors affecting users of tax professional services include the alternative options including do-it-yourself software, friends and family, as well as private practice accountants in local communities. 2. For H&R Block Canada what are examples of (a) shifting the demand curve to the right to get a higher price for tax filing services (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? Answer: a. Movement of the demand curve. Movement of the demand curve to the right occurs with more complex tax filings which may involve trusts, foreign property or other situations not easily handled with software —establishing an inelastic, price-insensitive demand for the product. b. Moving along a demand curve. Movement along a demand curve is illustrated when prices are set for a service depending if it should be $39, $69, or $109. These points are simply different points on the same demand curve, not on different demand curves. 3. Assume an H&R Block Canada location had a fixed cost of $12,000 to cover during tax filing season, and variable costs for each service of $29. What would the break-even point be for professional services of (a) 109, (b) $69, and (c) $39? Also, (d) if H&R Block Canada achieves the sales target of 2,000 units at the $129 retail price, what will its profit be? Answer: a. Tax Filing Service = $109. Assumptions: Price (P) = $109 Fixed Costs (FC) = $12,000 Unit Variable Costs (UVC) = $29 BEP = FC P – UVC BEP = $12,000 $109 – $29 BEP = 150 tax filings b. Tax Filing Service = $69. Assumptions: Price (P) = $69 Fixed Costs (FC) = $12,000 Unit Variable Costs (UVC) = $29 BEP = FC P – UVC BEP = $12,000 $69 – $29 BEP = 300 tax filings c. Tax Filing Service = $39. Assumptions: Price (P) = $39 Fixed Costs (FC) = $12,000 Unit Variable Costs (UVC) = $29 BEP = FC P – UVC BEP = $12,000 $39 – $29 BEP = 1,200 tax filings Note: These are fictitious figures and do not actually reflect the costs in conducting a tax filing service. d. Profit based on retail price = $129. Assumptions: Price (P) = $129 Fixed Costs (FC) = $12,000 Unit Variable Costs (UVC) = $29 Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost = (P x Q) – [FC + (UVC x Q)] Profit = ($129 x 2,000) – [$12,000 + ($29 x 2,000)] Profit = $258,000 – ($12,000 + $58,000) Profit = $178,000 4. Assume that H&R Block Canada opened an office to a remote part of Canada where fixed costs were cut in half to $6,000 and variable costs for each service were dropped to $19, what would be what will be the (a) new break-even point at a $129 retail price for this services and (b) the new profit if it produces 2,000 returns? Answer: a. Retail price = $129; BEP based on remote part of Canada costs. Assumptions: Price (P) = $129 New Fixed Costs (FC) = $6,000 Unit Variable Costs (UVC) = $19 BEP = FC P – UVC BEP = $6,000 $129 – $19 BEP = 55 tax filings b. Profit based on retail price = $129 and Nashville costs. Assumptions: Profit = Total Revenue – Total Cost = (Unit Price x Quantity Sold) – Total Cost = (P x Q) – [FC + (UVC x Q)] Profit = ($129 x 2,000) – [$6,000 + ($19 x 2,000)] Profit = $258,000 – ($6,000 + $38,000) Profit = $214,000 5. If for competitive reasons H&R Block eventually opens offices in Thailand, (a) which specific costs might be lowered and (b) what additional costs might it expect to incur? Answer: a. Costs that will be lowered in moving the production to Asia. The following costs should be lowered: rent and taxes, depreciation of equipment, management and quality control, direct materials, and direct labour. b. Additional costs incurred. Those lower costs must be balanced against the additional costs of travel to head office for training, the extra management costs of communicating across an ocean, and the risk that political uncertainties can cause upheaval in the business. BRING IT TO LIFE: NEWSFLASHES SYNOPSIS AND DISCUSSION QUESTIONS Two interesting NewsFlashes and a Focus on Ethics are included in this chapter. Discussing these sections in class can bring the material to life for the students in an interesting, relevant, and timely fashion. They can be used as ice-breakers to launch into a relevant subject. Many of the topics are interesting to students and may be familiar. A. RETAILERS LAMENT HIGH CREDIT CARD FEES Every time a merchant swipes a customer’s credit card it costs the retailer about 2 per cent of the value of the purchase. That's $2 on every $100 worth of goods or services. To the customer, this little expense is invisible. It isn't added at the cash register. Instead, like heat and hydro and other costs of doing business, it's buried in the overall price of the merchandise, whether the consumer buys with a card or cash. Questions 1. What is your preferred method of payment when shopping? Answer: Preferred Payment Method: I prefer using a credit card for the convenience and rewards, but I also use debit or cash for budgeting and smaller purchases. 2. Do you believe that the fees merchants pay in order to accept Visa and MasterCard should be factored into the prices they charge for their products? Answer: Factoring Fees into Prices: Yes, it's reasonable for merchants to factor credit card fees into prices since these costs impact their overall expenses. However, transparency about this cost could help consumers make more informed choices. Note: These discussion questions are meant to generate lively in-class discussion and critical thinking on the chapter material. There are no correct or incorrect answers. B. ZIPPING OUR WALLETS THROUGH CAR SHARING There are roughly 20,000 Toronto members of AutoShare and Zipcar, two car-sharing services in the city that have enjoyed rapid growth in the past four years. In North America, membership in car-share services is expected to balloon more than eightfold between now and 2016, a trend that could trim the market for new auto sales by up to one million vehicles. Questions 1. What do you see as the main benefits in a car-sharing service? Answer: Main Benefits: Car-sharing services offer reduced costs for insurance, maintenance, and fuel, and provide flexibility without the commitment of owning a vehicle. 2. Do you feel car sharing popularity will increase or decrease in the next few years? Give reasons. Answer: Future Popularity: Car sharing is likely to increase in popularity due to growing urbanization, environmental concerns, and the appeal of cost savings and convenience for younger generations. Note: These discussion questions are meant to generate lively in-class discussion and critical thinking on the chapter material. There are no correct or incorrect answers. C. DEATH BY CHOCOLATE In 2013, Hershey Canada was fined $4 million for its role in a price-fixing chocolate cartel. The six-year investigation found that Hershey was guilty of conspiring, agreeing, or arranging to fix chocolate products in Canada in 2007. Hershey Canada cooperated with the Competition Bureau’s investigation and plans to continue to cooperate on any further issues. The class action lawsuit resulted in Cadbury Adams Canada Inc., Nestlé Canada Inc., Mars Canada Inc., and Hershey Canada Inc. agreeing to pay more than $23 million to settle. Questions 1. If a company such as Hershey’s can be accused of deceptive pricing practices, what other companies could as well? Give an example from your own experience where you encountered deceptive pricing practices. Answer: Other Companies: Companies in sectors like pharmaceuticals, electronics, or fuel could also engage in deceptive pricing. An example from personal experience might be a retailer advertising a "sale" where the original prices were artificially inflated to make the discount seem larger. 2. Price fixing is a key concern for the Competition Bureau. Figure 9–10 highlights four deceptive pricing practices. Which of the four do with you feel is the most unethical and unlawful? Give reasons. Answer: Most Unethical Practice: Among the four deceptive practices, price fixing is the most unethical and unlawful because it undermines market competition, inflates prices, and harms consumers by depriving them of fair market rates and choices. Note: These discussion questions are meant to generate lively in-class discussion and critical thinking on the chapter material. There are no correct or incorrect answers. BRING IT TO LIFE: NEWSFLASH PRINTOUT AND WORKSHEET Name: Section: HIGH CREDIT CARD FEES STILL AN ISSUE Every time a merchant swipes a customer’s credit card, it costs the retailer about 2 percent of the value of the purchase. That’s $2 on every $100 worth of goods or services. To the customer, this little expense is invisible. It isn’t added at the cash register. Instead, like heat and hydro and other costs of doing business, it’s buried in the overall price of the merchandise, whether the consumer buys with a card or cash. It might not sound like a very high price to pay for all the convenience, rewards, and financial flexibility that credit cards offer both consumers and merchants, but some Canadian retailers say credit card fees now take $5 billion a year out of their pockets, and they’re spiraling out of control. Consumers argue it is they who are paying the $5 billion in hidden credit card fees because the retailers are passing on these hidden costs to the consumer in the price. With two very large multinational companies, Visa and MasterCard, dominating the card market, retailers say it can only get worse unless government intervenes. Peter Woolford, vice-president of policy development and research at the Retail Council of Canada, says, “We don’t disagree that credit cards are useful means of payment. Customers love them. They are a reasonably effective and efficient way of paying for goods. Our main concern is that they’re exorbitantly expensive.” In 2013, in an attempt to gain more negotiating power over the fees being charged, merchants argued that Visa and MasterCard were engaging in anti-competitive behaviour. A federal Competition Tribunal dismissed the case. The fee that retailers pay is called interchange, the percentage of each transaction that Visa and MasterCard banks collect from merchants every time a credit card is used to pay for a purchase. The fee varies with type of card, size of merchant, and other factors, but as much as $2 of every $100 a consumer spends goes to card issuers. Interchange fees are higher in Canada, an average of 2 percent, compared with less than 1 percent in most other industrialized countries. Questions 1. What is your preferred method of payment when shopping? Answer: Preferred Payment Method: I prefer using debit cards for shopping because they have lower transaction fees and offer a direct link to my bank account, which helps in budgeting. 2. Do you believe that the fees merchants pay in order to accept Visa and MasterCard should be factored into the prices they charge for their products? Answer: Fees and Prices: Yes, fees merchants pay for Visa and MasterCard should be factored into product prices. These costs inevitably impact the overall pricing structure, and transparency could help consumers understand the true cost of credit transactions. BRING IT TO LIFE: NEWSFLASH PRINTOUT AND WORKSHEET Name: Section: ZIPPING OUR WALLETS THROUGH CAR SHARING As gasoline prices and traffic volumes continue to rise, roughly 20,000 Toronto residents have become members of AutoShare and Zipcar. These are two car-sharing services in the city that have enjoyed rapid growth in recent years. In North America, membership in car-share services is expected to balloon more than eightfold between now and 2016, a trend that could trim the market for new auto sales by up to one million vehicles. David Zhao, an automotive research analyst with Frost & Sullivan, says it’s a wake-up call for the automakers. “Once that population of shared vehicles gets bigger, the impact on the car market will become more serious,” says Zhao, who published a report on car sharing. He predicts car-share membership in North America will reach 4.4 million by 2016, translating into a car-share fleet of more than 70,000 vehicles. There will be a million fewer cars on North American streets by 2016. “It’s a trend that will happen and vehicle manufacturers need to carefully gauge the potential impact on their total sales,” Zhao concludes. Such predictions are no surprise for Kevin McLaughlin, founder and president of 12-year-old AutoShare. As big cities improve public transit, as the cost of car ownership rises, and as young people rely more on their iPhones and other technologies to connect and socialize, buying a car is becoming less of a priority, said McLaughlin. McLaughlin says that in just four years, the number of Torontonians using car-sharing services such as AutoShare has gone from 2,000 to over 20,000. AutoShare, which operates only in Toronto, has roughly 10,000 members. The company has a fleet of about 210 cars representing 13 different models, from minivans to Mini Coopers to hybrids. Cambridge, Massachusetts –based Zipcar has 350,000 members and a fleet of 6,500 vehicles operating in dozens of North American cities. Its Toronto fleet has grown to about 260 cars since 2006. Promoting car sharing also reduces air pollution and greenhouse-gas emissions. It is estimated that car-share members drive 31 percent less than they would if they owned their own vehicle. A consumer who owns a car wants to get as much use out of it as possible. Faced with the option of driving a few blocks, walking, or taking transit, most people hop in the car. Paying by the hour from a car-sharing company means that a consumer makes every trip a financial calculation and forces consideration of other options. The pay-as-you-go model encourages conservation every time, whether it’s applied to mobile phone minutes, hydro use, or water consumption. A third player in the car-sharing market is Shelby Clark, a former Zipcar member. The 27-year-old Harvard MBA grad recently launched his own company called RelayRides, which is attempting to pioneer “peer-to-peer” car sharing. Here’s how it works: A person who owns a car but doesn’t use it very often signs up to RelayRides and offers to let other members drive his or her car for an hourly fee. The Boston-based RelayRides maintains an online reservation system, provides the insurance, does the background checks, confirms that a safety inspection has been done, and acts as a payment clearinghouse. In return, it takes a 15 percent cut of the action. Questions 1. What do you see as the main benefits in a car-sharing service? Answer: Main Benefits of Car-Sharing: Car-sharing offers cost savings by eliminating ownership expenses like insurance and maintenance. It also reduces environmental impact by lowering overall vehicle use and emissions, and provides flexibility for users who need occasional access to a car. 2. Do you feel car- sharing popularity will increase or decrease in the next few years? Give reasons. Answer: Car-Sharing Popularity: Car-sharing will likely increase in popularity due to rising gasoline prices, urban congestion, and growing environmental awareness. Additionally, technological advancements and changing consumer preferences towards convenience and sustainability support this trend. BRING IT TO LIFE: NEWSFLASH PRINTOUT AND WORKSHEET Name: Section: DEATH BY CHOCOLATE Lovers of chocolate have jokingly associated it with sin. Ironically, one of the largest confectionery and snack companies around the world was involved in deceptive pricing practices. In 2013, Hershey Canada was fined $4 million for its role in a price-fixing chocolate cartel. The six-year investigation found that Hershey was guilty of conspiring, agreeing, or arranging to fix chocolate products in Canada in 2007. Hershey Canada cooperated with the Competition Bureau’s investigation and plans to continue to cooperate on any further issues. The class action lawsuit resulted in Cadbury Adams Canada Inc., Nestlé Canada Inc., Mars Canada Inc., and Hershey Canada Inc. agreeing to pay more than $23 million to settle. In a statement, John Pecman, commissioner of competition, said, “Price-fixing is a serious criminal offence, regardless of whether it is in the chocolate confectionary market or any other industry.” Hershey stated that its senior employees spoke with members of the cartel in 2007. Hershey also stated that its current Canadian management and the rest of Hershey Company had no involvement in the cartel. Nonetheless, this news may leave a bad taste in the mouth for some. Questions 1. If a company such as Hershey’s can be accused of deceptive pricing practices, what other companies could as well? Give an example from your own experience where you encountered deceptive pricing practices. Answer: Other Companies Accused of Deceptive Pricing: Companies in various industries, such as airlines, tech firms, or utilities, could also engage in deceptive pricing practices. For example, I encountered deceptive pricing with a hotel that advertised low rates but added hidden fees for amenities and services at checkout. 2. Price fixing is a key concern for the Competition Bureau. Figure 9–10 highlights four deceptive pricing practices. Which of the four do with you feel is the most unethical and unlawful? Give reasons. Answer: Most Unethical Pricing Practice: Among the four deceptive pricing practices, price fixing is the most unethical and unlawful. It colludes to set prices artificially high, undermining market competition and harming consumers by inflating prices unfairly. BRING IT TO LIFE: IN-CLASS ACTIVITY ALCLA NATIVE PLANTS INC. – INSTRUCTIONS Learning Objectives 1. To analyze the pricing practice of a product in its introductory stage. 2. To suggest the benefits of skimming pricing and penetration pricing to customers and the company as well as the effects on other competitors. Description of In-Class Activity •Have students discuss the reasons why ALCLA Native Plant Restoration Inc. should use either a skimming or penetration pricing strategy in the introduction of their consumer packaged seeds. •ALCLA Native Plant Restoration Inc. www.alclanativeplants.com is piloting a new store level packaging program for their native plant selection to release in the early spring of next year. They need to decide which alternative would stimulate the consumer purchase given these economic and environmental times. •Students are asked to complete the worksheet and then defend their position whether ALCLA should use penetration or skimming prices. •This activity can be successfully conducted individually or in groups. Estimated class time: 30 minutes. Preparation before Class •Review the content in chapter 9 on skimming and penetration pricing. •View the ALCLA Native Plant Restoration Inc. website to familiarize yourself with the company: www.alclanativeplants.com •Make copies of the handout which is a written version of the two mini-lectures found in the next section. •Make copies of the worksheet:” Why should ALCLA choose either Skimming or Penetration Pricing”. In-Class Implementation •Relevant Chapter Content – Prior to assigning this in-class activity you will need to deliver the following two mini-lectures. The first mini-lecture is on introductory demand pricing choices. It is as follows: “Circumstances that support skimming pricing are: (1) enough prospective customers are willing to buy the product immediately at the high initial price to make sales profitable, (2) the high initial price will not attract competitors, (3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and (4) customers interpret the high price as signifying high quality. Circumstances that support penetration pricing are the opposite of skimming, and they are: (1) many segments of the market are price sensitive, (2) low initial price discourages competitors from entering the market, and (3) unit production and marketing costs fall dramatically as production volume increase.” ○ Ask students if they are familiar with the concept of native plants and land restoration. The Alberta Native Plant Council website is of assistance with more information at www.anpc.ab.ca The second mini-lecture is as follows: “There has always been a place for environmentalists in Canada. Those who want to preserve and propagate natural areas our country. The native plant and restoration movement is nothing new to the country but due to the recent environmental movement sweeping the world, it has gained some attention of the mass media and a growing concern for the average citizen. The basic philosophy of planting native plants is to propagate the plants that grow easily in the various climate zones of our country, and also to preserve the native plants from extinction. This provides a more sustainable environment for all. The restoration projects are undertaken in urban areas, suburban areas as a well as many rural areas in reclamation from industrial use. The urban and suburban projects are often ones consumers choose to do individually as a response to their own environmental concerns and views. Many corporations and municipalities are undertaking restoration projects for similar as well as political reasons. ALCLA Native Plant Restoration Inc. is a company that has responded to this need in our marketplace. Incorporated in 1992 ALCLA has promoted the use of local native floral in reclamation, restoration and landscaping projects along highways, around homes, and office buildings as well as many industrial sites and disturbed land areas. Now they are embarking on a new phase, the retailing of their native seed packets.” •In-Class Instructions – Have students research ALCLA www.alclanativeplants.com and The Alberta native Plant Council at www.anpc.ab.ca to give them some extra background on the topic. Have some groups of students give their reasons for skimming prices and other groups give their reasons for penetration prices. •Handout – Distribute the handout and worksheet for students to complete. Evaluation – Have a representative of each group defend their position. Alternatively, collect the worksheets from this activity for evaluation purposes. [Note: ALCLA Native Plant Restoration Inc. is an interesting study for the students to see the implications of various pricing choices and to think about the many implications for a company, the consumer as well as the competition. In reality, ALCLA prices their seed packets at the higher end, so a skimming strategy at this point is appropriate. It is in-line with other designer seeds and seeds of their kind.] BRING IT TO LIFE: IN-CLASS ACTIVITY ALCLA NATIVE PLANTS INC. – HANDOUT Below is a written version of the mini-lectures for background information. Mini-Lecture 1 Circumstances that support skimming pricing are: (1) enough prospective customers are willing to buy the product immediately at the high initial price to make sales profitable, (2) the high initial price will not attract competitors, (3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and (4) customers interpret the high price as signifying high quality. Circumstances that support penetration pricing are the opposite of skimming, and they are: (1) many segments of the market are price sensitive, (2) low initial price discourages competitors from entering the market, and (3) unit production and marketing costs fall dramatically as production volume increase. Mini-Lecture 2 There has always been a place for environmentalists in Canada. Those who want to preserve and propagate natural areas our country. The native plant and restoration movement is nothing new to the country but due to the recent environmental movement sweeping the world, it has gained some attention of the mass media and a growing concern for the average citizen. The basic philosophy of planting native plants is to propagate the plants that grow easily in the various climate zones of our country, and also to preserve the native plants from extinction. This provides a more sustainable environment for all. The restoration projects are undertaken in urban areas, suburban areas as a well as many rural areas in reclamation from industrial use. The urban and suburban projects are often ones consumers choose to do individually as a response to their own environmental concerns and views. Many corporations and municipalities are undertaking restoration projects for similar as well as political reasons. ALCLA Native Plant Restoration Inc. is a company that has responded to this need in our marketplace. Incorporated in 1992 ALCLA has promoted the use of local native floral in reclamation, restoration and landscaping projects along highways, around homes, and office buildings as well as many industrial sites and disturbed land areas. Now they are embarking on a new phase, the retailing of their native seed packets. Research ALCLA (www.alclanativeplants.com) and The Alberta Native Plant Council (www.anpc.ab.ca) to get some background on the topic. BRING IT TO LIFE: IN-CLASS ACTIVITY ALCLA NATIVE PLANTS INC. – WORKSHEET Name: Section: WHY ALCLA SHOULD CHOSE EITHER SKIMMING OR PENETRATION AS A PRICING STRATEGY FOR THEIR CONSUMER SEED PACKETS WORKSHEET: FACTOR REASONS FOR SKIMMING PRICING REASONS FOR PENETRATION PRICING •Benefits to Customers •Benefits to Company •Effects on Competition BRING IT TO LIFE: METRICS ASSIGNMENT CALCULATING A BREAK-EVEN POINT – WORKSHEET Name: Section: Calculate a Break-Even Point. The formula is as follows: Imagine that you’re opening a picture frame store. Suppose that you wish to identify how many pictures you must sell to cover your fixed cost at a given price, which is called the break-even point. Assume that the average price customers are willing to pay for each picture is $90. Also, suppose your fixed cost (FC) totals $22,000 (for real estate taxes, interest on a bank loan, and other fixed expenses) and unit variable cost (UVC) for a picture is $50 (for labour, glass, frame, and matting). BRING IT TO LIFE: METRICS ASSIGNMENT CALCULATING A BREAK-EVEN POINT – ANSWERS The solution to the break-even problem is as follows: BEP Quantity = Fixed cost/(Unit price – Unit variable cost) BEP Quantity = $22,000/($90 minus $50) BEP Quantity = $22,000/$40 = 550 units Solution Manual for Marketing: The Core Roger A. Kerin, Steven W. Hartley, William Rudelius, Christina Clements, Harvey Skolnick, Arsenio Bonifacio 9781259030703, 9781259269264, 9781259107108
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