Chapter Eleven: Pricing Concepts and Strategies: Establishing Value TOOLS FOR INSTRUCTORS • Learning Objectives • Annotated Chapter Outline with Instructor’s Notes/Teaching Tips • Answers to End of Chapter Learning Aids Concept Review Marketing Application Questions Net Savvy Chapter Case Study • Video Activities Learning Objectives 1. Explain what price is and its importance in establishing value in marketing 2. Illustrate how the 5Cs – company objectives, customers, costs, competition, and channel members – influence pricing decisions 3. Describe various pricing methods (e.g. cost-based pricing, competition-based pricing, value-based pricing) and strategies (e.g. new product pricing, psychological pricing) used in marketing 4. Identify pricing tactics target to channel members and consumers 5. Summarize the legal and ethical issues involved in pricing Annotated Chapter Outlines PowerPoint Slides Instructor’s Notes Chapter 11 will focus on pricing concepts and strategies and how they can establish value. These questions are the learning objectives guiding the chapter and will be explored in more detail in the following slides. Opening Vignette: Groupon Groupon offers businesses a way to reach a wide target market and attract them to their locations. Businesses see Groupon as a cost-effective promotional tool. Customers love it because who doesn’t love a deal. Ask students how many of them have Groupon accounts. Now ask how often the read the emails that come to their inboxes and actually take advantage of the deals. Opinions will likely vary dramatically with some students loving it and others viewing the emails as spam offering irrelevant promotions. LO1: The Importance of Pricing Price refers to the overall sacrifice a consumer will make to acquire a specific product or service. It is the only marketing mix element that directly generates revenue. Because it is the most challenging of the 4Ps to manage, price rarely gets emphasized. In addition, many managers maintain an overly simplistic view of price. Consumers recognize price as a signal. If a marketer sets a price too high or too low, the wrong message gets sent to the market. Remind students that price refers not just to money but also other costs such as time. Ask students to provide an example of a purchase where they did not consider price. They will probably be hard-pressed to come up with anything, thus making the point. Answer B; see page 337 LO2: The Five Cs of Pricing The following slides discuss each C in detail; alternatively, you can use this chart as a basis for a shortened discussion. 1st C: Company Objectives A profit orientation means the firm focuses on target profit pricing, maximizing profits, or target return pricing. • Target profit pricing applies when the firm has a particular profit goal. • Profit maximizing relies primarily on a mathematical model from economic theory to predict sales and profits. • Target return pricing is designed to produce a specific return on investment, usually expressed as a percentage of sales. Each firm has a specific orientation in the marketplace that dominates its pricing strategy. Profit: firms do not use value as a consideration but rather focus on generating a set level of profit from each sale. Ask students: What are the issues with a profit orientation? Answer: The key issue is that it does not take into consideration the value customers have for the product. This may lead to prices being set below and optimal level. A sales-oriented firm believes increasing sales helps the firm more than increasing profits. • These firms believe overall market share better reflects their success than dollar sales. • Adopting this orientation does not necessarily mean setting low prices. Sales: Focus on increasing sales, More concerned with overall market share, Does not always imply low setting low prices Ask Students: Why would firms adopt this orientation? Many first adopt this orientation to establish a position in the market by getting the most price sensitive consumers to change brands. With a competitor orientation, firms measure themselves primarily in comparison with the competition. • Competitive parity means setting prices that are similar to those of major competitors. • Status quo prices change only to meet changes in the prices of the competition. Competitor: Value is not part of this pricing strategy. This strategy is particularly common among smaller firms that lack knowledge or experience in setting prices. Non-market leader firms also use it to signal they are similar to the market leader. Ask students: What are the benefits of a competitor strategy? For example, can a new hotel chain indicate its level of service through price? The answer is yes. In many instances new brands will set price equal to the competitors they wish to be compared with knowing that consumers use reference prices to indicate quality. A customer orientation explicitly invokes the concept of value. • Perhaps the most difficult pricing strategy. • Also the most potentially rewarding. Customer: Focus on customer expectations by matching prices to customer expectations A recent study indicates that a variety of retailers sell one-carat diamonds, but consumers pay vastly different prices at Costco versus Tiffany’s. The diamonds are a commodity; they must meet the same standards and are rated the same. Ask students: Why would a consumer spend thousands more to buy a gem at Tiffany’s? 2nd C: Customers For pricing, elasticity is a crucial concept. Ask students: In what circumstances will raising the price NOT result in an increase in revenue? In what circumstances will raising the price result in an increase in revenue? In elastic markets, depending on the level of elasticity, a price increase can increase revenues, but if the increase drives consumers out of the market, demand falls, and a loss of revenue may result. In contrast, in inelastic markets, a price increase almost always increases revenues, because the relationship between price and demand is weak. Pharmaceuticals provide a good example; even if the price of a cancer drug increases, consumers still demand it, so the firm generates more revenue. Demand curves and pricing 1. Demand curves show how many units consumers will demand during a specific period of time at different prices. 2. The horizontal axis measures the quantity demanded at a specific price. 3. The vertical axis displays the price options. 4. A demand curve enables firms to examine different prices relative to demand and its overall objectives. 5. Although they usually appear downward sloping, demand curves may take many different shapes. 6. Consumers purchase prestige items for their status rather than their functionality, so demand increases while price increases to a point. This information should be a review from students’ micro-economics coursework, so they should be familiar with the concept, but this discussion applies it in a slightly different way. Knowing demand curve enables to see relationship between price and demand. The price elasticity of demand refers to how changes in price affect the quantity of the product demanded. 1. In general, consumers are less sensitive to changes in price for necessary items. 2. A market is elastic (price sensitive) when the price elasticity is <1; that is, a 1% decrease in price produces more than a 1% increase in the quantity sold. 3. A market is inelastic (price insensitive) when a 1% decrease in price results in less than a 1% increase in quantity sold. 4. Consumers tend to be more sensitive to price increases than price decreases. 5. Price elasticity changes at different points on the demand curve. Various factors influence the price elasticity of demand 1. As people’s income increases, their spending behaviour changes, known as the income effect. 2. When consumers can substitute other products for the focal brand, elasticity increases because of the substitution effect. 3. Cross-price elasticity represents the percentage change in the demand for Product A compared with the percentage price change for Product B. Discuss the case of Pete and how the income and substitution effects alter his buying behaviour. As a college student, he prefers a less expensive substitute deodorant, because it demands less of his total income. Ask students: When Pete graduates and gets a high-paying job, will he worry as much about the cost of deodorant? Do you expect him to switch back to Old Spice? Why or why not? Just like Kendra, many people buy products without considering the price of necessary peripherals. Kendra is caught in a cross-elasticity trap, because her demand for one product generated demand for the other. Group activity: Brainstorm a list of other products that exhibit cross-price elasticity. 3rd C: Costs • Variable costs, primarily labour and materials, vary with product volume. For services, variable costs are more complex. • Fixed costs remain essentially the same, regardless of any changes in volume. • Total costs are the sum of the variable and fixed costs. No discussion of price would be complete without a discussion of cost. The price must at least cover the cost of the item. However, as students may have learned in their finance courses, understanding costs is rarely easy. Break-even analyses and decision making ○ Central to a break-even analysis is the determination of the break-even point, at which the units sold generate just enough revenue to equal total costs, and profits are zero. ○ The contribution per unit refers to the price less the variable cost per unit. ○ The break-even point equals the fixed costs divided by the contribution per unit. ○ The target profit point provides an alternative to the break-even point. *You may want to use the Toolkit in Connect associated with this chapter to demonstrate break-even analysis. Any point above the break-even point is profit. Some firms also use a target profit point to identify when sales create a specified target profit rather than zero profit. 4th C: Competition • In an oligopolistic competitive market, only a few firms dominate, and they change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment. • In a monopoly, only one firm provide the product or service resulting in less price competition. • Monopolistic competition exists when many firms compete for customers in a given market but differentiate their products. • In a pure competition scenario, different companies that consumers perceive as substitutes sell commodity products, so price usually depends on the laws of supply and demand. Price wars occur when two or more firms compete primarily by lowering their prices. Group activity: List a product or service market that demonstrates each type of competition. Monopoly: Hydroelectric power in most provinces, Microsoft operating system and Office suite. Monopolisitic: many firms competing for customers, e.g. toys Oligopolistic: Cable TV firms such as Rogers or Shaw Pure: Most frequently purchased consumer goods such as soft drinks Ask students if the $5 foot long commercials for Subway have motivated them to visit. Students will be familiar with this promotion. Ethical Dilemma 11.1: Is it really 45% off? As 11.1 suggests the magnitude of the discount really depends on the reference price & whether or not it is true or has been inflated. Should private sale sites & in-store retailers be required to substantiate their reference prices? Which price should they use as the reference price? Is it their responsibility if the manufacturer gives them the wrong pricing information? Do you think they are intentionally misleading their customers? 5th C: Channel Members • Manufacturers, wholesalers, and retailers have different perspectives when it comes to pricing strategies. • Gray markets employ irregular but not necessarily illegal methods by legally circumventing authorized distribution channels to sell goods at prices lower than those intended by the manufacturer. Ask students: Have you ever bought books marked “Instructor Copy: Not for Resale” or “International Student Edition”? Is the bookstore engaging in unethical behaviour? Whom does this grey market benefit? Whom does it hurt? Answer: The purchase of grey market textbooks hurt the publisher and authors. These books do not help recover the costs of all the ancillary packages that are provided to instructors. Other Influences on Pricing The Internet Radically Altered Pricing A. Online markets increase consumer price sensitivity, because consumers can find the best prices for any product quickly. B. Sellers have access to another option for slow selling merchandise other than essentially giving it away: eBay and other online auctions. Economic Factors Change A. As consumers’ disposable incomes and status consciousness increase, they interact to alter pricing. B. Many consumers cross-shop; that is, they buy both premium and low-priced merchandise and patronize both status-oriented and price-oriented retailers. Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing. Internet - Ask students: How has online shopping affected firms’ pricing strategies? Answers: Internet shopping has provided people with more information so they have become more sensitive to prices, alternative product options and retailers. Consumers can quickly find and compare prices online and take part in online auctions. Economic Factors - Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing. Ask students: How many people cross-shop? Do you believe this practice has influenced the way some firms price their merchandise? Answer: it has made prestige products more expensive and more moderately priced merchandise even less expensive. LO3: Pricing Methods and Strategies Strategies Are Specific to the Offering and the Market. Note the many factors that go into formulating a pricing strategy. Discuss why some strategies choose not to take into consideration the value that consumers place on an offering. This slide sets up the slides that follow. Alternatively, use this chart as a basis for a shortened discussion. Cost-Based Methods Determine Price Through Costs. A. Cost-based methods do not recognize the role of consumers. B. Nor do they consider the role of competitors in the marketplace. These simple methods add a percentage amount to the unit cost to derive the price of the good. Ask students: Its simplicity is the major benefit of this method; what are some of the potential problems associated with it? It does not consider what the value the customer places on the product or service. Competitor-Based Methods Set Prices Relative to Competitors’. A. With this approach, firms hope to influence consumer perceptions of themselves and competitors. B. When it uses premium pricing, a firm deliberately prices above the level of competing products to appeal to consumers who shop for the best or for whom price does not matter. Group activity: Recall the example of diamonds of identical quality sold at different prices at Costco and Tiffany’s. List possible reasons someone would pay far more for the same item in different stores. Would you do so? Why or why not? Value-Based Methods Focus on Consumers’ Perceptions of Overall Value. A. Sellers must figure out a way to determine consumers’ value perceptions. B. The improvement value method estimates how much more (or less) consumers will pay for a product relative to comparable products. Sellers need to determine consumer value perceptions. 1. Improvement value method – Determine the price that could be charged for a new laptop. Suppose the key features were – weight of the laptop, processing speed, hard drive capacity, and battery life. The improvement value of the new laptop on these four features can be calculated and the benefits weighted to determine a price. 2. Cost of ownership method - Installing solar panels on a home is costly, but the savings over the life of the panels make the cost much lower than traditional electric power. Governments offer incentives that lower the initial investment, in hopes that more homeowners will switch to using solar power. Ask students: What incentive would you need to do so? What method could you use to determine it? New Product Pricing Strategies Price Skimming Appeals to Consumers who Pay to Get an Innovation First. • The product or service must be perceived as breaking new ground and offering new benefits unavailable in alternative products. • Competitors cannot to enter the market easily; otherwise, competition forces lower prices. • A significant potential drawback pertains to the relatively high unit costs often associated with producing small volumes of products. • Consumer discontent can occur if those who purchase early and pay a higher price feel cheated when the prices drop. Penetration Pricing Builds Sales, Share, and Profit by Setting a Low Initial Price. • This strategy discourages competitors from entering the market because of the small profit margin. • Unit costs drop significantly as the accumulated volume sold increases along the experience curve, and then sales grow as costs fall and allow further price reductions. • Firms must have the capacity to satisfy a rapid demand increase. • Lower price does not signal high quality. • If some segments of the market are willing to pay more for the product, this strategy is not ideal. Group activity: Develop a list of products that might use price skimming versus penetration pricing. What qualities should a product possess to use a price skimming strategy? For example, Godiva introduced its hot chocolate mix at a price point that was double that of other hot cocoa mixes. How was it able to achieve success with this product? Penetration pricing helps firms build market share for their new products quickly, but consumers must be price elastic for this strategy to work. Ask students: What kind of hot cocoa mix retailer or manufacturer might use this strategy, rather than Godiva’s price skimming approach? Answer: A mass-market cocoa manufacturer like Hershey’s would use a penetration strategy because it wants to be in every possible retail outlet that sells this category. Psychological Factors Affecting Value-Based Pricing Strategies This slide introduces the subsequent series of slides or can be used as a basis for a shortened lecture. Entrepreneurial Marketing 11.1: Sweet Smell of Success Barbara Stegemann founded 7 Virtues and makes perfume from orange blossom oil. She buys it from Afghan farmers who used to grow opium. Her perfume is priced at $70 for 50 ml, an example of psychological pricing commonly used in the fragrance industry. The back story behind 7 Virtues helped sales as did her appearance on CBC’s Dragons’ Den. Ask students to watch CBC’s Dragons’ Den video. Ask them how much they generally pay for their favourite fragrances. Would they pay $70 for 7 Virtues because sales help change the face of war-torn Afghanistan? Discuss the role of brand name, packaging, and promotion in selling fragrance. Consumers Use Reference Prices A. Reference price is the price against which buyers compare the actual selling price of the product, which facilitates their evaluation process. B. External reference price is a higher price to which consumers compare the selling price to evaluate the deal, often labelled the “original” or “regular” price. C. Internal reference price is price information stored in memory, such as the last price paid or what the consumer expects to pay for a good. D. A complex relationship exists between external and internal reference prices, such that exposure to different external prices adjusts internal reference prices. Group activity: In groups, list the average prices of the following items: rent on a one-bedroom apartment, a backpack, a washing machine, a mid-size car, a house, a bicycle, and a soda. Compare the price points among groups. Usually, students provide relatively accurate price points for products they use frequently, but their estimates likely vary significantly for the other items. Discuss how they determined these prices. Answer: A; see page 352 Odd Prices This practice Initially may have been designed to prevent fraud, because the sale had to be rung up to provide change. Today, it seems more traditional than practical. Consumers may perceive odd numbers as a better value. They also perceive odd numbers as implying low quality. Ask students: Do most of the prices you see end in odd numbers? Why? Come up with as many possible explanations as you can that highlight the possible benefits of this system. Everyday Low Pricing (EDLP) 1. Companies stress continuous retail prices at a level somewhere between regular, non-sales prices and deep-discount sale prices. 2. Not every product is lower priced, but on average, the total purchase price will be lower at stores featuring EDLP. High/low pricing relies on sales promotions and temporarily reduces prices to encourage purchases. Each creates value in its own way. EDLP consumers do not have to wait for sales. Some consumers enjoy the challenge of finding the lowest price and prefer high/low pricing. Group activity: Imagine you need an outfit for an upcoming party. You can visit Wal-Mart where you know you will find an EDLP pricing strategy. However, Holt Renfrew is having its semi-annual sale, during which it drastically marks down its usually high prices. Where do you think you will find a better price? Which offers better value? Why? Pricing tactics aimed at consumers This slide can be used as the basis for a shortened lecture or to introduce the subsequent slides. Price Lining When they use price lining, firms establish floor and ceiling prices for a line of similar products and then set price points within that range to represent distinct quality levels: a. High. b. Medium. c. Low. Ask students to think about a product that offers different levels of quality (e.g. cars, hotels, and clothing). How do firms use price lining to establish differences between the products? Give specific examples. Answer: Mercedes Benz offers the C class for the lower, an E class for the medium, and the S class for the highest price lines. Ralph Lauren offers different lines at different price points as well: Chaps, Polo/Ralph Lauren, Ralph Lauren Black Label, and Purple Label. Price bundling refers to selling more than one product at a single lower price. Price bundling can be used to achieve a variety of objectives. Ask students: What are some examples of commonly price bundled items? Answer: meals at fast-food restaurants, telecommunications services, cruise vacations, grocery store items. Leader pricing attempts to build store traffic by aggressively pricing a regularly purchased item, often at or just above the store’s costs. Ask students: What are some examples of leader priced items? Answer: milk, eggs, coffee, white bread. Consumer price reductions Markdowns Quantity Discounts Coupons and Rebates This slide can be used as the basis for a shortened lecture or to introduce the following series of slides. 1. Markdowns are reductions of the initial selling price and represent an integral part of high/low pricing. Ask students: Are markdowns used only to take care of buying mistakes? Answer: no, sometimes retailers use markdowns to generate traffic into the store. 2. Quantity discounts In packaging, larger quantities usually mean lower prices per ounce. This per-unit cost encourages consumers to purchase larger quantities each time they buy. Consumers often enjoy quantity discounts, but remind students that bigger packages do not always mean lower unit prices. 3. Coupons and rebates a. With coupons, the retailer handles the discount. b. Coupons prompt consumers to try a product, reward loyal customers, or encourage repurchase. c. Rebates return a portion of the purchase price to the buyer. d. Consumers often find rebates frustrating because they must follow specific rules and meet submission deadlines. Ask students: When did you last use a coupon or a rebate? For what type of product? How much did you save with the rebate/coupon? For what kind of products would you expect to find a coupon or rebate? How do coupons or rebates influence your purchases? Consumers use a lot of coupons to buy cereal, but the high value (generally $.75 or more) of the coupons costs cereal firms a lot of money. When they tried to eliminate coupons and lower the everyday price, consumers wanted the coupons back. With redemption rates for coupons falling, many firms are beginning to wonder if it is time to end the practice altogether. How should firms respond when couponing no longer seems to work to increase sales? Answer: B; see page 359 Business-to-business pricing tactics & discounts a. Seasonal discounts b. Cash discounts c. Allowances d. Quantity discounts e. Uniform delivered vs. geographic pricing This slide provides the basis for a shortened lecture or can be used to introduce the more detailed discussion that follows. Business-to-business pricing tactics & discount differ significantly from those used in consumer markets. Among the most popular are noted in the Exhibit. a. Seasonal discounts are offered as an additional reduction incentive to retailers to order merchandise in advance of the normal buying season. Just as consumers do, businesses benefit from seasonal pricing, though with different timing. Most retailers place their Christmas orders in the summer or early fall. Some vendors give them an extra discount to place orders well in advance of the selling season. Ask students: Why would a vendor offer a seasonal discount to retailers? Answer: Because they can plan their production and get the inventory out of their warehouses and into the hands of the retailers. b. Cash discounts reduce the invoice cost if the buyer pays the invoice prior to the end of the discount period. Typically, it is expressed in the form of a percentage, such as “3/10, n/30,” or “3 percent, 10 days, net 30,” all of which means the buyer can take a 3 percent discount on the total amount of the invoice if the bill is paid within 10 days of the invoice date; otherwise, the full, or net, amount is due within 30 days. Sellers want outstanding invoices paid as soon as possible and therefore offer discounts to encourage it. Ask students: Would you pay your rent bill early if you received a monetary incentive to do so? c. Allowances are another pricing tactic that lowers the final cost to channel members. This includes advertising or listing allowances, offered in return for specific behaviours. An advertising allowance offers a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts. Lowers the final cost to channel members. Allowances include advertising, listing, As the questions at the end of several chapters show, listing allowances have become quite controversial. Group activity: Split the class in half. One half represents smaller producers who believe they are being shut out of grocery markets by listing fees, which can reach $10,000 per store or more. The other half represents grocers, who consider listing fees necessary for their survival in the competitive marketplace. Conduct a debate that presents both sides of this issue. d. A quantity discount provides a reduced price according to the amount purchased. The more the buyer purchases, the higher the discount and, of course, the greater the value. Reduced pricing according to the amount that is purchased (e.g. bulk buying) Cumulative discount: uses the amount purchased over a specific period of time. Non-cumulative discount: based on the amount purchased in a single order. Ask students: Why would a vendor offer a quantity discount to a retailer? Answer: It helps them plan their production schedule. If may stimulate the retailer to buy more merchandise. It actually costs less on a per unit basis to sell more in one order than less, e.g. transportation expense e. These pricing tactics are specific to shipping, which represents a major cost for many manufacturers. With a uniform delivered pricing tactic, the shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer. Geographic pricing, however, sets different prices depending on a geographical division of the delivery areas. Online shoppers know that delivery can add a significant amount onto cost; the same is true for B2B transactions, in which sellers often vary their delivery charge calculations based on where the customer lives. Uniform: shipper charges one rate no matter where the buyer is located. Geographic: shipper charges different rates depending on where the buyer is located. LO5: Legal and Ethical Aspects of Pricing 1. Deceptive and Illegal Price Advertising • Deceptive reference prices advertise inflated or just plain fictitious prices. • Loss leader pricing is similar to leader pricing, but it involves lowering the price below the store’s cost, which is considered to be an unfair competitive practice. • A bait and switch occurs when sellers advertise items for a very low price, then aggressively pressure customers into purchasing a higher-priced model. • Predatory pricing attempts to drive competitors out of business by offering very low prices. 2. Price Discrimination • Selling the same products to different resellers or consumers at different prices. Not all forms are illegal, e.g. quantity discounts. 3. Price Fixing • Horizontal price fixing occurs among competitors that produce and sell competing products but collude to establish a price. • Vertical price fixing occurs among parties at different levels of the same marketing channel. • Whereas horizontal price fixing is clearly illegal under the Sherman Antitrust Act, vertical price fixing falls into a gray area and is not always considered illegal. Deceptive/Illegal - Loss leader pricing, Bait and switch Ask students: Have you ever been involved in a bait and switch? Predatory - Prices set low with the intent to drive competitor out of business (See Case in Point which follows for an example.) Price Discrimination - Price discrimination in a B2B setting isn’t always illegal. It is legal to give quantity discounts, to meet competition, and in barter situations. Why are quantity discounts legal? Because it costs less on a per unit basis to sell to customers that buy larger quantities Price Fixing - Ask students: How many products list a manufacturer’s suggested retail price? How many indicate a retail price instead? Note that MSRPs are a form of vertical price fixing; the manufacturer sets the price, and wherever the consumer shops, the price will be the same. However, some retailers argue that this form of price fixing prevents them from passing lower costs on to consumers. Concept Review Generally, the concept questions are designed to achieve a single purpose – to encourage students to test their knowledge and understanding of the theoretical content of the chapter. These questions encourage recall and reflection, which will better prepare students to answer the marketing applications questions based on their understanding of the theory. 1. Explain the importance of pricing in the marketing mix from the perspective of the firm and the consumer. Answer: Price is the only element of the marketing mix that generates revenue. From the perspective of the firm, it is crucial to get the price right because otherwise there may not be sales to generate profits. Consumers consistently rank price as one of the most important factors in their purchase decisions, indicating the necessity for a company to ensure its pricing strategy is sound. 2. List the 5Cs of pricing. Which one do you consider to be the most important and why? Answer: ○ Company Objectives, Customer, Costs, Competition, and Channel Members are the 5Cs of pricing ○ Customers are the most important element because companies must understand consumer reaction to different prices. Consumers seek value and price is closely tied to the value equation. 3. Explain how companies try to determine consumers’ sensitivity to price changes. What factors influence their price sensitivity? Answer: ○ Companies consider price elasticity of demand, which measures how changes in price affect the quantity of the product demanded, to determine consumers’ sensitivity to price changes. ○ One factor that influences price sensitivity is whether the products are staples (necessary goods) or prestige products. ○ Other factors include the income effect (product and quantity demands go up as income goes up), the substitution effect (can consumers substitute other products), and cross price elasticity (does demand for products have a positive correlation, e.g. complementary products such as DVD players and DVDs, or have a negative correlation, e.g. DVD players are seen as substitute products for VCRs.) 4. Why is it important for firms to determine costs when setting prices? Answer: Firms must understand their cost structures to determine how profitable their products and services will be at different price points. Consumers make purchase decisions based on perceived value and so will not pay more for a product simply because a company is not as cost efficient as its competitors. 5. Why does a company need to understand a product’s break-even point? Answer: Companies need to understand the relationship between cost, price, revenue and profit at different levels of production and sales. Break-even point, or the point at which the number of units sold generates enough revenue to cover total costs, is a tool that enables managers to examine these relationships and make appropriate pricing decisions. 6. How has the Internet changed the way some people use price to make purchasing decisions? Answer: The Internet has made consumers more price sensitive. Search engines allow them to quickly and easily make price comparisons and find the lowest price available. Online auction sites such as eBay have allowed consumers to bid on products, some of which they get at fire sale prices. The Internet has also made new categories of products accessible to consumers who would not otherwise have been able to purchase them in the past. This increased selection and variety has led consumers to become more demanding and more price sensitive. 7. What is the major difference between pricing strategies and pricing tactics? Give three examples of each. Answer: ○ Pricing strategies are long-term approaches to setting prices based on the 5Cs or pricing. Three examples of pricing strategies include– cost based methods, competitor based methods, and value based methods. ○ Pricing tactics are short-term methods that focus on select components of the 5Cs of pricing. There are different tactics aimed at businesses versus consumers. ○ B2B tactics include seasonal discounts, cash discounts, quantity discounts, cash allowances, and uniform delivered versus geographic pricing. ○ Consumer tactics include price lining, price bundling, and leader pricing. 8. Explain how psychological factors may influence a firm’s pricing strategy. Answer: Consumers make judgments about prices based on how they categorize it, e.g. expensive, cheap, fair, overpriced. Some psychological factors that influence consumers include: ○ Use of Reference Prices – buyers compare the actual selling price against an external reference such as regular price or original price. Buyers may also compare prices against an internal reference, or the last price they recall paying or the price they expect to pay. ○ Everyday Low Pricing (ELDP) versus High/Low Pricing – For EDLP, companies keep prices at a consistent level between regular, non-sale pricing and deep discount sale pricing. With high/low pricing, prices are temporarily reduced from time to time to encourage purchase. ○ Odd Prices – prices that end in an odd number such as $4.99 or $8.77 instead of being rounded off to $5 or $9 ○ Price-Quality Relationship – most consumers believe that higher cost products must be higher quality 9. In what conditions should a price skimming strategy be used? When is it appropriate to use a market penetration strategy? Answer: ○ Price skimming strategy – is used for new and innovative products or services that are perceived as ground breaking or offering new benefits currently unavailable in other products. Price skimming may be used to send a signal of high quality or to limit demand while a firm builds its production capacity. It can also be used to quickly recoup the R&D costs invested in a new product. Lastly, since it is easier to lower prices than to raise them, price skimming can be used to test consumers’ price sensitivity. For price skimming to work, competitors cannot be able to easily enter the market. ○ Market penetration strategy – is used when a company wants to build sales and market share quickly. Companies use it to discourage competition from entering the market when profit margins are low. Market penetration pricing should not be used if a firm cannot satisfy a rapid rise in demand or if it wants to send a signal of high quality. It should be avoided if some segments are willing to pay a higher price since this leaves money on the table. 10. Explain the four types of illegal or ethical pricing practices. Answer: ○ Deceptive or illegal price advertising ○ Deceptive reference prices – reference prices that have been inflated or are fictitious ○ Loss leader pricing – lowering the price below cost ○ Bait and switch – advertising items for very low prices with the intention of luring (baiting) customers into the store and then convincing them to buy (switch) a higher price item ○ Predatory pricing – setting a very low price for one or more products with the intention of driving its competition out of business ○ Price discrimination – selling the same product to different resellers at different prices ○ Price fixing – colluding with other companies to control prices Marketing Applications 1. You and your two roommates are starting a pet grooming service to help put yourself through college. There are two other well-established pet services in your area. Should you set your price higher or lower than that of the competition? Justify your answer. Instructor’s Notes: In formulating their responses, students could consider two key factors: value provided and perceptions of quality. Example answers: Whether we establish a price that is higher or lower than our competition depends on several factors, including the type of services offered, the breadth of that service, our experience, and the perceived value we provide. Because we are simply college students with limited experience in pet grooming, it might be wise to set a price that is just less than that of our competition but not so low that it signals our service quality is poor. Because people look for bargains and college students often can provide value at a lower cost (e.g., house-painting services by college students), consumers should appreciate our efforts to put ourselves through college and be willing to pay a price slightly lower than that of the competition but still sufficient for us to make a reasonable profit. You should set your price lower than the competition. This can help attract budget-conscious customers and establish your service in the market. Once you build a client base and gain reputation, you can consider adjusting your prices. Lower pricing can also differentiate your service and help you compete effectively against the established providers. 2. One roommate believes the most important objective in setting prices for the new pet grooming business is to generate a large profit, while keeping an eye on your competitors’ prices; the other roommate believes it is important to maximize sales and set prices according to what your customers expect to pay. Who is right and why? Instructor’s Notes: This question focuses on pricing strategies with particular objectives, so for the pet-grooming business, students must determine whether a profit-oriented or a sales-oriented strategy is more appropriate. To make this determination, students need to decide which orientation allows them to meet their overall objective of helping put themselves through college. Example answers: Both roommates could be right, depending on how we hope to meet our overall objective. If we chose a profit orientation, we would need to set a particular profit goal, use advanced economic theory to create a mathematical model to capture all the factors required to explain and predict sales, and determine a target return price that will produce a specific return on our investment. With a sales orientation, we must focus on fixing prices that might mean lower profits in the beginning, in the hopes of building our reputation and providing sufficient value that customers return, increase our sales, and help us take market share away from the competition. Because we do not have a set profit goal in mind, and because of our lack of overall experience, we should set a lower price and build sales over the course of our college years. The second roommate is right. Maximizing sales by setting prices according to customer expectations is crucial for establishing your business and building a loyal client base. Once you have a steady stream of customers and understand their willingness to pay, you can then consider adjusting prices for profitability. Prioritizing customer expectations helps in capturing market share and ensures long-term success. 3. Assume you have decided to buy an advertisement in the local newspaper to publicize your new pet grooming service. The cost of the ad is $1000. You have decided to charge $40 for a dog grooming, and you want to make $20 for each dog. How many dogs do you have to groom to break even on the cost of the ad? What is your break-even point if you charge $50 per dog? Instructor’s Notes: This exercise allows students to gain experience performing break-even analyses, which require three key pieces of information: (1) the price of the service, (2) the fixed costs, and (3) the variable costs. In this scenario, the price is what the groomers charge, the fixed cost is the cost of the newspaper advertisement, and the variable cost is the price minus the profit per dog. Example answers: According to break-even analysis, the fixed cost is $1000 for the advertisement, the variable cost is $20 per dog groomed, and the initial price is $40. These numbers translate to a contribution per unit of dog grooming of $20. To determine the break-even point, we divide the $1000 fixed cost by the $20 contribution per unit; thus, we need to groom 50 dogs to break even. If we charge $50 per dog, the contribution per unit of dog grooming increases to $30, and when we divide that into the $1000 fixed cost, we find we need to groom 34 dogs to break even. To break even on the $1000 ad cost: 1. At $40 per dog: You need to groom 50 dogs. (Break-even quantity = $1000 / ($40 - $20) = 50 dogs) 2. At $50 per dog: You need to groom 40 dogs. (Break-even quantity = $1000 / ($50 - $20) = 40 dogs) 4. On your weekly grocery shopping trip, you notice that the price of ground beef has gone up 50 cents a kilogram. How will this price increase affect the demand for ground beef, ground turkey, and hamburger buns? Explain your answer in terms of the price elasticity of demand. Instructor’s Notes: Students should be able to apply the concepts of substitutability, complementarity, and price elasticity to determine the demand for ground turkey and hamburger meat. However, because both hamburger and turkey may be complements of hamburger buns, students cannot state for sure whether demand for buns will change because of the price change of the hamburger meat. Example answers: Ground beef experiences price elasticity, so consumers likely will react negatively to the price increase and display decreased demand. They should regard ground turkey as a substitute and demand more of it because of the ground beef price increase. However, the change in demand for hamburger buns is unknown, because buns complement either ground beef or ground turkey, so their demand depends on whether consumers replace ground beef with ground turkey on a one-to-one basis or simply forgo making any burgers—regardless of meat type—until the price decreases. The price increase of ground beef is likely to decrease the demand for ground beef due to its price elasticity; as it becomes more expensive, consumers may buy less. For ground turkey, the demand might increase as it is a substitute for ground beef. For hamburger buns, the effect depends on their cross-price elasticity with ground beef; if buns are closely associated with beef consumption, their demand might decrease if beef demand falls. 5. Zinc Energy Resources Co., a new division of a major battery manufacturing company, recently patented a new battery that uses zinc-air technology. Traditional lead-acid batteries typically sold to retailers for $35 each and had set costs, such as the battery housing (the casing that holds the energy-producing elements), that equalled $6 per unit. Their additional per unit costs included $4 in materials and $4 in direct labour costs. The unit costs for the zinc-air battery are slightly higher: The battery housing is $8, materials are $6, and direct labour is $6 per unit. The contribution per unit will be similar to that of the traditional lead-acid model. Retooling the existing factory facilities to manufacture the zinc-air batteries amounts to an additional $5 million in equipment costs (the equipment is expected to last 10 years). Annual fixed costs include sales, marketing, and advertising expenses of $1 million; general and administrative expenses of $1 million; and other fixed costs totalling $2 million. The prevailing interest rate is 5.0%. Ryan Martin, the marketing manager, must first analyze his costs before beginning to develop a pricing strategy for this innovative product. By answering the following questions, Ryan believes he will be armed with the necessary cost information so he can evaluate various pricing strategies. a. What is the total per unit variable cost associated with the new battery? b. What are the total fixed costs for the new battery? c. If the price for the new battery was set to match the price of current batteries, $35, what would the break-even point be? d. Draw a break-even graph that illustrates the nature of the fixed costs, variable costs, total costs, revenue (at the current market price of $35), and break-even point. What can you conclude from this graph? Instructor’s Notes: This extended exercise challenges students to think through a complete break-even analysis by determining total variable costs, total fixed costs, and product price and using that information to determine the break-even point. Example answers: a. The total per unit variable cost for the new battery is $20 (= $8 battery housing + $6 materials + $6 direct labour). b. The total fixed cost for the new battery is $9 million (= $5 million facility retooling + $1 million sales/marketing/advertising expenses + $1 million general administrative expenses + $2 million other fixed costs). If the money used to fund the new battery was taken out on loan, with the prevailing 5.0% interest rate, the fixed cost could be higher. c. With a price of $35 per battery, the contribution per unit would be $15 (= $35 price – $20 variable cost). The break-even number of units would then be 600,000 batteries (= $9 million fixed cost/$15 contribution per unit). d. The graph below shows that it will take a minimum of $21 million in revenues to break even with the new battery if the price stays at $35 per unit. 6. How do pricing strategies vary across markets that are characterized by monopolistic, oligopolistic, pure competition and monopoly? Instructor’s Notes: To respond effectively, students must consider the difference between market types and the effect those differences have on pricing strategies. Example answers: Pricing strategies vary depending on the type of market, as follows: • Monopoly: Since one firm provides the product or service, it results in less price competition. • Monopolistic: Product differentiation rather than strict pricing competition tends to exist. By successfully positioning its products as different and better, a firm can command a price premium. • Oligopolistic: Prices typically change in reaction to competition to avoid upsetting an otherwise stable competitive environment. A price war can ensue if two or more firms compete primarily by lowering their prices. • Pure competition: Consumers perceive the products from different companies as largely substitutable commodity products, so prices are usually set according to the laws of supply and demand. • Monopolistic Competition: Pricing is influenced by product differentiation. Firms set prices based on perceived value and competition, often using strategies like premium pricing or discounts to attract consumers. • Oligopoly: Pricing is interdependent on competitors’ actions. Firms may use collusion or tacit agreements to stabilize prices, or engage in price wars. Strategies include price matching, signaling, and kinked demand curves. • Pure Competition: Pricing is determined by market forces. Firms are price takers, setting prices based on the equilibrium of supply and demand, with little influence over the market price. • Monopoly: The single seller sets prices to maximize profit. Pricing strategies may include price discrimination, setting higher prices to maximize revenue from different consumer segments. 7. Though not illegal, many firms operating over the Internet have been experimenting with charging different consumers different prices for the same product or service. Since stores in different parts of the country might have different prices, some websites require postal code information before providing prices. Why would retailers charge different prices in different markets or postal codes? Is it ethical for retailers to do so? Is it a good business practice? Instructor’s Notes: This ethical scenario requires students address their degree of comfort with a practice that may represent discrimination based on geography. Example answers: Retailers might charge different prices in different markets or postal codes to make even more profit. However, it only makes ethical sense to charge different prices for products if there is something about the product that makes moving or shipping it to an area more costly. Even in those cases, the product should remain the same price, but the cost of shipping and handling can increase to meet the higher freight charges. Overall though, price discrimination based on location is not smart, because consumers are getting sophisticated enough to comparison shop online and discover such differences, which probably will make them unhappy – possibly so unhappy that they engage in negative word-of-mouth behaviour. After all, there is nothing to stop consumers from entering a false postal code to determine if the prices they are quoted is discriminatory. Retailers often charge different prices in different markets or postal codes due to variations in local demand, competition, and cost of living. This practice allows them to maximize profits by adjusting prices based on the purchasing power and preferences of consumers in different regions. Ethical Considerations: • Pro: It can be seen as fair if prices reflect local economic conditions and cost structures. • Con: It may raise concerns if consumers in higher-income areas are charged significantly more, or if it results in unfair price discrimination. Business Practice: • Good Practice: It can be effective for maximizing revenue and competitive advantage if managed transparently. • Risk: It could damage brand trust if consumers perceive the pricing as unfair or exploitative. 8. Suppose you have been hired as the pricing manager for a grocery store chain that typically adds a fixed percentage onto the cost of each product to arrive at the retail price. Evaluate this technique. What would you do differently? Instructor’s Notes: In examining the potential issues inherent to the cost-based pricing method, students might consider the role of the consumer, the effect of competition, and the place for consumers’ value perceptions. Example answers: This approach is a cost-based pricing method, because the cost of the product is the basis the retailer uses to determine the final price. This technique is not very effective, because it fails to recognize the role that consumers and competitor’s prices play in the marketplace. If consumers are willing to pay more for the product, the retailer could be leaving money on the table. If the firm’s competitors are charging less, it could be losing out on sales. Using this method also assumes that the retailer can identify all of the costs associated with the product, down to the unit level, even though this might be quite hard to do. Rather than using the cost-based method, I would recommend a value-based approach, in which the retailer sets the price according to the value customers perceive the product to have. Fixed Percentage Markup: • Pros: Simple to implement and ensures consistent profit margins. • Cons: Doesn't account for variations in product demand, cost structure, or competition, potentially leading to overpricing or underpricing in certain cases. Alternative Approach: • Cost-Plus Pricing: Consider varying markup based on product category, demand elasticity, and competition. • Dynamic Pricing: Implement flexible pricing strategies that adjust based on real-time factors like inventory levels and market conditions. These methods can enhance pricing accuracy and competitiveness, leading to better alignment with market conditions and customer expectations. 9. Coupons and rebates benefit different channel members. Which would you prefer if you were a manufacturer, a retailer, and a consumer? Why? Instructor’s Notes: Coupons and rebates both provide discounts to consumers, but the provider of these discounts differs. Therefore, students must take all three perspectives to determine their preferred methods. Example answers: If I were a manufacturer, I would prefer the rebate, because it offers me greater control and valuable customer information that I might not get otherwise. In addition, many customers do not take the time to complete all the steps required to receive the rebate, so the redemption rate is low, which means more money in my pocket. As a retailer, I would prefer the coupon, because it prompts more customers to come to my store. As a consumer, I prefer coupons, which I can redeem immediately and for which I do not need to engage in the long, drawn-out hassle associated with rebates. Manufacturer: • Preferred: Rebates. • Why: Rebates help manage costs by reducing immediate discounts while encouraging higher sales volumes. Retailer: • Preferred: Coupons. • Why: Coupons drive foot traffic and sales to the store, benefiting from immediate consumer use and boosting overall store revenue. Consumer: • Preferred: Coupons. • Why: Coupons provide immediate savings at checkout, making them more convenient and immediately rewarding. 10. Imagine that you are the newly hired brand manager for a t-shirt company introducing a new line. After receiving a very positive review from a major fashion magazine, the company wants to reposition the brand as a premium youth brand. Your boss asks what price you should charge for the new t-shirt line. The current line, considered mid-range retail, is priced at $20. What steps might you take to determine the new price? Instructor’s Notes: This question focuses on pricing quality, premium products. Therefore, students should consider the competitor-based pricing method and suggest pricing the new shirt above the prices set for competing products to attract consumers who do not care about price but always want the best product. To determine the specific price to charge, students will have to consider the price of other competing products and decide how much more to add to signal quality to fashion-conscious consumers. Example answers: I want to make sure this product is perceived as a premium brand that should command a premium price, so I first look at how my competitors price similar products. Knowing that the current line costs consumers $20 helps determine the absolute minimum price I would charge, but it is more important to understand how other t-shirt products that consumers consider fashionable are priced. I then would attempt to determine the value that fashion-forward consumers put on the latest trends and styles and price my product in accordance with this value. 1. Market Research: Analyze competitors' pricing for premium youth brands. 2. Consumer Insights: Conduct surveys to understand how much your target audience is willing to pay for a premium product. 3. Cost Analysis: Calculate the production and distribution costs to ensure profitability. 4. Value Perception: Assess the perceived value added by the positive review and brand repositioning. 5. Pricing Strategy: Set a price based on the gathered data that reflects the new premium positioning while balancing consumer expectations and cost considerations. Toolkit Break-even Analysis A shoe manufacturer has recently opened a new manufacturing plant in Asia. The total fixed costs are $50 million. They plan to sell the shoes to retailers for $50, and their variable costs (material and labour) are $25 per pair. Calculate the break-even volume. Now see what would happen to the break even if the fixed costs were increased to $60 million due to the purchase of new equipment, or the variable costs were decreased to $20 due to a new quantity discount provided by the supplier. Please use the toolkit provided on Connect to experiment with changes in fixed cost, variable cost, and selling price to see what happens to break-even volume. Net Savvy 1. Several different pricing models can be found on the Internet. Each model appeals to different customer groups. Go to www.eBay.com and try to buy this book. What pricing options and prices are available? Do you believe that everyone will choose the least expensive option? Why or why not? Now go to http://www.Amazon.ca. Is there more than one price available for this book? If so, what are those prices? If you had to buy another copy of this book, where would you buy it, and why would you buy it there? Instructor’s Notes: Some students may have purchased this book from one of these sites, but the question asks them to examine the price differences more closely and in an analytical sense Example answers: http://www.eBay.com offers two pricing options, bid and buy now. The current bid for a copy of this book is $20.51. The “buy now” price is $39.99. Not everyone will choose the least expensive option, because some will consider the reputation of the buyer or be worried about the condition of the book (e.g., new or used). Amazon lists a wide variety of prices that refer to both new and used textbooks. The prices range from $54.70 for a new book to $19.99 for a used book sourced from another retailer. I would be more inclined to buy another copy of this textbook from Amazon, because it consistently has the product available, either through its own distribution network or from used dealers, whereas there is less of a guarantee that eBay.com will always have another copy in the condition I want. eBay: • Pricing Options: Typically, you might find auction-style pricing or fixed-price listings. Prices can vary widely depending on the condition and seller. • Least Expensive Option: Not everyone will choose the least expensive option because buyers may prioritize factors like seller reputation, shipping time, or book condition. Amazon.ca: • Pricing Options: Usually, you might find multiple prices for new copies, used copies, and sometimes rental options. • Prices: New, used, and sometimes rental options with different prices. Preferred Purchase Location: • Decision: If I had to buy another copy, I’d choose based on the overall value, including price, condition, seller ratings, and shipping options. If Amazon offers a better combination of these factors, I'd buy there. 2. Prices can vary depending on the market being served. Because Dell sells its computers directly to consumers all around the world, the Dell Web site makes it easy to compare prices for various markets. Go to www.dell.com. Begin on the Dell Canada site and determine the price of a Dimension 3000 desktop computer. Next go to the Dell United Kingdom website and another more country of your choice to find the price of the same computer. (If you need to convert currency, go to www.xe.com.) How does the price of the desktop computer vary? What would account for these differences in price? Instructor’s Notes: The Dimension 3000 may no longer be available because, similar to many high-tech firms, Dell frequently updates its product offerings. If the Dimension 3000 has become obsolete, tell students to use any particular model and compare its pricing across sites. Example answers: Compared with the price of $749 in the United States, the same desktop cost the equivalent of $1515 in the United Kingdom and $727 in Canada. Some price variation is likely due to protections against exchange rate fluctuations and the price of competitors’ comparable products in the respective markets. Price Variation: • Dell Canada: The price of the Dimension 3000 desktop computer may be CAD $xxx. • Dell United Kingdom: The price might be GBP £xxx. • Another Country: For example, in Australia, the price might be AUD $xxx. Reasons for Price Differences: • Currency Fluctuations: Exchange rates can affect pricing. • Local Taxes and Duties: Different countries have varying tax rates and import duties. • Market Conditions: Costs related to distribution, labor, and consumer demand can impact prices. • Pricing Strategies: Dell may adjust prices based on regional economic conditions and competition. End-of-Chapter Case Study Battle Royale: Apple versus Amazon 1. Who are the key players in this industry? Apple, Amazon.com, Warner, Universal, and the consumer who purchases online music downloads. (Note: this industry is changing and new competitors are entering. For example, Walmart is selling online in the US but not in Canada. Spotify, which started in Europe, has signaled its intentions to operate in Canada. At the time of writing, this has not yet happened but be aware the above competitors are in a state of flux.) The key players in the tech and retail industry battle between Apple and Amazon are: 1. Apple: Known for its hardware products like iPhones, iPads, Macs, and its ecosystem of software and services. 2. Amazon: Dominates e-commerce, cloud computing (AWS), and offers consumer electronics like Kindle and Echo devices. 2. Why do you think different music companies, such as Warner and Universal, have taken such different stances on DRM protection? Warner and Universal have taken a different approach to DRM protection because they wanted to broaden their market. Not dictating how or listeners played their songs (the restriction of the DRM to iPod and iPhone) and partnering with Amazon.com allowed the opportunity to sell using economies of scale. Different music companies, such as Warner and Universal, have taken different stances on DRM protection due to: 1. Business Strategy: Some companies prioritize strict DRM to protect their revenue from piracy, while others focus on wider distribution and consumer satisfaction. 2. Market Positioning: Companies with a strong digital sales presence may favor DRM to safeguard their assets, whereas those aiming for market expansion might opt for fewer restrictions. 3. Consumer Feedback: Responses to consumer demand for ease of use and flexibility can lead to varying DRM policies. 4. Partnerships: Relationships with digital platforms and retailers can influence a company's stance on DRM. 3. What would represent an effective response by Apple to Amazon’s lower prices? Should it lower download prices to match the offer? Why or why not? Apple’s response to Amazon is dependent on how Apple wants to be perceived by its target market. Does it was to be perceived as prestigious and offer limited outlets to purchase the music along with restrictions on players that will play it? In essence, they would make themselves exclusive to patrons of the Apple iPod or Apple iPhone. The other alternative is to follow suite of the other companies and cut prices and re-think their strategy to broaden their market share. An effective response by Apple to Amazon’s lower prices could include: 1. Enhancing Value: Adding exclusive content, superior user experience, or bundling services to differentiate from Amazon. 2. Strengthening Ecosystem: Leveraging the integration of its devices and services to create added value for users. Lowering Prices: • Pros: It might attract price-sensitive customers. • Cons: It can devalue the brand and reduce profit margins. Apple should focus on value and quality rather than engaging in a price war. 4. If a price war will reduce margins, as the case suggests, why would any company embrace this strategy? The economies of scale (selling in high volume for less money) will generate more sales resulting in higher profits. Though the profit margin is less per unit, the reduced price per unit sells more. Companies may embrace a price war strategy to: 1. Increase Market Share: Attract more customers by being the lowest-priced option. 2. Drive Competitors Out: Pressure competitors financially, potentially leading them to exit the market. 3. Clear Inventory: Quickly sell off excess stock. 4. Establish Brand Awareness: Gain visibility and attract new customers, hoping they remain loyal even after prices normalize. While risky, these strategies can sometimes yield long-term benefits despite short-term margin reductions. Video Activities Video: 7 Virtues (CBC’s Dragons’ Den) Learning Objective: LO3 Description: This video provides a real world pitch by Barbara Stegemann of 7 Virtues Communications Group in Halifax on CBC’s Dragons’ Den. The back story behind the launch of 7 Virtues perfume attracted interest from Arlene Dickinson, who has travelled to Afghanistan. The product launch was an attempt to change the face of war and peace in Afghanistan and give farmers an alternative to growing opium. 7 Virtues was launched on the International Day of Peace in upscale stores such as Holt Renfrew. It has since expanded distribution to Hudson’s Bay and other retailers. When buying fragrance, it’s important to note that the contents in the bottle cost very little. Manufacturers use psychological pricing, brand name, packaging and promotion to convince consumers to buy the product. Key Words: psychological pricing, pricing strategy, pricing tactic, competitive advantage Activity: Bring in a variety of fragrances at different price points if possible (choose both women’s perfume/cologne and men’s fragrance/aftershave). Line up the bottles and ask students to say which one they would choose if they had to buy one. Don’t let them smell them just yet! Then ask how much they would be willing to pay for each product. Ask how the brand name, packaging and any promotional campaigns they may have seen for the fragrance affected their choice. After they have chosen, tell them the prices and ask if anyone would change their mind based on cost. Now let them smell the contents and ask again if students would stick with their original choices. Solution Manual for Marketing Dhruv Grewal, Michael Levy, Shirley Lichti, Ajax Persaud 9781259030659, 9781259104312
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