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Chapter Eleven: Pricing Concepts and Strategies: Establishing Value 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. 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? o Company Objectives, Customer, Costs, Competition, and Channel Members are the 5Cs of pricing o 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? o 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. o One factor that influences price sensitivity is whether the products are staples (necessary goods) or prestige products. o 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? 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? 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? 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. o 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. o 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. o B2B tactics include seasonal discounts, cash discounts, quantity discounts, cash allowances, and uniform delivered versus geographic pricing. o Consumer tactics include price lining, price bundling, and leader pricing. 8. Explain how psychological factors may influence a firm’s pricing strategy. Consumers make judgments about prices based on how they categorize it, e.g. expensive, cheap, fair, overpriced. Some psychological factors that influence consumers include: o 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. o 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. o 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 o 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? o 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. o 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. o Deceptive or illegal price advertising o Deceptive reference prices – reference prices that have been inflated or are fictitious o Loss leader pricing – lowering the price below cost o 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 o Predatory pricing – setting a very low price for one or more products with the intention of driving its competition out of business o Price discrimination – selling the same product to different resellers at different prices o 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. Setting the price for your pet grooming service requires a strategic approach, especially when competing with established competitors. Here are the factors to consider: 1. Value Proposition: Assess what unique value your service offers compared to the competition. Is it superior customer service, specialized grooming techniques, convenient scheduling, or something else? If your service offers significant added value, you could justify setting a higher price. 2. Market Positioning: Consider how you want your brand to be perceived in the market. If you position your service as premium or exclusive, a higher price may align with that positioning. Conversely, if you aim to attract price-sensitive customers or emphasize affordability, a lower price might be more suitable. 3. Competitive Analysis: Analyze the pricing strategies of your competitors. If they are charging higher prices and attracting customers, it may indicate room in the market for another premium service. Conversely, if they are charging lower prices and still dominating the market, you might need to undercut them to gain a foothold. 4. Cost Structure: Calculate your costs, including grooming supplies, rent, utilities, and labor. Ensure that your pricing covers these expenses while also providing a reasonable profit margin. If your costs are lower than your competitors', you may have flexibility to set a lower price while still maintaining profitability. 5. Target Customer Base: Understand your target market's preferences and willingness to pay. If your research indicates that customers prioritize quality and are willing to pay more for it, you can set a higher price. Conversely, if they prioritize affordability, a lower price might be more attractive. Considering these factors, if your service offers unique benefits and you can justify a higher price without alienating your target market, it may be advantageous to set your price slightly higher than that of the competition. However, if your goal is to quickly gain market share or attract price-sensitive customers, a lower price could be more effective in the short term. Ultimately, the key is to find the right balance that maximizes profitability while meeting the needs and expectations of your target market. Instructor’s Notes: In formulating their responses, students could consider two key factors: value provided and perceptions of quality. • Example answers: o 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. 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? Both roommates raise valid points, and ideally, a balance between generating profit and satisfying customer expectations should be struck. Here's a breakdown of each perspective: Maximizing Profit: Setting prices to generate a large profit ensures the business can sustain itself, grow, and remain competitive in the long term. Profitability is crucial for covering operational costs, reinvesting in the business, and rewarding stakeholders. Keeping an eye on competitors' prices helps to ensure that your prices remain competitive within the market, preventing potential customers from turning to alternatives. Maximizing Sales and Customer Expectations: Setting prices according to what customers expect to pay can attract more customers and encourage repeat business. Understanding and meeting customer expectations can build trust and loyalty, contributing to long-term success. However, setting prices too low may lead to financial strain or undervaluing the services provided, potentially compromising quality or sustainability. Ultimately, the right approach lies in finding a balance between these two perspectives. Pricing strategies should consider both the need for profitability and the importance of customer satisfaction. Conducting market research, understanding the target audience, analyzing competitors' pricing strategies, and regularly reviewing and adjusting prices based on market dynamics can help achieve this balance. By aligning pricing strategies with both profit goals and customer expectations, the business can maximize its chances of success in the competitive pet grooming industry. 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: o 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. 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? To find the break-even point, we need to determine how many dogs need to be groomed to cover the cost of the advertisement. 1. Break-even point with $40 per dog: Each dog groomed brings in $40 in revenue. You want to make $20 profit per dog, so your cost per dog is $40 - $20 = $20. The cost of the ad is $1000. To find the number of dogs needed to cover the ad cost: Break-even point = Cost of ad / Profit per dog = $1000 / $20 per dog = 50 dogs So, you need to groom 50 dogs to break even on the cost of the ad at $40 per dog. 2. Break-even point with $50 per dog: Each dog groomed brings in $50 in revenue. You want to make $20 profit per dog, so your cost per dog is $50 - $20 = $30. The cost of the ad is still $1000. To find the number of dogs needed to cover the ad cost: Break-even point = Cost of ad / Profit per dog = $1000 / $20 per dog = 33.33 dogs (rounded up to the nearest whole number) So, you need to groom 34 dogs to break even on the cost of the ad at $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: o 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. 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. The impact of a price increase on the demand for ground beef, ground turkey, and hamburger buns will depend on the price elasticity of demand for each of these products. Ground Beef: If ground beef is relatively inelastic in demand, meaning consumers are not very responsive to price changes, then the demand for ground beef may not decrease significantly despite the price increase. This is because people generally view ground beef as a staple or necessity, and there may not be easily available substitutes. However, if the price elasticity of demand for ground beef is elastic, meaning consumers are sensitive to price changes, then the demand for ground beef could decrease, especially if consumers switch to cheaper alternatives like ground turkey. Ground Turkey: The demand for ground turkey could increase if consumers perceive it as a cheaper alternative to ground beef. If ground turkey is a close substitute for ground beef and consumers are price-sensitive (elastic demand), they may switch to ground turkey in response to the price increase of ground beef. However, if ground turkey is viewed as a distinct product with its own set of consumers who are loyal to it, the impact may be less pronounced. Hamburger Buns: The demand for hamburger buns might be less affected by the price increase of ground beef because they are a complementary good. If people still want to consume hamburgers despite the higher price of ground beef, they may continue to purchase hamburger buns. However, if the price increase for ground beef leads to a significant decrease in its consumption, the demand for hamburger buns could indirectly decrease as well, though to a lesser extent. In summary, the price increase in ground beef will likely have different effects on the demand for ground beef, ground turkey, and hamburger buns depending on the elasticity of demand for each product and their relationships as substitutes or complements. 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: o 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. 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? a. The total per unit variable cost associated with the new battery can be calculated by summing up the variable costs for materials, direct labor, and battery housing. For the zinc-air battery: Total variable cost per unit = Materials cost + Direct labor cost + Battery housing cost = $6 + $6 + $8 = $20 b. The total fixed costs for the new battery include retooling costs, sales, marketing, and advertising expenses, general and administrative expenses, and other fixed costs: Total fixed costs = Retooling costs + Sales, marketing, and advertising expenses + General and administrative expenses + Other fixed costs = $5,000,000 + $1,000,000 + $1,000,000 + $2,000,000 = $9,000,000 c. The break-even point is the level of sales at which total revenue equals total costs. We can calculate the break-even point by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the total variable cost per unit. Contribution margin per unit = Selling price per unit - Total variable cost per unit = $35 - $20 = $15 Break-even point (in units) = Total fixed costs / Contribution margin per unit = $9,000,000 / $15 = 600,000 units d. Below is the break-even graph: The total cost line starts at the fixed costs level and increases linearly with the number of units sold, representing both fixed and variable costs. The revenue line starts at zero and increases linearly with the number of units sold at a slope equal to the selling price per unit. The break-even point is the point where the total cost line intersects with the revenue line, indicating the level of sales required to cover all costs. From this graph, we can conclude that to cover all costs and break even, the company needs to sell at least 600,000 units of the new battery. Below this level of sales, the company will incur losses, and above this level, it will generate profits. 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? There's a brief overview of how pricing strategies vary across different market structures: Monopolistic Competition: In monopolistic competition, many firms offer similar but slightly differentiated products. Pricing strategies often revolve around product differentiation and branding. Firms may engage in non-price competition such as advertising, product quality, and customer service to gain market share. Pricing tends to be flexible, with firms having some control over their prices due to product differentiation. Oligopoly: Oligopolies consist of a few large firms dominating the market. Pricing strategies are often influenced by the actions of competitors. Firms may engage in strategic pricing, such as price leadership or collusion, to maintain stability and avoid price wars. Non-price competition, such as advertising and innovation, is common to differentiate products. Pure Competition: Pure competition involves many small firms producing homogeneous products. Pricing is determined by market forces of supply and demand, with no individual firm having control over the market price. Firms are price takers and must accept the market price determined by industry equilibrium. Non-price competition is limited, and firms may compete on factors such as quality and customer service. Monopoly: Monopolies exist when there is only one seller in the market. Pricing strategies can vary depending on the market power of the monopolist. Monopolists may engage in price discrimination, charging different prices to different consumers based on their willingness to pay. Pricing decisions are typically influenced by maximizing profit while considering factors like elasticity of demand and production costs. Non-price competition may be limited, depending on the level of product differentiation. Overall, pricing strategies across these market structures are influenced by factors such as market concentration, product differentiation, competition level, and the degree of market power held by firms. 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: o 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. 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? Retailers may charge different prices in different markets or postal codes for several reasons: Market Demand: Prices may vary based on the level of demand in a particular market. If there is higher demand in one area, retailers may increase prices to capitalize on consumer willingness to pay more. Cost of Operations: Operating costs can vary significantly depending on location. Retailers may adjust prices to reflect differences in rent, taxes, labor costs, and other expenses. Competitive Environment: Pricing strategies can be influenced by the level of competition in a given market. Retailers may adjust prices to stay competitive with local businesses or to gain an advantage over competitors. Targeted Marketing: Retailers may use dynamic pricing to target specific consumer segments or to implement pricing strategies based on demographic or behavioral data. Whether or not it is ethical for retailers to charge different prices in different markets is a matter of debate. Some argue that it is unfair to consumers and can lead to price discrimination, while others believe it is simply a reflection of market dynamics. From a business perspective, dynamic pricing can be seen as a legitimate strategy to maximize profits and optimize revenue. By adjusting prices based on market conditions, retailers can increase profitability and maintain competitiveness. However, it's essential for retailers to be transparent about their pricing practices and to ensure that they are not engaging in deceptive or discriminatory practices. Ultimately, the ethicality and effectiveness of charging different prices in different markets depend on factors such as transparency, fairness, and consumer trust. As long as retailers are transparent about their pricing strategies and do not engage in discriminatory practices, dynamic pricing can be a viable business practice. However, retailers should be mindful of potential backlash from consumers and regulators if their pricing practices are perceived as unfair or unethical. 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. 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? The fixed percentage markup method is a simple and commonly used approach for determining retail prices in retail businesses like grocery stores. However, it may not always be the most effective or profitable strategy. Here's an evaluation of this technique and some alternative approaches: Evaluation of Fixed Percentage Markup: Simplicity: One of the main advantages of this method is its simplicity. It's easy to calculate and implement, requiring minimal effort. Consistency: Applying a fixed percentage markup across all products ensures consistency in pricing, which can simplify operations and make it easier for customers to understand. Profit Margin Stability: By using a fixed percentage markup, the store can maintain consistent profit margins on products regardless of changes in the cost of goods sold. Limitations and Challenges: Competitive Pricing: This method may not take into account competitive pricing strategies or market demand for specific products. It could result in overpricing or underpricing compared to competitors. Product Variability: Different products may have varying levels of price elasticity and demand, making a uniform markup percentage less effective in maximizing profits. Cost Fluctuations: If the cost of goods sold fluctuates significantly, a fixed percentage markup could lead to inconsistent or uncompetitive pricing. Alternative Approaches: Value-Based Pricing: Evaluate each product's perceived value to customers and set prices accordingly. Higher-value items may warrant higher markups, while lower-value items could have lower markups. Dynamic Pricing: Implement a pricing strategy that adjusts prices in real-time based on factors such as demand, competitor prices, and inventory levels. This approach can maximize revenue and profit margins. Cost-Plus Pricing: Determine retail prices by adding a predetermined markup to the actual cost of each product. This method ensures that prices reflect the true cost of goods sold while still allowing for profitability. Segmented Pricing: Tailor pricing strategies to different customer segments or product categories based on factors such as demographics, buying behavior, or product attributes. Conclusion: While the fixed percentage markup method has its advantages in simplicity and consistency, it may not always be the most effective approach for maximizing profitability and competitiveness in the grocery retail industry. By considering alternative pricing strategies such as value-based pricing, dynamic pricing, cost-plus pricing, or segmented pricing, the grocery store chain can better adapt to market dynamics and customer preferences while optimizing revenue and profit margins. 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: o 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. 9. Coupons and rebates benefit different channel members. Which would you prefer if you were a manufacturer, a retailer, and a consumer? Why? As a manufacturer, I would prefer rebates over coupons because rebates often require consumers to mail in proof of purchase, which provides valuable data on consumer behavior and allows for better tracking of sales performance. Additionally, rebates can help stimulate larger purchases upfront, as consumers may be enticed by the prospect of receiving money back after the sale. As a retailer, I would also prefer rebates because they can drive more foot traffic to my store or website as consumers seek to take advantage of the rebate offer. Moreover, rebates can incentivize consumers to buy higher-priced items, increasing the average transaction value and potentially boosting profits. As a consumer, I might prefer coupons because they offer immediate savings at the point of purchase, which can be especially appealing for budget-conscious shoppers. Coupons are also straightforward to redeem and don't require the extra step of mailing in proof of purchase or waiting for a rebate check. However, if the rebate offers a significant discount, I might still opt for it despite the extra hassle. In summary, each channel member may have different preferences based on their specific needs and objectives, but rebates generally offer advantages for manufacturers and retailers in terms of data collection, sales stimulation, and profit potential, while coupons offer immediate savings and convenience for consumers. 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. 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? To determine the new price for the t-shirt line as a premium youth brand, several steps can be taken: Market Research: Conduct thorough market research to understand the pricing strategies of competitors offering similar premium youth clothing. Analyze their pricing models, target demographics, and perceived value. Target Audience Analysis: Identify the target demographic for the premium youth brand. Understand their purchasing behavior, willingness to pay, and what factors influence their perception of value. Value Proposition: Evaluate the unique selling points of the new t-shirt line compared to competitors. Determine how these factors contribute to the perceived value of the product among the target audience. Cost Analysis: Assess the production costs, including materials, labor, overhead, and any additional expenses associated with repositioning the brand as premium. Ensure that the new price covers these costs while maintaining profitability. Brand Image: Consider how the new price aligns with the desired brand image as a premium youth brand. The price should reflect exclusivity, quality, and lifestyle aspirations associated with premium brands. Price Sensitivity Testing: Conduct price sensitivity testing through surveys, focus groups, or A/B testing to gauge the audience's response to different price points. This helps determine the optimal price that maximizes revenue without deterring potential customers. Incremental Price Increase: Gradually increase the price from the current mid-range retail price of $20 to the new premium price point. Monitor customer reactions, sales performance, and market dynamics to assess the impact of each price adjustment. Promotional Strategy: Develop a comprehensive promotional strategy to communicate the value proposition of the premium t-shirt line to the target audience. Highlight the unique features, quality craftsmanship, and exclusive branding through marketing channels such as social media, influencer partnerships, and experiential events. Flexibility and Adaptability: Remain flexible and open to adjustments based on ongoing market feedback, competitor actions, and changes in consumer preferences. Continuously monitor the pricing strategy and be prepared to adapt to evolving market conditions. By following these steps, the brand manager can determine the optimal price for the new t-shirt line, effectively repositioning the brand as a premium youth brand while maximizing profitability and customer satisfaction. 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: o 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. 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 at www.mhhe.com/grewal-levy 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? Let's break down these tasks step by step: Break-even Analysis: The break-even volume can be calculated using the formula: Break-even volume = Total fixed costs/Selling price per unit−Variable cost per unit Given: • Total fixed costs = $50 million • Selling price per unit = $50 • Variable cost per unit = $25 Substituting these values into the formula: Break-even volume = 50,000,000/50−25 = 50,000,000/25 = 2,000,000 units Now, let's analyze the impact of changes: 1. If fixed costs increase to $60 million: Break-even volume = 60,000,000/50 • 25 = 60,000,000/25 = 2,400,000 units Break-even volume = 50,000,000/50 − 20 = 50,000,000/30 ≈1,666,667 units 1. On eBay, pricing options can vary widely depending on sellers and listing types such as auctions or fixed-price listings. Prices for the book may range from brand new to used copies, with different conditions and sellers offering varying prices. Not everyone will necessarily choose the least expensive option as factors like seller reputation, shipping costs, and the condition of the book may influence buyers' decisions. 2. On Amazon.ca, multiple sellers may offer the same book at different prices, especially for new and used copies. Prices may vary due to factors like seller location, condition of the book, and shipping options. If I had to buy another copy of the book, I would consider factors such as price, seller reputation, shipping speed, and return policy. Ultimately, I would choose the option that offers the best balance of price, quality, and convenience. 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: o 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. 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? However, I can provide you with a general approach on how to find this information and analyze the price differences. 1. Go to Dell's Website: Visit Dell's website for Canada, the UK, and any other country you choose. 2. Search for the Dimension 3000 Desktop: Navigate through the website's product categories or use the search bar to find the Dimension 3000 desktop computer. 3. Note the Prices: Record the price of the Dimension 3000 desktop computer in each country's respective currency. 4. Analyze the Price Differences: • Currency Conversion: If necessary, convert the prices to a common currency using a reliable currency converter like XE.com. • Tax and Duties: Consider any taxes, tariffs, or import duties applied to the product in each country. These can vary significantly and impact the final price. • Shipping Costs: Shipping fees can differ based on distance and shipping method chosen. This can influence the overall price discrepancy. • Market Demand: Prices may vary based on the demand for Dell products in each country. Higher demand can lead to higher prices. • Local Economy: Economic factors such as GDP per capita, inflation rate, and purchasing power parity can affect pricing strategies in different regions. • Competition: The competitive landscape in each market can influence pricing decisions. Dell may adjust prices to remain competitive with local rivals. • Distribution Costs: Costs associated with distribution, such as warehousing and logistics, may differ across countries and impact the final price. 5. Compare Prices: After considering these factors, compare the prices of the Dimension 3000 desktop computer in each country. Note any significant variations and try to identify the main factors driving these differences. By following these steps, you can analyze how the price of the Dell Dimension 3000 desktop computer varies across different markets and understand the factors contributing to these differences. 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: o 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. 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. 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. 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. 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. ADDITIONAL TEACHING TIPS Part of this chapter focuses on pricing strategies, pricing tactics, and ethics of pricing. Students are introduced to the idea of tying marketing strategy to pricing strategy to achieve a desired outcome (gain market share, become a brand name, market bundled products, etc.). What is important for students to learn is that the pricing must not only considered fixed cost, variable costs, and break-even-point, but it also must take into consideration the marketing goal of the company for that product , the current dynamics of the market place, and a focus on what their target market will pay. Instructors should spend some time relating the pricing strategies to the marketing goal using Exhibit 11.1 below. Students may be under the false impression that all that pricing has to do with is maximizing profit margin. That is true in some cases but not in other cases. As the Apple vs. www.Amazon.com case points out, profit can be won through economies of scale with pricing less per unit but selling more in volume. It’s important to point out how value and perception affects the pricing strategy as well. Why pay three times as much for a specific brand name when there are comparable products on the market. The consumer is willing to pay for the brand name because they perceive added value and are willing to pay for that (whether it be in image, quality, or scarcity). Video Activities Video: Taco Bell: Pricing for Value Learning Objective: LO3 Page Number in Text: 368 Description: Taco Bell had used everyday low pricing until competitors started to copy their strategy. Today they have switched to value-based pricing and offer products on a value menu. The value approach retains their heaviest user segment and offers a fair price point. Key Words: value-based pricing, competitive advantage, everyday low pricing, discounting, limited time offers Activity: Ask students to work in groups and compare the fast food outlets they have patronized over the past month. Get them to estimate how much they spent per visit and if discounting or special price promotion (e.g. coupons) had an impact on their decision to go to one outlet versus another. Have them add up the total estimated savings they enjoyed by taking advantage of price promotions. Discuss brand loyalty to the outlet and if they would return to it in the future without any special pricing incentives. In this activity, students are asked to work in groups and compare their experiences with different fast food outlets over the past month. They should estimate how much they spent per visit and consider if discounting or special price promotions influenced their decision to choose one outlet over another. Additionally, they are prompted to calculate the total estimated savings they enjoyed by taking advantage of price promotions. To answer this activity, students would first discuss their experiences with various fast food outlets, sharing information such as the menu offerings, pricing strategies, and any discounts or promotions they encountered. They can then calculate the total amount they saved through these promotions by adding up the savings from each visit. Next, students can discuss their brand loyalty to the outlets they visited and whether they would return to them in the future without any special pricing incentives. This can lead to a deeper conversation about the impact of pricing strategies on consumer behavior and brand loyalty. Overall, this activity encourages students to apply the concepts of value-based pricing, competitive advantage, and pricing promotions to real-world experiences, fostering a deeper understanding of these concepts and their implications for businesses and consumers. Solution Manual for Marketing Dhruv Grewal, Michael Levy, Shirley Lichti, Ajax Persaud 9780071320382, 9780070984929
