pricing : understanding and capturing customer value

Chapter 9 Pricing: Understanding and Capturing Customer Value

CHAPTER 9PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE

PREVIEWING THE CONCEPTS – CHAPTER OBJECTIVES

1. Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.

2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions.

3. Describe the major strategies for pricing new products.4. Explain how companies find a set of prices that maximizes the profits from the total

product mix.5. Discuss how companies adjust their prices to take into account different types of

customers and situations.6. Discuss the key issues related to initiating and responding to price changes.

JUST THE BASICS

CHAPTER OVERVIEW

Firms successful at creating customer value with the other marketing mix activities must capture this value in the prices they earn.

Despite its importance, many firms do not handle pricing well.

In this chapter, we begin with the question, “What is a price?” Next, we look at three major pricing strategies – customer value-based, cost-based, and competition-based pricing – and at other factors that affect pricing decisions.

Finally, we examine pricing strategies for new-product pricing, product mix pricing, price adjustments, and dealing with price changes.

ANNOTATED CHAPTER NOTES/OUTLINE

FIRST STOP

Trader Joe’s: A Special Twist on the Price-Value Equation – Cheap Gourmet

Trader Joe’s isn’t really a gourmet food store. Then again, it’s not a discount food store either. It’s actually both.

Trader Joe’s puts its own special twist on the price-value equation – call it cheap gourmet. It offers gourmet-caliber, one-of-a-kind products at bargain prices in a vacation-like atmosphere

Copyright © 2015 Pearson Education, Inc.9-1

Part 3 Designing a Customer-Driven Strategy and Mixthat makes shopping fun.

Trader Joe’s describes itself as an “island paradise” where “value, adventure, and tasty treasures are discovered every day.”

Shelves bristle with an eclectic assortment of gourmet-quality grocery items. They stock only about 4,000 products (compared with 50,000 items in a typical grocery store).

You cannot buy most of their items elsewhere.

How does Trader Joe’s keep its gourmet prices so low? It carefully shapes nonprice elements to support its overall price-value strategy.

It’s all about value and price – what you get for what you pay.

INTRODUCTION

Companies today face a fierce and fast-changing pricing environment.

Yet, cutting prices is often not the best answer.

WHAT IS A PRICE?

In the narrowest sense, price is the amount of money charged for a product or service.

Use Key Term Price here.

More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service.

Price is the only element in the marketing mix that produces revenue.

Price is one of the most flexible marketing mix elements.

MAJOR PRICING STRATEGIES

Figure 9.1 summarizes the major considerations in setting price.

Use Chapter Objective 1 here.Use Figure 9.1 here.

Use Discussion Question 9-1 here.


Chapter 9 Pricing: Understanding and Capturing Customer ValueCustomer Value-Based Pricing

In the end, the customer will decide whether a product’s price is right.

Figure 9.1 suggests three pricing strategies: customer value-based pricing, cost-based pricing, and competition-based pricing.

Use Figure 9.2 here.

Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing.

Price is considered along with the other marketing mix variables before the marketing program is set.

Figure 9.2 compares value-based pricing with cost-based pricing.

Cost-based pricing is product driven.

“Good value” is not the same as “low price.”

Two types of value-based pricing are good-value pricing and value-added pricing.

Use Key Terms Customer Value-Based Pricing and Good-Value Pricing here.Use Marketing Ethics here.

1. Good-value pricing involves offering just the right combination of quality and good service at a fair price.

Everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts.

High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.

2. Value-added pricing is the strategy of attaching value-added features and services to differentiate their offers and thus support higher prices.

Use Key Term Value-Added Pricing here.Use Discussion Question 9-2 here.Use Marketing at Work 9.1 here.


Part 3 Designing a Customer-Driven Strategy and MixCost-Based Pricing

Whereas customer-value perceptions set the price ceilings, costs set the floor for the price that the company can charge.

Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.

Types of Costs

Fixed costs (also known as overhead) are costs that do not vary with production or sales level.

Variable costs vary directly with the level of production. They are called variable because their total varies with the number of units produced.

Use Key Terms Cost-Based Pricing, Fixed Costs (Overhead), and Variable Costs here.

Total costs are the sum of the fixed and variable costs for any given level of production.

Use Key Term Total Costs here.

Cost-Plus Pricing

Use Key Term Cost-Plus Pricing (Markup Pricing) here.

The simplest pricing method is cost-plus pricing (markup pricing) – adding a standard markup to the cost of the product.

Does using standard markups to set prices make sense? Generally, no.

Markup pricing remains popular for many reasons.

1. Sellers are more certain about costs than about demand. 2. When all firms in the industry use this pricing method, prices tend to be similar and price

competition is thus minimized. Another cost-oriented pricing approach is break-even pricing, or a variation called target profit pricing. The firm tries to determine the price at which it will break even or make the target profit it is seeking.

Target return pricing uses the concept of a break-even chart, which shows total cost and total revenue expected at different sales volume levels.


Chapter 9 Pricing: Understanding and Capturing Customer ValueThe major problem with this analysis is that it fails to consider customer value and the relationship between price and demand.

Typically, as the price increases, demand decreases.

Use Key Term Break-even Pricing (Target Return Pricing) here.Use Figure 9.3 here.

Competition-Based Pricing

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings.

What principle should guide decisions about what price to charge relative to those of competitors? The answer is simple in concept but difficult in practice.

Be certain to give customers superior value for the price.

Use Key Term Competition-Based Pricing here.

Other Internal and External Considerations Affecting Price Decisions

Overall Marketing Strategy, Objectives, and Mix

Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives.

Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program.

Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge.

Target costing starts with an ideal selling price based on customer-value considerations, and then targets costs that will ensure that the price is met.

Use Chapter Objective 2 here.Use Key Term Target Costing here.

Companies may deemphasize price and use other marketing mix tools to create nonprice positions.


Part 3 Designing a Customer-Driven Strategy and MixOrganizational Considerations

In small companies, prices are often set by top management rather than by the marketing or sales departments.

In large companies, pricing is typically handled by divisional or product line managers.

In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.

In industries in which pricing is a key factor, companies often have pricing departments to set the best prices or to help others in setting them.

The Market and Demand

Pricing in Different Types of Markets

Pure competition: The market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price.

In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy.

Monopolistic competition: The market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers.

Oligopolistic competition: The market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies.

There are few sellers because it is difficult for new sellers to enter the market.

Pure monopoly: The market consists of one seller. The seller may be a government monopoly, a private regulated monopoly, or a private nonregulated monopoly.

Analyzing the Price-Demand Relationship

The relationship between the price charged and the resulting demand level is shown in the demand curve (Figure 9.4).

Use Key Term Demand Curve here.Use Figure 9.4 here.



In a normal case, demand and price are inversely related; that is, the higher the price, the lower the demand.

In a monopoly, the demand curve shows the total market demand resulting from different prices.

If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.

Price Elasticity of Demand

Price elasticity: How responsive demand will be to a change in price.

If demand hardly changes with a small change in price, we say demand is inelastic.

If demand changes greatly with a small change in price, we say the demand is elastic.

Use Key Term Price Elasticity here.Use Discussion Question 9-3 here.

Use Critical Thinking Exercise 9-7 here.Use Marketing by the Numbers here.

The Economy

Economic conditions can have a strong impact on the firm’s pricing strategies.

In the aftermath of the recent Great Recession, consumers have rethought the price-value equation. Many consumers have tightened their belts and become more value conscious.

The most obvious response to the new economic reality is to cut process. Rather than cutting prices, many companies are shifting their marketing to focus on more affordable items in their product mixes.

Remember, even in tough economic times, consumers do not buy based on price alone.

The key is to offer great value for the money.

Other External Factors

The company must also consider what impact its prices will have on other parties in its environment, such as resellers and the government.

Social concerns may have to be taken into account.


Part 3 Designing a Customer-Driven Strategy and Mix

Use Linking the Concepts here.

NEW-PRODUCT PRICING STRATEGIES

Market-Skimming Pricing

Market-skimming pricing (or price skimming) is setting high initial prices to “skim” revenues layer by layer from the market.

Market skimming makes sense under certain conditions.

1. The product’s quality and image must support its higher price and enough buyers must want the product at that price.

2. The costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more.

3. Competitors should not be able to enter the market easily and undercut the high price.

Use Key Term Market-Skimming Pricing (Price Skimming) here.Use Chapter Objective 3 here.

Market-Penetration Pricing

Market-penetration pricing is setting a low initial price in order to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share.

Several conditions must be met for this strategy to work.

1. The market must be highly price sensitive so that a low price produces more market growth.

2. Production and distribution costs must fall as sales volume increases. 3. The low price must help keep out the competition, and the penetration pricer must

maintain its low-price position.

Use Discussion Question 9-4 here.Use Key Term Market-Penetration Pricing here.

PRODUCT MIX PRICING STRATEGIES (Table 9.1)

In product line pricing, management must decide on the price steps to set between the various products in a line.



Use Table 9.1 here.

The price steps should take into account cost differences between the products in the line.

Use Key Term Product Line Pricing here.Use Chapter Objective 4 here.

Optional product pricing is offering to sell optional or accessory products along with a main product.

Use Key Term Optional Product Pricing here.

In captive product pricing, companies make products that must be used along with a main product.

Use Key Term Captive Product Pricing here.

In the case of services, captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate.

Using by-product pricing, the company seeks a market for the by-products produced in the generation of some products and services.

Use Key Term By-Product Pricing here.

Using product bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price.

Use Key Term Product Bundle Pricing here.Use Marketing Ethics here.

PRICE-ADJUSTMENT (Table 9.2)

Use Chapter Objective 5 here.Use Table 9.2 here.

Discounts include:

Cash discount is a price reduction to buyers who pay their bills promptly. Quantity discount is a price reduction to buyers who buy large volumes. Functional discount (also called a trade discount) is offered by the seller to trade-

channel members who perform certain functions.


Part 3 Designing a Customer-Driven Strategy and Mix Seasonal discount is a price reduction to buyers who buy merchandise or services out of

season.

Allowances are a reduction from the list price.

Trade-in allowances are price reductions given for turning in an old item when buying a new one.

Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs.

Use Key Terms Discount and Allowance here.

Segmented pricing occurs when the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs.

Customer-segment pricing: different customers pay different prices for the same product or service.

Product-form pricing: Different versions of the product are priced differently but not according to differences in their costs.

Location-based pricing: A company charges different prices for different locations, even though the cost of offering each location is the same.

Time-based pricing: A firm varies its price by the season, the month, the day, and even the hour.

Use Key Term Segmented Pricing here.

Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics.

One aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product.

Use Key Terms Psychological Pricing and Reference Prices here.Use Discussion Question 9-5 here.

With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost to create buying excitement and urgency.

Discounts: A reduction from normal prices to increase sales and reduce inventories. Special-event pricing: Pricing differently in certain seasons to draw more customers. Limited-time offers (flash sales): Create buying urgency and make buyers feel lucky to

have gotten in on the deal. Cash rebates: Offered to consumers who buy the product from dealers within a specified


Chapter 9 Pricing: Understanding and Capturing Customer Valuetime; the manufacturer sends the rebate directly to the customer.

Promotional pricing can have adverse effects.

1. Price promotions can create “deal-prone” customers who wait until brands go on sale before buying them.

2. Constantly reduced prices can erode a brand’s value in the eyes of customers. 3. Promotional pricing can lead to industry price wars.

Use Key Term Promotional Pricing here.

Geographical Pricing involves deciding how to price products for customers located in different parts of the country or world.

FOB-origin pricing: The goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location.

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

Basing-point pricing: The seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

Freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business.

Dynamic and Internet Pricing

Dynamic Pricing is adjusting prices continually to meet the characteristics and needs of individual customers and situations.

Dynamic pricing is extremely prevalent online where the Internet seems to be taking us back to a new age of fluid pricing.

Dynamic pricing offers many advantages:

Internet sellers can mine their databases to gauge a specific shopper’s desires, measure his or her means, and instantaneously tailor products to fit that shopper’s behavior, and price products accordingly.

Buyers can also negotiate prices at online auction sites and exchanges.



Internet buyers benefit from the Web and dynamic pricing. A wealth of price comparison sites—such as Yahoo! Shopping and PriceGrabber—offer instant product and price comparisons from thousands of vendors.

Use Critical Thinking Exercise 9-6 here.Use Key Term Dynamic Pricing here.

Use Online, Mobile, and Social Media Marketing here.Use Marketing at Work 9.2 here.

International Pricing

The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system.

Costs play an important role in setting international prices.

PRICE CHANGES

Initiating Price Changes

Initiating Price Cuts

Several situations may lead a firm to consider cutting its price.

Excess capacity Falling demand in the face of strong price competition Desire to dominate market

Initiating Price Increases

A major factor in price increases is cost inflation.

When raising prices, the company must avoid being perceived as a price gouger.

One technique for avoiding this problem is to maintain a sense of fairness surrounding any price increase.

Buyer Reactions to Price Changes

Customers do not always view price changes in a straightforward or rational way. They may


Chapter 9 Pricing: Understanding and Capturing Customer Valueview price cuts or price increases in several ways.

Competitor Reactions to Price Changes

Competitors are most likely to react when the number of firms involved is small, when the product is uniform, and when the buyers are well informed about products and prices.

Responding to Price Changes (Figure 9.5)

The firm needs to consider several issues: Why did the competitor change the price? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other competitors going to respond?

Figure 9.5 shows the ways a company might assess and respond to a competitor’s price cut.

Use Figure 9.5 here.

1. The company could reduce its price to match the competitor’s price.2. The company could maintain its price but raise the perceived value of its offer. 3. The company could improve quality and increase price, moving its brand into a higher

price-value position. 4. The company could launch a low-price “fighter brand”—adding a lower-price item to

the line or creating a separate lower-price brand.

Use Chapter Objective 6 here.Use Figure 9.6 here.

PUBLIC POLICY AND PRICING

Figure 9.6 shows the major public policy issues in pricing.

Pricing Within Channel Levels

Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected.

Sellers are prohibited from using predatory pricing—selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business.

Pricing Across Channel Levels

The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade.



Laws prohibit retail (or resale) price maintenance—a manufacturer cannot require dealers to charge a specified retail price for its product.

Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer who takes independent pricing action, nor can it punish the dealer by shipping late or denying advertising allowances.

Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers.

Other deceptive pricing issues include scanner fraud and price confusion.

END OF CHAPTER MATERIAL

Discussion and Critical Thinking

Discussion Questions


9-1. Name and describe the two types of value-based pricing methods. (AACSB: Written and oral communication)

Answer:

There are two types of value-based pricing: good-value pricing and value-added pricing. Good-value pricing strategies offer just the right combination of quality and good service at a fair price. In many cases, this has involved introducing less-expensive versions of established, brand name products. In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts. To increase their pricing power, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices.

9-2. Describe the cost-plus pricing method and discuss why marketers use it even if it is not the best method for setting prices. (AACSB: Written and oral communication)

Answer:

The simplest pricing method is cost-plus pricing (or markup pricing)—adding a standard


Chapter 9 Pricing: Understanding and Capturing Customer Valuemarkup to the cost of the product. For example, an electronics retailer might pay a manufacturer $20 for a flash drive and mark it up to sell at $30, a 50-percent markup on cost. The retailer’s gross margin is $10. If the store’s operating costs amount to $8 per flash drive sold, the retailer’s profit margin will be $2. The manufacturer that made the flash drive probably used cost-plus pricing, too. If the manufacturer’s standard cost of producing the flash drive was $16, it might have added a 25 percent markup, setting the price to the retailers at $20.

Does using standard markups to set prices make sense? Generally, no. Any pricing method that ignores consumer demand and competitor prices is not likely to lead to the best price. Still, markup pricing remains popular for many reasons. First, sellers are more certain about costs than about demand. By tying the price to cost, sellers simplify pricing. Second, when all firms in the industry use this pricing method, prices tend to be similar, and price competition is minimized.

9-3. What is price elasticity? Why is it important for marketers to consider price elasticity when making pricing decisions? (AACSB: Written and oral communication; Reflective thinking)

Answer:

Price elasticity is how responsive demand will be to a change in price. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue. At the same time, most firms want to avoid pricing that turns their products into commodities.

9-4. Name and describe the two broad new product pricing strategies. When would each be appropriate? (AACSB: Written and oral communication)

Answer:

Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies: market-skimming pricing and market-penetration pricing.

Many companies that invent new products set high initial prices to “skim” revenues layer by layer from the market, a strategy called market-skimming pricing (or price skimming). Market skimming makes sense only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the


Part 3 Designing a Customer-Driven Strategy and Mixadvantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.

Rather than setting a high initial price to skim off small but profitable market segments, some companies use market-penetration pricing. They set a low initial price in order to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the companies to cut their prices even further. Several conditions must be met for this low-price strategy to work. First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must fall as sales volume increases. Finally, the low price must help keep out the competition, and the penetration pricer must maintain its low-price position—otherwise, the price advantage may be only temporary.

9-5. How do marketers use psychological pricing to communication something about the product? (AACSB: Written and oral communication)

Answer:

In using psychological pricing, sellers consider the psychology of prices, not simply the economics. For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality. But when they cannot judge quality because they lack the information or skill, price becomes an important quality signal.

Another aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers’ reference prices when setting price.

Critical Thinking Exercises

9-6. You can turn your hobby into profits at online sites such as Etsy. In a small group, create ideas for a craft product to sell on Etsy, an online community of buyers and creative businesses. Using the resources available at www.etsy.com as a guide to setting prices, determine the price for your product. Justify that price and provide a link to the resources you found most useful on the Etsy site. (AACSB: Written and oral communication; Information technology; Analytical thinking)

Answer:

Students’ ideas will vary, but they must consider costs, demand, and competition when setting prices. Etsy has several resources on pricing, such as determining costs (see


Chapter 9 Pricing: Understanding and Capturing Customer Valuewww.etsy.com/blog/en/2007/the-art-of-pricing-understanding-your-costs/) and other pricing activities (for example, www.etsy.com/blog/en/2009/the-art-of-pricing-three-helpful-pricing-exercises/). Costs to consider include direct costs, such as materials used to make the item, packaging, PayPal fees, Etsy fees, and indirect costs such as the time it takes to create the item. Currently, it costs $0.20 to list an item for 4 months or until it sells on Etsy, and once it sells, Etsy takes a 3.5% fee on the sale price. PayPal has different levels of fees for merchants, but one is 2.9% + $0.30 per transaction. Students should look at prices for similar products sold on the Web site to compare their prices to the competitions’.

9-7. What is the Consumer Price Index (CPI)? Select one of the reports available at www.bls.gov/cpi/home.htm and create a presentation on price changes over the past two years. Discuss reasons for those changes. (AACSB: Written and oral communication; Information technology; Reflective thinking)

Answer:

The Bureau of Labor Statistics (BLS) releases the Consumer Price Index (CPI) each month and considerable information can be found at www.bls.gov/cpi/home.htm. The CPI measures the change in prices of major product categories including food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. Instructors may want to assign specific reports to students to get a broad spectrum of price trend information.

Minicases and Applications

Online, Mobile, and Social Media Marketing: HOT Lanes

If you have traveled in a big city, you know how congested traffic can get. Many major cities now have HOV (high-occupancy vehicle) lanes that allow vehicles with two or more occupants to sail past all the other vehicles in single-occupancy lanes. The lanes are usually barricaded off between the opposing direction lanes and switch directions from morning to evening to cater to the flow of heavy traffic. Mobile technology has resulted in a new opportunity for communities by converting these lanes to HOT lanes (high-occupancy toll lanes). For example, travelers in Houston can drive in these lanes for free if more than two people are in the car, but single-riders can jump in these lanes as well for a toll. But the toll varies depending on the volume of traffic. The “dynamic pricing” lanes now appear in about a dozen cities, with digital signs indicating the fluctuating prices. Tolls range from 25 cents to $1.40 per mile, depending on the speed of traffic and are charged to drivers’ toll tags.

9-8. Suggest another example of how dynamic pricing can be applied based on information obtained from consumers’ digital behavior on the Internet, use of social media, or through mobile technology usage. (AACSB: Written and oral communication; Information technology, Reflective thinking)


http://www.bls.gov/cpi/home.htm

Part 3 Designing a Customer-Driven Strategy and MixAnswer:

Students’ answers will vary. Dynamic pricing is especially prevalent online, where the Internet seems to be taking us back to a new age of fluid pricing. Such pricing offers many advantages for marketers. For example, Internet sellers such as L.L. Bean, Amazon.com, or Dell can mine their databases to gauge a specific shopper’s desires, measure his or her means, instantaneously tailor offers to fit that shopper’s behavior, and price products accordingly. Also, most retailers today—both online and offline—monitor each other’s prices and quickly adjust their own prices accordingly. For example, when Target recently advertised plans to sell a Dyson Ball vacuum cleaner at a low sale price in its stores, Best Buy beat it to the punch with an even lower online price. Fast-growing retailer Kohl’s even uses electronic price tags on products throughout its stores that allow it to quickly change prices on individual items based on competitive and other market requirements. Thus, services ranging from retailers, airlines, and hotels to sports teams change prices on the fly according to changes in demand, costs, or competitor pricing, adjusting what they charge for specific items on a day-by-day or even hour-by-hour basis. And many direct marketers monitor inventories, costs, and demand at any given moment and adjust prices instantly.

In the extreme, some companies customize their offers and prices based on the specific characteristics and behaviors of individual customers, mined from online browsing and purchasing histories. These days, online offers and prices might well be based on what specific customers search for and buy, how much they pay for other purchases, and whether they might be willing and able to spend more.

9-9. Is dynamic pricing ethical? (AACSB: Written and oral communication; Ethical understanding and reasoning)

Answer:

Although such dynamic pricing practices seem legally questionable, they’re not. Dynamic pricing is legal as long as companies do not discriminate based on age, gender, location, or other similar characteristics. Dynamic pricing makes sense in many contexts—it adjusts prices according to market forces and consumer preferences. But marketers need to be careful not to use dynamic pricing to take advantage of certain customer groups, thereby damaging important customer relationships.

Marketing Ethics: The Price of a Song

Country music stars such as Taylor Swift, Rascal Flatts, and Tim McGraw will be the first artists to be paid every time their songs are played on the radio. In the United States, only songwriters and music publishers receive royalties from radio airplay or when a song is played in a movie, television program, commercial, or even as hold music on telephones. This dates back to a 1917 Supreme Court ruling that composers of copyrighted music are due a royalty every time the


Chapter 9 Pricing: Understanding and Capturing Customer Valuemusic is played or performed through commercial means. But performing artists or recording companies do not receive such royalties. The rationale is that radio play promotes record sales, where the artists earn royalties ranging from 8 to 25 percent of the price of a CD. But thanks to the Internet and music download sites such as iTunes, sales of traditional recorded music have dropped almost 50 percent. In 2011, digital music sales surpassed traditional CD sales. Listeners have also tuned in to Internet sites such as Pandora, Spotify, and Rdio to listen to music. Recording artists did get some relief through the Digital Performance Rights in Sound Recording Act of 1995. The act gave performers their first royalties when their songs are played in a digital format, such as in a Webcast or on satellite radio, where listeners subscribe but cannot select specific songs. Pandora, the online radio company, claims that such royalty payments, equivalent to about 60 percent of revenues, are the reason the company is unprofitable.

9-10. Research how music royalties work to learn more about the cost and pricing of music. Write a report of what you learned. (AACSB: Written and oral communication; Reflective thinking)

Answer:

Students can search the Internet to learn how music royalties work. A good source is http://entertainment.howstuffworks.com/music-royalties.htm. It’s actually very complicated with mechanical licenses and royalties, performance rights and royalties, synchronization rights and royalties, and print rights and royalties. Even manufacturers of blank recording media must pay a percentage of sales to the Register of Copyrights to compensate for the lost sales due to copying of purchased recordings. Unlike songwriters and publishers, recording artists and record labels do not receive royalties on public performances; that is, when their music is played on the radio, TV, or other places like restaurants and bars they do not receive compensation. They earn money from the sale of their recordings. Songwriters and publishers earn royalties each time a piece is played because it is based on copyright law. Performers used to beg to get airtime on radio because that was the only promotion for their music. However, things have changed due to the Internet where performers can be discovered on YouTube and do not necessarily need traditional radio to promote their songs. The only royalties artists can earn is when their songs are played in a digital arena, such as the Webcasts or satellite radio, and the listener is a subscriber but does not select the songs to hear. However, artists and their backers don’t want their work used for free in other commercial venues, and several music labels that represent performers are fighting back and demanding royalties. For example, Big Machine Label Group, a company that represents several big country stars like those listed above, entered a deal with Clear Channel Media & Entertainment, which is the largest U.S. radio broadcaster.

9-11. Should artists and record labels be paid royalties every time their music is played? What type of cost does this represent for a radio station? (AACSB: Written and oral communication; Reflective thinking)


Part 3 Designing a Customer-Driven Strategy and MixAnswer:

Students will likely agree that artists should be paid when their songs are played. However, most of them have probably illegally downloaded music from the Internet, which means the artists isn’t paid at all due to not selling their music.

Royalty costs represent variables costs for radio stations and usually are calculated as a fraction-of-a-cent fee for each song played. However, some larger companies like satellite-radio operators pay a fixed royalty as a percent of revenue, which would be a fixed cost.

Marketing by the Numbers: Louis Vuitton Price Increase

One way to maintain exclusivity for a brand is to raise its price. That’s what the makers of Louis Vuitton, the luxury fashion and leather goods brand, did. The company does not want the brand to become overexposed and too common, so it raised prices 10 percent and is slowing its expansion in China. The Louis Vuitton brand is the largest contributor to the company’s $13.3 billion revenue from its fashion and leather division, accounting for $8 billion of those sales. It might seem counterintuitive to want to encourage fewer customers to purchase a company’s products, but when price increases, so does the product’s contribution margin, making each sale more profitable. Thus, sales can drop and the company can still maintain the same profitability as before the price hike. 9-12. If the company’s original contribution margin was 40 percent, calculate the new

contribution margin if price is increased 10 percent. Refer to Appendix 3, Marketing by the Numbers, paying attention to endnote 6 on the price change explanation in which the analysis is done by setting price equal to $1.00. (AACSB: Written and oral communication; Analytical thinking)

Answer:

If we do not know the price but know the original contribution margin (in this case 40%), we can set the old price to $1.00/unit. If price equals $1.00, then that means the unit contribution is $0.40/unit, and variable costs are $0.60/unit. If price is increased by 10 percent, the new price is $1.10/unit. However, the variable costs do not change just because price increases, so the unit contribution and contribution margins increase as follows:

Old New (10% increase)

Price $1.00/unit $1.10/unit

variable cost $0.60/unit $0.60/unit

= unit contribution $0.40/unit $0.50/unit



Contribution margin ($0.40/unit)/($1.00/

unit)

= 0.40 = 40%

($0.50/unit)/($1.10/unit)

= 0.4545 = 45.45%

The 10% increase in price results in the contribution margin increasing from 40% to 45.45%.

9-13. Determine by how much sales can drop and the company will still maintain the total contribution it had when the contribution margin was 40 percent. (AACSB: Written and oral communication; Analytical thinking)

Answer:

To determine the amount by which sales can drop before profitability is impacted negatively, we calculate the sales revenue at the new price level to maintain the original total contribution.

The original total contribution can be calculated by multiplying the original contribution by the original sales revenue:

Original total contribution = 0.40 × $8,000,000,000 = $3,200,000,000

Now determine the sales necessary to maintain that original total contribution of $3.2 billion:

Original total contribution = new contribution margin new sales

So,

original total contribution $3,200,000,000 New sales = —————————— = —————— = $7,040,704,070

new contribution margin .4545

Thus, Louis Vuitton’s sales can drop $959,295,930 (that is $8,000,000,000 - $7,040,704,070) before the price increase will negatively impact profitability.

Video Case Chapter 9 – Hammerpress

Running time


Part 3 Designing a Customer-Driven Strategy and MixIntro: 2:28Problem: 2:16Solution: 2:54Total: 7:37

Video Summary

Printing paper goods may not sound like the best business to get into these days. But Hammerpress is a company that is carving out a niche in this old industry. And they’re doing it by returning to old technology. Today’s printing firms use computer-driven graphic design techniques and printing processes. But Hammerpress creates greeting cards, calendars, and business cards that are hand crafted by professional artists and printed using traditional letterpress technology.

When it comes to competing, this old-fashioned process presents both opportunities and challenges. While Hammerpress’ products certainly stand out as works of art, the cost for producing such goods is considerably higher than the industry average. This video illustrates how Hammerpress employs dynamic pricing techniques in order to meet the needs of various customer segments and thrive in a competitive environment.

Questions and Answers

9-14. How does Hammerpress employ the concept of dynamic pricing?The text defines dynamic pricing as “adjusting prices continually to meet the characteristics and needs of individual customers and situations.” The nature of Hammerpress’ customer base and its product types are a perfect match for dynamic pricing. Hammerpress doesn’t just change its prices around on the same exact product. It creates packages and options. A great example of this is the concert promotion posters. If a producer wants to pay the price that will cover the costs of the product and provide Hammerpress with a reasonable margin, they can do that. But knowing that concert promoters are often working from a tight budget (and delayed cash flow), Hammerpress also offers the option of paying a lower price if it can retain the rights to sell copies of the posters.

9-15. Discuss Hammerpress in relation to the three major pricing strategies. Which of these three strategies is the company’s core strategy?Cost-based pricing – It seems that Hammerpress primarily relies on this method of designing the product, adding up the costs, and adding in a margin. This is the main method for the industry. Customer value-based pricing – Hammerpress is a good example of a company that is primarily cost-based, but still considers customer value. The example given of movie posters is one such illustration. However, so is the example of printing the bread bags for Whole Foods. They were uncertain about the cost structure of that new job. So they


Chapter 9 Pricing: Understanding and Capturing Customer Valueworked on the expectations of the customer by stating that the price of future jobs might vary. They still used a cost-based model for both of these examples. But they made modifications based on perceptions of customer value. Competition-based pricing – Because Hammerpress is so unique, it does not have to compete on price like other computer-based services do. For many of them, the market may establish the price entirely. But Hammerpress has some flexibility due to the process and quality of its work.

9-16. Does it make sense for Hammerpress to compete in product categories where the market dictates a price that is not profitable for the company? Explain. Yes. Brady was very smart to create a by-product pricing option by giving some customers the option of paying a lower price in exchange for releasing the rights of the design to Hammerpress so that they can sell copies. This is a benefit associated with certain kinds of products. Since Hammerpress works with a more artistic and high-quality method, they can do this where many of their competitors might not.

Teaching Ideas

This video begins with an introductory segment, followed by a problem segment, and ends with a solution segment. The intention here is to provide flexibility and multiple options for using the video. The following are some of the ways that instructors may utilize these three video segments.

1. Introduction only - Instructors may choose to use the introduction segment alone as a means of highlighting the company. As a stand-alone video, the introduction segment supplements material in many of the chapters of the text. The introduction of this Hammerpress video gives details on the uniqueness of the company’s products. This sets up the basis for pricing strategy.

2. Problem challenge - The instructor may show the problem segment, either with or without the introduction segment, and with or without the solution segment. This may be done in the interest of time. It may also be done strategically. An ideal way to challenge students is to require them to develop possible solutions to the presented problem before they have seen the solution segment. The instructor then has the option of whether or not to show the solution segment. Hammerpress works in an industry that is largely driven by competition-based pricing. Modern computer-based printing services all churn out the same stuff. So, they have a commodity product. Hammerpress’s challenge is based on communicating the differences in its products that merit high prices based on higher cost.

3. Solution only – This may be done to illustrate a specific concept in the chapter. Rather than taking the time to perform a problem/solution exercise, the solution segment may be shown to demonstrate how a company overcame a specific problem. Hammerpress is successful at working through a cost-based pricing system by knowing and understanding


Part 3 Designing a Customer-Driven Strategy and Mixthe different needs of its different types of customers. It employs dynamic pricing as a means of adjusting price to appeal to different needs.

Company Case Teaching Notes

Cases appropriate for this chapter include: Case 9, JCPenney: The Struggle to Find Optimum Price (Synopsis, Discussion

Questions, and Teaching Notes below) Case 11, Dollar General: Today’s Hottest Retailing Format (see IM Chapter 11 for

instructor material) Case 16, Warby Parker: Eyewear with a Purpose (see IM Chapter 16 for instructor

material)

JCPenney: The Struggle to Find Optimum Price

Synopsis

JCP is one of the oldest general merchandise retailers around. During the 1970s and 1980s, it succeeded in becoming “America’s Favorite Store.” But the 1990s and 2000s brought new retail concepts and locations, turning consumers to different outlets. JCP remained the same, until recognizing that it was losing out to these new options. This story highlights the efforts by a veteran brand to reinvent itself. JCP created an entirely new pricing strategy and backed it up with operational changes and a huge promotional effort. But all this effort and money spent was not enough to break through the perceptions of consumers.

Teaching Objectives

The teaching objectives for this case are to:

1. Highlight the difference between the major pricing strategies. 2. Understand the role of pricing in building brands.3. Gain an appreciation for how interconnected the various elements of the marketing mix

are. 4. Consider the deeply entrenched perceptions of value that customers have.


1. Of the major pricing strategies discussed in this chapter, which one best describes JCPenney’s “Fair and Square” pricing strategy? It is very clear that so far as the two major pricing strategies are concerned, JCP is pursuing a value-based approach over a cost-based approach (see Figure 9.2). Within


Chapter 9 Pricing: Understanding and Capturing Customer Valuethat pricing strategy, the very definition of “good-value pricing” describes JCP’s “Fair and Square” pricing to a tee. “Offering just the right combination of quality and good service at a fair price.” Some might argue that by overhauling its stores, adding more name brands, and creating features like the “Town Square,” JCP is adding features and services that justify JCP’s higher prices (the definition of value-added pricing). But there are two things that do not support value-added pricing. First, overall, JCP’s new pricing is not any higher than it was previously. In other words, JCP has not made a marked increase in average price. Rather, it has simply reformatted prices such that there is less variability and more consistency. Second, the changes it is making to its operations provide more support for “the right combination of quality and good service” than they do for “attaching value-added features…” that justify “charging a higher price.”

2. Compare JCPenney’s former traditional approach to pricing versus the “Fair and Square” pricing strategy. Discuss the advantages and disadvantages of each. One of the biggest advantages to the previous JCP pricing tactic (perhaps the only advantage) is the payoff that comes from the constant allure of “good deals” that comes with playing a period discounter’s game. There are clearly customers who are drawn to this, customers who are on the constant lookout for rock bottom deals. As such, these customers are not interested in “fair.” They want to come out ahead, even at the expense of the retailer coming out behind. JCP was clearly drawing in a certain percentage of these shoppers, even as they watched their market share and revenues drop.

There are various disadvantages associated with JCP’s former pricing technique. The biggest is that such an approach is not a brand-building approach. It does not build loyalty to the brand, but only to the concept of “it’s on sale”. That promise can be fulfilled by any brand, and consumers are quick to jump ship when their brand is not fulfilling the need.

The idea behind “Fair and Square” is that consumers can always count on JCP for low prices, and they don’t have to wait for items to go on sale to get a good price. This approach also does away with the confusion of hundreds of sales and prices that jump all over the place.

In the end, it appears that JCP struggled to capture and retain more customers with the new pricing approach than they lost. Also, it is evident that the new pricing approach did not become an ingrained part of JCP’s brand image quickly enough to keep customers coming in.

3. Discuss the role of product, place, and promotion in connection to “Fair and Square” pricing. Product – JCP is moving to a “house of brands” structure, adding more name brands to its portfolio. Place – JCP is renovating and redesigning its retail outlets to make them more modern,


Part 3 Designing a Customer-Driven Strategy and Mixmore user-friendly, and to establish them as gathering places. Promotion – before, during, and after the big switch, all JCP promotions focused on communicating the new “Fair and Square” approach. The old onslaught of constant pricing games disappeared.

4. Did “Fair and Square” pricing fail for JCPenney? Explain your answer. This is a complicated question that deserves considerable discussion. Without more information than is available at the time of publication, it would be easy to say that Fair and Square was an epic failure. It did nothing to slow the declining sales and seems to only have sped that trend up. What remains to be seen is whether or not JCP can do anything to save itself. And this isn’t just to save itself from the damage caused by Fair and Square. Rather, JCP was on its way down. It had to do something drastic and completely reinvent itself. Fair and Square combined with the operational changes was a very good attempt at that reinvention. There were certainly mistakes made in execution. However, if JCP had continued along, making only minor changes, there is certainly nothing that would have prevented its continued decline. By taking this bold step, Johnson did what needed to be done. The issue was, die a certain slow death, or take a gamble at truly turning things around accompanied by the risk of dying a fast death. Unfortunately for JCP, it appears that the errors in execution that were made during the implementation of Fair and Square resulted in failure. The other issue is that these types of changes take time, especially for a retailer that has been around for so long. And the stock market is not at all patient.

5. With Johnson out and Ullman in, what do you predict for JCPenney? What recommendations would you offer Ullman? It would seem that with the changing of the guard, there has been a reversal to the “old pricing ways” of JCP. While many recommendations can be made, consider these: 1) Conduct what amounts to a promotional about-face on pricing. 2) Retain the core of Fair and Square while returning to some portion of the sales game. 3) Continue making all the operational changes. 4) Use other techniques to draw new customers (those who are less price sensitive) to the newly remodeled JCP. 5) Once the store changes are in place, slowly bring JCP’s pricing strategy in line with a more “good-value” pricing strategy.

Teaching Suggestions

Present students with various retailers (show their Web sites, put names up on the board). Consider such possibilities as Walmart, Kohls, Dollar General, Target, Nordstrom, or Macy’s. Ask students why people shop at those stores. It should be apparent that for Walmart, Dollar General, and possibly some others, that “low price” is the answer (point out that these are chains not known so much for sales as for everyday low prices). For Kohls, the “on sale” aspect may win out. For Target, price will likely not be mentioned, even though its pricing structure is close to matching that of Walmart. For Nordstrom, the answer will likely have nothing to do with price, only with luxury or exclusivity. Then ask students why people shop at JCP. Unless they or


Chapter 9 Pricing: Understanding and Capturing Customer Valuetheir parents are JCP customers, they probably won’t be able to tell you why. Then, ask students what they think would happen if Walmart started raising the quality of their goods, while at the same time raising prices and changing their promotional message. Use this opening activity to illustrate that brand images for these retailers are pretty firmly entrenched, and establishing a new and different image can be very difficult.

GREAT IDEAS

Barriers to Effective Learning

1. Even if a few students have worked in a family business, it is a very safe bet that none of them have ever set prices on anything. Even if they are a devotee of eBay and have been buying and selling items for years, they still won’t have set prices because of the auction environment of that and other sites that have sprung up in the years since the explosion of the World Wide Web. So, although the “What Is a Price?” section is very short, it is well worth spending some time talking about the difference between fixed-price policies and dynamic pricing. A discussion of what it’s like to buy a meal at a restaurant, where you cannot typically haggle on price, and buying a car, where you are expected to haggle on price, can drive home the difference between the two. A discussion of what has happened with auctions and exchanges online will also help.

2. There are so many factors to consider in setting prices that the students might begin to feel overwhelmed very early in the chapter. It might be easier to discuss this in the context of a new business the class will launch—say, a laundry service on campus. Most students hate doing laundry, so they are willing to pay someone to do it for them, especially with pickup and delivery service. You can easily run through the internal and external factors that would affect such a service, and even discuss pricing strategy if a competitor were to develop a similar service.

3. Students may also need further explanation regarding why cost-based pricing isn’t the right way to price everything. It’s simple, it’s easy to apply a formula, and there is no guesswork involved. You need to drive home the point that it ignores the customer completely—cost-based pricing is internally focused, without a thought to the demand parameters or competitors’ prices. You can talk about this from the perspective of a high-cost manufacturer—how much would they be able to sell if their product cost 50% more than the competition simply because the company hadn’t figured out how to manufacture it effectively?

4. Value-based pricing could engender a considerable amount of conversation, particularly if someone thinks it is unethical to charge a price for something that yields the company a very large margin. Why wouldn’t you treat customers “right” by charging them less? A discussion of the meaning of customer focus and of benefits to the customer will help the class to understand that if the customer thinks he is getting value, he will happily pay the price.


Part 3 Designing a Customer-Driven Strategy and Mix5. After this discussion, the students might then be quite confused that value pricing and

everyday low pricing are subsets of value-based pricing. It might be helpful here to differentiate between value-based pricing in a business market and value or EDLP in the consumer market. Many businesses will buy based on a value they assign to a product or service, often in terms of ROI for themselves. Consumers will rarely do that explicitly and, at least for basic necessities, will often buy based on price. It is still value-based pricing.

6. Product line pricing can easily be illustrated with the example of gasoline. Virtually every gas station in this country sets the prices of each of its grades of gas between 8 and 10 cents apart (e.g., regular for $3.25, the next grade for $3.35, and the premium grade for $3.55). This is an everyday example of price steps with which everyone will have experience. Captive-product pricing will also be a fairly easy concept to understand with the example of razors and razor blades. Optional-product pricing could cause some problems, however. Discussing the example of buying a computer with or without a service agreement could help explain how this is done.

7. Segmented pricing can easily be explained by using the examples of senior citizen discounts or the discount you get at the movies for going during the day (matinee prices). Most students today have traveled, so it is also useful to talk about the airlines’ use of yield management.

8. Geographical pricing can cause some problems. Although the students might have heard of FOB pricing, it will not be a common term for them. Explaining that this is basically a decision between the customer paying the freight and the company paying the freight will help, especially because the majority of the students will have purchased at least something online, so they will have experience with freight or delivery charges.

Student Projects

1. Take a drive around town and look at the pricing of gasoline at a variety of different stations. Use Product Line Pricing to explain what you are seeing.

2. How does Wal-Mart make use of Good-Value Pricing?3. Explain how companies such as Dell use Cost-Plus Pricing. What are the competitive

disadvantages of such pricing strategies?4. Take a look at Rolex watches (www.rolex.com/en). What pricing strategy is being

employed here? What message is this pricing strategy sending to potential consumers?5. Walk though your favorite supermarket or discount store. Make a list of 10 products that

employ Captive-Product Pricing.

Small Group Assignment

Form students into groups of three to five. Each group should read the opening vignette to the chapter on Trader Joe’s. Each group should then answer the following questions:

1. Is Trader Joe’s utilizing an effective pricing strategy?


http://www.rolex.com/en

Chapter 9 Pricing: Understanding and Capturing Customer Value2. What are the dangers Trader Joe’s faces by using their unique pricing strategy?3. What is Trader Joe’s position in the mind of the customer?

Each group should share its findings with the class.

Individual Assignment

Product Bundle Pricing has become a very popular pricing strategy. Review and compare the current pricing strategies being used by your local cable provider and that offered by DirectTV (www.directtv.com). Are they making the most of product bundle pricing? What suggestions could you offer to improve their competitive positions against one another?

Think-Pair-Share

Consider the following questions, formulate answers, pair with the student on your right, share your thoughts with one another, and respond to questions from the instructor.

1. Under what conditions should market-penetration pricing be used?2. Provide examples of when promotional pricing may be considered unethical.3. What is predatory pricing and why is its use questionable?4. When raising prices, care must be taken so that the company does not appear to be a

price gouger. What techniques can be employed to assist in this?5. Give examples of unfair price discrimination.

Classroom Exercise/Homework Assignment

For the ultimate in Dynamic Pricing, one need only look to the air travel industry. Go online to Expedia (www.expedia.com), one popular booking engine, and “book” yourself a flight to Cancun for the Christmas break. Examine the vast differences in prices offered and explain why this is occurring. Now, “book” this same trip to Cancun, and add in a hotel stay for six nights. Again, examine and explain the vast differences in prices offered.

Classroom Management Strategies

This is a very long chapter, and it might be best to break it into two class periods. It is noted below where a reasonable break would be if you are able to do so.

1. Discussing the history of pricing, and the differences between fixed prices and dynamic prices is worthy of at least 5 minutes. You can also tie dynamic pricing back into the individual markets that were discussed in a previous chapter to drive home the value of dynamic pricing.

2. If you are breaking the chapter into two class sessions, spend 20 minutes on Factors to Consider when Setting Prices. If you do not have that luxury, 10 minutes will suffice. In


http://www.expedia.com/

http://www.directtv.com/

Part 3 Designing a Customer-Driven Strategy and Mixthis case, you will want to hit the major factors of marketing objectives and marketing mix strategy for internal factors, and the market and demand for the external factors.

3. Another 20 minutes should be spent on General Pricing Approaches in a two-session approach to this chapter. If covering the material in one session, spend 10 minutes on this. In this approach, focus on the differences among the three pricing approaches.

4. New Product Pricing Strategies should be covered in 15 minutes. In one class session, spend about 5 minutes covering the differences between market skimming and market penetration. This would also be where you should break for the session if you are going to continue with the chapter in the next class.

5. Product Mix Pricing Strategies covers a lot of information. In the second class session, spend 20 minutes on this topic, being sure to cover each of the five subsections. In one class period, you can cover this in 10 minutes by focusing on the three pricing strategies, briefly explaining the last two.

6. Price-Adjustment Strategies also covers a lot of material. In a second class section, 20 minutes should also be spent on this topic. Again you can cover this in 10 minutes by focusing on the first three subsections.

7. Regardless of whether you are presenting this material in one class or two, spend 15 minutes on Price Changes. This is an important element to understanding pricing, and this is the area where many marketing managers make their money when it comes to pricing.


Chapter 9 Pricing: Understanding and Capturing Customer ValuePROFESSORS ON THE GO

Pricing: Understanding and Capturing Customer Value

Key ConceptsInternal factors affecting pricingExternal factors affecting pricingCost-based pricingValue-based pricingCompetition-based pricing

• The chapter points out many companies do not handle pricing well. Beyond focusing too much on cost, what are some of the other difficulties that marketers have in setting prices?

• Interview a local business about their pricing philosophy and/or strategy. Use their terms and then apply what you have learned from them to assess their approach to those described in the text. What are the similarities and differences? How successful do the strategies appear to be? How did you make this judgment?

• Explain why the elasticity of demand is such an important concept to marketers who market a “commodity-type” product.

• Cost-plus-pricing and target-profit-pricing are two different types of cost-based pricing. Which of these methods is a better tool for marketers?

• What are the primary methods of competition-based pricing?

Key ConceptsMarket-skimming and market-penetration pricingProduct mix pricing strategies

• What market conditions would discourage a company from using a market-penetration pricing strategy to enter a market?

• Cell phone companies use a two-part pricing strategy. From a consumer’s perspective, is there a better pricing strategy? What is it? Explain.

Key ConceptsPricing within channel levelsPricing across channel levels

• Lawful price discrimination by sellers is a common practice. Discuss the conditions under which this price discrimination practice becomes unlawful.

• Find several examples where a retail outlet charges less than the manufacturer’s suggested price. Why would they do that? Can you find any examples of retailers charging more than the suggested price? How would a manufacturer react to each of these scenarios?


pricing : understanding and capturing customer value

Business

goodvalue pricing

highlow pricing

pricing environment

keyto pricing

product mix pricing

newproduct pricing

pricing new products

customer valuebased