Kotler Pom15 Im 10

Chapter 10 PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE MARKETING STARTER: CHAPTER 10 JCPenney: Radical New “Fair and Square” Pricing—No Games, No Gimmicks Synopsis In its recently launched ―Enough. Is. Enough‖ ad campaign, JCPenney put an end to today‘s retail pricing insanity. With what it calls ―Fair and Square‖ pricing, Penney‘s is halting coupons, doorbuster deals, and nonstop markdowns on artificially inflated prices. In their place, the chain is launching a simplified everyday low pricing scheme with only occasional special promotions. Over the past 20 years, JCPenney has been steadily losing ground to department store rivals such as Macy‘s and Kohl‘s, on the one hand, and to nimbler specialty store retailers on the other. Under the new scheme, all three sets of prices will employ simplified tags and signage, with prices ending in ―0‖ rather than ―.99‖ or ―.50‖ to suggest good value. And tags will list only one price, rather than making ―previously priced at‖ comparisons. JCPenney makes it clear that its ―Fair and Square‖ pricing isn‘t Walmart-like everyday low pricing. Penney‘s everyday prices will not be as low as the biggest discounts it once offered. Instead, the goal is to offer fair, predictable prices for the value received. It remains to be seen how well JCPenney‘s radical remake will work. Changing store layouts, merchandise, and in-store shopper experiences will take time. And while that‘s happening, the new pricing strategy might not appeal to some deal-prone core customers who have learned to look for Penney‘s deep discounts.

Discussion Objective A brief discussion of JCPenney‘s ―Enough. Is. Enough‖ ad campaign highlights the importance of an innovative pricing strategy in today‘s marketplace. Begin the discussion by asking students to identify the pricing strategy they think JCPenney is pursuing – is it customer value-based, good value-based, or value-added? The discussion should focus on the key insights behind JCPenney‘s new pricing strategy in the minds of consumers. Why might consumers prefer an everyday ―Fair and Square‖ price to multiple ―sale‖ prices? You should also get students to discuss whether they believe this is a smart move in the current economy.

Starting the Discussion To kick things off, visit www.jcpenney.com Key in the search term, ―fair and square‖ on their website and evaluate the search results as a class. How well do the results underscore what they read in the opening vignette? You should also explore how well the campaign has played out since its inception in early 2012. Then, visit www.macys.com or www.kohls.com Build a discussion around a side-by-side comparison of the shopping experiences among the stores. If possible, shop for similar items on the two sites to compare the respective pricing and overall shopping experiences. In the side-by-side comparisons, encourage students to evaluate their shopping experiences and likely buying outcomes. Use the following questions to guide the discussion.

Discussion Questions 1.

The opening story for today‘s chapter describes a seismic shift in a JCPenney‘s overall pricing strategy. What is your assessment of this strategy? Which factors might affect its success? (JCPenney‘s everyday prices will not be as low as the biggest discounts it once offered. Instead, the goal is to offer fair, predictable prices for the value received. Penney‘s asks its customers, ―Why play the ‗wait for the rockbottom price‘ game when you can get ‗pretty good‘ prices every day on what you want, when you want it?‖ It remains to be seen how well this radical remake will work. Changing store layouts, merchandise, and instore shopper experiences will take time. And while that‘s happening, the new pricing strategy might not appeal to some deal-prone core customers who have learned to look for JCPenney‘s deep discounts.) Copyright©2014 Pearson Education

2.

Beyond its pricing component, what else is JCPenney doing to revamp the overall shopping experience for its customers? How important are these changes in the marketing mix? (CEO Ron Johnson says that JCPenney wants to become America‘s favorite store. To succeed, he says, the company must radically reinvent the experience in the store. For starters, that means putting the ―department‖ back in department stores. By 2015, each JCPenney store will be reorganized into a collection of 80 to 100 of stores-within-astore—a kind of ―Main Street‖ of in-store brand shops spread along wider, less-cluttered aisles. Like Apple stores, Johnson wants Penney‘s to be a place where shoppers come to hang out. So each Penny‘s store will have a ―Town Square‖ at its center, a large area featuring changing services and attractions, such as expert advice plus, say, free haircuts during back-to-school days or free hot dogs and ice cream in July.)

3.

What does the JCPenney story have to do with the concepts presented Chapter 10 on pricing? (The story makes a key point: price is a powerful marketing tool but it‘s only part of a broader value equation. Companies must integrate price into a broader marketing mix that creates the best value for customers.)

CHAPTER OVERVIEW Use Power Point Slide 10-1 Here Firms successful at creating customer value with the other marketing mix activities must capture this value in the prices they earn. This chapter addresses the importance of pricing, explores three major pricing strategies, and looks at internal and external considerations that affect pricing decisions. Companies today face a fierce and fast-changing pricing environment. Value-seeking customers have put increased pricing pressure on many companies. Yet, cutting prices is often not the best answer. No matter what the state of the economy, companies should sell value, not price.

CHAPTER OBJECTIVES Use Power Point Slide 10-2 Here 1. Answer the question ―what is price?‖ and discuss the importance of pricing in today‘s fast changing environment. 2. Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices. 3. Identify and define the other important external and internal factors affecting a firm‘s pricing decisions.

Copyright©2014 Pearson Education

CHAPTER OUTLINE p. 288

INTRODUCTION Over the past two decades, JCPenney has steadily lost ground to department store rivals and specialty retail chains. To turn things around, Penney‘s new CEO has set out to radically reinvent the 110-year-old retailer‘s operations and marketing. At the core of the transformation is a sweeping new pricing strategy—called ―Fair and Square‖ pricing—that aims to put the ―value‖ back into Penney‘s price-value equation.

p. 289 Photo: JCPenney

The goal is to offer fair, predictable prices for the value received, along with revamped store layouts to maximize the customer experience. How well will JCPenney‘s radical remake will work? Changing store layouts, merchandise, and in-store shopper experiences will take time. And while that‘s happening, the new pricing strategy might not appeal to some deal-prone core customers who have learned to look for Penney‘s deep discounts.

p. 290 PPT 10-3

 Opening Vignette Questions 1. Is the strategy customer value-based, good value-based, or value-added? 2. What is your assessment of this strategy? Which factors might have affected its success? 3. Beyond its pricing component, what else is JCPenney doing to revamp the overall shopping experience for its customers? 4. Given how the campaign played out, what could JCPenney have done differently? 5. CEO Ron Johnson realized it would take along time to change the thinking and behavior of Penney‘s customers. Is this kind of change possible and practical? Explain. Assignments, Resources Use Web Resources 1 and 2 here Chapter Objective 1 WHAT IS A PRICE? In the narrowest sense, price is the amount of money p. 290 Key Term: Price charged for a product or service. Copyright©2014 Pearson Education

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. p. 290 Photo: Pricing 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 PPT 10-4

Chapter Objective 2

Figure 10.1 summarizes the major considerations in setting price. p. 291 Key Term: Customer ValueIn the end, the customer will decide whether a product‘s Based Pricing price is right. p. 291 Customer value-based pricing uses buyers‘ perceptions of Figure 10.1: Considerations in value, not the seller‘s cost, as the key to pricing. Setting Price Price is considered along with the other marketing mix variables before the marketing program is set. p. 292 Figure 10.2: ValueCost-based pricing is often product driven. Based Pricing Value-based pricing reverses this process. The company first Versus Cost-Based assesses customer needs and value perceptions, then sets its Pricing target price based on customer perceptions of value. p. 292 Two types of value-based pricing are good-value pricing and Ad: Steinway value-added pricing. Customer Value-Based Pricing

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Good-Value Pricing is offering just the right combination of p. 292 Key Term: Goodquality and good service at a fair price. Value Pricing Everyday low pricing (EDLP) involves charging a constant, everyday low price with few or no temporary price p. 293 Ad: Snap Fitness discounts. High-low pricing involves charging higher prices on an p. 294 everyday basis but running frequent promotions to lower Ad: RYANAIR prices temporarily on selected items. Copyright©2014 Pearson Education

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Value-Added Pricing Value-added pricing is the strategy of attaching valueadded features and services to differentiate their offers and p. 293 thus support higher prices. Key Term: ValueAdded Pricing p. 295 Photo: AMC Cinema Suites  Assignments, Resources Use Real Marketing 10.1 here Use Discussion Questions 1, 2, and 3 here Use Critical Thinking Exercise 1 here Use Video Case here Use Marketing Technology here Use Additional Projects 1, 2, and 3 here Use Individual Assignments 1 and 2 here Use Small Group Assignment 1 here Use Think-Pair-Share 1, 2, and 3 here Use Outside Example 1 here Use Web Resources 3 and 4 here  Troubleshooting Tip 1) Even if a few students have worked in a family business, it is a 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 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) Value-based pricing could generate considerable discussion, particularly if someone thinks it is Copyright©2014 Pearson Education

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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. Cost-Based Pricing

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

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Types of Costs

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

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

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

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p. 295 Key Term: CostBased Pricing,

p. 296 Key Terms: Fixed Costs (Overhead), Variable Costs, Total Costs

p. 296 Figure 10.3: Cost Per Unit at Costs at Different Levels of Production Different Levels of To price wisely, management needs to know how its costs Production Per vary with different levels of production. Period Figure 10.3A shows the typical short-run average cost curve (SRAC). Figure 10.3B shows the long-run average cost curve (LRAC). p. 297 Figure 10.4: Cost Average cost tends to fall with accumulated production Per Unit as a experience, as shown in Figure 10.4. This drop in the Function of average cost with accumulated production experience is Accumulated called the experience curve (or the learning curve). Production: The Experience Curve A single-minded focus on reducing costs and exploiting the experience curve will not always work. Aggressive pricing Costs as a Function of Production Experience

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might give the product a cheap image.

p. 297 Key Term: Furthermore, while the company is building volume under Experience Curve one technology, a competitor may find a lower-cost (Learning Curve) technology that lets it start at prices lower than those of the market leader, who still operates on the old experience curve. Cost-Plus Pricing PPT 10-17 The simplest pricing method is cost-plus pricing—adding a standard markup to the cost of the product.

p. 297 Key Term: CostPlus Pricing (Markup Pricing)

Does using standard markups to set prices make sense? Generally, no. Markup pricing remains popular for many reasons: p. 297 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. 3. Many people feel that cost-plus pricing is fairer to both buyers and sellers. Break-Even Analysis and Target Profit Pricing PPT 10-18 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.

p. 298 Key Term: BreakEven Pricing (Target Profit Pricing)

Target pricing uses the concept of a break-even chart that shows the total cost and total revenue expected at different p. 298 sales volume levels. Figure 10.5 shows a break-even chart. Figure 10.5: BreakEven Chart for The manufacturer should consider different prices and Determining estimate break-even volumes, probable demand, and profits Target-Return Price for each. This is shown in Table 10.1. and Break-Even Volume

p. 298 Table 10.1: BreakEven Volume and Profits at Different Copyright©2014 Pearson Education

Prices  Assignments, Resources Use Discussion Question 4 here Use Additional Projects 4 here Use Think-Pair-Share 4 and 5 here  Troubleshooting Tip Students may 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 percent more than the competition simply because the company hadn‘t figured out how to manufacture it effectively? p. 299

Competition-Based Pricing

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

p. 299 Key Term: Competition-Based Pricing

Consumers will base their judgments of a product‘s value on the prices that competitors charge for similar products. No matter what price you charge relative to the competition—high, low, or in-between—be certain to give customers superior value for that price.

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Other Internal and External Considerations Affecting Price Decisions Overall Marketing Strategy, Objectives, and Mix Before setting price, the company must decide on its overall marketing strategy for the product or service. Pricing strategy is largely determined by decisions on market positioning. Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. Copyright©2014 Pearson Education

p. 299 Ad: Hot Mama

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. PPT 10-20

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.

p. 300 Key Term: Target Costing

Companies may de-emphasize price and use other marketing mix tools to create non-price positions.

p. 300 Ad: Titus

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Organizational Considerations

p. 301 Photo: Trader Joe‘s

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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.

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The Market and Demand

p. 303 PPT 10-23

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 Copyright©2014 Pearson Education

p. 303 Ad: Honda

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 unregulated monopoly.  Assignments, Resources Use Real Marketing 10.2 here Use Discussion Question 5 here Use Marketing Ethics here Use Additional Projects 5 here Use Outside Example 2 here Use Web Resources 5 here p. 303

Analyzing the Price-Demand Relationship

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The relationship between the price charged and the resulting demand level is shown in the demand curve (Figure 10.6).

p. 303 Key term: Demand Curve

In the 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 PPT 10-25

Price elasticity is how responsive demand will be to a change in price.

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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. Copyright©2014 Pearson Education

p. 304 Figure 10.6: Demand Curves p. 304 Key Term: Price Elasticity

Buyers are less price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness; substitute products are hard to find or when they cannot easily compare the quality of substitutes; and the total expenditure for a product is low relative to their income or when the cost is shared by another party. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. p. 305

The Economy

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Economic conditions can have a strong impact on the firm‘s pricing strategies. A boom or recession, inflation, and interest rates affect consumer spending, consumer perceptions of the product‘s price and value, and the company‘s costs of producing and selling a product. In the aftermath of the recent Great Recession, consumers have rethought the price-value equation. Other External Factors The company must also know 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.  Assignments, Resources Use Critical Thinking Exercises 2 and 3 here Use Marketing by the Numbers here Use Company Case here Use Small Group Assignment 2 here Use Web Resources 6 here

END OF CHAPTER MATERIAL Discussion Questions Copyright©2014 Pearson Education

p. 305 Photo: Whole Foods

1. What is price? Discuss factors marketers must consider when setting price. (AACSB: Communication). Answer: In the narrowest sense, price is the amount of money charged for a product or a service. More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a product or service. The price the company charges will fall somewhere between one that is too high to produce enough demand and one that is too low to produce a profit. Customer perceptions of the product‘s value set the ceiling for prices. If customers perceive that the price is greater than the product‘s value, they will not buy the product. Product costs set the floor for prices. If the company prices the product below its costs, company profits will suffer. In setting its price between these two extremes, the company must consider a number of other internal and external factors, including competitors‘ strategies and prices, the company‘s overall marketing strategy and mix, and the nature of the market and demand. 2. Compare and contrast good-value pricing and everyday low pricing (EDLP). (AACSB: Communication) Answer: These pricing strategies are two types of value-based 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 goodvalue 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. 3. Name and describe the types of costs marketers must consider when setting prices. Describe the types of cost-based pricing and the methods of implementing each. (AACSB: Communication) Answer: A company‘s costs take two forms: fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales level. For example, a company must pay each month‘s bills for rent, heat, interest, and executive salaries regardless of the company‘s level of output. Variable costs vary directly with the level of production. Each PC produced by HP involves a cost of computer chips, wires, plastic, packaging, and other inputs. Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies with the number of units produced. Total costs are the sum of the fixed and variable costs for any given level of production. Management wants to Copyright©2014 Pearson Education

charge a price that will at least cover the total production costs at a given level of production. Cost-based pricing is product driven. The company designs what it considers to be a good product, totals the costs of making the product, and sets a price that covers costs plus a target profit. The simplest pricing method is cost-plus pricing—adding a standard markup to the cost of the product. 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 pricing uses the concept of a breakeven chart, which shows the total cost and total revenue expected at different sales volume levels. 4. What is target costing and how is it different from the usual process of setting prices? (AACSB: Communication) Answer: Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, ―Can we sell it for that?‖ Instead, it starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure that the price is met. 5. Name and describe the four types of markets recognized by economists and discuss the pricing challenges posed by each. (AACSB: Communication) Answer: Economists recognize four types of markets, each presenting different pricing challenges:  Pure competition: the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. A seller cannot charge more than the going price, because buyers can obtain as much as they need at that price. Nor would sellers charge less than the market price, because they can sell all they want at this price. Marketing activities play little or no role. 

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Monopolistic competition: the market consists of many buyers and sellers who trade over a range of prices rather than a single market price because sellers can differentiate their offers to buyers. Buyers see differences in sellers‘ products and will pay different prices for them. 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. Each seller is alert to competitors‘ strategies and moves and responds to each other‘s changes in price. Pure monopoly: the market consists of one seller, which may be a government monopoly, a private regulated monopoly, or a private nonregulated monopoly. Pricing is handled differently in each case. In a regulated monopoly, the government Copyright©2014 Pearson Education

permits the company to set rates that will yield a ―fair return.‖ Nonregulated monopolies are free to price at what the market will bear. However, they do not always charge the full price for a number of reasons: a desire not to attract competition, a desire to penetrate the market faster with a low price, or a fear of government regulation.

Critical Thinking Exercises 1. 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 why you decided on that price and provide a link to the resources you found most useful on the Etsy site. (AACSB: Communication; Use of IT; Analytical Reasoning) 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 www.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-pricingexercises/). Costs to consider include direct costs, such as materials used to make the item, packaging, PayPal fees, and Etsy fees, and indirect costs such as 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‘. 2. Find estimates of price elasticity for a variety of consumer goods and services. Explain what price elasticities of 0.5 and 2.4 mean (note: these are absolute values, as price elasticity is usually negative). (AACSB: Communication; Reflective Thinking) Answer: Students‘ responses will vary depending on the source used to collect this information. One useful Web site listing price elasticities of several consumer goods and services is www.mackinac.org/article.aspx?ID=1247. Some examples of inelastic demand include salt (0.1), gasoline (0.2), coffee (0.25), and physician services (0.6). Examples of approximately unitary elasticity include movies (0.90) and private education (1.1). Examples of elastic demand include restaurant meals (2.3), foreign travel (4.0), and automobiles (1.2-1.5). A price elasticity of 0.5 represents inelastic demand, which means the percentage change in quantity demanded is less than the percentage change in price. The less elastic the demand, the more it pays for the seller to raise the price. A price elasticity of 2.5 is elastic, meaning the percentage change in quantity demanded is greater than the percentage change in price. Copyright©2014 Pearson Education

3. 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 that change. (AACSB: Communication; Use of IT; 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. Marketing Technology: Cheap Gas It seems a day doesn‘t go by without some talk about gas prices. Consumers are more keenly aware of the price now that it costs $40 to $100 to fill up the tank. And many consumers are using technology to help find the lowest prices in their area. While there have been Web sites available that map gas prices by zip code, smartphone apps such as GasBuddy, Fuel Finder, and Cheap Gas and in-car navigation systems such as Garmin and Waze put price information at drivers‘ fingertips while on the road. That‘s because these systems are based on a driver‘s actual location based on GPS positioning information. This is an example of crowdsourcing information, because these apps and systems rely on volunteers to update prices. 1. Discuss the pros and cons of gas finder apps from the consumer‘s viewpoint and the gas retailer‘s viewpoint. Do you think they have any impact on gas prices? Explain. (AACSB: Communication; Reflective Thinking) Answer: The primary advantage for consumers is easy access to price information because most consumers will seek the lowest price for gasoline, which is viewed as a commodity to many. However, a negative aspect of these types of apps—for both consumers and retailers—is that the information might not be correct or even available at all because it is based on other consumers updating price information. Gas prices have always been visible to drivers, so stations located near each other usually have the same price. However, drivers couldn‘t see prices a half mile or more away. These apps now allow consumers to see prices at stations that are at a reasonable enough distance to warrant traveling the extra mile for an extra 5¢ off. Thus, retailers that used to charge much higher prices due to their locations (for example, expressway exit ramps) might not be able to charge too much of a premium if there are other stations just a short distance up the road about which drivers now have information. Marketing Ethics: You’ve Been Crammed! Copyright©2014 Pearson Education

Have you ever tried to figure out what all those charges are on a phone bill? Not all of them are from your phone service provider. A study by a Congressional committee reported that $2 billion a year in ―mystery fees‖ appear on consumers‘ landline phone bills—a practice called ―cramming.‖ It is illegal for a phone company or a third party to tack unauthorized fees onto landline phone bills, but it is still happening. That prompted the Federal Communications Commission to propose new rules requiring companies to disclose charges more clearly so consumers can spot them. The agency would like to see the fees listed in a separate section of customers‘ bills that will also include the FCC‘s contact information for filing complaints. The problem is creeping into wireless phone bills as well, and the agency also proposed that companies should provide alerts to wireless customers when they are approaching their monthly voice and data limits. Do you remember what happened the first time you exceeded your texting limit. If you don‘t, and if your parents paid the bill, they do remember! 1. Look at a phone bill for the same service over several months. How does the service provider price this service? Do you see any suspicious charges, such as any of those listed by the FCC at www.ftc.gov/bcp/edu/pubs/consumer/products/pro18.shtm? Suggest ways to price this service that will make it easier for customers to understand but also allow the company to make a reasonable profit. (AACSB: Communication; Reflective Thinking) Answer: Students‘ responses will vary. Some of them may never have looked at a phone bill before. They will notice that there are fixed and variable cost elements to their service, unless they use a flat-rate service, such as Vonage. 2. How can a third-party vendor place a charge on a phone bill, authorized or unauthorized? Do phone companies benefit from allowing third-party vendor billing? Research this issue and discuss whether or not this should be allowed. (AACSB: Communication; Reflective Thinking; Ethical Reasoning) Answer: Students can Google the term ―cramming‖ to find information on this issue. An interesting video can be found at http://redtape.msnbc.msn.com/_news/2011/07/13/7072019-bigtelecom-firms-make-millions-from-cramming-fees-senator-says. Phone companies receive a small fee, maybe a dollar or two, for allowing third-parties to place charges on their customers‘ bill. That may not seem like much, but companies have enough customers that AT&T, Verizon, and Quest earned $650 million over a five-year period. The third-party billing system was actually a consequence of the FCC‘s requirement that phone companies bill and collect for other companies providing specialized and longdistance services as a result of AT&T‘s divestiture. Whereas it is no longer required, phone companies continue to allow third party vendor charges on their customers‘ bills. This problem has been going on for more than a decade, and an interesting report of the FCC‘s Copyright©2014 Pearson Education

1998 statement before a Senate subcommittee can be found at http://www.ftc.gov/os/1998/07/cramming.htm. Phone companies are unable to determine if third-party charges are authorized, however, so customers are left to fend for themselves and often don‘t even notice them on their complicated monthly phone bills. Phone companies are making significant profits from this practice and are not moving to stop the practice.

Marketing by the Numbers: Kei Cars The U.S. government fuel-economy regulations require carmakers to achieve a fleet average of 54.5 miles per gallon by 2025. Smaller vehicles can help car companies meet those standards. Tiny vehicles in Japan, known as kei cars (from ―kei-jidosha‖ or ―light automobile‖), achieve 55 mpg ratings. Kei cars are not new in Japan. They began as a tax and insurance break to stimulate the Japanese economy after World War II. However, the typical kei buyer in Japan is close to 50 years old, causing concern for Japanese automakers focusing only on the Japanese market. The U.S. regulations provide an opportunity for these automobiles in America. However, profit margins are almost as tiny as the cars themselves, causing carmakers to wonder if they can make an adequate profit when exporting to the United States. Of the big-three Japanese carmakers—Honda, Toyota, and Nissan—Honda is the only one making kei cars. It is considering bringing its new Honda NBox to the United States. Its closest competitor would be Daimler‘s Smart car, which made a profit of $108.3 million on sales of $10.7 billion in the United States last year. Smart cars sell for around $13,000 but seat only two people. In comparison, Honda‘s NBox holds four people and would be priced at $16,000, making it an alternative for small-car-minded families. To answer the following questions, refer to Appendix 2, Marketing by the Numbers. 1. What is the profit margin for the Smart car? (AACSB: Communication; Analytical Reasoning) Answer: Profits Profit Margin = ————— = $108.3 million/$10.7 billion = 0.01 or 1% Sales 2. If the unit variable cost for each NBox is $14,000 and the Honda has fixed costs totaling $20 million for this car, how many NBox cars must Honda sell to break even? How many must it sell to realize a profit margin similar to that of the Smart car? (AACSB: Communication; Analytical Reasoning) Answer: Fixed cost Breakeven volume = ———————— Price – Variable Cost So, Copyright©2014 Pearson Education

$20,000,000 Breakeven volume = ——————— = 10,000 cars $16,000 – $14,000 The profit margin found for the Smart car was 1%. To determine the unit volume necessary to achieve this goal, we incorporate the profit goal into the unit contribution as an additional variable cost. Look at it this way: If 1% of each sale must go toward profits, that leaves only 99% of the selling price to cover fixed costs. Thus, the equation becomes:

fixed cost Unit volume = ——————————— or price  variable cost  (0.01  price)

fixed cost —————————— (0.99  price)  variable cost

So, $20,000,000 Unit volume = ————————— = 10,869.56 cars (0.99  $16,000)  $14,000 Therefore, to realize a 1% profit margin, Honda would have to sell 10,870 cars.

Company Case Notes Burt’s Bees: Willfully Overpriced Synopsis From garage candle maker to billion dollar brand, Burt‘s Bees is a classic new company success story. The company is only about 25 years old. And, it was started by two very unassuming, down-to-earth individuals who were just trying to make a living. The interesting thing is not that this company has been successful through premium pricing. The bigger story is that Burt‘s Bees hit it biggest success through premium pricing in discount chains and grocery stores. Many companies price their products at the upper range of products in their category –think Coach handbags, Tag-Heuer watches, or Uggs boots. But the difference here is that products like that are sold through select retailers and specialty stores. It‘s hard to imagine a Coach, Tag, or Uggs being sold at Walmart or even Target, alongside similar goods selling for one-tenth the price. In the case of Burt‘s Bees, the pricing tactic of pricing at a premium involves more consumer psychology than simply paying for a status brand or even paying a high price for quality goods. In this case, the concept of ―willful overpricing‖ is explained as a factor that has contributed to Burt‘s Bees success. Copyright©2014 Pearson Education

Teaching Objectives The teaching objectives for this case are to: 1. Allow students to understand the effects of pricing as a tool for differentiation. 2. Help students understand the concept of ―value‖ in relation to price. 3. Enable students to understand how the nature of a market and market demand affect pricing decisions. 4. Let students examine different pricing strategies in the context of an actual company. 5. Allow students to consider the sustainability of pricing strategies. Discussion Questions 1. Does Burt‘s Bees pricing strategy truly differentiate it from the competition? There are always premium brands. But as stated in the synopsis, Burt’s strategy has put it in stores where “premium” is not common. But even in Walmart and Target, there are brands that are in Burt’s price range on many items. One might must say that Burt’s was one of the first to pioneer this strategy for personal care products in these outlets. For example, when Burt’s first hit Target, it was probably the only $3 tube of lip balm. Now, there are a few at least (Aveeno, Nuetrogena, and even VitaminWater). But Burt’s has a big presence in many categories as far as premium brands go. So, in this respect, it stands out as a product that is more expensive than that competition. Just enough so to get customer’s attention and cause them to consider the product. 2. Has Burt‘s Bees executed value-based pricing, cost-based pricing, or competition-base pricing? Explain. Burt’s Bees definitely follows a value-based pricing strategy. Although one might find some evidence for the other strategies, this is a product (and product line) that are based on what the customer will pay. There is little else to support a strategy for $3 lip balm. Even the natural ingredients aren’t worth a retail price that is three times that of Chap Stick. Of the value-based strategies, it seems that value-added pricing is the most applicable. Burt’s Bees has added the “feature” of natural ingredients, and even the image of eco-friendliness. Neither of those things cause costs to increase three times. Yet, they manage to charge that much more for product. Customers pay it because the added features are worth it to them. 3. Discuss how Burt‘s Bees has implemented product-mix pricing strategies. The most relevant of the product-mix pricing strategies is product line pricing. As the case points out, Burt’s now has over 150 different products. Thus, the pricing of any one product must take into consideration the pricing of many other Burt’s Bees products. For example, its “Naturally Ageless” line of creams for eyes and face are all priced at the same price point. But that price point must take into account the price and demand for other lines of similar products that Burt’s sells, like its “Radiance” line and its other eye and face creams. The same can be said for any of its products. Burt’s sells more than one kind of lotion, shampoo, and face cleanser. Not only does the pricing of any one of these Copyright©2014 Pearson Education

have to consider the price of other same-type products it sells, but such pricing must also consider price and demand for other products that are relevant (shampoo and conditioner, body and hand lotion, etc.). 4. Could Burt‘s Bees have been successful as a natural product marketer had it employed a low-price strategy? Explain. It is doubtful. There are many examples of companies that have attempted to introduce a high-quality good for the same or lower price as standard products. The result is that most people do not believe the claims. Not only do people consider that “better” has to cost more, but they also actually derive value from paying more for a good that has more value to them. 5. Is Burt‘s Bees pricing strategy sustainable? Explain. So far, it seems that Burt’s has been very successful with its pricing levels. In other words, it is profitable with prices and costs where they are. One of the things that might put pressure on Burt’s Bees are mega retailers like Walmart to decrease costs. However, this places the responsibility on Burt’s to demonstrate to such retailers that decreasing prices would have a negative effect on unit sales, thus have an even bigger effect on revenues. In this respect, Burt’s pricing is sustainable. The cost of many commodities (such as beeswax) is increasing. However, Burt’s has more flexibility than most brands to adjust accordingly. For a brand where people are already used to paying a bit more, they likely will not notice price increases as much as they would for a low-priced brand that they know should not cost more than a certain amount. Teaching Suggestions Start a discussion about products that students are willing to pay a bit more for. List them on the board. As these products are listed, in a separate column, list the reasons that they are willing to pay a higher price. Have them consider things like cost of goods sold. Guide the discussion toward the fairness of prices being set at a higher point than cost of goods sold would justify. Is value-pricing fair? After discussing these things for a few minutes, move in to the discussion of the questions for Burt‘s Bees. This case goes well with the chapters on managing customer relationships and company strategy (Chapters 1 and 2).

ADDITIONAL PROJECTS, ASSIGNMENTS, AND EXAMPLES

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Projects 1. 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? (Objective 2) 2. Use the local newspaper to compare grocery store ads for price specials. What can you determine about the competitors‘ pricing strategies? How many of the techniques from the chapter do the organizations seem to be using? What strategy appears to be the most successful? How did you make this judgment? (Objective 2) 3. How does Walmart make use of good-value pricing? (Objective 2) 4. Explain how companies such as Dell use cost-plus pricing. What are the competitive disadvantages of such pricing strategies? (Objective 3) 5. Take a drive around town and look at the price of gasoline at a variety of different stations. Use oligopolistic competition to explain what you are seeing. (Objective 3)

Small Group Assignments 1. Form students into groups of three to five. Each group should read Real Marketing 10.1: Ryanair: Really Good-Value Pricing – Fly for Free! Each group should then answer the following questions and share their answers with the class. (Objective 1) a. Explain Ryanair‘s pricing strategy in your own words. What do they mean by the term ―price‖? b. How is Ryanair distinguishing itself from other ―value-oriented‖ airlines in the wake of the Great Recession? c. Discussing his approach to ―less-for-less‖ value-pricing, Ryanair CEO Michael O‘Leary says, ―The physical process of getting from point A to point B shouldn‘t be pleasant, nor enriching. It should be quick, efficient, affordable, and safe.‖ Analyze this statement. How does such an approach deliver value to consumers? Explain. 2. Form students into groups of three to five. Each group should read the Real Marketing 10.2: Trader Joe‘s Unique Price-Value Positioning: ―Cheap Gourmet.‖ Each group should then answer the following questions and share their answers with the class. (Objective 2) 1. What unique pricing strategy has Trader Joe‘s adopted in the food marketplace? 2. Relative to competitors, what is Trader Joe‘s market position? a. What is the unique ―customer value‖ that Trader Joe‘s delivers to its patrons?

Individual Assignments 1. Reread the opening section of this chapter on ―What Is a Price?‖ Imagine you are considering purchasing a new suit for interviewing. You are considering comparisonshopping for your new suit at Saks Fifth Avenue (a high-end department store) and Dillard‘s (a moderate department store). Discuss the overall differences in ―price‖ between the two establishments. (Objective 1)

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2. What is ―everyday low pricing?‖ Besides Walmart, what companies do you believe have been able to use this pricing strategy to great success? (Objective 2)

Think-Pair-Share Consider the following questions, formulate an answer, pair with the student on your right, share your thoughts with one another, and respond to questions from the instructor. 1. What is price? (Objective 1) 2. Discuss the role that customer value plays in the determination of price. (Objective 2) 3. Explain the difference between value-based, good-value, and value-adding pricing strategies. (Objective 2) 4. What is target-profit pricing? (Objective 3) 5. Explain the demand curve. (Objective 3)

Outside Examples 1. Take a look at The Poisoned Pen (www.poisonedpen.com/). The Poisoned Pen is a small independent bookstore located in Scottsdale, Arizona. Their motto is ―It‘s more than a bookstore, it‘s an experience.‖ Look around their Web site. Read the blog by Barbara, the owner. See what authors are scheduled to appear and sign their books. Check out their pricing. Experience them. Discuss The Poisoned Pen‘s approach to pricing. How are they able to remain competitive against booksellers such as Amazon.com or Borders? (Objective 2) Possible Solution: After spending some time looking around the Web site of The Poisoned Pen, it becomes evident that they are certainly not a discount pricing operation. In an industry where it has become normal to find newly released hardback books at 25 percent to 50 percent off of the manufacturer‘s suggested price, The Poisoned Pen does not discount. But, for their customers, this pricing strategy is a bargain. The Poisoned Pen uses a value-based pricing approach. The prices of their products are set not on what the product costs them, but, rather, on the buyer‘s perception of value. Their approach is definitely value-added. They provide a high level of personalized service to their clients, keeping track of what they have previously purchased and making suggestions on what else they may be interested in. Your personal information is kept on file with them allowing a customer to simply call them up and say, ―Hi, this is Mike. Would you please send me the new Cussler book‖? Additionally, they specialize in signed first editions. This high level of personalized service combined with author signed editions of books is what ensures they are capable of proving high value to their customers. This is value-added pricing at its best.

2. Your text talks about Bang & Olufsen, the high-end consumer electronics producer. You can explore their company and products at www.bang-olufsen.com. Take some time to learn about the types of products they offer and find something you would like to own. Copyright©2014 Pearson Education

Use their store locator and find the retailer closest to you. All of their retailers have their own Web site. Visit one and price the components of interest to you. How can they charge what they charge? (Objective 3) Possible Solution: Bang & Olufsen does not sell on price. As a matter of fact, it is rather difficult to find any reference to prices on the Web sites. As the text points out, they have worked to create a ―nonprice‖ position for B&O products. They build products know for exceptional quality and construction, products that are on the cutting edge, both from a performance and aesthetic perspective. They do not compare their products to any other products, because they believe they have no peer. Because Bang & Olufsen has chosen to compete on nonprice variables, decisions about quality, promotion, and distribution become most important.

Web Resources 1. http://247.prenhall.com This is the link to the Prentice Hall support link. 2. www.amazon.com/ Check out Amazon.com‘s homepage. It will be useful to you as you read and think about the opening segment of this chapter. 3. www.jcpenney.com/ Take a look at JCPenney and examine their pricing strategies. 4. www.stagumbrellas.com/ This is the home page for Ebrahim Currim & Sons, the manufacturer of Stag umbrella. 5. www.traderjoes.com Explore Trader Joe‘s, where you can learn about their market position and how they provide value to customers. 6. www.annieblooms.com This is a great site to learn about how a small independent bookseller can successfully compete with the major chains.

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