Part -1:
1. To gain a perspective on pricing practices, it is helpful to understand the role pricing plays in the context of marketing.
(a) What is a marketing activity? What are the two general components of the marketing activity of pricing?
(b) Explain what is meant in this course by the term -.value." Use this concept to describe how pricing is unique among what are traditionally considered the four major categories of marketing activities.
(c) How does the marketing concept relate to marketing activities? How should the marketing concept be implemented in pricing activities?
2. Calculate the price in the following situations where cost-based pricing is used:
(a) An item costs $4.60 and the retailer marks it up by $5.00.
(b) An item costs $18 and the retailer applies a 30 percent markup.
(c) An item costs $112 and the retailer wants to maintain a 60 percent gross margin.
3. The manager of a machine-parts distributor is about to buy an automated telephone ordering system_ The manager estimates that each phone call handled. by such a system will result in $1.00 more contribution than if the phone call is handled by a sales representative. The company receives 30 calls per hour that could be handled by such. a system
The manager has narrowed his search to two possibilities, Telephone System A and Telephone System B. Telephone System A can handle 20 calls per hour and is priced at $50,000. Telephone System B can handle 2.4 calls per hour. Both telephone systems have the same expected life span, 6,000 hours (which does not include down time). Both Telephone System A and Telephone System B are expected to break down 8 times during their life span_ However, the average cost of repairing Telephone System A is $600 whereas the average cost of repairing Telephone System B is $1,000.
For this manager what is the value to the customer of Telephone System B?
4. A new machine coolant product has an improved formula that enables it to more effectively prevent a machine from overheating than its next closest substitute.
(a) Classify the differentiating factor of this new coolant into the appropriate cell of the product-needs framework described in the course_ How might this framework be used to identify other differentiating factors of this product?
(b) When the new coolant is used, the probability that a machine overheats is 0_003_ When its next closest substitute is used, the probability that a machine overheats is 0.02.1. If the cost to a company of repairing an overheated machine is $12,000, what is the value to that company of the new coolant's greater effectiveness?
5. A food processing organization that sells to retailers 5-pound bags of granulated sugar in the traditional paper packaging is considering also selling the sugar in a hard plastic container with a convenient pour spout. Management commissioned a conjoint study in which 800 homemakers were asked to rank their preferences among a set of alternative 5-pound packages of granulated sugar, each containing different features and prices_ A regression analysis was used to determine the results of the study_ Dummy-variable coding was used for the additive and packaging variables. The prices of the alternatives in the study ranged from $0.89 to $2.29 and were coded. in dollars.
The regression coefficients for the study are as follows:
|
Variable
|
Coefficient
|
|
Presence of additive to prevent dumping
|
0.58
|
|
Presence of plagtic container with pour spout
|
2.73
|
|
Puce
|
-1.82
|
Based on these results, calculate the maximum that the food processor could charge retailers for five pounds of sugar packaged with the plastic pour spout container over what is charged for five pounds of sugar in the traditional paper packaging. Assume the retail markup on granulated sugar is 2.0 percent.
6. A manufacturer is considering incurring $60,000 in research and development costs in order to produce a more sensitive electronic thermostat. Calculate the unit breakeven sales level for this product if the materials and labor costs for its production were $1.60 per unit and:
(a) It is priced at 52_20 per unit
(b) It is priced at $4.00 per unit
7 Company A is currently selling 500 units of a product per day at $10 per unit_ Variable costs are $4 per unit
(a) That is the unit breakeven sales level for a 15 percent price increase?
(b) What is the percent breakeven sales level for that price increase?
(c) If sales decrease by 75 units per day as a result of this price increase, then calculate the change in profit that will result from this price change
8. Company B is currently selling 500 units of a product per day at $10 per unit. The contribution margin for this product is $6 per unit. The managers of Company B expect sales to decrease next month to 400 units per day because of increased competition They are
considering decreasing the product's price by $1_00, effective next month_ What is the breakeven sales level for this prospective price decrease?
9 A small candy company sells a popular variety of hard candies in a reusable metal can The company has been buying the cans from an overseas producer for $0_36 apiece_ Other variable costs for this candy product amount to $1.14 per unit. The company has been selling 400 packages of this candy per week at a price of $150 each
(a) Say the overseas producer announces that the price for the cans will increase by $015 per unit, and the product manager is considering passing on that cost increase to customers by raising the product's price to $5.75. Calculate the breakeven sales level for this possible price change
(b) Say the overseas producer announces that his can prices will remain at their current levels, but the product manager at the candy company is considering switching to a U.S. producer who makes a higher quality can, but charges $0_25 more per unit than the overseas producer If the product manager would pass this $0_25 on to customers by raising the product's price, calculate the breakeven sales level for this possible price change.
(c) Describe the meaning of the breakeven sales level that you calculated in Part (b).
10. A company is currently selling 500 units of a product per day at $10 per unit. You can assume that the product's variable costs are constant; they are now at 40 percent of the product's current price. If the company's sales increase above 600 units per day, an incremental fixed cost of $240 will be incurred
(a) What is the breakeven sales level for a 12 percent price increase?
(b) What is the breakeven sales level for a 12. percent price decrease?
11. The manager of a small business is considering lowering the price on his main product for the coming year. If there is any increase in the company's current sales, the manager would have to acquire another delivery truck. He can obtain a used truck for $10000. The market value of this truck would be expected to decline by $2.000 per year Assume that the manager would earn 4 percent annual interest on the $10,000 if he did not buy the truck. that is the cost associated with this truck that is relevant to this pricing decision?
Part -2:
1. A new product has per-unit variable costs of $15 and an estimated value to the customer of $45 per unit. Products in this category have been selling at around $35 per unit. Describe the three basic initial-pricing strategies, and give the approximate price for this product that would be suggested by each of these three strategies. For each price, explain your reasoning.
2. In 1999, Sony introduced a new product into the U.S. market.It was Aibo„ the first interactive robot dog. It was able to learn its name, respond to commands, dance, and be programmed to perform a variety of actions.
Assume Sony's variable costs for producing this product were around $700, and market research indicated that the VTC of this product was around $1,400. Recommend a price that consumers should be charged for this product, and explain how you considered the factors determining initial-pricing strategy in making your recommendation_
3. A manufacturer is considering incurring $60,000 in research and development costs in order to produce a more sensitive electronic thermostat. The materials and labor costs for the production and sale of this product are $1.60 per unit.
(a) Calculate the breakeven sales level for this product if it is priced at S2.20 per unit
(b) Calculate the product's breakeven sales level if it is priced at S4 per unit
(c) Explain the implications of the difference between these two breakeven sales levels.
4. Optical Distortion, Inc_ (ODI) is about to introduce its new product: contact lenses for chickens.19 Unlike contact lenses for humans, which are designed to improve sight, these contact lenses for chickens are designed to distort images so that the chickens become half-blind. This is desirable to poultry farmers because chickens whose vision is impaired will exhibit significantly less fighting (Le., establishing of a pecking order). This will reduce flock mortality from 25 percent to 45 percent (each chicken killed through this fighting costs the farmer $2.4o).
The typical poultry farm consists of 10,000 to 50.000 birds. Currently, poultry farmers deal with deaths due to fighting by debealdng the chickens. Debeaking reduces flock mortality from 25 percent to 9 percent but is so traumatic to the chickens that they stop laying eggs for a week after the operation (a chicken lays an average of five eggs per week and the farmer sells eggs for an average price of 0.53/dozen). Moreover, deheaked chickens have difficulty eating feed from a trough. The resulting spillage causes increased feed costs to the farmer that amount to $ o.o 84 per chicken per year (the normal life span of a chicken is approximately one year).
The ODI lenses do not cause the chickens to become traumatized, and since it enables them to keep their beaks, it does not cause any eating difficulties. A three-person crew, which is able to debeak 250 chickens per hour could, after training, install contact lenses in 225 chickens per hour. The average labor costs for this crew is S36 per hour. ODI's materials and manufacturing costs are So.035 per pair of lenses.
ODI is aware that promoting their new product will not be easy. Many poultry farmers consider the idea of contact lenses for chickens to be ridiculous and complain that their workers are unfamiliar with the lens insertion procedure. However, ODI's immediate question is what price to charge for a pair of lenses.
(a) What is the low end of the price range that ODI should be considering?
(b) What is the high end of the price range that ODI should be considering?
(c) What price within this range should ODI use for its new contact lens product? Justify your answer, making use of what you know about the basic initial-pricing strategies.
(d) Assume the contact lens price that you recommended in Part (c). If first-year fixed costs are $68,000, how many pairs of contacts lenses would ODI have to sell during the first year to breakeven? How does this number affect your confidence in the price you recommended in Part (c)?
Part -3:
1. A manufacturer has been selling 50,000 units per year of a certain product. The price of this product is $20 and the variable costs associated with the product are $12 per unit. The manufacturer is considering decreasing the price of his product to $17 so as to increase sales. If he goes ahead with this price change, the manager will purchase new production machinery, at a cost of $75,000, to accommodate the increased sales.
(a) The manager intends to evaluate the prospective price change by computing a breakeven sales level using the traditional formula, BE = AFC/CM. Ex lain what is wrong with the logic of doing this.
(b) Suggest a more appropriate formula for calculating a breakeven sales level. Justify your suggestion.
(c) Use this more appropriate formula to calculate the breakeven sales level for this prospective price change. How can the manager use this breakeven in his decision about whether or not to go ahead with the price change?
(d )Use breakeven analysis to help the manager decide whether or not to purchase the new production machinery while keeping the product's price at $20.
2. Eastern Semiconductor is currently selling its most popular microchip for 8220. It has been selling 4,000 of these chips per month. The company has learned, however, that net month all overseas competitor will enter the market and start selling a copy of this chip for 8200. If Eastern maintains its price of $220 per chip, it expects its sales to decrease to 3,000 units per month.
(a) Given that Eastern's variable costs for this product are $40 per chip, what is the breakeven sales level for Eastern decreasing its price by $20 price per chip?
(b) Do you think it is likely that Eastern will achieve this breakeven sales level?
3. Plasiderm, Inc., sells a medical product. The company is currently selling the product for $18/unit and is considering whether it could increase profits by increasing the product's price to $20/unit.
Plasiderm currently sells 50,000 units per week. Its current weekly operating data are as follows:
| Sales revenue |
$900,000 |
| Variable costs |
$400,000 |
| Fixed costs |
$250,000 |
| Pretax profit |
$250,000 |
You can assume that per-unit variable costs do not vary with the level of production.
(a) What is the breakeven_ sales level for the price increase that Plasidei'm is considering? Explain what this breakeven sales level means.
(V) If the sales level for this product decreased by 5,000 units per week after the price increase, what would be the change in Plasiderm's weekly pretax profits caused by the price increase?
(c) What would be Plasiderm's profit change if, after the price increase, sales remained at 50,000 units per week?
4. A heating oil retailer has been buying heating oil at S2.82 per gallon and keeps a 30-day supply on hand. He sells 5,00o gallons per day and has been charging his customers S3.25 per gallon. The retailer has nonincremental fixed costs of S800 per day. Yesterday the wholesale price of heating oil decreased from $2.82 per gallon to $2.68 cents per gallon.
(a) What is the per-gallon cost that is relevant for pricing decisions concerning heating oil that the retailer will sell today? Explain your answer.
(b) If the heating oil retailer is planning to respond to the wholesale price decrease by lowering his S3.25-per-gallon retail price, should he wait 30 days to make that price change? Explain your answer.
5. A leather goods retailer has been buying a popular style of handbag for 512 per bag and selling them for $20 per bag. The retailer has been selling 200 handbags per month. The retailer has been close to bankruptcy for the past year. In response to this threat, the retailer's buyer has found an overseas source for this handbag. The new source results in the cost per handbag decreasing to 810 per bag, and the new shipments will begin arriving on January 1. The shop's owner feels that the arrival of the new versions of the popular handbag might present a good occasion to carry out a $2 price increase.
(a) What is the change in the retailer's variable costs that will occur on January 1? Is this change independent of the price change that the shop's owner is considering or is it tied to this prospective price change? Explain.
(b )Calculate the breakeven sales level for the price in that the
shop's owner is considering, and justify your answer.
6. A pharmaceutical company has been selling the prescription allergy drug Aquanox to retail pharmacists at a price of $3.20 per tablet, considerably above the company's variable costs of $0.52 per tablet. The company's director of marketing has recently suggested that they consider lowering the price, but the VP of the division rejected this idea. The VP's explanation was that they should not even consider lowering the price until the drug's high research and development costs have been recovered. Do you agree with the VP's reasoning? Why or why not?
7. One year ago, a manufacturer paid $3,000 for a stamping press that can produce only a particular plastic specialty product. The press now has a market value of $2,500 and is expected to continue to lose $500 of its market value each year. If the press were sold, assume that the manufacturer would earn 5 percent annual interest on the proceeds of the sale. The manufacturer is now considering changing this plastic specialty product's price for the coming year. If the manufacturer's pricing decision will affect whether or not this stamping press is retained by the company, what cost associated with the stamping press is relevant to this decision? Explain your answer.
Part -4:
1. Imagine that you are a member of a new-project team of a large appliance manufacturer. Your team is given the task of designing a new refrigerator for the U.S. consumer market.
(a) For each of the five types of consumer needs discussed in this chapter, give a suggestion for how a new refrigerator could satisfy that need better than most currently available refrigerators.
(b) For two of the suggestions you made in Part (a), discuss which of the three types of product characteristics might best accomplish this better satisfaction of the consumer need.
2. In 2010, the Center for Science in the Public Interest reported a study on the popular loo-calorie packs of branded snack foods, such as Doritos, Cheez-Its, and Oreos. They found that the per-ounce prices of these 100-calorie packs were 16 to 279 percent higher than the per prices of the regular-sized packages of these products. Use the product-needs framework described in this chapter to suggest the differentiating factors that could have created sufficient customer value to make these higher prices possible.
3. The Loctite Corporation, a large adhesives producer, makes a wide variety of products for both industrial and consumer markets. One of Loctite's industrial products is Quick Set Instant Adhesive. It is described in their catalog as follows:
A particularly powerful instant adhesive especially suited for equipment maintenance and repair. Typical applications include rubber belts, bumpers and 0-rings; metal handles, parts and wires; plastic nameplates, signs and trim.
(a) Give the title of the person in a manufacturing company (that would be a potential Loctite customer) who would be most likely to value Quick Set Instant Adhesive. What role is that person likely to play in the adhesives purchase process? How might knowing that role affect Loctite's efforts to price Quick Set Instant Adhesive so as to capture a large portion of its VTC?
(b) One of Loctite's consumer products is Loctite Super Glue Liquid. It is described as follows:
Uses a new formulation that affords super glue users increased working time, eliminating the need to rush and reducing the risk of mistakes when gluing. This allows for repositioning and precision alignment of surfaces, making it ideal for use on items such as porcelain dolls, china, and jewelry.
Who in a consumer household would be most likely to value Loctite Super Glue Liquid? What role is that person likely to play in the adhesives purchase process? How might knowing that role affect Loctite's efforts to price Super Glue Liquid so as to capture a large portion of its VTC?
4. A large information technology (IT) company sells a software product designed to help protect an organization's data. The company's market research has determined that hospitals and other medical organizations in its market area have a 1.3 percent chance of losing some of a patient's data over a five-year period. With the IT company's software, the chances of patient data loss for a five-year period are reduced to 0.12 percent.
Further, the market research has determined that, when patient data loss occurs, there is a 15 percent chance that the organization will lose the patient's business and a 0.75 percent chance that a lawsuit will result_ The average cost of losing a patient's business is $600 in promotion expenses and other start-up costs to acquire a new patient. The average cost of a lawsuit is $10o,000.
Given these research findings, calculate the value of this data-protection benefit of the IT company's software product to a medical organization that keeps data records on 20,000 patients.
5. The marketing manager of an automobile battery manufacturer is considering the prices that should be set for some new additions to the company's product line. The Basic is the standard model, which sells to consumers for $54. The Security is a new model that features power drain protection-the ability to turn off sources of excessive battery drain, such as headlights left on when the vehicle is parked. The Security Plus is a new model that features not only power drain protection but also includes a small backup battery that will start a car three to five times if the primary battery goes dead for any reason.
The manager commissioned a conjoint study in which 300 automobile owners were asked to rank their preferences among a set of alternative batteries, each containing different features and prices. Dummy-variable coding was used for the power-drain protection and backup battery variables. The price variable was coded in dollars. A regression analysis on the responses of these consumers produced the following regression coefficients:
| Variable |
Coffiecient |
| Presence of power drain protection |
11.31 |
| Presence of backup battery |
23.08 |
| Price |
-0.82 |
(a) Based on this data, calculate an appropriate price to retailers for the Security model. Assume that retailers take a 40 percent gross margin on car batteries.
(b) Based on this data, calculate an appropriate price to retailers for the Security Plus model. Again, assume that retailers take a 40 percent gross margin on car batteries.
Part -5:
1. A well-known local wine shop uses keystone pricing for its line of modular wine racks.
| 12-bottle rack, natural Finish |
Per-item cost: |
$22.50 |
| 12-bottle rack, ITIallogany Finish |
Per-item cost: |
$26.25 |
| 24-bottle rack, natural finish |
Per-item cost: |
$36.00 |
(a) Given this pricing practice, use the cost information here to calculate the retail prices for the following items. Show your calculations:
(b)What is the markup percentage being used for these wine racks? (0 If these wine racks are sold at the prices you calculated in Part (a), what would be the shop's percent gross margin for these items?
2. You are the manager of a successful gift shop. After a meeting with her accountant, the owner of the shop has told you that the shop's cost of goods sold should be about 30 percent of total sales revenue and that the price of each of the items that the shop sells should be in line with this.
(a) Based on the owner's instructions, give the price you would set for the following items. Show the formula (s) you used in your calculations:
| 12-bottle rack, natural Finish |
Per-item cost: |
$22.50 |
| 12-bottle rack, ITIallogany Finish |
Per-item cost: |
$26.25 |
| 24-bottle rack, natural finish |
Per-item cost: |
$36.00 |
(b) Is the owner using cost-based, competition-based, or customer-based pricing? What are the pros and cons of the owner's pricing procedure?
3. The manager of a local convenience store is expanding his line of small toy items. To price these new items, the manager is looking at the prices being charged by competing retailers in his area. For the popular "Titan Joe Action Figure," he has observed the following prices:
| Downtown department store: |
$14.00 |
| Chain drug store: |
$11.99 |
| Well-known local variety store |
$10.99 |
| Large discount department store: |
$9.97 |
| Discount toy store |
$9.55 |
If the manager is inclined to use parity pricing, what price should he set for the Titan Joe Action Figure? Explain your reasoning.
4. A homeowner has asked a local real estate agent for advice on the price he should set for his house. The real estate agent notes that the only comparable house in the neighborhood that is currently for sale is asking $350,000. Both houses are on a hill that overlooks a beautiful lake, but the owner's house is forty feet farther up the hill than the comparable house. The agent estimates that, in this area, customers will pay an additional $10,000 for a house for each ten added feet of elevation associated with the house's location. The owner's house has an old, outdated kitchen, but the sellers of the comparable house have just spent $24,000 to remodel their kitchen.
What is the selling price that the real estate agent should recommend?
5. Lincoln Manufacturing has just developed a more durable commercial carpeting. It has all the advantages of the currently available commercial carpeting and lasts twice as long. Lincoln's materials and labor costs for producing this new carpeting are $14.50 per square yard. Buyers of commercial carpeting must have it installed by independent contractors whose installation charges for this new carpeting average $10 per square yard.
The price of the currently available commercial carpeting averages $12 per square yard. independent contractors charge $8 per square yard for installing the currently available commercial carpeting.
(a) Use VIC analysis to calculate the VT C for commercial buyers of a square yard of Lincoln's new carpeting.
(b) Recommend a price for a square yard of Lincoln's new carpeting, and justify your recommendation. Your justification should make use of our estimate of the VT C of Lincoln's new carpeting.
Part -6:
1. The CEO of a large company selling seeds and garden supplies to consumers and businesses through catalogs and the Internet is unhappy with its overall profitability. He feels that part of the solution is to be more professional in price setting, and he asks the director of marketing to hire an experienced person for a new position of pricing manager. While interviewing one candidate, the marketing director explains that the company has been advised to listen more to customers and respond to their needs and asks the candidate how he would implement this advice in the area of pricing. The candidate responds as follows:
"It's great to listen to the customer when you are designing your product, but it's just not practical in pricing. All the customers have to say is that they want lower prices. If you want me to increase profits, I can't Very well listen to that!"
a. What should the marketing director make of this response?
b. If you were the candidate, how would you have responded to this question?
2. An entrepreneur is starting a business selling decorative items, such as vases, wall hangings, and prints (framed or unframed) over the Internet. She is aware that she needs to make a number of pricing decisions.
a. Describe a decision that the entrepreneur must make that would be an example of price setting. Describe a decision that she would have to make that would be an example of pricing policy.
b. Describe a decision that she would need to make regarding price format, and describe one regarding price structure.
3. As the marketer of your own professional services, you are responsible for price setting. Thus, it is necessary that you think about your pricing policy.
a. Describe how a business professional might implement the following pricing policies in the pricing of his or her services: negotiated price policy and fixed price policy.
b. Give and justify your views as to which of these pricing policies would be more appropriate in an individual's professional services pricing.
4. Identify someone you know who works in a business organization. Talk with that person to learn about the individuals in the organization who are involved in the setting of prices.
a. Describe the job of a person within the organization who plays a direct role in price setting.
b. Describe the job of a person within the organization who plays an indirect role in price setting. What is the information or expertise provided by that person? When during the price-setting process does that person interact with an individual who has a more direct role in price setting?
5. The marketing manager of a large truck manufacturer was surprised to learn that the price lists generated by his department had little relation to the prices that were actually charged to customers. The company's finance department often changed the prices to conform to profit goals before the prices reached the company's sales force. The salespeople often gave customers discounts to increase their sales volume. The operations manager made price adjustments to accommodate delays in promised shipping times.
a. I.V-hy is this situation undesirable for the company?
b. What can be done about this situation?