Solution Manual for Pricing Strategies: A Marketing Approach, 1st Edition

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Schindler, Pricing Strategies–Instructor ResourcesChapter 1: Answers to End-of Chapter QuestionsExercises1.The CEO of a large company selling seeds and garden supplies to consumers and businessesthrough catalogs and the Internet is unhappy with its overall profitability. He feels that part ofthe solution is to be more professional in pricesetting, and he asks the director of marketingto hire an experienced person for a new position of pricing manager. While interviewing onecandidate, the marketing director explains that the company has been advised to listen moreto customers and respond to their needs and asks the candidate how he would implement thisadvice 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’sjust not practical in pricing. All the customers have to say is that they want lowerprices. 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?Candidate does not seem able to thoroughly apply the marketing concept.Listening to customerispractical in pricing; customer response depends on taking intoaccount customer feelings such as:–Prices substantially higher than expectations (sticker shock)–Price considered unfair, higher than can be justified–Perceived discount, price lower than expectationsb.If you were the candidate, how would you have responded to this question?Listening is practical, … if you do it right.I would ask about product value–what are its benefits to the customers?Further,I would notonlylisten tothe customerabout thevalue that can be harvested, but alsoaboutthe customer’s feelings about the price such as the feeling ofitbeing substantiallyhigher than the customer’s expectations, the feeling that a price is unfair, or higher thancan be justified, or customers perceiving they are receiving a discount, or a price lowerthan their expectations.Both identifying the value that the product represents to the customer and consideringcustomers’ price expectations and feelings depend onlistening to andunderstandingcustomer needs.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 anumber of pricing decisions.a.Describe a decision that the entrepreneur must make that would be an example of pricesetting. Describe a decision that she would have to make that would be an example ofpricing policy.Price setting:$7 for a vase

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Price policy: vases are sold for fixedpricesb.Describe a decision that she would need to make regarding price format, and describe oneregardingprice structure.Price format:pricing the vase at $6.99 versus $7Price structure:customer gets10% off if he/she purchases 4 vases at the same time3.As the marketer of your own professional services, you are responsible for pricesetting.Thus, it is necessary that you think about your pricing policy.a.Describe how a business professional might implement the following pricing policies inthe pricing of his or her services: negotiatedprice policy and fixedprice policy.Negotiation policy:planasking price, reservation price, haggling (revisedprices, offers, andjustifications)Fixed-price policy: here are my prices, give out list (e.g., a market-research consultant;tutoring; a home decorator: $x for a 12’ x 15’ room)b.Give and justify your views as to which of these pricing policies would be moreappropriate in an individual’s professionalservices pricing.Negotiated-price policy is more appropriate–It enables price segmentation–No reason for fixed-price policy here (it’s done mainly becauseit is not practical for aseller/store to carry out negotiation on thelarge number ofitems)4.Identify someone you know who works in a business organization. Talk with that person tolearn about the individuals in the organization who are involved in the setting of prices.a.Describe thejob of aperson within the organization who playsa direct role in pricesetting.E.g.,a merchandise buyer in the linens department of a department store; would select a newpattern of towels to be sold by the store and would set the prices for each item in that lineof towelsb.Describethe job ofa person within the organization who plays an indirect role in pricesetting. What is the information or expertise provided by that person? When during theprice-setting process does that person interact withanindividual who has a more directrole in price setting?E.g.,a financial analyst in a consumer products manufacturing organization might advise theproduct managers on the company’s profit goals for their products;analyst mightinteraction with the product manager during product planning and when evaluating detailsof how the plans were implemented5.The marketing manager of a large truck manufacturer was surprised to learn that the pricelists generated by his department had little relation to the prices that were actually charged to

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customers. The company’s finance department often changed the prices to conform to profitgoals before the prices reached the company’s sales force. The salespeople often gavecustomers discounts to increase their sales volume. The operations manager made priceadjustments to accommodate delays in promised shipping times.a.Why is this situation undesirable for the company?Undesirable because,–Prices determined by factors that are short-term and not necessarily in line with theorganization’s overall strategies (there may be strategic drift, e.g., to a low-pricestrategy which would be hard to change)–Prices may be good for a department, but not for the whole company–Pricing interests may conflict, changes may cancel each other out–Resulting prices may not be profit-maximizingb.What can be done about this situation?Possibilities for fixing this situation,–Establishing centralized pricing manager–High-level management can establish policies regarding: what price adjustments canbe made by each function, under what circumstances, who would have to beconsulted, and that provides management feedback on how well these policies arebeing implemented–Include provision for periodically updating this systemReview and Discussion Questions1.Describe the two parties in a commercial exchange and what is given and received by eachparty.The seller provides a product to a buyer in return for something in exchange (usually an amount ofmoney). The product could be something tangible, which is referred to as a good. Or, the productcould be the result of human or mechanical effort, which is referred to as a service. The buyercould be a consumer–an individual who purchases a product for his or her own use. Or, the buyercould be a business customer–an individual or group who purchases the product in order to resellit or for other business purposes.2.How is the voluntary nature of the commercial exchange related to its potential for creatingbenefits for society?Because both parties to the exchange are better off after the exchange than before, one could saythat the exchange makes the world a just a little bit better place. There is a little more happinessafter the exchange than before it. Although there may be only a tiny bit of increased happinessfrom any one commercial exchange, these little pleasures can quickly mount up. In a society wherethe distribution of most goods and services is governed by afree-market economy, every personengages in numerous commercial exchanges every day. Each little increase in pleasure that acommercial exchange brings is then multiplied many times, and the societal benefits can becomeconsiderable.

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3.Give some terms other than “price” that are commonly used to refer to prices.Terms that are commonly used to refer to a price include rent, fee, premium, charge, toll, tuition,fare, salary, wages, commission, etc.4.In a business organization, describe how what a manager is referring to when speaking of“prices” differs from what a manager is referring to when speaking of “costs.”From the viewpoint of a business manager, the difference between prices and costs is quiteimportant. A price is what a business charges, and acostis what a business pays.5.What are the four categories of marketing activities, usually referred to as the marketingmix?In what important way does pricing differ from the other three categories?The four categories of marketing activities that are traditionally known as the four elements of themarketing mixare:–Product: designing, naming, and packaging goods and/or services that satisfy customer needs.–Distribution: efforts to make the product available at the times and places that customers want.–Promotion: communicating about the product and/or the organization that produces it.–Pricing: determining what must be provided by a customer in return for the product.Product, distribution, and promotion are all part of the process of providing something satisfying tothe customer. All three of these types of marketing activities contribute to the product being ofvalue to customers. Pricing, on the other hand, is not primarily concerned with creating value.Rather, it could be said to be the marketing activity involved with capturing, or “harvesting,” thevalue created by the other types of marketing activities.6.What is the marketing concept? How can pricing activities be guided by the marketingconcept?The marketing concept: The key to business success is to focus on satisfying customer needs. Anorganization that works toward satisfying customer needs in every feasible way when carrying outmarketing activities is likely to see more long-run success than a company that does not have sucha customer focus.Certainly, customers would prefer paying less. In fact, paying nothing at all might well be their firstchoice! But it is simply not feasible to “give away the store.” An organization that gives away thevalue it creates will soon cease to exist, and thus the value it creates will disappear. Rather, it is inthe customer’s interest for an organization that creates customer value to set prices that maximizethe organization’s profitability, since that would give the organization the greatest possible chanceof continuing to create that value. Further, the marketing concept points the price setter to considernot only the customer value that can be harvested, but also the customer’s feelings about the pricethat is being charged.7.What is barter? Give an example of barter, either from your reading or from your ownexperience.

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Barter is the practice of exchanging goods or services for other for other goods or services. Anexample of barter is that Shell Oil purchased sugar from a Caribbean country by giving in returnone million pest control devices.8.What is a medium of exchange? What is most commonly used in our society as a medium ofexchange?A medium of exchange is something that is widely accepted in exchange for goods and services ina market. A medium of exchange could be anything that the buyers and sellers in a society agreeupon. Most commonly used in our society as a medium of exchange is money, such as dollars,yen, euros, etc.9.Describe the basic elements of price negotiation. Why is a price arrived at throughnegotiation referred to as an “interactive price”?Basic elements of price negotiation:–Asking price: the first price stated by the seller.–Initial offer: the first payment amount offered by the buyer–Reservation price: the lowest price at which the seller would sell the item and the highest pricethe buyer would pay.–Haggling: a process involving some number of prices and offers and statements supporting thevalidity of each.These prices are termed “interactive prices” because the price that is paid results from aninteraction between the buyer and seller.10.What are fixed prices?What do customers like about fixed prices?What do retailers likeabout fixed prices?A fixed price is the price that a seller expects to receive and sticks to it.Customers appreciate the quicker and less stressful buying process associated with fixed prices.For the retailer, fixed prices help make possible the large department store, which depends on alarge number of quick transactions and staffing by low-paid, relatively unskilled, clerks. Also, theuse of fixed prices facilitates mail-order sales and supports the development of large catalogcompanies.11.What is price segmentation? Why might a seller want to engage in price segmentation?The practice of charging different customers different prices for the same item is known as pricesegmentation.12.Give an example of how different numbers could be used to express what would besubstantially the same price.The price of a lamp in a home furnishings catalog might be expressed as a price for the lamp thatincludes shipping or as a price for the lamp alone along with a separate price for the shipping of thelamp to the purchaser.13.What is the difference between price setting and pricing policy?

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Price setting consists of decisions about individual prices, while pricing policy involves decisionsthat guide and regulate the setting of individual prices.14.Give some examples of job titles of those in a large organization who are likely to havedirect responsibility for making pricing decisions.Brand manager, product manager, merchandise buyer, sales manager, sales representative,pricing specialist, etc.15.What are some of reasons that anitem’s pocket price may not be the same as the item’sinvoice price? What could be done about this?Reasons that an item’s pocket price may not be the same as the item’s invoice price:–Large or longtime customer may be able to convince his/her sales representative to offer a smalloff-invoice discount.–The customer may contact the company’s advertising department and arrange a small discountfor, say, displaying the product in the customer’s flyers.–Employees in each part of the company might be assuming that it makes sense to give a breakto such a good customer.For pricing decisions to be made effectively in a large organization, it is important that thesedecisions either involve high-level management in the organization or use some other means tocentrally coordinate and constrain the many pricing-related decisions that are likely to be made bymany different people throughout the organization.16.Give an example of a way that everyday pricing decisions could work against a company’slong-term interests.Price cutting done in response to competition could lead to price warfare and serious erosion ofprofits.17.Describe some benefits of coordinating pricing activities with the other functions of abusiness organization.If a price decrease is expected to lead to a sales increase, then it is useful to make sure thatproduction, procurement, customer service, and other functions of the organization are prepared tohandle this price decrease. Or, if new cost economies are achieved by some aspect of thecompany’s operations, rapid knowledge of this could contribute to more efficient pricing decisions.In addition, new possibilities, such as lowering costs by purchasing a component in an Asiancountry, could be more effectively evaluated with the combined input of marketing research andcentrally-coordinated pricing decision makers.18.Why might the study of pricing be relevant to a student who does not plan to ever set priceswithin a business organization?Pricing is so critical to a business organization that if affects, and is affected by, virtually everyfunction of the organization. In addition, price-setting is relevant to our personal lives. Even if we donot sell things at garage sales or on eBay, we are almost all marketers of our professional services.Our compensation–salary, bonuses, and benefits–constitutes the price we charge employers for

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our services. As managers of what is most likely, over the course of our careers, a multi-milliondollar product, it makes good sense for us to be familiar with the principles of effective pricing.

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Schindler, Pricing Strategies–Instructor ResourcesChapter 2: Answers to the End-of Chapter QuestionsExercises1.A well-known local wine shop uses keystone pricing for its line of modular wine racks.(a)Given this pricing practice, use the cost information here to calculate the retail prices forthe following items. Show your calculations:12-bottle rack, natural finishPer-item cost$22.5012-bottle rack, mahogany finishPer-item cost$26.2524-bottle rack, natural finishPer-item cost$36.00P =$22.50 + 1 x $22.50 = $45.00P =$26.25 + 1 x $26.25 = $52.50P =$36.00 + 1 x $36.00 = $72.00(b)What is the markup percentage being used for these wine racks?M = ( $22.50 / $22.50 ) x 100 = 100%(c)If these wine racks are sold at the prices you calculated in Part (a), what would be theshop’s percent gross margin for these items?%GM = ( $22.50 / $45.00) = 50%$ gross margins would be $22.50, $26.25, and $36.002.You are the manager of a successful gift shop. After a meeting with her accountant, theowner of the shop has told you that the shop’s cost of goods sold should be about 30 percentof total sales revenue and that the price of each of the items that the shop sells should be inline 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:Item APer-item cost:$26.00Item BPer-item cost:$9.25Item CPer-item cost:$103.60P = C /[1–(%GM/100)]If costs are 30%, then %GM = 1–30% = 70%P = 26/(1–.7) = $86.67P = 9.25/(1–.7) = $30.83P = 103.6/(1–.7) = $345.33Or, M = %GM x [100/(100–%GM)]M = 70% x (100/30) = 233%P = C + [(M/100) x C]P = 26 + (2.33x 26) = 26 + 60.58 = $86.58

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P = 9.25 + (2.33x 9.25) = 9.25 + 21.55 = $30.80P = 103.6 + (2.33x 103.6) = 103.6 + 241.39 = $344.99These prices differ from those obtained from the %GM formula only by round-off error.(b)Is the owner using cost-based, competition-based, or customer-based pricing? What arethe pros and cons of the owner’s pricing procedure?Cost-based pricing (in particular, markup pricing)Pros:Simple to understandandimplement; easy way to keep in lineCons:May result in a price that is so highthatfew buy or so low thatmostcustomerswould have paid moreNot useful for maximizing total profits3.The manager of a local convenience store is expanding his line of small toy items. Toprice these new items, the manager is looking at the prices being charged by competingretailers in his area. For the popular “Titan Joe Action Figure,” he has observed the followingprices:Downtown department store:$14.00Chain drug store:$11.99Well-known local variety store$10.99Large discount department store:$9.97Discount toy store$9.55If the manager is inclined to use parity pricing, what price should he set for the Titan JoeAction Figure? Explain your reasoning.Parity pricing is to price at the same level as competitors.But,whichcompetitors?Answer should show understanding of these alternatives:Prices:Those that are highest, lowest,ormiddlein the range?Competitors:Largest?(discount dept. store chain?)Fastest growing?(discount toy store?)Most prestigious?(downtown dept. store?)Most similar to price-setting company?(chain drug store?)4.A homeowner has asked a local real estate agent for advice on the price he should set for hishouse. The real estate agent notes that the only comparable house in the neighborhood that iscurrently for sale is asking $350,000. Both houses are on a hill that overlooks a beautifullake, but the owner’s house is forty feet farther up the hill than the comparable house. Theagent estimates that, in this area, customers will pay an additional $10,000 for a house foreach ten added feet of elevation associated with the house’s location. The owner’s house hasan old, outdated kitchen, but the sellers of the comparable house have just spent $24,000 toremodel their kitchen.What is the selling price that the real estate agent should recommend?

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VTCanalysis:reference value$350,000value of comparable housepos. diff.value+40,000hill: 4 x $10,000neg. diff. value–24,000value of kitchen in comparable house$366,000Real estate agent might recommend a selling price should be somewhat below the VTC, say,$350,000.5.Lincoln Manufacturing has just developed a more durable commercial carpeting. It has allthe 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 squareyard. Buyers of commercial carpeting must have it installed by independent contractorswhose 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 availablecommercial carpeting.(a)Use VTC analysis to calculate the VTC for commercial buyers of a square yard ofLincoln’s new carpeting.reference value$12price of next closest substitute (sq yard of current carpet)pos. diff. value+12price of sq yard of replacement carpet savedpos. diff. value+8price of replacement installation savedneg. diff. value–2$10–$8, more expensive installation$30(b)Recommend a price for a square yard of Lincoln’s new carpeting, and justify yourrecommendation. Your justification should make use of your estimate of the VTC ofLincoln’s new carpeting.Price should belower than$30 (=VTC)–there should be some inducement to purchasePrice needs to be above $14.50(=variable costs)–each sale should make some contributionto covering fixed costsThere should be a plausible argument for where within this range the price should be.Review and Discussion Questions1.What arethethree possible starting points for the process of setting an initial price that aredescribed in this chapter?Three starting points for the process of setting an initial price are: cost of product, competitors’prices, and customer needs.

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2.Suppose that you have a service business such as house painting. Describe how you woulduse cost-plus pricing in developing an estimate for a potential customer.First of all, the company may calculate its cost to do the job. Then, it determines how much shouldbe added to this cost by considering factors such as the number of such jobs it is likely to do in ayear, its overhead costs, and its desired final profits.3.If an item costs $10 and you apply a60 percent markup, what would be the item’s price? Ifyouused keystone pricing in this case,what then would be this item’s price?An item costs $10 and you apply a 60 percent markup, the item’s price would be:P = C + [(M/100) x C] = $10 + [(60/100) x $10] = $16If using keystone pricing,the markup would be 100 percent, andtheitem’s price wouldbe:P = $10 + [(100/100) x $10] = $204.If management’s profit guidelines mandate gross margins of25percent,calculate the markuppercentagethatwould be equivalent to thisgross margin.If management’s profit guidelines mandate gross margins of 25%, the markup percentage thatwould be equivalent to this gross margin is:M = %GM x [100/(100–%GM)] = 25% x [100/(100-25)] = 33%5.If an item will be priced according to a 55 percent gross margin and the item costs $20, usethat gross margin percentage to directly calculate the item’s price.If an item will be priced according to a 55% gross margin and the item costs $20, the item’s pricewould be:P = C / [1–(%GM/100)] = $20 / [1–(55/100)] = $44.446.Describe how you would research industry norms on gross margins to inform yourcompany’s decisions regarding pricing-related profit goals.A source of industry norms on gross margin is the publically available reports, such as the Form10-K, that every company must file with the U.S. Securities and Exchange Commission (SEC).7.Cost-based pricing is sometimes justified by arguing that it ensures that a company receives agood profit on the products that it sells. Describe a problem with this justification.What doesthisproblemhave to do with the main disadvantage ofcost-basedpricing?Although a cost-based price might ensure good per-item profits, it may not ensure good totalprofits.For example, a markup set to yield a good profit on each item might result in a price so highthat few items are sold.The total profits made from that item might then be quite disappointing.Alternatively, a markup set to yield a good profit on each item could result in a price that issubstantially lower than customers would be willing to pay.The result of this could be a level oftotal profits far lower than could otherwise have been made.Thisis the maindisadvantage of cost-based pricing–itis not particularly useful in efforts tomaximize total profits.

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8.Given that there is a serious disadvantage tocost-basedpricing, how would you account forits widespread use in retailingand other businesses?Onereason for the widespread use of cost-based pricingis its simplicity.Such simplicity isparticularly important in situations where there are large numbers of prices to determine on acontinuing basis.This is often the case among resellers, which at least partially explains why cost-based pricing is particularly widespread in wholesaling and retailing.A secondreason for the widespread useof cost-based pricinghas to do withthe common practiceof using standard markup or margin levels in an industry or for a particular type of product.Because per-item costs are often similar among competitors, applying a standard markup ormargin reduces the need to carry out research on competitors’ prices.Use of such cost-basedstandards canserve as an economical means of keeping one’s prices from being substantially outof line with those of competitors.9.What is parity pricing? How does it differ from other forms of competition-based pricing?Parity pricing is a pricing method in which a seller’s intent is to match the levels of competitors’prices.Other forms of competition-based pricing may start with the prices charged by competitors,and then choose to set prices lower or higher than these competitive prices.10.Describe some ways that a seller using competition-based pricing could deal with thepresence in the marketplace of a variety of prices for an item.A competition-based method of setting a product’s initial price could deal with this complexity byfocusing on only the highest marketplace prices, on only the lowest, or on only prices in the middleof the competitive price range.Alternatively, attention could be focused on the prices of oneparticular competitor, perhaps the one that is largest, the one showing the fastest growth, the onethat is most prestigious, or the one considered most similar to the company that is setting an initialprice.11.What might make it difficult to determine the prices of one’s competitors? When suchdifficulties occur, what could be done to surmount them?In business markets, a further difficulty of competition-based pricing involves determiningcompetitors’ actual prices.In many business markets, prices are not publicly posted, eitherbecause they are determined by a bidding process or because they are determined by privatenegotiations between the buyer and seller.Sometimes, the publicly available posted prices are notthe prices at which products are actually sold, because of subsequent private discounts ornegotiations.In such situations, a seller may be able to draw on reports from salespeople concerning whatcustomers have told them about the prices of their competitors.In most cases, useful estimates ofcompetitors’ prices would require supplementing such information from customers with informationabout competitors’ likely costs, strategies, profit levels, and other elements of “competitiveintelligence.”12.Describe one advantage and one disadvantage that competition-based pricing has in commonwith cost-based pricing.

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Competition-based pricing shares with cost-based pricing the advantages of being intuitive andrelatively easy to carry out.However, it also shares with cost-based pricing the disadvantage ofproducing prices that may not be helpful to efforts toward maximizing total profits.13.How is customer-based pricing related to the role of price in the commercial exchange versusthe role of the other three elements of the marketing mix?Starting the initial price-setting process by considering the customer’s needs makes possible arational basis for price setting.The role of price in the commercial exchange is to capture the valuecreated by the other three elements of the marketing mix.Because this value consists of thesatisfactions of customer wants and needs that are provided by the product, careful considerationof each of the ways a product satisfies, fails to satisfy, or could be made to satisfy these customerwants and needs provides essentialpricingguidance.14.Describe the concept of a product’s value to the customer. Why is themonetaryestimation ofthis value important for price setting?A product’s value to the customer (VTC) is the value created by the product, distribution, andpromotion elements of the marketingmix.A key technique of customer-based pricing is to be ableto arrive at a numerical estimate of this value. Such consideration places at the starting point of theinitial price-setting process a measure of the value that the product’s price could potentiallycapture.15.Describe the concept of a product’s reference value. How would you calculate the referencevalue for a consumer product whose package size is different than the package sizes of all ofits competing products?A product’s reference value is the price of the product thatthecustomer perceives as the nextclosest substitute fortheproduct. If a consumer product whose package size comes in a 10-ouncebox and the next closest substitute comes in a 20-ounce box, then the product’s reference valuewould be equal to half of the price of a box of the substitute product.16.Consider a familiar product, such as Apple’s iPhone. What would you consider to be its nextclosest substitute? Describe two factors that would differentiate the iPhone from its nextclosest substitute.The next closest substitute ofApple’s iPhonecould be theMotorola Droid. The first factor thatwould differentiate the iPhone fromthe Droidis thattheiPhone has more user-friendly interfacethanthe Droid.Asecond factorwould bethat Applehas a better brandreputationthanMotorola.17.What is the difference between a positive differentiating factor and a negative one? Is itpossible for an item to simultaneously have both positive and negative differentiatingfactors?If the product is superior to the next closest substitute on a factor, then the value of this differenceto the customer is a positive differentiation value.If the product is inferior to the next closestsubstitute on a factor, then the value of this difference to the customer is a negative differentiationvalue. It is possible for an item to simultaneously have both positive and negative differentiatingfactors.

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18.Which would be more prudent: pricing an item above its VTC, exactly at its VTC, or belowits VTC? Explain your reasoning.It is a good idea to setaproduct’s price at a level belowitsVTC. Assuming that the product’s VTCis assessed accurately, thencustomers would not buy it at a price higher than that amount. Ataprice equal to the product’s VTC, the customerwould bein a situation where there is no net benefitfor purchasing the product.The costs and benefits would be totally balanced.To avoid having alarge number of potential customers pass up the product, it is generally wise to tip that balance bysetting the price below the product’s VTC.19.If a salesperson tells a manufacturer that the machinethe salespersonis selling is better thancompeting machines because it will last longer, whatapproachshould be used to estimate thevalue of this differentiating factor?To estimate the value of the differentiating factor of a machine lasting longer,it is likely that it wouldbe practical to identify themonetary savings thatwouldresultfrom this greater durability. A benefitof using this approach is that it would probably be easier than marketing research to estimate howcustomers weigh money against their preferences for greater durability.20.If an item is particularly valuable to a customer, using customer-based pricing might suggesta price that is higher than the one that would be indicated by use of a standard markup.Describe a situation where the use of customer-based pricing would suggest a price that islower than the one that would be indicated by use of a standard markup.A retailer might use a standard markup of 100 percent on the brands of clock radios that he carries.Although the brands are generally comparable, customers find that one of these brands hascontrols that are substantially less convenient. This creates a lower VTC for that brand. If theretailer’s costs for that brand are similar to his costs for the other brands, then the lower retail pricenecessitated by the lower VTC for that brand would be a price lower than the one indicated by theuse of the product category’s standard markup.21.Explain how an openness to customer-based pricing helped contribute to the outstandingsuccess of the Ford Mustang.The consideration of customer needs told Ford that customers in the large middle-income marketdid not value all of the aspects of a sports car enough for them to pay what it would cost Ford toprovide these aspects.By considering these price-related customer needs early in the productdevelopment process, the Ford designers were able to look for, and include, the aspects thatcustomers most wanted (e.g., styling) and to cut costs on the other aspects (e.g., engine,transmission).Starting the pricing process with the consideration of customer needs rather thanproduct costs helped lead the company to start the pricing process before any cost commitmentswere made.This made it possible to substantially reduce those costs and achieve a highlyprofitable product.22.Describe a situation where different market segments would have different VTCs for thesame product.

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If the estimated VTC of Station’s tune-up for those town residents who commuted to the city bytrain was $110, what would be the VTC for those residents who did not take the train to work?Forthose residents, there would be no station-location differentiating factor, so their estimated VTCwould become $90(plus $15 for the added reliability and minus $5for the wait). Further, withinthose town residents who do not take the train, there may be groups such as parents with youngchildren or seniorswhofind the prospect of breaking down in their car particularly aversive andthus place greater value on the increased reliability of Station Auto Service’s repair work.For thesegroups, the VTC of Station’s tune-up might be somewhere between $90 and $110.23.If a company uses customer-based pricing, does that mean that costs and the prices ofcompeting products are not taken into account?No.When setting a price for a product that does not already have a price, all three types ofinformation–costs, competition, and customer needs–must be taken into account.The distinctionmade in this chapterconcerns the type of information that the price setter should attend tofirst.24.What is the most likely reason that customer-based pricing is not more often used? What doyou think of this reason?A major reason that customer-based pricing is not more often used is that it requires research oncustomer needs rather than only an estimate of one’s incurred costs or the prices of competingproducts.Although such investigation couldinvolve expensive market research studies, it is also possible togain some preliminary ideas of how one’s product creates value, or could create value,inexpensively, say,by informal conversations with consumersand/orobservations of themarketplace.Indeed, as advances in information technologydecrease the costs ofcollectinginformation about customer behavior, the use of customer needs as the starting point in the pricingprocess becomesan increasingly practical approach.

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