Deck 19: Pricing Strategies

Question 1

Watt's the Deal?

Pricing on most items isn't all that mysterious. Fast food lunch: $5.37. Hamburger: $2.49; fries: $1.89; drink: $.99. Those prices pretty much break down into operating expenses, food cost, and profit. It is what it is. When it comes to pricing an alternative energy system for your home, it's a different story.
The first thing you have to understand is what you're buying. First, you pay for the materials and labor, and you can count on a 20 percent mark-up for the company's profit and operations. Next comes the idea of watts, the electric company's unit of measure for how much electricity you use. Then there are the intangibles. When pricing an energy-saving system like wind or solar, you have to look at your initial investment and what you can expect to save when the electric bill comes. If you are really good about limiting your energy use, you may be able to sell some of your extra power back to the "grid." But what if it takes ten years to pay offthe home improvement loan you took out to finance the system? What will the interest be? Is that adjusted for inflation? Is the cost of electricity always going to go up, or will it stabilize or even go down in two years? What are the maintenance and repair costs? Get through all these questions and you're still faced with the choice of wind or solar. Wind is cheaper to start, but less predictable on the return on investment-solar is the opposite.
That's just for residential. Add an Inc. after your name and there's a whole bunch of other considerations. What is the depreciation on the equipment? Can it be accelerated? Are there state, local, or federal tax credits?
John Miggins of Standard Renewable Energy in Tulsa, Oklahoma, can do these calculations in his sleep but is quick to admit they are complicated. "The people call me and say, 'I have a 2,000-square-foot house. What do I need?'" There's no way to answer that, but what he does tell them is what the average customer might want. From there, all bets are offuntil he can do a custom quote designed for the customer's home-the location, type of construction, exposure, zoning, energy needs, what the customer realistically expects to get out of a wind or solar system and, most importantly, what the customer is willing to give up to get the most out of the system he or she wants.
When the students at the the University of Kansas School of Architecture and Urban Planning's Studio 804 called Miggins looking for a solar and wind system for their 547 Art Center design-build in Greensburg, Kansas, the needs versus wants equation really came into play. The building, a community and art museum in the heart of Greensburg, was a unique project. 547 Art Center was the first building to be completed in the devastated town and is definitely one of, if not the greenest, buildings in Kansas. Like all projects in Greensburg, money was an issue, but building a truly sustainable, green LEED Platinum building was just as important. Add to that the fact that the building was going to be a showpiece for the town, so aesthetics couldn't suffer either. Miggins quoted the project at about $50,000. Although he would have loved to give it all away for free, the studio needed to cover his costs. As they were completing the plans for the project, the design team threw him a curveball. They wanted three smaller wind turbines to power the building rather than the one larger one Miggins recommended. "It was a ten thousand dollar difference, easily," recalls Miggins. A frugal guy himself, he couldn't understand why they would spend the extra money on an already strapped project. "A friend of mine told me architects like threes," said Miggins. "And you gotta admit, it looks really cool!" In the end, he got what they were going for and donated some of the extra labor involved in installing the three turbines so they could achieve their vision.
"We can't treat everybody like that," says Miggins. As a sales rep for the Oklahoma/Kansas region, Miggins has some wiggle room in pricing jobs. Every project is carefully reviewed, and he knows he'll get a talking to if he gives too much away. The return on investment in cool projects like Greensburg isn't lost on the finance department at Standard Renewable. Miggins was recently called by Make it Right, Brad Pitt's foundation dedicated to the sustainable rebuilding of the 9th Ward of New Orleans, the area hardest hit by Hurricane Katrina. He is now involved in designing a solar system for a neighborhood playground. Standard knows they won't make a killing on the project, but the exposure will more than make up for it.
Why is it important for Standard Renewable Energy to allow Miggins flexibility in pricing?

Answer 1

1.
It is important for Standard Renewable energy to allow Mr. M flexibility in pricing t o serve the "customer's needs, wants, and demands".
Customer needs, tastes, and preferences vary from person to person. Hence, Mr. M focusses on making custom-made homes by considering certain parameters and installs the energy efficient system accordingly. The certain parameters are location, construction, zoning, energy needs and exposure.
The price rate varies from place to place according to the tax rates. The price also would change according to the square foot of the house.
2.
Energy efficient systems that are environment friendly and sustainable play a key role on the overall return on investment (ROI). The reasons are as follows:
• Saves on Money : The renewable energy is comparatively cheaper than the electricity generated by the natural gas or fossil fuels.
Under standard renewable energy, the electricity is generated by natural means such as solar panel that it is a one time investment.
• Maximizes return on investment (ROI ): Standard renewable energy maximizes ROI through improved and operation energy efficiency. This is because it is only a one time investment and the customer can reap the benefits for a longer period instead of paying monthly electricity bills. Hence, the returns are better on investment.
• Return on investment is an important factor as the capital investment is high to setup an own solar plant.
3.
The value of choosing Mr. M solar or wind energy systems are as follows:
a) Customized pricing : Mr. M offer products that suit the needs and wants of the consumer. Price of the product is finalized after considering the parameters such as location, type of construction, zoning, exposure etc.
b) Saves electricity bills : Mr. M implements net-metering strategy. It is a process wherein an individual or businessman can produce energy by natural means such as solar panels or wind energy during the day and feeds it back into the grid. Thereafter, the customer is credited for the amount of energy produced.
c) The quality and the service provided by Mr. M to his/her clients are different from the online service providers. Mr. M provides discounts to his/her customers.
In this way, using an energy efficient system saves on money and prevents the customer in paying high electricity bills.
4.
The following pricing objectives best fits the Standard renewable energy. They are as follows:
• Psychological pricing : This pricing uses the customer's emotional response to encourage sales. As per the case study, Mr. M fixes the prices for energy efficient system by determining the customer's tastes and preferences and follows the customized pricing.
• Emphasizes on specialty goods pricing strategy : Mr. M has tried to focus on specialty goods pricing strategy wherein the energy efficient systems would be installed as per the customer's needs and requirements. Moreover, prices are fixed on the basis of customer's requirement which is also known as individual pricing strategy.
5.
Perform a break even analysis by using the following steps:
Take a fixed cost of energy system; divide it by price and minus the variable costs.
Calculate the breakeven point by using the following formula:
The breakeven point helps in knowing how many units, a product need to be sold to breakeven. After reaching the breakeven point, one has recovered all the cost associated with producing the product i.e. both variable and fixed.
This calculation will help in knowing how many units of a product are needed to sell to break even. Once the person has reached that point, he/she has recovered all the costs associated with producing the product (both variable and fixed).
If the units exceed the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin.
Unit contribution margin may be defined as the amount each unit contributes to cover fixed costs and increase profits.
Assume the following information:
Total number of solar power systems = 400units
Suppose the fixed cost of installing solar system in a 2000sq. foot home = $15,000
Selling price per unit of installing solar system in a 2000sq. foot home = $100
Variable cost per unit of installing solar system in a 2000sq. foot home = $60
Find out the breakeven point of installing solar system in 2000 sq. foot home by using the following formula:
Hence, $375 per unit needs to be sold to break-even. Hence, after reaching the breakeven point, one has recovered all the cost associated with producing the product i.e. both variable and fixed.
If the units exceed the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin.
Now, calculate the contribution margin to carry forward the breakeven analysis.
Find out the total sales and variable cost of solar power system
Multiply sales per unit with total number of solar power units to find out the total cost of sales
Hence, total sales is $40,000
Multiply variable per unit with total number of solar power units to find out the total variable cost.
Hence, total variable cost is $24,000
Now, replace the values in the below formula:
Hence, contribution margin is $16,000.

Question 2

Why is competitive bidding an important factor in major purchase decisions such as vehicles for a police force, the construction of a bridge, or the manufacture of military uniforms?

Answer 2

Competitive bid:
The competitive bid is the process where it consists of inviting key potential dealers to quote prices on proposed purchases. The complete specifications, evaluate the products and services where the government agencies prefer to purchase. This process usually needs the assistance of organization's technical personnel such as engineers and chemists.
Competitive bidding in the purchase decision making:
• Competitive bidding is the crucial attribute through which organizations efficiently make purchases decisions required for services and products at a desired level of quality.
• This concept describes the purchaser sophistication in terms of the attributes required for effective competition in industry where it is completely influenced in the competitive environment.
• This process mainly focuses on the seller and its sophistication level of the purchase to evaluate the best appropriate promotion strategy.

Question 3

With a classmate, create two advertisements for the same product. One advertisement should feature a high price; the other advertisement should feature a low price. Present your advertisements to your classmates. Record their perceptions of the price-quality relationship. Which price do most of them seem to prefer?

Answer 3

Price quality relationship:
• The price quality is the most important in maintaining relationship to customer perceptions of quality products and its services.
• Many purchasers believe that if a product has a high price will have superior quality.
• As per the C university research shows that those consumers with high priced products doe's not high end demand.
• In the current scenario, many customers are proffering to pay more for the economically friendly goods.
• Even though consumer prefers prestige but they need good products with best deal available.
• Marketers should strive hard to convince consumers when they were giving superior quality products at the least price available.
• The major attribute of price quality relationship is the idea of best price limits available.
Perceptions of students for a high priced product:
The students who are interested in purchasing a product at high price prefer prestige within their group. They show many superiority attributes to show they were more worth. They even prefer highest quality of the product.
Perceptions of students for low priced product:
The students who are interested in purchasing a product at a least price available in the market show attributes such as they were price sensitive and quality oriented. They prefer to make best use of products available within the limited resources available.

Question 4

Decide on a trip you'd really like to take. Then go online to several of the travel sites-Travelocity, Priceline.com, or others-and compare prices for your trip, including airfare, hotels, and so forth. Does bundling the components give you a price break? Note any coupons or promotions for restaurants and attractions as well. Decide which trip is the best deal, and explain why.

Question 5

Why is competitive pricing risky for marketers?

Question 6

How is product-line pricing helpful to both retailers and their customers?

Question 7

Holding the (Price) Line on Luxury Goods
In a tough economy, the market for luxury goods and services faces unique challenges. Many people who at one time might have splurged on a Rolex watch or a Lexus sedan are now unemployed and, possibly, facing foreclosure on their home. Even those with high net worth felt the pinch when their investments-affected by a stock market in free-fall-took a hit, some losing as much as 50 percent of value. Thus, even the wealthy had less disposable income for high-priced vacations and weekly spa treatments.
The luxury goods market experienced a several-quarter drought during which sales fell 8 percent-about $227 billion. As the stock market began to stabilize, however, sales in the sector have begun to pick up: high-fashion house Hermes posted a 19 percent spike in sales for a recent quarter, and LVMH Moet Hennessy Louis Vuitton reported an 11 percent increase.
Still, luxury retailers aren't out of the woods yet, and they resist applying the same promotional strategies to bring in business that more mainstream retailers might try. Tiffany's-widely regarded as a premier jeweler-would risk damaging its carefully tended image if it were to advertise, for instance, a "buy one, get one free" sale or discounts on its crystal or sterling patterns. Interestingly, such promotions by retailers like JCPenney or Lord Taylor seemingly have no adverse effect on shoppers' perception of value.
Recently, Tiffany's quietly discounted its prime line, diamond engagement rings, by about 10 percent, but did it without hoopla. Only those shopping for an engagement ring would have known about the reduced prices, having been informed by the salesperson. Discounting merchandise without making it widely known allows retailers like Tiffany's to maintain their traditional pricing policy-outwardly, at least.
But what can a luxury retailer do to increase traffic during a recession if it doesn't advertise a sale? Many retailers choose to be discreet and communicate sales only through emails to regular customers. Others communicate more publicly, positioning the sale as "clearing inventory" while bolstering revenues. During a recent holiday season, Saks Fifth Avenue announced savings of as much as 70 percent, through print and Web ads, store signage, and e-mails. Saks management said the sales didn't hurt the store's image at all.
When spas and beauty salons discount the cost of services to encourage business, they run the risk that customers will think the service was initially overpriced. Instead, spas and salons have found success in bundling services: for example, a customer who gets a manicure can, for a reduced price, get a facial at the same time. For some reason, the notion of bundled services does not diminish their value in the customer's mind. Another tactic that works is the incentive plus special offer: for example, by referring a customer to your spa or salon, you'll receive a coupon good for 10 percent offon your next appointment. Such a promotion can also encourage the purchase of multiple services.
How do you think the price-quality relationship affects the marketing of luxury goods?

Question 8

What is the difference between loss leader and leader pricing? Give an example of when retailers would use each of these pricing strategies.

Question 9

As a consumer, would you rather shop at a store that features a sale once a month or a store that practices everyday low pricing (EDLP)? Why?

Question 10

What is the difference between a competitive bid and a negotiated price?

Question 11

The law allows companies in various industries to add what many refer to as "hidden" charges to customers' bills. Phone bills, airline tickets, and hotel receipts often contain charges that are difficult to identify. A traveler who stays in a hotel might be hit with a hospitality fee, a resort fee, or an automatic gratuity, to name just a few. These charges are not taxes, and although they are itemized, it is difficult for the average traveler to make sense of them. Most people either don't check their bills thoroughly or are in a hurry to check out and don't bother to dispute the charges, which may be only a few dollars. But these charges add up over the course of hundreds or thousands of visitors each year, and hotels are pocketing them-legitimately.
Visit the website of a hotel chain with which you are familiar to learn if it gives any information about additional surcharges. If consumers were informed about the charges ahead of time, would you feel differently about them? Why or why not?

Question 12

Describe briefly the three traditional global pricing strategies. Give an example of a firm or product that would be likely to adopt one of the three approaches, and explain why.

Question 13

Yield management. Say you'd like to visit Walt Disney World. Visit the WDW Web site (http://disneyworld.disney.go.com/vacation-packages/) to price week-long stays at various times of the year. Be sure to choose similar hotels. Which weeks are the most and least expensive? Do the days of arrival and departure make any difference? Prepare a summary of your findings and bring it to class so you can participate in a discussion on yield management.

Question 14

Although cannibalization generally forces price cuts, in what ways can it actually benefit a firm?

Question 15

Figure out how much it will cost to buy and own one of the following new cars from a dealership, or select another model. What is the list price? What price could you negotiate?
a. Ford Escape hybrid
b. Lexus RX 350
c. Hyundai Santa Fe
d. Scion tC

Question 16

What is the difference between a list price and a market price?

Question 17

Under Staples' "Easy Rebates" program, customers can submit most of their rebate applications online for products purchased over the Internet, through the catalog, and in Staples stores. Customers may also submit several rebates at once and receive emails about the status of their rebates at every stage.27 Staples claims the rebates are processed much faster than those of other companies. Do you think the "Easy Rebates" program will increase the number of rebates customers actually submit? Why or why not? Do you think other firms will follow with similar programs?

Question 18

Airbus and Boeing subsidies. The U.S. and European Union have had a long-running dispute over allegations of improper government subsidies to commercial aircraft manufacturers (the U.S. about Airbus and the EU about Boeing). Government subsidies may give the manufacturer a price advantage over its competition. Both sides filed complaints with the World Trade Organization. Go to the Web site of the WTO (http://www.wto.org) and write a report outlining the trade dispute and its current status.

Question 19

What is the difference between a skimming price strategy and a penetration pricing strategy? Under which circumstances is each most likely to be used?

Question 20

Assume that a product sells for $100 per ton and that Pittsburgh is the basing-point city for calculating transportation charges. Shipping from Pittsburgh to a potential customer in Cincinnati costs $10 per ton. The actual shipping costs of suppliers in three other cities are $8 per ton for Supplier A, $11 per ton for Supplier B, and $10 per ton for Supplier C. Using this information, answer the following questions:
a. What delivered price would a salesperson for Supplier A quote to the Cincinnati customer?
b. What delivered price would a salesperson for Supplier B quote to the Cincinnati customer?
c. What delivered price would a salesperson for Supplier C quote to the Cincinnati customer?
d. How much would each supplier net (after subtracting actual shipping costs) per ton on the sale?

Question 21

Holding the (Price) Line on Luxury Goods
In a tough economy, the market for luxury goods and services faces unique challenges. Many people who at one time might have splurged on a Rolex watch or a Lexus sedan are now unemployed and, possibly, facing foreclosure on their home. Even those with high net worth felt the pinch when their investments-affected by a stock market in free-fall-took a hit, some losing as much as 50 percent of value. Thus, even the wealthy had less disposable income for high-priced vacations and weekly spa treatments.
The luxury goods market experienced a several-quarter drought during which sales fell 8 percent-about $227 billion. As the stock market began to stabilize, however, sales in the sector have begun to pick up: high-fashion house Hermes posted a 19 percent spike in sales for a recent quarter, and LVMH Moet Hennessy Louis Vuitton reported an 11 percent increase.
Still, luxury retailers aren't out of the woods yet, and they resist applying the same promotional strategies to bring in business that more mainstream retailers might try. Tiffany's-widely regarded as a premier jeweler-would risk damaging its carefully tended image if it were to advertise, for instance, a "buy one, get one free" sale or discounts on its crystal or sterling patterns. Interestingly, such promotions by retailers like JCPenney or Lord Taylor seemingly have no adverse effect on shoppers' perception of value.
Recently, Tiffany's quietly discounted its prime line, diamond engagement rings, by about 10 percent, but did it without hoopla. Only those shopping for an engagement ring would have known about the reduced prices, having been informed by the salesperson. Discounting merchandise without making it widely known allows retailers like Tiffany's to maintain their traditional pricing policy-outwardly, at least.
But what can a luxury retailer do to increase traffic during a recession if it doesn't advertise a sale? Many retailers choose to be discreet and communicate sales only through emails to regular customers. Others communicate more publicly, positioning the sale as "clearing inventory" while bolstering revenues. During a recent holiday season, Saks Fifth Avenue announced savings of as much as 70 percent, through print and Web ads, store signage, and e-mails. Saks management said the sales didn't hurt the store's image at all.
When spas and beauty salons discount the cost of services to encourage business, they run the risk that customers will think the service was initially overpriced. Instead, spas and salons have found success in bundling services: for example, a customer who gets a manicure can, for a reduced price, get a facial at the same time. For some reason, the notion of bundled services does not diminish their value in the customer's mind. Another tactic that works is the incentive plus special offer: for example, by referring a customer to your spa or salon, you'll receive a coupon good for 10 percent offon your next appointment. Such a promotion can also encourage the purchase of multiple services.
What other pricing promotions could a luxury retailer offer to build sales? Should a retailer use different strategies when targeting existing customers and new customers? Why?

Question 22

What are allowances? How do they work?

Question 23

When Chinese automakers began exporting cars, rather than focusing on developed nations in the West, they shipped autos to emerging markets in countries such as Algeria, Russia, Chile, and South Africa. In these markets, even used vehicles from multinational manufacturers are relatively scarce-and relatively expensive. The Chinese automakers, who prioritize low cost rather than design or even safety, applied a penetration- pricing strategy. A woman in Santiago, Chile, who bought a new Chery S21 explained, "The price factor is fairly decisive. I paid $5,500 new and full. Toyota with similar features costs around $12,000." Why do you think Chinese automakers chose that pricing strategy? Do you think it was successful? As Chinese regulators pressure these manufacturers to make their cars safer, do you think they will be able to keep their prices low compared with those of the international automakers? Why or why not?

Question 24

Go online to a shopping site you use regularly and note the prices for different types of products. Does this firm use psychological pricing? Product line pricing? Note any pricing strategies you can identify. Do any of these strategies make you prefer the site over a competitor's site?

Question 25

The law allows companies in various industries to add what many refer to as "hidden" charges to customers' bills. Phone bills, airline tickets, and hotel receipts often contain charges that are difficult to identify. A traveler who stays in a hotel might be hit with a hospitality fee, a resort fee, or an automatic gratuity, to name just a few. These charges are not taxes, and although they are itemized, it is difficult for the average traveler to make sense of them. Most people either don't check their bills thoroughly or are in a hurry to check out and don't bother to dispute the charges, which may be only a few dollars. But these charges add up over the course of hundreds or thousands of visitors each year, and hotels are pocketing them-legitimately.
Do you think adding hidden charges to hotel bills is a smart marketing strategy? Why or why not?

Question 26

On your own or with a classmate, visit a local supermarket to find examples of promotional pricing and loss leaders. Note instances of both. Does the promotional pricing make you more likely to purchase a product? Does knowing the store uses loss-leader pricing of bananas make you more inclined to buy them? Present your findings and opinions to the class.

Question 27

Price competition. Using a popular travel site-such as Expedia.com or Kyack.com-look up airfares for each of the following pairs of cities:
New York to Los Angeles
Atlanta to Boston
Jacksonville, Florida to Dallas
Chicago to Omaha
Denver to Phoenix
Do some fares appear higher (on a per mile basis) than others? Do these differences reflect how many airlines provide nonstop service between each city pair? What about the impact of fares of so-called discount airlines (such as Jet Blue and Southwest)?

Question 28

Describe the three ways buyers and sellers handle transportation expenses.