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

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Schindler, Pricing Strategies – Instructor Resources
Chapter 1: Answers to End-of Chapter Questions
Exercises
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?
Candidate does not seem able to thoroughly apply the marketing concept.
Listening to customer is practical in pricing; customer response depends on taking into
account customer feelings such as:
– Prices substantially higher than expectations (sticker shock)
– Price considered unfair, higher than can be justified
– Perceived discount, price lower than expectations
b. 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 not only listen to the customer about the value that can be harvested, but also
about the customer’s feelings about the price such as the feeling of it being substantially
higher than the customer’s expectations, the feeling that a price is unfair, or higher than
can be justified, or customers perceiving they are receiving a discount, or a price lower
than their expectations.
Both identifying the value that the product represents to the customer and considering
customers’ price expectations and feelings depend on listening to and understanding
customer 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 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.
Price setting: $7 for a vase

Price policy: vases are sold for fixed prices
b. Describe a decision that she would need to make regarding price format, and describe one
regarding price structure.
Price format: pricing the vase at $6.99 versus $7
Price structure: customer gets 10% off if he/she purchases 4 vases at the same time
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.
Negotiation policy: plan asking price, reservation price, haggling (revised prices, offers, and
justifications)
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 more
appropriate in an individual’s professional services pricing.
Negotiated-price policy is more appropriate
– It enables price segmentation
– No reason for fixed-price policy here (it’s done mainly because it is not practical for a
seller/store to carry out negotiation on the large number of items)
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.
E.g., a merchandise buyer in the linens department of a department store; would select a new
pattern of towels to be sold by the store and would set the prices for each item in that line
of towels
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?
E.g., a financial analyst in a consumer products manufacturing organization might advise the
product managers on the company’s profit goals for their products; analyst might
interaction with the product manager during product planning and when evaluating details
of how the plans were implemented
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. Why is this situation undesirable for the company?
Undesirable because,
– Prices determined by factors that are short-term and not necessarily in line with the
organization’s overall strategies (there may be strategic drift, e.g., to a low-price
strategy 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-maximizing
b. 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 can
be made by each function, under what circumstances, who would have to be
consulted, and that provides management feedback on how well these policies are
being implemented
– Include provision for periodically updating this system
Review and Discussion Questions
1. Describe the two parties in a commercial exchange and what is given and received by each
party.
The seller provides a product to a buyer in return for something in exchange (usually an amount of
money). The product could be something tangible, which is referred to as a good. Or, the product
could be the result of human or mechanical effort, which is referred to as a service. The buyer
could be a consumer – an individual who purchases a product for his or her own use. Or, the buyer
could be a business customer – an individual or group who purchases the product in order to resell
it or for other business purposes.
2. How is the voluntary nature of the commercial exchange related to its potential for creating
benefits for society?
Because both parties to the exchange are better off after the exchange than before, one could say
that the exchange makes the world a just a little bit better place. There is a little more happiness
after the exchange than before it. Although there may be only a tiny bit of increased happiness
from any one commercial exchange, these little pleasures can quickly mount up. In a society where
the distribution of most goods and services is governed by a free-market economy, every person
engages in numerous commercial exchanges every day. Each little increase in pleasure that a
commercial exchange brings is then multiplied many times, and the societal benefits can become
considerable.

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 quite
important. A price is what a business charges, and a cost is what a business pays.
5. What are the four categories of marketing activities, usually referred to as the marketing
mix? 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 the
marketing mix are:
– 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 to
the customer. All three of these types of marketing activities contribute to the product being of
value 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,” the
value created by the other types of marketing activities.
6. What is the marketing concept? How can pricing activities be guided by the marketing
concept?
The marketing concept: The key to business success is to focus on satisfying customer needs. An
organization that works toward satisfying customer needs in every feasible way when carrying out
marketing activities is likely to see more long-run success than a company that does not have such
a customer focus.
Certainly, customers would prefer paying less. In fact, paying nothing at all might well be their first
choice! But it is simply not feasible to “give away the store.” An organization that gives away the
value it creates will soon cease to exist, and thus the value it creates will disappear. Rather, it is in
the customer’s interest for an organization that creates customer value to set prices that maximize
the organization’s profitability, since that would give the organization the greatest possible chance
of continuing to create that value. Further, the marketing concept points the price setter to consider
not only the customer value that can be harvested, but also the customer’s feelings about the price
that is being charged.
7. What is barter? Give an example of barter, either from your reading or from your own
experience.

Barter is the practice of exchanging goods or services for other for other goods or services. An
example of barter is that Shell Oil purchased sugar from a Caribbean country by giving in return
one million pest control devices.
8. What is a medium of exchange? What is most commonly used in our society as a medium of
exchange?
A medium of exchange is something that is widely accepted in exchange for goods and services in
a market. A medium of exchange could be anything that the buyers and sellers in a society agree
upon. 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 through
negotiation 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 price
the buyer would pay.
– Haggling: a process involving some number of prices and offers and statements supporting the
validity of each.
These prices are termed “interactive prices” because the price that is paid results from an
interaction between the buyer and seller.
10. What are fixed prices? What do customers like about fixed prices? What do retailers like
about 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 a
large number of quick transactions and staffing by low-paid, relatively unskilled, clerks. Also, the
use of fixed prices facilitates mail-order sales and supports the development of large catalog
companies.
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 price
segmentation.
12. Give an example of how different numbers could be used to express what would be
substantially the same price.
The price of a lamp in a home furnishings catalog might be expressed as a price for the lamp that
includes shipping or as a price for the lamp alone along with a separate price for the shipping of the
lamp 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 decisions
that 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 have
direct 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 an item’s pocket price may not be the same as the item’s
invoice 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 small
off-invoice discount.
– The customer may contact the company’s advertising department and arrange a small discount
for, 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 break
to such a good customer.
For pricing decisions to be made effectively in a large organization, it is important that these
decisions either involve high-level management in the organization or use some other means to
centrally coordinate and constrain the many pricing-related decisions that are likely to be made by
many different people throughout the organization.
16. Give an example of a way that everyday pricing decisions could work against a company’s
long-term interests.
Price cutting done in response to competition could lead to price warfare and serious erosion of
profits.
17. Describe some benefits of coordinating pricing activities with the other functions of a
business organization.
If a price decrease is expected to lead to a sales increase, then it is useful to make sure that
production, procurement, customer service, and other functions of the organization are prepared to
handle this price decrease. Or, if new cost economies are achieved by some aspect of the
company’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 Asian
country, could be more effectively evaluated with the combined input of marketing research and
centrally-coordinated pricing decision makers.
18. Why might the study of pricing be relevant to a student who does not plan to ever set prices
within a business organization?
Pricing is so critical to a business organization that if affects, and is affected by, virtually every
function of the organization. In addition, price-setting is relevant to our personal lives. Even if we do
not 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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Schindler, Pricing Strategies – Instructor Resources
Chapter 2: Answers to the End-of Chapter Questions
Exercises
1. 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 for
the following items. Show your calculations:
12-bottle rack, natural finish Per-item cost $22.50
12-bottle rack, mahogany finish Per-item cost $26.25
24-bottle rack, natural finish Per-item cost $36.00
P = $22.50 + 1 x $22.50 = $45.00
P = $26.25 + 1 x $26.25 = $52.50
P = $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 the
shop’s percent gross margin for these items?
%GM = ( $22.50 / $45.00) = 50%
$ gross margins would be $22.50, $26.25, and $36.00
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:
Item A Per-item cost: $26.00
Item B Per-item cost: $9.25
Item C Per-item cost: $103.60
P = C / [1 – (%GM/100)]
If costs are 30%, then %GM = 1 – 30% = 70%
P = 26 / (1–.7) = $86.67
P = 9.25 / (1–.7) = $30.83
P = 103.6 / (1–.7) = $345.33
Or, M = %GM x [100/(100–%GM)]
M = 70% x (100/30) = 233%
P = C + [(M/100) x C]
P = 26 + (2.33 x 26) = 26 + 60.58 = $86.58

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P = 9.25 + (2.33 x 9.25) = 9.25 + 21.55 = $30.80
P = 103.6 + (2.33 x 103.6) = 103.6 + 241.39 = $344.99
These 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 are
the pros and cons of the owner’s pricing procedure?
Cost-based pricing (in particular, markup pricing)
Pros: Simple to understand and implement; easy way to keep in line
Cons: May result in a price that is so high that few buy or so low that most customers
would have paid more
Not useful for maximizing total profits
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.
Parity pricing is to price at the same level as competitors.
But, which competitors? Answer should show understanding of these alternatives:
Prices: Those that are highest, lowest, or middle in 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 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?

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VTC analysis:
reference value $350,000 value of comparable house
pos. diff. value + 40,000 hill: 4 x $10,000
neg. diff. value – 24,000 value of kitchen in comparable house
$366,000
Real 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 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 VTC analysis to calculate the VTC for commercial buyers of a square yard of
Lincoln’s new carpeting.
reference value $12 price of next closest substitute (sq yard of current carpet)
pos. diff. value + 12 price of sq yard of replacement carpet saved
pos. diff. value + 8 price of replacement installation saved
neg. diff. value – 2 $10 – $8, more expensive installation
$30
(b) Recommend a price for a square yard of Lincoln’s new carpeting, and justify your
recommendation. Your justification should make use of your estimate of the VTC of
Lincoln’s new carpeting.
Price should be lower than $30 (= VTC) – there should be some inducement to purchase
Price needs to be above $14.50 (= variable costs) – each sale should make some contribution
to covering fixed costs
There should be a plausible argument for where within this range the price should be.
Review and Discussion Questions
1. What are the three possible starting points for the process of setting an initial price that are
described 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 would
use 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 should
be added to this cost by considering factors such as the number of such jobs it is likely to do in a
year, its overhead costs, and its desired final profits.
3. If an item costs $10 and you apply a 60 percent markup, what would be the item’s price? If
you used 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] = $16
If using keystone pricing, the markup would be 100 percent, and the item’s price would be:
P = $10 + [(100/100) x $10] = $20
4. If management’s profit guidelines mandate gross margins of 25 percent, calculate the markup
percentage that would be equivalent to this gross margin.
If management’s profit guidelines mandate gross margins of 25%, the markup percentage that
would 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, use
that 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 price
would be:
P = C / [1 – (%GM/100)] = $20 / [1 – (55/100)] = $44.44
6. Describe how you would research industry norms on gross margins to inform your
company’s decisions regarding pricing-related profit goals.
A source of industry norms on gross margin is the publically available reports, such as the Form
10-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 a
good profit on the products that it sells. Describe a problem with this justification. What does
this problem have to do with the main disadvantage of cost-based pricing?
Although a cost-based price might ensure good per-item profits, it may not ensure good total
profits. For example, a markup set to yield a good profit on each item might result in a price so high
that 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 is
substantially lower than customers would be willing to pay. The result of this could be a level of
total profits far lower than could otherwise have been made.
This is the main disadvantage of cost-based pricing – it is not particularly useful in efforts to
maximize total profits.

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8. Given that there is a serious disadvantage to cost-based pricing, how would you account for
its widespread use in retailing and other businesses?
One reason for the widespread use of cost-based pricing is its simplicity. Such simplicity is
particularly important in situations where there are large numbers of prices to determine on a
continuing 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 second reason for the widespread use of cost-based pricing has to do with the common practice
of 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 or
margin reduces the need to carry out research on competitors’ prices. Use of such cost-based
standards can serve as an economical means of keeping one’s prices from being substantially out
of 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 the
presence 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 by
focusing on only the highest marketplace prices, on only the lowest, or on only prices in the middle
of the competitive price range. Alternatively, attention could be focused on the prices of one
particular competitor, perhaps the one that is largest, the one showing the fastest growth, the one
that is most prestigious, or the one considered most similar to the company that is setting an initial
price.
11. What might make it difficult to determine the prices of one’s competitors? When such
difficulties occur, what could be done to surmount them?
In business markets, a further difficulty of competition-based pricing involves determining
competitors’ actual prices. In many business markets, prices are not publicly posted, either
because they are determined by a bidding process or because they are determined by private
negotiations between the buyer and seller. Sometimes, the publicly available posted prices are not
the prices at which products are actually sold, because of subsequent private discounts or
negotiations.
In such situations, a seller may be able to draw on reports from salespeople concerning what
customers have told them about the prices of their competitors. In most cases, useful estimates of
competitors’ prices would require supplementing such information from customers with information
about competitors’ likely costs, strategies, profit levels, and other elements of “competitive
intelligence.”
12. Describe one advantage and one disadvantage that competition-based pricing has in common
with cost-based pricing.

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Competition-based pricing shares with cost-based pricing the advantages of being intuitive and
relatively easy to carry out. However, it also shares with cost-based pricing the disadvantage of
producing 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 versus
the role of the other three elements of the marketing mix?
Starting the initial price-setting process by considering the customer’s needs makes possible a
rational basis for price setting. The role of price in the commercial exchange is to capture the value
created by the other three elements of the marketing mix. Because this value consists of the
satisfactions of customer wants and needs that are provided by the product, careful consideration
of each of the ways a product satisfies, fails to satisfy, or could be made to satisfy these customer
wants and needs provides essential pricing guidance.
14. Describe the concept of a product’s value to the customer. Why is the monetary estimation of
this value important for price setting?
A product’s value to the customer (VTC) is the value created by the product, distribution, and
promotion elements of the marketing mix. A key technique of customer-based pricing is to be able
to arrive at a numerical estimate of this value. Such consideration places at the starting point of the
initial price-setting process a measure of the value that the product’s price could potentially
capture.
15. Describe the concept of a product’s reference value. How would you calculate the reference
value for a consumer product whose package size is different than the package sizes of all of
its competing products?
A product’s reference value is the price of the product that the customer perceives as the next
closest substitute for the product. If a consumer product whose package size comes in a 10-ounce
box and the next closest substitute comes in a 20-ounce box, then the product’s reference value
would 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 next
closest substitute? Describe two factors that would differentiate the iPhone from its next
closest substitute.
The next closest substitute of Apple’s iPhone could be the Motorola Droid. The first factor that
would differentiate the iPhone from the Droid is that the iPhone has more user-friendly interface
than the Droid. A second factor would be that Apple has a better brand reputation than Motorola.
17. What is the difference between a positive differentiating factor and a negative one? Is it
possible for an item to simultaneously have both positive and negative differentiating
factors?
If the product is superior to the next closest substitute on a factor, then the value of this difference
to the customer is a positive differentiation value. If the product is inferior to the next closest
substitute on a factor, then the value of this difference to the customer is a negative differentiation
value. It is possible for an item to simultaneously have both positive and negative differentiating
factors.

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18. Which would be more prudent: pricing an item above its VTC, exactly at its VTC, or below
its VTC? Explain your reasoning.
It is a good idea to set a product’s price at a level below its VTC. Assuming that the product’s VTC
is assessed accurately, then customers would not buy it at a price higher than that amount. At a
price equal to the product’s VTC, the customer would be in a situation where there is no net benefit
for purchasing the product. The costs and benefits would be totally balanced. To avoid having a
large number of potential customers pass up the product, it is generally wise to tip that balance by
setting the price below the product’s VTC.
19. If a salesperson tells a manufacturer that the machine the salesperson is selling is better than
competing machines because it will last longer, what approach should be used to estimate the
value of this differentiating factor?
To estimate the value of the differentiating factor of a machine lasting longer, it is likely that it would
be practical to identify the monetary savings that would result from this greater durability. A benefit
of using this approach is that it would probably be easier than marketing research to estimate how
customers weigh money against their preferences for greater durability.
20. If an item is particularly valuable to a customer, using customer-based pricing might suggest
a 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 is
lower 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 has
controls that are substantially less convenient. This creates a lower VTC for that brand. If the
retailer’s costs for that brand are similar to his costs for the other brands, then the lower retail price
necessitated by the lower VTC for that brand would be a price lower than the one indicated by the
use of the product category’s standard markup.
21. Explain how an openness to customer-based pricing helped contribute to the outstanding
success of the Ford Mustang.
The consideration of customer needs told Ford that customers in the large middle-income market
did not value all of the aspects of a sports car enough for them to pay what it would cost Ford to
provide these aspects. By considering these price-related customer needs early in the product
development process, the Ford designers were able to look for, and include, the aspects that
customers 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 than
product costs helped lead the company to start the pricing process before any cost commitments
were made. This made it possible to substantially reduce those costs and achieve a highly
profitable product.
22. Describe a situation where different market segments would have different VTCs for the
same product.

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If the estimated VTC of Station’s tune-up for those town residents who commuted to the city by
train was $110, what would be the VTC for those residents who did not take the train to work? For
those residents, there would be no station-location differentiating factor, so their estimated VTC
would become $90 (plus $15 for the added reliability and minus $5 for the wait). Further, within
those town residents who do not take the train, there may be groups such as parents with young
children or seniors who find the prospect of breaking down in their car particularly aversive and
thus place greater value on the increased reliability of Station Auto Service’s repair work. For these
groups, 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 of
competing products are not taken into account?
No. When setting a price for a product that does not already have a price, all three types of
information – costs, competition, and customer needs – must be taken into account. The distinction
made in this chapter concerns the type of information that the price setter should attend to first.
24. What is the most likely reason that customer-based pricing is not more often used? What do
you think of this reason?
A major reason that customer-based pricing is not more often used is that it requires research on
customer needs rather than only an estimate of one’s incurred costs or the prices of competing
products.
Although such investigation could involve expensive market research studies, it is also possible to
gain some preliminary ideas of how one’s product creates value, or could create value,
inexpensively, say, by informal conversations with consumers and/or observations of the
marketplace. Indeed, as advances in information technology decrease the costs of collecting
information about customer behavior, the use of customer needs as the starting point in the pricing
process becomes an increasingly practical approach.

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

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