Deck 18: Creating Competitive Advantage

Question 1

You work for a major restaurant in your town. The manager is facing cost pressures from rising food prices and says she needs to raise revenues. She decides to reduce the size of the meal portions and use cheaper cuts of meat and fish in some entrées while holding the menu prices constant. She tells you and other staff members not to mention the changes to customers and to deflect any questions or complaints you hear. The descriptions in the menu will not be changed, she says, "because the printing costs would be too high."
You know the restaurant advertises the quality of its ingredients in the local media. The menu changes are not advertised, and it bothers you. What course of action would you take?

Answer 1

Value pricing:
Value pricing is a concept that emphasizes on product benefit at comparative levels of price and quality.
Tackling cost pressures:
Cost pressures increase prices and disrupt production and ultimately the final output. In order to tackle the situation, the quality and quantity of raw materials is reduced.
In the current situation, due to increase in price of food material, the owner reduces the meal portions and uses cheaper ingredients. These menu changes are not intimated to the customers.
"Restaurant advertises about its ingredient quality, but not its menu changes."
• Customers are the king of any business. They make a business flourish and at the same time they turn around the business to a huge loss.
• In the current instance, the restaurant advertises the quality but does not inform about quantity or menu changes.
• The restaurant has changed the menu to raise the income; instead, they should have advertised the menu changes to the customers. The act is illegal as it misleads the customers.
The restaurant has to be informed about value pricing as they cannot decrease the quality and gain more income. In case there is a change in quality or quantity, it has to be informed in prior without misleading the customers. When the organization refuses to do so, it has to face legal consequences to protect consumer rights.

Question 2

What are the practical problems in applying price theory concepts to actual pricing decisions?

Answer 2

Actual pricing decisions:
The actual pricing decision is based on the actual cost of materials, labor, and overhead expenses that are incurred for a particular product.
Practical problems involved in pricing theory:
The three problems involved in actual pricing decision are as follows:
• Many organizations do not attempt to increase profits based on the primary assumption of price theory.
• It is very difficult to evaluate accurate demand curves.
• The poor managerial training and miscommunication between executives and economists make it very difficult to solve current scenario problems.

Question 3

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

Answer 3

Price competition is explained below:
Price competition is a strategy in which products are distinguished based on its price. The primary purpose of price competition is to enhance the customer demand by changing the product price based on the competitors.
Airfares for pairs of cities in two different airline providers are provided below:
Analysis:
Based on the above findings, it is concluded that the pricing strategy of A airlines and U airways are different from each other. Some airline providers charge higher fares based on their strategies and facilities they offer. The airfare can also be changed based on their own financial stability.
Impact on non-stop service between cities is given below:
In the nonstop airline services, there is less price difference as compared to other service providers. However, if there are stops in between the journey, there is a huge difference in the prices, where the low cost airlines are succeeding.
Impact on fares of discount cost airlines are given below:
• There is a huge impact in the aviation market due to low cost airlines, where SW airline is now A Country's largest domestic airline.
• Due to low cost fares and its best services, the airlines are moving towards monopoly stage.
• The company can provide offers like charging low prices for long distances, thus making it competitive for other competitors.

Question 4

How do cell phone companies make money by charging a flat rate per month for a set number of minutes, such as $35 for 300 minutes? Can you think of a more profitable plan? Would it appeal to consumers?

Question 5

In small teams, categorize each of the following as a specific type of pricing objective. Suggest a company or product likely to use each pricing objective. Compare your findings.
a. 7 percent increase in profits over the previous year
b. prices no more than 8 percent higher than prices quoted by independent dealers
c. 5 percent increase in market share
d. 15 percent return on investment (before taxes)
e. setting the highest prices in the product category to maintain favorable brand image

Question 6

Explain the advantages and drawbacks of using incrementalcost pricing rather than full-cost pricing.

Question 7

You might not be a skier or live anywhere near a mountain. Perhaps your idea of fun leans more toward sun, sand, and waves. But as a marketer, you can appreciate the seasonal nature of a small ski resort like Ski Butternut that's tucked away in the Berkshire Mountains of western Massachusetts How do marketers approach pricing objectives and set prices for a recreational experience that is vulnerable to the whims of weather, climate, overall economic shifts, and the cost of everything from electricity to labor-not to mention the changing incomes and lifestyles of consumers? Ski Butternut has been in business for more than 50 years, which means that its owners have solved at least some of the pricing puzzle. Matt Sawyer, director of marketing at Ski Butternut, puts it this way: "Our customers are looking for a great value. They're willing to be loyal if we treat them correctly."
Ski Butternut takes both sides of this equation-great value and loyal customers-into consideration for its pricing objectives. Sawyer readily points out that, while Ski Butternut is a forprofit company, the mountain doesn't realize a profit every winter. "Weather plays a huge role," he says. "You don't know whether you're going to be profitable until the end of February." Running a ski resort involves huge up-front costs and a lot of uncertainty. Target-return objectives for the ski school or holiday periods may melt with an early thaw. Ski Butternut managers must try to project a typical operating budget and find ways to make a profit as their customers enjoy their time on the slopes.
Plenty of ski resorts dot the New England landscape, which puts Ski Butternut in competition for consumers' recreation dollars. So Ski Butternut offers value to customers, hoping to capture market share and increase the volume of skiers on its slopes. The mountain offers value pricing to everyone, with special attention to first-time skiers, families, and season pass-holders. In order to boost the number of skiers who hit the mountain during the week (reducing gridlock on the slopes during weekends), Ski Butternut sets its Monday-Friday lift ticket price at $25. Unlike other mountains, Ski Butternut doesn't offer special deals, such as a "half-price Tuesday" or "ladies' Wednesday." Sawyer believes that customers prefer this straightforward approach to pricing. "It's easy to understand, it's predictable," he explains.
To attract more skiers and snowboarders to the mountain, Ski Butternut offers first-timers a learn-to-ski package for $75, which includes a lift ticket, lesson, and rental equipment (if purchased separately, these three items would total $135). The offer is good every day, all season-no blackout periods for weekends or holidays. "We want people to come when they can," explains Sawyer. For the second visit, skiers can purchase a $100 package ($35 off). "This price point allows people to get exposed to the sport," notes Sawyer. The mountain also offers midweek ski-and-stay packages for $45 per person/per night-a great deal especially when compared to some of the larger, more glamorous resorts.
Kids and families are a special focus for Ski Butternut, which has created several special programs for them. For example, fifth graders ski free Sunday through Friday when accompanied by a paying adult (and children who have never skied before get a free firsttimers' package). Ski Butternut targets this group, because it's the optimum age to get started, experience success, and continue with a lifetime of skiing or snowboarding. Because New England is home to a number of colleges and universities, Ski Butternut offers a $20 discount to college students, giving them a reason to get outside and ski-and become loyal Butternut customers.
Sawyer points to season pass-holders as one of Ski Butternut's most important customer segments. With a $275 price tag and a breakeven point of only five visits, a Ski Butternut season pass represents huge savings to regular skiers. In return, those skiers spend dollars on food, lessons, and other mountain services. Once they've spent the money for the pass, they tend to ski at least 10 to 15 times during a season. "That's great because they are the strongest wordof- mouth advertising we're going to find," acknowledges Sawyer.
Finally, Ski Butternut boosts its volume by offering special rates to groups under its "You Serve, You Save" program, along with Boy Scouts and preregistered ski clubs. Members of the military, police officers, firefighters, and EMT professionals (and their families) receive discounted packages when they make advance reservations. "We want to give them an incentive and say thank you," explains Sawyer.
Questions for Critical Thinking
1. Ski Butternut avoids pricing to meet the competition. Instead, it focuses on the value that it creates for customers. In your opinion, why is this a successful strategy?
2. What factors might determine demand elasticity for Ski Butternut's offerings?

Question 8

How can locating the breakeven point assist in price determination?

Question 9

Give an example of each of the major categories of pricing objectives.

Question 10

Explain the advantage of modified breakeven analysis over the basic breakeven formula.

Question 11

Recording artists earn only about 9 percent in royalties per CD, using a royalty base of retail price less 25 percent for packaging costs. The rest goes to the producer and to cover recording costs, promotion, copies given away to radio stations and reviewers, and other costs such as videos. What do you think happens to the artist's royalties when a CD is marked down to sell faster? Consider two cases: (a) the marked-down CD sells more copies; and (b) it sells the same number of copies as before.

Question 12

Explain how the use of yield management can result in greater revenue than other pricing strategies.

Question 13

You work for a major restaurant in your town. The manager is facing cost pressures from rising food prices and says she needs to raise revenues. She decides to reduce the size of the meal portions and use cheaper cuts of meat and fish in some entrées while holding the menu prices constant. She tells you and other staff members not to mention the changes to customers and to deflect any questions or complaints you hear. The descriptions in the menu will not be changed, she says, "because the printing costs would be too high."
A customer mentions that the chicken in the sandwich he ordered is "tough and dry" and the order seems smaller than before. What would you do?

Question 14

How do pricing objectives for a global firm differ from those used generally?

Question 15

Yield management. You are planning a trip to Walt Disney World. Visit the website 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.http://disneyworld.disney.go.com/vacation-packages

Question 16

How are the following prices determined and what do they have in common?
a. admission to a local museum
b. college tuition
c. local sales tax rate
d. printing of business cards
e. lawn mowers

Question 17

What are the major price implications of the PIMS studies? Suggest possible explanations for the relationships the PIMS studies reveal.

Question 18

Some finance experts advise consumers not to worry about rising gasoline prices, the cost of which can easily be covered by forgoing one takeout meal a month, but to worry about how high energy prices will affect the rest of the economy. For example, each dollar-a-barrel price increase is equivalent to a $20 million-a-day "tax" on the economy. Explain what this means.

Question 19

Airbus and Boeing subsidies. The United States 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 have filed complaints with the World Trade Organization. Go to the WTO website and see the article link listed below. Write a report outlining the trade dispute and its current status.
www.wto.org
http://www.reuters.com/article/2014/05/19/us-trade-aircraft-subsidies-exclusive-idUSBREA4I03W20140519

Question 20

WebTech Development of Nashville, Tennessee, is considering the possible introduction of a new product proposed by its research and development staff. The firm's marketing director estimates the product can be marketed at a price of $70. Total fixed cost is $278,000, and average variable cost is calculated at $48.
a. What is the breakeven point in units for the proposed product?
b. The firm's CEO has suggested a target profit return of $214,000 for the proposed product. How many units must be sold to both break even and achieve this target return?

Question 21

Identify each factor influencing elasticity and give a specific example of how it affects the degree of elasticity in a good or service.

Question 22

Distinguish between fair-trade and unfair-trade laws. As a consumer, would you support either fair-trade or unfair-trade laws? Would your answer change if you were the owner of a small store?

Question 23

Ajax Motor Company recently announced that it will rely less on high-volume strategies such as discounts and rebates to improve its profitability. Another strategy it will employ is to sell fewer cars to rental fleets, which eventually return the cars to Ajax for sale at low auction prices. How do these types of sales affect Ajax's profitability?

Question 24

If you've ever tried to get tickets for a game, show, or concert that ended up being sold out, you may be surprised to find that 20 to 40 percent of seats for many such events actually go unsold. High prices keep many otherwise-willing people away from arenas and concert halls, although the live-event business earns $22 billion a year in the United States. The recessionary economy is having an impact on sales, causing even headline acts to cancel performances when tickets priced at hundreds of dollars don't sell.
Now, however, you can bid on hundreds of thousands of those unsold seats through a fast-growing, Los Angeles-based start-up called ScoreBig, which lets consumers make an offer for the event of their choice in much the same way that PriceLine.com auctions hotel rooms and airline tickets.
ScoreBig operates a website through which visitors can bid on upcoming events, and a daily auction on its mobile app for the iPhone, called ScoreBig Daily, for those who don't need to plan ahead and who live in Los Angeles, San Francisco, or New York. In both channels, the company lists events with excess inventories of seats and invites customers to bid for the chance to pay at least 10 percent less and sometimes as much as 60 percent less than the original price, often within a seating area of their choice. The company provides a ballpark price for bidders. If the bid is accepted, a confirming email is sent immediately and the customer prints out the ticket. The average savings is 42 percent, and because ScoreBig deals directly with event promoters, there are no fees or handling charges.
ScoreBig Daily, the iPhone app, will soon be available on other wireless platforms. It offers tickets for about six performances a day and stores customers' event preferences, whether for sports, music, theater, comedy, or family events. It will offer the same deal to friends if the bidder shares a purchase via social media and will even save nearby seats for friends
QUESTIONS FOR CRITICAL THINKING
1. Critics say event promoters are to blame for the high number of unsold tickets, because they have continued to raise ticket prices to compensate for unsold seats until they rise out of range for most audiences. Yet promoters feel discounts damage their brands. Can you suggest possible answers to this pricing strategy problem?
2. Is auctioning the best way to eliminate unsold seats? Why or why not?

Question 25

Research the price schedule at your local movie theater multiplex. Which pricing strategy accounts for any price differentials you discover? Why don't matinee prices constitute price discrimination against those who don't qualify for the discounts?

Question 26

Prices at amusement parks might rise if operators such as Disney and Universal Studios add new attractions. The parks also have to deal with high fuel prices. List as many things as you can think of that such parks offer patrons in return for their money. Which of these do you think are directly reflected in the price of admission?