Market-Based Management 6th Edition

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CHAPTER 8

Value-Based Pricing and Pricing Strategies

 Dell Computer has it. So do Amazon.com and eBay.
Oracle has it, and even some traditional manufacturing
companies like Toyota and Volkswagen have it. What
these companies have in common, according to a new
research report, is the ability to move away from
traditional methods of setting prices, such as the cost-
plus model or benchmarking of competitor's prices, and
begin to use the power of "value pricing."
— Miller-Williams Consulting
“Pricing Power,” 2003

The above quote could be used to introduce the concept of value-based pricing and how it differs from cost-
based pricing. You could ask students to price a consumer product that costs a business $500 to make and
$200 in marketing and sales expenses. How should the business price the product if competing products sell
for $1,000 but the business’s product will last twice as long (4 years versus 2 years)? The example can serve
as the basis for a discussion of cost-based pricing, competitive pricing, and value-based pricing.

Introductory Exercise
A pair of New Balance athletic shoes is retail priced at $100 and costs about $30 to manufacture ($20 for
materials, $2.50 for labor, and $7.50 for manufacturing overhead).
 How would a business using a cost-based approach to pricing arrive at a price of $100?
 How would a business using a value-based approach to pricing arrive at a price of $100?
 Using value pricing, why would a comparable pair of Nike shoes be priced higher?

Teaching Objectives
Demonstrate the importance of product positioning, alternative positioning strategies, and the positioning
factors that need to be addressed in developing a successful product positioning strategy:
 Present the difference between cost-based pricing and value pricing and the role pricing plays in product
positioning.
 Demonstrate the importance of price elasticity and cross elasticities in developing product line pricing
strategies.
 Demonstrate the impact of pricing promotions on customers, intermediaries, and business revenues and
profits.

Harvard Business School Case Materials

 Soren Chemical: Why Is the New Swimming Pool Product Sinking? (2009). HBS Case 4188-PDF-ENG.
Topics include distribution channels, pricing, and new product marketing. Jen Moritz, the marketing manager
for Soren, is struggling with the poor sales performance of Coracle, a new clarifier for residential swimming
pools. The performance is puzzling because Coracle is chemically similar to another Soren product that has
sold well for treatment of larger pools. Soren distributes the other product B2B through "chemical
formulators" serving the commercial pools market – but Soren uses wholesale distributors to sell Coracle.
Given the slow start in establishing Coracle as a consumer brand, Moritz suspects that the go-to-market
strategy may be flawed, but she is unsure where the problem lies; she examines channel strategy,
distribution partners, the Coracle pricing scheme, the threat of competitors' offerings, and other potential
problem sources. The case study evaluates different approaches to pricing, including value pricing,
competitive parity pricing, and customer indifference pricing (cannibalization).

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 Culinarian Cookware: Pondering Price Promotion (2009). HBS Case 4057-PDF-ENG. In November
2006, senior executives at Culinarian Cookware were debating the merits of price promotions for the
company's premium products. The vice president of marketing, Donald Janus, and the senior sales
manager, Victoria Brown, had different views. Janus felt price promotions were unnecessary, damaging to
the brand image, and encouraged retailer hoarding. Brown believed the promotions strengthened trade
support, improved brand awareness, and stimulated sales from new and existing customers. The issue was
complicated by a consultant's study of the firm's price promotions, which concluded that these promotions
had a negative impact on profits. Janus trusted the study’s results, but Brown, believing the study’s
assumptions were flawed and required further analysis, suspected the promotions had actually produced
positive results. The pressing decision is whether to run a price promotion in 2007 and, if so, to determine
which merchandise to promote. The broader issue is the strategy Culinarian should pursue to achieve sales-
growth goals, and what role price promotions should play. The case study explores the risks and
opportunities of price promotion as a strategic and tactical marketing tool. Through quantitative analysis, it
evaluates the financial impact of a price promotion using different cost and sales assumptions.
 Deaver Brown and Cross Rover, Inc. HBS Case No. 9-897-508 (video). The video presents an interview
on encouraging customers to distribute product knowledge while presenting the benefits to the buyer. The
case study provides sets the stage for a class discussion of value pricing.
 Fabtek (A). HBS Case No. 9-592-095. This case study focuses on the selection and scheduling of orders by
a small industrial titanium fabricator that finds itself plagued by poor delivery and a lack of capacity. Four
orders are offered, from which the student must select one. Each order represents different customer and
order situation issues. The case study requires students to choose among the four orders, given conflicting
estimates of capacity available, other businesses likely to come along, and the requirements of each order.
A rewritten version of an earlier case. Teaching Note 5-593-006. Supplement 9-592-096.
 Duncan Department Stores. HBS Case 9-594-012. Describes a Midwestern department store chain facing
price competition from both regional and national store operators, as well as other retailers. The company’s
pricing policies are often inconsistent and usually instituted as a reaction to a competitor’s sale price. At the
time of the case study, spring 1991, the company had about 50 stores with sales of $450 million. For
students in the second-year MBA retailing course, the case study could be used to prompt discussion on
how a department store chain might transition from a combination of a “hi-lo” and value-based pricing policy
to one more acceptable to consumers, more cohesive, and more profitable. Teaching Note 5-594-041.
 Hartmann Luggage Co. ― Price Promotion Policy. HBS Case 9-581-068. The president and the
marketing vice president are reviewing previous Hartmann price promotions in order to decide whether to
again run one or more promotions. Teaching Note 5-592-074.
 Precision Pricing for Profit in the New World Order: Increasing Customer Value, Pricing Latitude, and
Profits. HBS Case 9-999-003 (24 pages). Offers a comprehensive framework for managing pricing to
improve profits.
 Note on Behavioral Pricing. HBS Case 9-599-114 (10 pages). Provides a good review of economic-based
pricing concepts and then moves into the area of perceived value and pricing. The psychological aspects of
pricing are presented in a series of vignettes.

Market-Based Strategic Thinking

1. How could cost-based pricing lead to a price lower than the one customers would have paid? How
does this affect the profit of a business?
Let’s assume a customer would be willing to pay $1,000 for a new PC with a particular performance level.
The PC cost $450 to make. A manufacturer using cost-based pricing with a desired margin of 25 percent
would sell the PC to retailers for $600 ($150 / $600 = 25%). The retailers mark up the PC to a $750 retail
price to achieve a 20 percent retailer margin ($150 / $750 = 20%). This means the manufacturer
underpriced the PC by as much as $250. The manufacturer’s margin at a $1,000 retail price would be $350
($1,000 – $200 – $450). The margin at the current $600 price to retailers is $200 lower, and hence profits
are much lower. The dollar margin for retailers is also hurt. At the $1,000 retail price, the retailers’ 20
percent margin would be $200 instead of $150 at the cost-based retail price of $750.

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 2. How could cost-based pricing lead to a price higher than target customers are willing to pay? How
does this affect the profit of a business?
As in question 1, let’s assume the customer would be willing to pay $1,000 for a PC that operates at a
certain performance level. If the cost to manufacture the PC is $750 and the desired margin is 25 percent,
the manufacturer would sell it to retailers for $1,000. Retailers would markup the PC to $1,250 to obtain a
20 percent retailer margin. At this price, fewer sales would occur than at the $1,000 price. With a higher
margin but a significantly lower volume, the company would have lower profits.

3. How does value-based pricing differ from cost-based pricing? What should a business do if the
value-based price is not high enough to deliver desired levels of profitability?
Value-based pricing starts with the customer, the product’s differentiating features, and competing
products. The combination of these three factors enables a manufacturer to determine whether customers
would pay more for its product. Let’s assume competing PCs are priced at $900 but target customers
would be willing to pay an additional $100 to obtain the company’s PC with its extra features. If the $1,000
price is not sufficient to produce a desired margin after accounting for all costs, the manufacturer has three
options: (1) lower the manufacturing cost, (2) ask retailers to take a smaller margin in exchange for higher
volumes at the $1,000 price, and (3) do not pursue the launch of this product since it cannot meet the
company’s profitability requirements at the value-based price of $1,000.

4. How would an earthmoving equipment manufacturer use value-in-use pricing to determine its
customer value of its product?
The process requires an understanding of how the customer acquires, finances, uses, repairs, and
eventually sells the earthmoving equipment when it is no longer of use. Each of these areas entails costs
to the customer, and reducing those costs adds to the product’s customer value. For example, a product
that is more efficient (moves more per load), lasts longer, has fewer breakdowns, and is easy to use could
translate into considerable cost savings for the customer. The manufacturer would want to consider all the
costs of ownership and then compare the total cost of ownership for its product against that of competing
products. Let’s assume the annualized cost of ownership for competing products with a 5-year life is
$25,000. If the total cost of ownership for the manufacturer’s product is $15,000, then it has a customer
value of $10,000.

5. How would the earth-moving equipment manufacturer use the net present value of a customer’s
total cost of ownership to set a value price?
Similar to the example illustrated in Figure 8-7, the manufacturer would seek to find a price point on the
basis of the total cost of ownership of its product compared to that of a similar product manufactured by the
company’s main competitor. If the ownership costs associated with the manufacturer’s products are
significantly lower than its main competitor, the manufacturer can charge a higher price than the
competitor but still save customers money over the life of the equipment.

6. How would Toyota use perceived-value pricing to set a price for the Prius? How would Toyota
select a specific price that delivered a meaningful customer value?
Similar to the example in Figure 8-8 and 8-9, Toyota could compute a customer benefits index for the Prius
based on customers’ (or potential customers’) perceptions of the Prius relative to competing hybrids.
Toyota could measure customers’ perceptions relative to competing hybrids for:

Product Performance ........ Design, reliability, fuel efficiency, paint quality, space, and comfort.
Service Quality ................... Required maintenance, quality, and availability of service.
Brand Reputation............... Image and status.

As in Figure 8-9, Toyota would then calculate a cost of purchase index for the Prius by determining the
level of importance that customers place on purchase price, service and maintenance costs, and
depreciation, and then by determining the advantage Toyota presently has in each of these areas relative
to competitors. On the basis of the level of customer value that the Prius has (customer benefits index
minus cost of purchase index), Toyota could set a new purchase price that results in the desired level of
profitability while still maintaining good customer value. (See Chapter 4 for details on calculating relative
advantage scores, the cost of purchase index, and customer value.)

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 7. At what price would the Prius not have any perceived customer value?
When the overall perceived benefits index equals the total cost of purchase index, there is no net customer
value. At this point, car buyers would have less incentive to buy a Prius. If the total cost of purchase index
exceeds the overall product performance index, a negative customer value results. This would further
lower the attractiveness and sales of the Prius.

8. How could Toyota use performance-based pricing to determine a price that would create a good
value for customers and a good price for Toyota?
Using the top-two performance benefits―fuel economy and reliability―along with price, a set of nine
configurations can be created using conjoint analysis. A sampling of customers would rank the nine options
from most preferred to least preferred. Toyota would then derive preferences curves for the two
performance benefits and price, on the basis of the customer rankings of the nine options. If the price curve
is relatively flat and the two performance curves slanted upward from low performance to high
performance, then Toyota would know that price is far less important than the performance benefits. The
company could compare the overall value for competing cars and determine a performance-based price
that would satisfy target customers and produce an attractive profit margin for Toyota.

9. How could Subaru use customerization pricing for the Subaru

Outback and benefit from a top-down price presentation of price-
performance options?
Subaru uses customerization pricing with an interactive feature called
Build Your Own Car on the company’s web site. In this example, we
selected the most expensive vehicle at $38,000. The slider bar allows
customers to set the price and to select the features they want. At this
price, the best gas mileage available for the SUV is a little over 21 MPG.
Other features where pushed to the maximum to obtain a reference price.
This is the top price-performance configuration. Subaru buyers could
save money by lowering the performance features.

10. Why would Apple use a skim-pricing strategy for a new Apple
product?
When Apple launched the iPod, it used skim pricing to obtain a high
margin and low volume because production capacity was limited. The
relatively high skim price has limited the market to customers who are
generally less price sensitive and willing to pay more for the iPod product benefits. Once this customer
segment is fully penetrated, Apple will likely lower the price to attract more customers and greater volume.
But this strategy would make sense only if the new gross profit (margin per unit times volume) is higher
than the current combination of high margin per unit and low volume.

11. What kind of pricing strategy is single-segment pricing? Why is single-segment pricing used early
in the growth stage of the product life cycle?
A single-segment strategy targets one type of customer, which means many other customers will not find
the product-price positioning attractive. Single-segment pricing is based on value-in-use pricing. The
strategy maintains a premium price but still offers customers an attractive savings because the product’s
total cost of ownership is significantly lower than that of the main competing product. It is used early in the
early growth stage of the product life cycle because the lower total cost of purchase attracts customers
who are entering the market, while maintaining good margins.

12. Why would a business use a penetration-pricing strategy instead of a single-segment strategy?
How does the penetration-pricing strategy create customer value?
A business with a production capacity advantage and a high customer benefits index could use penetration
pricing to increase volume and drive down costs, thereby creating a cost advantage across several or all
segments of a market. Such a low-cost producer would then likely gain market share, more than it would
with a single-segment approach, on the basis of its low price. For a business in a low-cost position, the
strategy creates customer value by lowering the cost of purchase index relative to the overall product
performance index.

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13. How does a low-cost-leader-pricing strategy differ from a penetration-pricing strategy?
Low-cost producers do not need a large volume to achieve a low-cost position. These businesses simply
remove excessive costs in making their products and running their businesses. A local motel with the
lowest price in town may not have a lobby, no TVs in guestrooms, no breakfast bars, and offer small,
sparsely decorated rooms. To further lower costs, the motel’s owners clean the rooms themselves and do
not advertise. The owners have created a low-cost advantage that the national chains cannot match. Of
course, the motel’s guests give up some benefits to obtain the lower price.

14. Why would a business use multi-segment pricing early in the late-growth stage of the product life
cycle?
As a market grows, customers with different usage needs become identifiable, and a business can attract
them with products or services that meet those needs and are priced accordingly. As the cellular phone
service market grew rapidly in the 1990s, for example, customers with different needs comprised segments
identifiable by the customers’ level of usage and price sensitivities. Based on individual needs, usage, and
price sensitivities, cellular service providers developed separate pricing programs for the different
segments. The “package plan” was a flat-fee program for customers in the “field office” segment. The “flex
plan” had a variable usage charge designed around the usage needs of those in the “time management”
segment. The “security plan” had a low fixed monthly fee but a high per-use charge, allowing those in the
“personal” segment low-cost access to cellular service for emergencies and special occasions. Attracting
cellular customers today, however, requires a much different pricing strategy.

15. What is plus-one pricing and why is a business more likely to use it in the mature stage of the
product life cycle?
Plus-one pricing involves adding one unique benefit that customers value to a product that other
businesses also offer. As products move into the mature stage of the product life cycle, product
differentiation is greatly diminished and all products start to look about the same and are comparably
priced. Adding one benefit (plus-one) to service or the product allows a business to more easily attract
customers at the same price as competitors’ prices. Of course, if competitors copy this plus-one benefit,
then the business loses its plus-one advantage.

16. What is reduce-focus pricing? How can a business possibly be more profitable with fewer
customers and lower volumes?
Businesses often unintentionally attract customers who are not profitable or only slightly profitable. By
raising prices, a business encourages these customers to leave, but those who are retained at the higher
price produce a higher margin. The combination of higher margin and lower volume results in greater profit,
as illustrated here:

Original Pricing Strategy:

Gross Profit = 1,000 customers  100 units per customer  ($800 – $700) = $1,000,000
Reduce-Focus Pricing:
Gross Profit = 800 customers  100 units per customer  ($900 – $700) = $1,600,000

17. Why would a business use harvest pricing? Why do many businesses using harvest pricing never
exit the market?
When a market becomes less profitable and less attractive, a harvest strategy provides a way for a
business to slowly exit the market using a combination of sequential price increases along with reductions
in marketing and sales expenses. A harvest strategy is expected to result in a sales decline but with much
higher short-term profits. The reason many companies never exit a market when using a harvest strategy
is that they discover a combination of margin, volume, and marketing and sales expenses that yields an
above-average profit. While the market may still be less than attractive, the above-average profit keeps a
business’s product or service in play.

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18. How would a business estimate the price elasticity needed for a price decrease that would maintain
the current level of profits?
Let’s assume that a personal computer that costs $800 to produce sold 10,000 units at a net price of
$1,000. This yields a gross profit of $2 million. A 5 percent price decrease would require a volume of
13,333 to maintain the current gross profit of $2 million. This corresponds to a price elasticity of –6.6, which
is a huge price elasticity and one not likely to occur. Thus, a strategy to lower price by 5 percent is likely to
produce lower profits.
Gross Profit = 10,000  ($1,000 – $800) = $2 million
$2 million = Volume  ($950 – $800)
$2 million = Volume  $150
Volume = $2 million / $150 = 13,333
Percent Change in Volume = 13,333 / 10,000 = 33.3%
Elasticity = 33.3% / –5% = –6.6

19. Why should a business always raise price when it is inelastic?

When prices are inelastic, a price increase will always result in a sales increase and a profit increase. This
is a pricing truism.

20. When price elasticity is –1.5 to –2, why would a price reduction result in larger volumes, higher
market share, and greater sales but lower profits?
For businesses with margins of less than 40 to 50 percent, price elasticities need to be larger than –2 for a
price decrease to be profitable. For example, the current sales of $10 million produce a gross profit of $2
million, as shown below. A 10 percent decrease with a –2 price elasticity would lower the price to $900 and
increase volume to 12,000 units. Sales increase to $10.8 million, but gross profit drops from $2 million to
$1.2 million.
Sales (current) = 10,000  $1,000 = $10 million
Gross Profit (current) = 10,000  ($1,000 – $800) = $2 million
Sales (new) = 12,000  $900 = $10.8 million
Gross Profit (new) = 12,000  ($900 – $800) = $1.2 million

21. Why is break-even market share more useful than the break-even volume?
Break-even volume provides a good index from which to determine the number of units needed to be
profitable. However, this is a rather abstract number without some meaningful point of reference. By
dividing the break-even volume by the unit size of the target market, we can determine the break-even
market share. This is a much more meaningful index for marketing decisions. A break-even share well
below a business’s target share is more likely to produce a profit than a break-even market share near the
target market share.

22. What happens to a substitute product when the price of another product in a business’s product
line is increased by 10 percent when the cross-price elasticity is 0.4? Why would a business
intentionally shift sales volume from one product to another in its product line?
When product A’s price is increased 10 percent, the volume of substitute product B increases by 4 percent,
assuming no change in product B’s price. A business may raise the price for one product when its margins
are low and the margins for another of the business’s substitute products are high. A price increase for the
low-margin product shifts volume to the high-margin product, which should increase overall profits.

23. What happens to a complementary product when the price of the product that it complements is
decreased by 10 percent and the cross-price elasticity is 0.4?
When product A’s price is decreased 10 percent, the volume of complementary product B would increase
by 4 percent, assuming no change in product B’s price. A business may decrease the price for one product
when its margins are high enough to absorb the price decrease and when margins for the business’s
complementary product are modest. A price decrease for product A creates more volume for both products
A and B.

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24. Frito-Lay introduced Stax to compete with Pringles in 2003. Assuming the company had excess
production capacity, how would the profits of other Frito-Lay chip products be affected by the
success of Stax?
Any business with excess production capacity can lower the average cost of all products made in that
facility by introducing another brand to be made in the same facility. A large portion of the cost of goods
sold is manufacturing overhead (fixed expenses, such as those associated with facilities, equipment, and
utilities). This cost is allocated to all products made in the facility on the basis of volume or time in
production. The addition of Stax meant Frito-Lay now had another product that could take on a portion of
this overhead expense. An extension of a company’s product line lowers the average cost for all products
and improves the profitability of each.

25. Under what conditions would eliminating a brand with a negative pre-tax profit from a product line
result in lower overall pre-tax profit?
The different brands in a company’s product line often share the same manufacturing operations. When
manufacturing capacity is underutilized, the strategy is to add brands to take advantage of the excess
production capacity. This lowers the cost of the existing brands and enables a lower cost for the new
brands than if they were made at a separate facility. Likewise, when a brand is eliminated, even one with a
negative pre-tax profit, the average cost of all other brands increases because a company then has fewer
brands to absorb allocations of manufacturing overhead. Thus, the removal of an unprofitable brand from a
product line could result in a reduction in a company’s overall pre-tax profit.

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Marketing Performance Tools and Application Exercises

8.1 Value-in-Use Pricing: This marketing performance tool is used with Figure 8-6 in addressing items A and
B below.
A. The ownership costs for a business’s products that extend the life of machine fluids appear in the first
example. Assess the economic value for several price points and select a price that creates a
meaningful value for customers.

Com pany Price Prem ium 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Company Price $2.00 $2.10 $2.20 $2.30 $2.40 $2.50
Competitor $2.00 $2.00 $2.00 $2.00 $2.00 $2.00
Company Usage Cost $6.00 $6.00 $6.00 $6.00 $6.00 $6.00
Competitor Usage Cost $5.05 $5.15 $5.25 $5.35 $5.45 $5.55
Customer Value (Savings) $0.95 $0.85 $0.75 $0.65 $0.55 $0.45
% Custom er Savings 18.8% 16.5% 14.3% 12.1% 10.1% 8.1%

Teaching Note: The table above presents the variance in customer value (savings) for different price
premiums, ranging from no premium to a 25 percent premium. The current price has a 10 percent price
premium and a customer savings of 75 cents per application. This is a savings of 14.3 percent when
compared to the competing product priced 10 percent lower.

B. In this example, let’s assume that the usage cost for the business’s product is further reduced to $2.50
per pound. How would this affect customer value and the perception of the value price of $2.45?

Teaching Note: In the analysis above, the company’s usage cost is reduced from $2.80 to $2.50 and
the price is increased from $2.20 to $2.45. This combination results in a customer savings of 80 cents.
This is just a little more than the current savings of 75 cents per application. However, the price
differential is getting fairly large and could create some emotional concerns with the customer. Holding
the price at between $2.30 and $2.33 may ease this perception and still allow the company to improve
its margins and significantly increase customer value.

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8.2 Perceived-Value Pricing: This marketing performance tool is used with Figures 8-8 and 8-9 in addressing
items A (below) and B (next page).
A. Assume the business can improve its ease of use from a 5.6 rating to a 7.5 rating. How would this
change the overall benefits and customer value at the current price of $6,250?

Product Perform ance Relative Our Com petitors Product

(Voice of the Custom er) Im portance Business A B C Advantage

Reliable Perdormance 50 7.3 7.5 5.4 6.7 17

Ease of Use 30 5.6 5.1 7.7 4.9 -10
Product Life 20 6.6 5.2 5.2 6.1 13
100 120

Service Quality Relative Our Com petitors Service

(Voice of the Custom er) Im portance Business A B C Advantage
Parts Availability 60 7.2 6.3 4.3 6.7 20
20 6.5 6.8 6.6 5.5 0
20 7.2 6.3 5.2 6.6 7
100 127

Brand Reputation Relative Our Com petitors Brand

(Voice of the Custom er) Im portance Business A B C Advantage

Most Respected Brand 50 7.7 7.5 5.4 6.7 17

Know n for Quality 50 7.5 6.7 6.6 3.5 17
100 134

Teaching Note: Improving “ease of use” from a 5.6 rating to 7.5 would allow the company to
outperform competitors A and C and match the perceived performance to competitor B. This would
change the product advantage for “ease of use” from -10 to 20 and, as shown below, it would improve
the overall product performance advantage score from 120 to 150.

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 B. With this higher ease-of-use rating, how would the customer value index change if the business raised
its price to $6,500 and the business’s rating on price of equipment increased from 7.5 to 8.0? Would
you recommend this price increase?

Cost of Purchase Relative Our Com petitors Overall

(Voice of the Custom er) Im portance Business A B C Cost
Price of Equipment 60 7.5 7.2 6.7 4.9 20
Service & Maintenance Costs 30 5.1 7.2 7.1 5.3 -20
Depreciated Value 10 5.5 4.5 5.5 5.7 0
Cost of Purchase Index 100 100

Teaching Note: Assume raising the price from $6,250 to $6,500 would increase the perceived price
rating from 7.5 to 8.0. Although the higher rating for “price of equipment” indicates a somewhat weaker
competitive position for that particular cost of purchase component, the higher price would have no
impact on the overall cost index for “price of equipment,” and it would therefore not affect the cost of
purchase index. The company’s price rating of 8.0 would still be less than 1 point above competitor A’s
rating of 7.2, and it would of course remain more than one point higher than the ratings for competitors
B and C. The higher price retains the same cost of purchase index, and the improvement in “ease of
use” leads to an increase in company’s value index from 23 to 41, as shown here:

Customer Value Index = Overall Performance Index – Cost of Purchase Index

Prior to Improvement = 123 – 100 = 23
After Improvement = 141 – 100 = 41

8.3 Performance-Based Value Pricing: This marketing performance tool is used with Figures 8-11 and 8-12
in addressing items A (below) and B (next page).
A. Replace the existing data with two car performance factors each with three levels of performance (e.g.,
<20 MPG, 25 MPG, and >30 MPG) and a price factor with three price levels (e.g., $20,000, $25,000
and $30,000). Then rank the nine alternatives from 1 (most preferred) to 9 (least preferred) and
interpret the performance and price curves.

Teaching Note: The setup is shown above. The nine options created were then ranked from 1 (most
preferred) to 9 (least preferred), as shown below. In the performance preference curves, note the
similarity between “extra maintenance” and “fuel economy.”

Options: A B C D E F G H I
Rank Order: 9 6 5 8 4 2 7 3 1

Market-Based Management Copyright © 2012

Sixth Edition – 98 – Pearson Education, Inc.
Instructor’s Manual – Chapter 8 Publishing as Prentice Hall
 B. Input the product positioning (position on each performance factor and price) for your company
auto and competing auto. Interpret the value index for each automobile and how each might influence
market share.

Teaching Note: Compared to its benchmark competitor, the company has a value index of 2.31 based
on better fuel economy (35 MPG), no extra maintenance cost, and the better price ($30,000) for this
class of car. The competitor had lower gas mileage (25 MPG) and $250 in extra maintenance cost per
year but a lower price at $25,000. However, based on the performance factors that are important to this
type of customer, the competitor’s value index (1.88) is lower. The company’s better value index should
allow the company to achieve a market share higher than its competitor in this customer segment, as
long as the company’s marketing communications and channel system are efficient. You could ask
students: “How could a company’s competitor with a lower value index have a higher market share?”
On the part of the company, poor marketing communications (low awareness, low comprehension of
advantages) and poor availability of the product could cause this to happen.

Market-Based Management Copyright © 2012

Sixth Edition – 99 – Pearson Education, Inc.
Instructor’s Manual – Chapter 8 Publishing as Prentice Hall
8.4 Price-Volume Pricing: This marketing performance tool is used with Figures 8-23 to 8-25 in addressing
items A and B below.
A. The price elasticity for personal computers is estimated to be –2. For the PC manufacturer shown,
evaluate the sales and profit impact of a 10 percent price increase and a 10 percent price decrease.

Teaching Note: As shown above, a 10 percent price increase would lower volume, sales, and market
share, but it would more than double marketing profits (NMC) and greatly improve marketing ROI.
Current margins are 15 percent, but a 10 percent price decrease would lower them to 5.6 percent. This
would destroy profits even though sales and market share increase. In general, price decreases for
low-margin products result in a decrease in profits even when the price elasticity is very high.

B. For each pricing strategy, determine the break-even market share and discuss the profit risk associated
with it.
Teaching Note: The current break-even share is 3.3 percent and the current share is 5 percent. This
means there is a share cushion of 1.7 points over zero profits. With the 10 percent increase in price, the
break-even share drops to 1.8 percent and the spread between the new share (4%) and break-even
share (2.2%) is 2.2 points. The strategy poses little risk to profits should it fail. The break-even share for
the 10 percent price decrease is 10.8 percent, which is well above the 6 percent market share obtained
with this price decrease. This pricing strategy would result in negative profitability.

Market-Based Management Copyright © 2012

Sixth Edition – 100 – Pearson Education, Inc.
Instructor’s Manual – Chapter 8 Publishing as Prentice Hall