pricing by keralaguest


									CHAPTERS 17 AND 18

Vaughan C. Judd
Auburn University Montgomery


     The relationship between product price and quality is more relevant to students when they analyze it
using "third party data." Food product ratings in Cook's Illustrated magazine provide the data for the
analyses. Consumer Reports, however, can be used as a data source if Cook's Illustrated is not readily
available. The Spearman rank correlation coefficient, an easy statistic to calculate in class with a hand-held
calculator, is used to measure the relationship.

An Example of the Process

       Step 1: Students are grouped in teams of two or three. Each team is given a reprint of a different food
review from Cook's Illustrated magazine, and a worksheet which is equivalent in form to Table 1, but with
only the column headings.
       Step 2: The example, Table 1, is based on ratings of six brands of canned red kidney beans. Students
list the brands in column 1, and the rank order of quality in column 2-the best quality being ranked number
one. Although there are no ties in quality ranks in this example, brands are sometimes tied.
       Step 3: Students then list the price and volume of each brand in column 3. Since the cans contain
different volumes, the prices from column 3 are converted to per ounce equivalents in column 4. The prices
shown in column 4 are ranked from highest to lowest (1 = highest) in column 5. Note that there are two
brands with identical prices—at $.030/ounce. Using the midrank method for handling ties, these brands are
each ranked 5.5.
       Step 4: Students next calculate the coefficient of correlation between the quality and price rankings.
First, they complete the d (difference) column by subtracting the x rank from the y rank for each brand,
then the d2 column by squaring the values in the d column and summing them up. Finally, the coefficient of
correlation is calculated.
       Step 5: Each group is asked to draw conclusions regarding the
relationship between price and quality for the brands analyzed, and to report the conclusions to the class.
The conclusions, based on the coefficients, are noted on the chalkboard. Also they are asked how
successful a consumer would be in obtaining quality by picking the highest or lowest priced brands. With
regard to canned red kidney beans, there is a strong association between quality and price. Unfortunately
for consumers, the relationship is in the wrong direction as expressed by the -.90 coefficient. Also, out of
the six brands evaluated, the highest priced brand ranked last in quality.
                             Table 1 Canned Red Kidney Beans

(1)                  (2)   Price                                      (6)      (7)
Brand              Quality       (3)          (4)        (5)           d       d2
                    Rank     Price/Wt.        *Price     Price Rank  (y-x)
                    (y)                       per Unit   (x)
Green Giant      1         $.59/15.5 oz.      $.038      5.5        -4.5       20.25
Goya             2         $.59/15.5oz.       $.038      5.5        -3.5       12.25
S&W              3         $1.09/15 oz.       $.073      3          0          0
Progresso        4         $.89/19 oz.        $.047      4          0          0
Wesbrae          5         $1.59/15 oz.       $.106      2          3.0        9.00
Eden             6         $1.99/15oz.        $.133      1          5.0        25.0
TOTAL                                                                          66.5
Source: Cook's Illustrated (September/October 1997)
*Converted to a per/ounce basis

The formula for calculating Spearman's rho is:

rs = 1- 6d2
        (n3 – n)

Where: rs= Spearman rank order correlation, d, = difference in rank in the paired rankings, n = number of
items ranked, and 6 = a constant in the formula.

    rs = 1 - 6(66.5)/(63 - 6)
    rs =-.90
Discovering on one's own is an important element of learning. This exercise provides that opportunity.
Students sharing their discoveries with their fellow classmates further complement the learning process.
Finally, from the shared findings there is an opportunity to generalize about the price-quality relationship.
Obviously the results will vary depending on the product categories assigned. With regard to food products,
however, experience has shown that there tends to be low levels of correlation between price and quality.

Philip R. Kemp
DePaul University

                                 SURVIVAL BARTER EXERCISE

Survival is a group exercise in which student teams must use the barter system to gather the necessary
items in order to survive. Each group is given a list of six items (on a sheet of paper or index card) with the
amounts of each item they must gather to survive, see Table 1. As seen m Table 1 a team may have the
exact amount, a shortage or excess of goods in a category of what they need to survive. A team with an
excess of goods in a particular category can use these excess goods to barter for other goods.

The ideal size of each student team is five to six students; one member of the team is assigned the task of
bookkeeper another assigned the task of observer at the end of the exercise the bookkeeper reports what
their team has accumulated through the barter of excess goods. The observer reports on the dynamics which
took place within the group during the exercise One or two students should be asked to report on the
dynamics of the whole exercise as it occurs. As shown in Table 1 each team must gather the exact same
items and each team must gather the same amount of each of these items.

After the teams have been formed, and the roles of bookkeeper and group observer and overall observer
have been assigned, the class is instructed that they have twenty minutes to complete the exercise. No
additional assistance is provided by the instructor. After about 20-25 minutes the exercise tends to end on
its own. Hint: Move the class to an open area or arrange the room so that desks are at the one side of the
room. This will eliminate any physical barriers from interfering with the exercise.

After the exercise is over ask each bookkeeper to give an account of the items and amounts of each item
their respective team has gathered. A matrix with teams on the top and items on the side serves as an
excellent visual aid to show the national accounts (see Table 1). The class is informed that the only way a
team can win is under the following conditions, first they must have gathered all the necessary items in the
amounts necessary to survive (excess goods are acceptable), no goods at the macro level can have been
either lost or created. Teams have been able to gather the necessary goods in the correct amounts, but there
is always some loss or gain of goods when the national accounts are totaled.

After the national accounts have been shown, ask this question of the class "What would have helped you
to accomplish your teams' survival in this exercise?" The usual answers to this question are:
      better communications,
      currency or money,
      knowing the value of one item in relationship to other items, .
      a central market, and
      in some rare cases a student will say a middleman.

All of these responses then can lead into a discussion of the exchange function, central markets, the
function of money within an economy, and how middlemen can assist in increasing the efficiency of the
marketplace. When the discussions of a central market or middlemen are introduced ask the group/team
observers and the overall exercise observers to describe the dynamics of what occurred in the groups and
exercise as a whole. Every time I've done the exercise the same dynamic emerges.

The overall exercise dynamic usually runs as follows, each team gathers in their respective groups, then
one member of the team goes to other teams to determine what they have to trade(excess products). They
soon realize that sending out one person is too slow a process. They then decide to send out other group’s
members to talk to different groups to barter their excess goods (This is the time when goods are created
and lost at the Marco level).

When more than one team member is sent out of the group typically a central market forms (all the teams
gather in a section of the room, which looks like the trading floor of a commodities exchange pit). Finally,
the central marketplace disbands and the teams then reform. Using diagrams on the blackboard with circles
as the groups and lines with arrows as the traders one can show the exchange process that takes place in a
barter market. Then add to the diagram the other "runners" coming from each group. This diagram shows
the formation of the central market, one can just use a large circle around all six groups on the board. I have
become so bold as to draw these diagrams on a flip chart and just turn the pages as the observers describe
the dynamics of the exercise. These diagrams are useful to introduce and discuss the topics of
communication (promotion), central markets and functions of middlemen. The exercise has benefits
beyond instruction which are:
     It an excellent icebreaker for the first class meeting;
     icebreaker for students to introduce themselves to one another,
     if class discussion is important to you it set the tone for the rest of the term;
     and far superior than just passing out the syllabus and starting to lecture on a topic when the
      students have had not had the opportunity to read the textbook.

                             TEAM ONE (1)
3 CORDS OF WOOD                                        1 CORD OF WOOD (-2)
200 LBS. OF MEAT                                       350 LBS. OF MEAT (+150)
6 PAIRS OF BOOTS                                       4 PAIRS OF BOOTS (-2)
100 BUSHELS OF WHEAT                                   150 BUSHELS OF WHEAT (+50)
250 LBS. OF VEGETABLES                                 200 LBS. OF VEGETABLES (-50)
I COOK STOVE                                           2 COOK STOVES (+1)

                             TEAM TWO (2)
3 CORDS OF WOOD                                        1 CORD OF WOOD (-2)
200 LBS. OF MEAT                                       50 LBS. OF MEAT (-150)
6 PAIRS OF BOOTS                                       7 PAIRS OF BOOTS (+1)
100 BUSHELS OF WHEAT                                   200 BUSHELS OF WHEAT (+100)
250 LBS. OF VEGETABLES                                 200 LBS. OF VEGETABLES (-50)
I COOK STOVE                                           I COOK STOVE

                               TEAM THREE (3)
3 CORDS OF WOOD                                        2 CORDS OF WOOD (-1)
200 LBS. OF MEAT                                       250 LBS. OF MEAT (+50)
6 PAIRS OF BOOTS                                       7 PAIRS OF BOOTS (+1)
100 BUSHELS OF WHEAT                                   50 BUSHELS OF WHEAT (-50)
250 LBS. OF VEGETABLES                                 200 LBS. OF VEGETABLES (-50)
I COOK STOVE                                           I COOK STOVE

                               TEAM FOUR (4)
3 CORDS OF WOOD                                        5 CORDS OF WOOD (+2)
200 LBS. OF MEAT                                       400 LBS. OF MEAT (+200)
6 PAIRS OF BOOTS                                       5 PAIRS OF BOOTS (-1)
100 BUSHELS OF WHEAT                                   50 BUSHELS OF WHEAT (-50)
250 LBS. OF VEGETABLES                                 200 LBS. OF VEGETABLES (-50)
I COOK STOVE                                           0 COOK STOVE (-1)
                                  TEAM FIVE (5)
3 CORDS OF WOOD                                        3 CORDS OF WOOD (+1)
200 LBS. OF MEAT                                       50 LBS. OF MEAT (-150)
6 PAIRS OF BOOTS                                       9 PAIRS OF BOOTS (+3)
100 BUSHELS OF WHEAT                                   0 BUSHELS OF WHEAT (-100)
250 LBS. OF VEGETABLES                                 350 LBS. OF VEGETABLES (+10)
I COOK STOVE                                           2 COOK STOVES (+1)

                                  TEAM SIX (6)
3 CORDS OF WOOD                                        5 CORDS OF WOOD (+2)
200 LBS. OF MEAT                                       100 LBS. OF MEAT (-100)
6 PAIRS OF BOOTS                                       4 PAIRS OF BOOTS (-2)
100 BUSHELS OF WHEAT                                   150 BUSHELS OF WHEAT (+50)
250 LBS. OF VEGETABLES                                 350 LBS. OF VEGETABLES (+100)
I COOK STOVE                                           0 COOK STOVE (-1)



WOOD     3        3         3        3        3         3        18

MEAT     200      200       200      200      200       200      1200

BOOTS    6        6         6        6        6         6        36

WHEAT 100         100       100      100      100       100      600

VEG.     250      250       250      250      250       250      1500

OVEN     1        1         1        1        1         1        6

Laura Balus
Central Community College

To introduce the third element of the 4 P's, pricing, I gather various products from my home and office.
Some of these products include grocery items, toys, office equipment, and computer software. Various
products were ordered through a mail-order catalog and others were beauty items purchased through a
home party. All of these items are arranged on a long table at the front of the classroom. All price tags have
been removed. In preparation for this activity, I completed small recipe cards that individually listed
specifics on each product and the purchase

I announce to the class that I am conducting a silent auction of sorts. Each student is asked to file by the
table of products and write down what each believes to be the purchase price of each product. When the
students have returned to their seats, I divide the class into two teams. I explain that we will play a version
of the popular television game show, "The Price Is Right."

Members of each team take turns at being either the game show host or the contestant. The game show host
selects one product from the table and the accompanying recipe card of information, then orally presents a
brief description of the product and its many uses and benefits. Then the price guessing begins. The
contestant is given thirty seconds to randomly call out prices, with the game show host responding with
"higher" or "lower" until the correct price is announced.

The excitement increases with each round of price guessing until all of the products are used. Guessing the
correct price within thirty seconds earns each team a point. Points are tallied, and the losing team (the team
with fewer points) is asked to bring treats for the whole class.

The activity proceeds with an explanation of how pricing is indeed a game in itself. I refer to our study of
the consumer's "black box" and how research and creativity go hand in hand when establishing price.
Indeed, mathematical pricing formulas are used with careful planning to cover the cost of goods, overhead,
and retain a profit. However, I further explain that a price tag should not reflect wishful thinking. Pricing
must revolve around the consumers' innate sense of value.

I stress to the class that our silent auction resulted in quite extreme price differences between class
members, which was revealed with our game show rendition. Finally, I provide an overview of the
numerous pricing strategies commonly used in today's marketplace, with emphasis on how many of these
strategies are intended to psychologically persuade consumers to buy.

Keith Absher
University of North Alabama


The price section in many marketing textbooks is often not as inherently interesting to students as
promotion, product, or place. I have found this simple price assignment stimulates a lot of interest on the
part of the students, and also promotes classroom participation.
Students are asked to visit three retail stores to collect prices on fifteen different products. The
products have to be the same brand name, size, weight, etc. Most students find they can complete the as-
signment in an hour and a half to two hours. A sample form is provided that can be given to students to
assist them in their understanding and organization of the project.

Possible suggestions for store comparison could include:
1. Grocery items—large chain store, local chain, and convenience store;
2. Health and beauty aid items—grocery store, department store, drug store;
3. Over the counter drug items—drug store chain, local drug store, discount store;
4. Clothing—specialty store, department store, discount store;
5. A comparison of prices in the same store in different cities;
6. Allow the student to create their own comparisons.

The day the assignment is due, ask students to select three or four of their price comparisons and
place them on the board. You may elect to do this by types of goods, types of stores, or price ranges. This
assignment can lead to an excellent discussion of such topics as price competition, non-price competition,
odd-even pricing, promotional pricing, prestige or image pricing, customary pricing, promotional pricing,
price lining, and unit pricing.

Some possible questions for stimulating discussion are:
1. What factors do you think account for the price variations?
2. What was the biggest surprise you found?
3. Is it worth the time and expense involved for the consumer to shop at a number of different stores to
   check prices?
4. Could you identify any specific pricing strategies or policies in the stores you visited?
5. Could you identify any specific marketing strategies or policies in the stores visited?
6. Did the location of the store play a role in the prices?
7. What additional services (if any) are the stores you selected providing customers? Do these services
   account for any of the price differences in your price comparisons?

William H. Brannen
Creighton Univeristy

                          CAN YOU?

In the beginning marketing course, when covering the pricing topic, an attempt to bring realism into the
course is made by asking the students to solve a series of pricing problems. One of the problems which has
been virtually unsolvable by most students for the last several years is known as the banana problem.

To introduce this problem to the class, I usually bring to class with me two bananas connected by the stem,
one bearing a Dole label and the other bearing a Chiquita label. This is a test to see if anybody in class is
awake. I offer to give a banana to a student who comes to class the next class period and correctly works
the banana problem on the board for the rest of the class. Most often I have had to eat the banana myself.


The average markup for a produce department is 28% on selling price. When sold at a 28% markup on
selling price, bananas usually account for 25% of department sales and 25% of department markup. This
week, because bananas are on special sale at the retailer's cost, twice as many pounds of bananas were sold.
However, they are sold at a zero markup. If all other things remain the same, the average markup for the
produce department this week is ____% markup on selling price.

My quantitative friend and colleague, Dr. I-Shien Chien, works the problem in a mathematical formula as

X = Total department sales before change
x(.28) (1-.25)
x(l-.25) + x(.25) (1-.28) (2)
= .21                 = 18.9%

My own solution is mathematically not so pure, but does illustrate to many students exactly what is going
on when bananas are on sale. This solution focuses on an example which is illustrated in Exhibits 1 and 2.
Exhibit 1 is for a normal week when bananas are not on a special sale price. For purpose of illustration, it is
assumed that total sales for the produce department for that week are $ 100. Students are then asked to
begin reading the problem, sentence by sentence, to fill in the empty boxes with whatever other information
they can determine.

Vertically, the exhibits show that dollar cost plus dollar markup is equal to dollar selling price.
Horizontally, the sales of bananas plus the sale of everything else in the department equals the total sales of
the department. From information in the first sentence of the problem, students should be able to determine
that the $100 of total sales is composed of $72 of cost and $28 of markup.

The next sentence tells us that the bananas account for 25% of the department sales and 25% of the
department profits. Thus, the $100 of sales represents $25 of banana sales and $75 of everything else sales.
The $28 of markup represents $7 of banana profits and $21 of everything else profits. By subtracting
markups from selling prices, we determine that the cost for bananas was $ 18 and the cost for everything
else was $54. If our mathematics are correct, our rows and columns


PRODUCTS                 BANANAS            EVERYTHING         TOTAL

$COST                    $18                $54                $72

$ MARKUP                 $07                $21                $28
$ SELL. PRICE            $25                $75                $100

At this point, students should be able to see what happened during a normal week when bananas were not
on sale at a special price.

Now we move to Exhibit 2, beginning with all the boxes empty. The next sentence of the problem tells us
that bananas are on sale and that they are being sold at cost. This should tell the student that the dollar
markup from bananas is zero and that the figure in the cost and markup boxes for bananas will be an
identical amount.
The problem goes on to tell us that twice as many pounds of bananas were sold. If twice as many pounds of
bananas were sold, twice as many pounds of bananas must also have been purchased. This means that our
cost for bananas is now $36 rather than $18 and that our selling price for those same bananas is also $36.
The problem states that everything else remains the same. So column two can be filled in as in the previous
week with $54 being the cost, $21 being the markup and $75 being the selling price for everything else. To
fill in the total column, we simply add across. Thus, total cost is $36 plus $54, totalling $90. Total markup
is $0 plus $21, equalling $21, and total sales are $36 plus $75, equalling a new greater total of $111.

To find the average markup for the produce department for the sale week, we now divide the total number
of markup dollars by the total sales. $21 divided by $111 is equal to approximately 19%. This is the
average markup for the produce department for the sale week. More than one thing has happened to come
up with this new markup percentage. First, the total number of markup dollars available is less. Second, the
total sales for the department is greater. The combination of these two things makes the average markup for
the department substantially less because bananas accounted for such a large proportion of sales and profits
for the department. Having bananas on sale is a rather expensive proposition in terms of profits.

PRODUCTS                BANANAS           EVERYTHING         TOTAL
$                                         ELSE

$COST                   $36               $54                $90

$ MARKUP                $00               $21                $21

$ SELL PRICE            $36               $75                $111

The banana problem is a simplified illustration which has been helpful in learning about how to figure
markups, relationships among costs and selling prices, and how markup is affected. It does not address
promotion questions, such as "Which products should be promoted at sale prices?"

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