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CHAPTERS 17 AND 18 WINNER Vaughan C. Judd Auburn University Montgomery ANALYZING THE PRICE-QUALITY RELATIONSHIP 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- 6d2 (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. Calculation: rs = 1 - 6(66.5)/(63 - 6) rs=l-(1.90) rs =-.90 Conclusion 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. RUNNER-UP 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. TABLE 1 TEAM ONE (1) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) YOU NEED THE FOLLOWING YOU NOW HAVE THE FOLLOWING 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) NATIONAL ACCOUNTS (KEY) TEAM 1 TEAM 2 TEAM 3 TEAM 4 TEAM 5 TEAM 6 TOTAL 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 RUNNER-UP Laura Balus Central Community College PRICING ... AN ART OR A MATHEMATICAL FORMULA? 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 price. 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. HONORABLE MENTION Keith Absher University of North Alabama RETAIL PRICE PATR0L: A COMPARISON OF RETAIL PRICES 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? HONORABLE MENTION William H. Brannen Creighton Univeristy CAN YOUR MARKETING STUDENTS SOLVE THE BANANA PROBLEM? 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 BANANA PROBLEM 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. Solution: My quantitative friend and colleague, Dr. I-Shien Chien, works the problem in a mathematical formula as follows: X = Total department sales before change x(.28) (1-.25) x(l-.25) + x(.25) (1-.28) (2) = .21 = 18.9% 1.11 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 balance. EXHIBIT 1 PRODUCE DEPARTMENT IN 'TYPICAL" WEEK PRODUCTS BANANAS EVERYTHING TOTAL ELSE $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. EXHIBIT 2 PRODUCE DEPARTMENT WITH BANANAS ON SALE 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?"