Chapter Seventeen
Interactive Exercise –
Pricing Policies & Discounts
Instructions for the Professor:
Overview:
The purpose of this exercise is to help students distinguish between the various
pricing policies and discounting tactics that are often implemented when
marketing a product. Three pricing scenarios are described; students are
challenged to identify the correct pricing policy or discounting tactic being used
for each example.
Concept Review:
To be effective, pricing policies should stem from and be consistent with the
overall pricing objectives set for a specific brand or a line of products. A variety
of pricing policies exist which address issues such as the variability of pricing
when dealing with different customers, the initial price level chosen during the
introductory phase of the product life cycle, and discounting policies that alter the
final price paid by the ultimate purchaser.
A one-price policy is in effect when all customers who purchase like quantities of
a product under essentially the same conditions pay the same price. A flexible
pricing policy is operative when different customers pay different prices when
purchasing comparable quantities of the exact same item. For example, most
auto dealers and furniture stores use a flexible pricing strategy; the final price
paid depends on the ability of the consumer to negotiate. Catalog retailers who
customize their direct mailings by altering the prices charged for the exact same
items depending on the zip code to which the catalog is being sent also use
flexible pricing. Students are often confused (or incensed) by the flexible pricing
policy; some may claim that the practice is or should be illegal. It may be
worthwhile to remind students that the laws governing price discrimination do not
protect consumers, as price discrimination is treated as a form of unfair
competition (between businesses). Two extremes exist when setting the
introductory price for a new brand. A skimming pricing policy sets the initial price
of a product as high as the market will bear; over time the price is “stepped
down” to appeal to additional consumers who were not willing to pay the high
initial price. By contrast, a penetration pricing policy introduces the product at a
low initial price in an attempt to appeal to all potential consumers immediately
and thus build market share quickly. Discounts are applied to the list price to
reduce the final price paid by the purchaser: quantity, seasonal, cash, and trade
discounts are commonly used.
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Using the Exercise:
Initial Screen:
1. This screen introduces the pricing policies and discounting
exercise.
 After the initial animation sequence is complete and the photo
representing the first pricing scenario to be explored appears on the
screen, the professor can begin the exercise by clicking anywhere
on the screen. Clicking within photo box is not necessary.
 The exercise will automatically transition to the next screen.
Next Screen:
2. The direct mail catalog pricing scenario screen appears.
 The professor reads the pricing scenario to the class.
The professor then challenges students to identify the correct
pricing practice exemplified by the scenario under consideration.
The professor reads the alternative choices to the class.
 The professor clicks on the letter associated with the answer that
corresponds to the student’s response.
 If the wrong response is given, a “negative” sound will be heard and
the letter associated with the incorrect answer will turn red. For
details related to right and wrong answers, refer to the ANSWERS
AND EXPLANATION section below.
The selection process is repeated until the correct answer is
chosen. When this happens, a “positive” sound will be heard. The
slide will then automatically transition to the next pricing scenario
screen.
Next Two Screens:
3. A new pricing scenario screen appears.
 The professor repeats the selection process described in step 2
until each of the three pricing scenarios has been explored.
Final Screen
4. The final screen matches each pricing scenario to the name of
the pricing policy or discount tactic that it best exemplifies.
5. The professor clicks the “X” icon in the upper left hand corner of
the screen to end the exercise.
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Answers and Explanations
DIRECT MAIL CATALOG
CORRECT ANSWER: Flexible Pricing Policy
Some students may believe that the company is using a skimming strategy by
virtue of their personal knowledge that prices for this brand are typically
higher than many other brands of lingerie, or perhaps because they think that
charging a higher price to more affluent customers is akin to “skimming” more
profit. While a discussion of the company’s pricing policy as it relates to the
general price level may prove interesting, the actual pricing policy scenario
described in this exercise deals with the issue of pricing flexibility. The pricing
policy used by this catalogue retailer is flexible because lingerie is offered at
higher prices to more affluent customers, while zip codes characterized by
lower income levels receive an alternate catalog featuring the exact same
items of merchandise for sale at lower prices.
FLAT SCREEN PLASMA TV
CORRECT ANSWER: Skimming
The electronics firm is using a skimming pricing strategy. At an initial price of
$20,000, the new flat screen plasma TV will be sold only to those customers
to whom price is no object. Once this initial market has been tapped, the
company will continue to reduce the price periodically to appeal to additional
consumers who are increasingly price sensitive.
CHRISTMAS CARDS
CORRECT ANSWER: SEASONAL DISCOUNT
Students should be able to recognize that this is an example of a discount,
rather than a specific pricing policy. No mention is made of discounting on the
basis of prompt payment, retailer/wholesaler status or quantity. Instead,
discounts are available to those who are willing to order out of season. Those
who order far in advance of the selling season earn the largest discount as
such orders help the manufacturer to maintain steady production throughout
the year without having to hold excess inventory.
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