Pricing - Understanding and Capturing Customer Value 36-73 Answer Key

36) Which of the following is an economic factor that affects the pricing decisions of a company? A) market-penetration practices B) top management decisions C) promotional activities D) reseller policies E) interest rates Answer: E 37) Target costing starts with an ideal selling price based on customer value considerations and then aims at costs that will ensure that the price is met. Answer: TRUE 38) Some companies deemphasize price and use other marketing mix tools to create non-price positions in the marketplace. Answer: TRUE 39) Under oligopolistic competition, the market consists of only a few large sellers. Answer: TRUE 40) The demand curve shows the number of units the market will buy in a given time period at similar prices. Answer: FALSE 41) There is no true substitute for coffee. If the price goes from $8 to $12 for a package of k-cups due to a coffee bean shortage, demand will remain relatively unchanged. This is an example of demand elasticity. Answer: FALSE 42) If demand is elastic rather than inelastic, sellers typically consider increasing their prices. Answer: FALSE 43) Pricing strategies usually remain the same as a product passes through its life cycle. Answer: FALSE 44) With reference to the different types of markets, compare pure competition with monopolistic competition. Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Under monopolistic competition, the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offerings to buyers. 45) With reference to pricing in different types of markets, compare oligopolistic competition with a pure monopoly. Answer: Under oligopolistic competition, the market consists of only a few large sellers. As there are few sellers, each seller is alert and responsive to competitors' pricing strategies and marketing moves. In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing is handled differently in each case. 46) What is a demand curve? Why is it useful to marketers? Answer: Each price a company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is illustrated in a demand curve. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely related — that is, the higher the price, the lower the demand. Understanding a demand curve is crucial to good pricing decisions. In a monopoly, the demand curve shows the total market demand resulting from different prices. If a company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices. 47) Explain the concept of price elasticity. Answer: Price elasticity refers to how responsive demand will be to a change in price. If demand hardly changes with a small change in price, the demand is inelastic. If demand changes greatly, the demand is elastic. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue. At the same time, most firms want to avoid pricing that turns their products into commodities. 48) What external factors affect the pricing decisions made by organizations? Answer: External factors that affect pricing decisions include the nature of market and demand, competitors' strategies, and competitors' prices. Economic conditions can also have a strong impact on the firm's pricing strategies. Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product's price and value, and the company's costs of producing and selling a product. Beyond the market and the economy, a company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment, such as resellers' reactions to prices. The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company's short-term sales, market share, and profit goals may need to be tempered by broader societal considerations. 49) The first generation Apple iPod was introduced in 2001 and sold for $500. The following year a mini version was introduced for $250. Apple initially used a ________ strategy to price their digital music innovation. A) market-skimming B) target costing C) deceptive D) market-penetration E) predatory Answer: A 50) The first Target store opened in 1962. Its initial strategy was to set prices low to attract a large number of buyers quickly and win a large market share. This is referred to as ________. A) market-skimming pricing B) market-penetration pricing C) value-added pricing D) target costing E) deceptive pricing Answer: B 51) Which of the following conditions is most likely essential for implementing a successful market-skimming pricing strategy for a product? A) The product's quality and image must support its high price. B) Lower-priced alternatives can enter the market easily. C) Low prices promote more market growth than high prices. D) The product's price matches its manufacturing costs. E) A low-price position of the product is maintained. Answer: A 52) Which of the following conditions is most likely essential for implementing a successful market-penetration pricing strategy for a product? A) The product's quality supports its high price. B) Alternative products can enter the market easily. C) The market for the product is highly price sensitive. D) Prices increase incrementally as sales volume increases. E) Production costs rise with an increase in marketing efforts. Answer: C 53) Posh Collections introduced a new watch to appeal to upscale consumers. The company will most likely use a(n) ________ strategy. A) market-skimming pricing B) market-penetration pricing C) optional-product pricing D) by-product pricing E) allowance pricing Answer: A 54) Market skimming makes sense when a product's quality and image support its higher price, and enough buyers want the product at that price. Answer: TRUE 55) Distinguish between market-skimming pricing and market-penetration pricing. Answer: Many companies that invent new products set high initial prices to skim revenues layer by layer from the market. This is known as market-skimming pricing. For this strategy to work, the product's quality and image must support its higher price, and enough buyers must want the product at that price. The costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Competitors should not be able to enter the market easily and undercut the high price. Market-penetration pricing is used to penetrate the market quickly to attract a large number of buyers in a short period and win a large market share by setting a low initial price. For this strategy to work, the market must be highly price sensitive so that a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Also, the low price must help keep out competition and be maintained over time. 56) NerdHerd Electronics sells three different sizes of televisions at three different prices. In this case, the company's pricing strategy is referred to as ________ pricing. A) product line B) optional-product C) by-product D) product bundle E) captive-product Answer: A 57) Computer World sells laptops separately from accessory products like docking stations, antivirus software, and external hard drives. This is referred to as ________ pricing. A) product bundle B) optional-product C) market-penetration D) by-product E) product line Answer: B 58) Establishing prices for razor blades that must be used with a razor blade system is known as ________ pricing. A) by-product B) market-penetration C) product line D) product bundle E) captive-product Answer: E 59) How do firms that use captive-product pricing make up for the low prices of their main products? A) They reduce the cost of the captive products. B) They provide the captive products as freebies. C) They set high markups on the captive products. D) They increase the price of the main products. E) They offer the captive products and main products together at a reasonable price. Answer: C 60) Netcorp, an Internet service provider, charges its users a fixed rental fee for its basic package, which has a download limit. If a user exceeds this download limit, an additional fee is charged for every download. In this case, the firm's pricing strategy is referred to as ________ pricing. A) by-product B) two-part C) optional-product D) segmented E) promotional Answer: B 61) Salon Du Jour offers special combination packages at a reduced price. Separately, a haircut is $30 and a conditioning treatment is $35. But the combo price is $50. This is referred to as ________ pricing. A) by-product B) product bundle C) captive-product D) optional-product E) product line Answer: B 62) When using product line pricing, a firm sets one price for all products in the line based on average manufacturing costs. Answer: FALSE 63) Universal Appliance prices its refrigerators at five distinct price levels based on finish, style, capacity, and features. They range from $799 to $9,500. This is an illustration of price steps. Answer: TRUE 64) Dynamic pricing is particularly suitable for Internet-based companies like Amazon who want to be responsive to shoppers' desires and marketplace changes. Answer: TRUE 65) When a manufacturer seeks a market for by-products and accepts a price that covers more than the cost of storing and delivering those by-products, the manufacturer is able to reduce the main product's price to make it more competitive. Answer: TRUE 66) When using product bundle pricing, sellers combine several products and offer the bundle at an increased price for increased profit. Answer: FALSE 67) Explain product line pricing. Provide an example. Answer: In product line pricing, management must decide on the price steps to set between the various products in a line. The price steps should take into account cost differences between products in a line. More important, they should account for differences in customer perceptions of the value of different features. For example, at a Mr. Clean car wash, you can choose from any of six wash packages, ranging from a basic exterior-clean-only "Bronze" wash for $5; to an exterior clean, shine, and protect "Gold" package for $12; to an interior-exterior "Signature Shine" package for $27 that includes the works, from a thorough cleaning inside and out to a tire shine, underbody rust inhibitor, surface protectant, and even air freshener. The car wash's task is to establish perceived value differences that support the price differences. 68) Which pricing mix strategy should be used in relation to saleable scrap materials? How does this strategy function? Answer: Producing products and services often generates by-products. If the by-products have no value and if getting rid of them is costly, this will affect the pricing of the main product. When using by-product pricing, a manufacturer can seek a market for scraps or by-products and accept any price that covers more than the cost of disposing of or storing and delivering the byproducts. By-product pricing allows the seller to reduce the main product's price to make it more competitive. 69) Which group is most likely offered functional discounts by manufacturers? A) trade-channel members that perform sales tasks B) consumers who buy products in large quantities C) buyers who pay their bills before the due date D) buyers who purchase merchandise out of season E) retailers that participate in advertising programs Answer: A 70) The National Tree Company offers resellers half-price reductions on artificial Christmas trees if they purchase them in July. This is an example of a ________. A) functional discount B) seasonal discount C) promotional allowance D) trade-in allowance E) quantity discount Answer: B 71) Vac "N" Sew, a consumer electronics outlet, offers a price reduction of $100 when customers bring in a used vacuum cleaner and exchange it for a new vacuum cleaner or sewing machine. This is an example of a ________. A) functional discount B) cash discount C) seasonal discount D) trade-in allowance E) by-product allowance Answer: D 72) When Nabisco offers to cover half the cost of all local advertising for supermarkets that sell Oreo Cookies, the company is granting ________. A) cash discounts B) seasonal discounts C) quantity discounts D) promotional allowances E) trade-in allowances Answer: D 73) Metro Museum has different admission prices for students, adults, and seniors. All three groups are entitled to the same services. This form of pricing is called ________ pricing. A) time-based B) location-based C) customer-segment D) by-product E) product form Answer: C