Chapter 10



Chapter 9

Pricing: Understanding and Capturing Customer Value

GENERAL CONTENT: Multiple-Choice Questions

1. _____ is the amount of money charged for a product or service.

a. Experience curve

b. Demand curve

c. Price

d. Wage

e. Salary

(Answer: c; p. 263; Easy)

2. Big Mike’s Health Food Store sells nutritional energy-producing foods. The price of the products sold varies according to individual customer accounts and situations. For example, long-time customers receive discounts. This strategy is an example of _____.

a. price elasticity

b. cost-plus pricing

c. dynamic pricing

d. value pricing

e. penetration pricing

(Answer: c; p. 285; Challenging)

3. Price is the only element in the marketing mix that produces _____.

a. revenue

b. variable costs

c. expenses

d. fixed costs

e. stability

(Answer: a; p. 263; Easy)

4. Lawnmowers of Chicago is a landscaping company established throughout the American Midwest. Upon entering a new community, lower prices are asked for their services. After gaining a respectable reputation in a new area, prices are gradually increased. Starting a business in this manner is an example of which marketing objective?

a. Current profit maximization.

b. Market share leadership.

c. Product quality leadership.

d. Survival.

e. Status quo existence.

(Answer: d; p. 268; Challenging)

5. A company sets not a single price, but rather a _____ that covers different items in its line that change over time as products move through their life cycles.

a. pricing range

b. pricing structure

c. pricing loop

d. pricing cycle

e. pricing bundle

(Answer: b; p. 274; Moderate)

6. Pricing is difficult because the various products have related _____ and costs, and face different degrees of _____.

a. demand; product modifications

b. demand; competition

c. competition; obsolescence

d. substitutes; customer loyalty

e. revenue levels; challenges

(Answer: b; p. 276; Moderate)

7. Companies usually develop _____ rather than single products.

a. product families

b. product groupings

c. product lines

d. product brands

e. product images

(Answer: c; p. 276; Easy)

8. A marketer must be familiar with the five major product mix pricing situations. Which of the following is not one of them?

a. Product line pricing.

b. Optional-product pricing.

c. Captive-product pricing.

d. Unbundled product pricing.

e. None of the above.

(Answer: d; p. 276; Moderate)

9. Swatch surveyed the market and identified an unserved segment of watch buyers. Using these results, they created a watch at a price consumers were willing to pay. The unorthodox order of this marketing mix decision is an example of _____.

a. competition-based pricing

b. cost-plus pricing

c. target costing

d. value-based pricing

e. penetration pricing

(Answer: c; p. 268; Moderate)

10. Costs that do not vary with production or sales level are referred to as _____.

a. fixed costs

b. variable costs

c. target costs

d. total costs

e. unit costs

(Answer: a; p. 266; Easy)

11. Costs that vary directly with the level of production are referred to as _____.

a. fixed costs

b. variable costs

c. target costs

d. total costs

e. unit costs

(Answer: b; p. 266; Easy)

12. _____ are the sum of the _____ and _____ for any given level of production.

a. Fixed costs; variable; total costs

b. Fixed costs; total; variable costs

c. Variable costs; fixed; total costs

d. Total costs; fixed; variable costs

e. Break-even costs; fixed; total costs

(Answer: d; p. 267; Easy)

13. A challenge for management in product line pricing is to decide on the price steps between the _____.

a. various products in a line

b. product mixes

c. product groupings

d. product lines

e. various target markets

(Answer: a; p. 276; Moderate)

14. Fixed costs _____ as the number of units produced increases.

a. decrease

b. increase

c. divide in half

d. remain the same

e. increase at a diminishing rate

(Answer: d; p. 266; Easy)

15. When Circuit Town Electronics sets its televisions at three price levels of $699, $899, and $1,099, it is using _____.

a. price points

b. tier-level pricing

c. market-penetration pricing

d. B and C

e. none of the above

(Answer: a; p. 276; Easy)

16. When using price points, the seller must establish perceived _____ that support the price differences.

a. nonprice competition

b. quality differences

c. service levels associated with each

d. images

e. all of the above

(Answer: b; p. 276; Challenging)

17. Price setting is usually determined by _____ in small companies.

a. top management

b. marketing departments

c. sales departments

d. divisional managers

e. cross-functional teams

(Answer: a; p. 269; Easy)

18. Price setting is usually determined by _____ in large companies.

a. top management

b. divisional managers

c. product-line managers

d. purchasing departments

e. both B and C

(Answer: e; p. 269; Easy)

19. In industrial markets, _____ has the final say in setting the pricing objectives and policies of that company.

a. the sales manager

b. top management

c. the production manager

d. the finance manager

e. the purchasing department

(Answer: b; pp. 269–270; Moderate)

20. Which of the following is an external factor that affects pricing decisions?

a. The salaries of production management.

b. Competition.

c. The salaries of finance management.

d. Funds expensed to clean production equipment.

e. A, C, and D

(Answer: b; p. 268; Easy)

21. Under _____, the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities.

a. pure competition

b. monopolistic competition

c. an oligopoly

d. pure monopoly

e. anti-trust agreements

(Answer: a; p. 271; Easy)

22. In Lima, Peru, 20 stores specializing in selling the same quality and brand of wheat products are located on one street. An individual seller cannot charge more than the going price without the risk of losing business to the other stores that are still selling the product at its uniform price. This is an example of what type of market?

a. Pure competition.

b. Monopolistic competition.

c. Oligopolistic competition.

d. Pure monopoly.

e. Socialist.

(Answer: a; p. 271; Challenging)

23. Under _____, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price.

a. pure competition

b. monopolistic competition

c. oligopolistic competition

d. pure monopoly

e. none of the above

(Answer: b; p. 271; Easy)

24. Under _____, the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies.

a. pure competition

b. monopolistic competition

c. an oligopoly

d. pure monopoly

e. capitalism

(Answer: c; p. 272; Easy)

25. Nonregulated monopolies are free to price at what the market will bear. However, they do not always charge the full price for a number of reasons. What is NOT one of those reasons?

a. They desire to attract competition.

b. They desire to penetrate the market faster with a low price.

c. They have a fear of government regulation.

d. They want to encourage government regulations.

e. They want to please a large group of consumers.

(Answer: d; p. 272; Moderate)

26. A general practice when using captive-product pricing is to set the price of the main product _____ and set _____ on the associate’s supplies.

a. low; low markups

b. high; low markups

c. low; high markups

d. high; high markups

e. moderately; moderate markups

(Answer: c; p. 277; Moderate)

27. The relationship between the price charged and the resulting demand level can be shown as the _____.

a. demand curve

b. variable cost

c. target cost

d. break-even pricing

e. experience curve

(Answer: a; p. 272; Easy)

28. When Gibson Guitar Corporation lowered its prices to compete more effectively with Japanese rivals, why did they not sell more guitars?

a. The Gibson guitars were not as well made as the Japanese guitars.

b. The market was already flooded with guitars.

c. The sound of the Gibson guitar was not as good as the Japanese guitars.

d. Customers were unable to distinguish the superiority of the Gibson guitar when it was at a lower price.

e. Customers had come to expect a higher price for a Gibson guitar.

(Answer: d; pp. 272–273; Challenging)

29. _____ is how responsive demand will be to a change in price.

a. Price elasticity

b. Break-even pricing

c. Demand curve

d. Target cost

e. Supply

(Answer: a; p. 273; Easy)

30. Buyers are less price sensitive for all of the following reasons except _____.

a. when the product they are buying is unique

b. when the product they are buying is in high demand

c. when substitute products are hard to find

d. when the total expenditure for a product is high relative to their income

e. when the product is a specialty product

(Answer: d; p. 274; Easy)

31. When setting prices, the company also must consider other factors in its external environment. _____ can have a strong impact on the firm’s pricing strategies. This includes factors such as boom or recession, inflation, and interest rates affecting pricing decisions.

a. Demand curve

b. Economic conditions

c. Target costing

d. Value-based pricing

e. Competitors

(Answer: b; p. 274; Moderate)

32. When setting prices, the company also must consider other factors in its external environment. How will _____ react to various prices? The company should set prices that will allow these people to receive a fair profit.

a. resellers

b. producers

c. consumers

d. the elderly

e. competitors

(Answer: a; p. 274; Easy)

33. When companies set prices, the government and social concerns are two _____ affecting pricing decisions.

a. external factors

b. internal factors

c. economic conditions

d. demand curve

e. temporary influences

(Answer: a; p. 274; Easy)

34. Product costs set a(n) _____ to the price.

a. demand curve

b. experience curve

c. floor

d. learning curve

e. break-even cost

(Answer: c; p. 263; Easy)

35. Consumer perceptions of the product’s value set the _____.

a. demand curve

b. floor

c. ceiling

d. variable cost

e. image

(Answer: c; p. 263; Moderate)

36. Companies set prices by selecting a general pricing approach that includes one or more of three sets of factors. One of these is the cost-based approach, which means _____.

a. value-based pricing

b. going-rate and sealed-bid pricing

c. cost-plus pricing, break-even analysis, and target profit pricing

d. A and C

e. none of the above

(Answer: c; p. 267; Challenging)

37. Companies set prices by selecting a general pricing approach that includes one or more of three sets of factors. One of these is the buyer-based approach, which means _____.

a. value-based pricing

b. going-rate and sealed-bid pricing

c. cost-plus pricing, break-even analysis, and target profit pricing

d. low-price image

e. none of the above

(Answer: a; p. 264; Challenging)

38. When Kodak sets the general price range of its cameras low and its related film high, it is practicing _____.

a. market-penetration pricing

b. market-skimming pricing

c. product line pricing

d. captive-product pricing

e. price bundling

(Answer: d; p. 277; Challenging)

39. Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This is known as _____.

a. variable costs

b. cost-plus pricing

c. value-based pricing

d. break-even price

e. penetration pricing

(Answer: b; p. 267; Easy)

40. Hotline Long Distance Service uses captive-product pricing for its phone call charges. Because this is a service, the price is broken into a fixed rate plus a _____.

a. fixed rate usage

b. variable usage rate

c. flexible usage rate

d. volume usage rate

e. none of the above

(Answer: b; p. 277; Challenging)

41. When amusement parks and movie theaters charge admission plus fees for food and other attractions, they are following a(n) _____ pricing strategy.

a. by-product

b. optional-product

c. captive-product

d. skimming

e. penetration

(Answer: c; p. 277; Challenging)

42. When management at Yamaha Motorcycles makes decisions on which type of saddlebags, handle bars, and seats for its bikes, they become engaged in _____.

a. product line pricing

b. optional-product pricing

c. captive-product pricing

d. by-product pricing

e. value-based pricing

(Answer: b; p. 276; Challenging)

43. Companies that have a problem of deciding which items to include in the base price and which to offer as options are engaged in _____ pricing.

a. product bundle

b. optional-product

c. captive-product

d. by-product

e. skimming

(Answer: b; p. 276; Moderate)

44. What will by-product pricing allow a seller to do? Keep in mind that the seller must sell the by-products at a price that covers more than the cost of storing and delivering them.

a. Increase the main product’s price.

b. Make extra profit.

c. Reduce the main product’s price.

d. None of the above.

e. B and C

(Answer: e; p. 277; Challenging)

45. Break-even pricing, or a variation called _____, is when the firm tries to determine the price at which it will break even to make the profit it is seeking.

a. competition-based pricing

b. target profit pricing

c. fixed cost

d. value-based pricing

e. customer-based pricing

(Answer: b; p. 267; Easy)

46. Sometimes, companies do not realize how _____ their by-products are.

a. costly

b. time consuming

c. valuable

d. unnecessary

e. mandatory

(Answer: c; p. 277; Easy)

47. _____ uses buyers’ perceptions of what a product is worth, not the seller’s cost, as the key to pricing.

a. Value-based pricing

b. Target costing

c. Variable costs

d. Price elasticity

e. Product image

(Answer: a; p. 264; Challenging)

48. In _____, price is considered along with the other marketing mix variables before the marketing program is set.

a. target pricing

b. value-based pricing

c. variable costs

d. price elasticity

e. building the marketing mix

(Answer: b; p. 264; Challenging)

49. _____ pricing is product driven. The company designs what it considers to be a good product, totals the expenses of making the product, and sets a price that covers costs plus a target profit.

a. Value-based

b. Fixed cost

c. Cost-based

d. Variable

e. Skimming

(Answer: c; p. 264; Challenging)

50. Value-based pricing is the reverse process of what?

a. Variable cost pricing.

b. Cost-plus pricing.

c. Cost-based pricing.

d. A or D

e. None of the above.

(Answer: c; p. 264; Moderate)

51. In _____ price is set to match consumers’ perceived value.

a. variable cost pricing

b. cost-plus pricing

c. cost-based pricing

d. value-based pricing

e. none of the above

(Answer: d; p. 264; Moderate)

52. Measuring _____ can be difficult. A company might conduct surveys to test this in the different products they offer.

a. price elasticity

b. demand curve

c. perceived value

d. break-even pricing

e. quantity supplied

(Answer: c; p. 265; Challenging)

53. Underpriced products sell very well, but they produce less revenue than they would have if price were raised to the _____level.

a. perceived value

b. value-based

c. variable

d. demand curve

e. price-floor

(Answer: a; p. 265; Moderate)

54. With product bundle pricing, sellers can combine several products and offer the bundle _____.

a. as a working unit

b. at a reduced price

c. as a complete self-service package

d. A or C

e. any of the above

(Answer: b; p. 278; Moderate)

55. What is a major advantage of product bundle pricing?

a. It can promote the sales of products consumers might not otherwise buy.

b. It offers consumers more value for the money.

c. It combines the benefits of the other pricing strategies.

d. It provides a more complete product experience for consumers.

e. All of the above.

(Answer: a; p. 278; Moderate)

56. _____ is a company’s power to maintain or even raise prices without losing market share.

a. Variable cost

b. Pricing power

c. Target cost

d. Fixed cost

e. Unit cost

(Answer: b; p. 265; Easy)

57. To maintain a company’s _____, a firm must retain or build the value of its marketing offer.

a. variable cost

b. pricing power

c. target cost

d. fixed cost

e. image

(Answer: b; p. 265; Challenging)

58. When there is intense price competition, many companies adopt ______rather than cutting prices to match competitors.

a. pricing power

b. value-added strategies

c. fixed costs

d. price elasticity

e. image pricing

(Answer: b; p. 265; Moderate)

59. What is the important type of value pricing that Wal-Mart uses?

a. Competition-based pricing.

b. EDLP.

c. Cost-plus pricing.

d. Break-even pricing.

e. Penetration pricing.

(Answer: b; p. 265; Easy)

60. _____ involves charging a constant, everyday low price with few or no temporary price discounts.

a. High-low pricing

b. Target pricing

c. Cost-plus pricing

d. EDLP

e. Penetration pricing

(Answer: d; p. 265; Moderate)

61. Discounts and allowances are price adjustments to the basic price to reward customers for _____.

a. early payment of bills

b. off-season buying

c. accepting early delivery

d. volume purchases

e. all of the above

(Answer: c; p. 278; Easy)

62. Quantity discounts are a legal form of price discrimination. A quantity discount is a price reduction to buyers who purchase _____.

a. frequently

b. large volumes

c. close outs

d. inferior merchandise

e. superior merchandise

(Answer: b; pp. 278–279; Easy)

63. Companies offer functional discounts to channel members who _____.

a. perform certain marketing functions

b. perform certain jobs that save them money

c. function better as resellers

d. provide funding to assist with promotion

e. none of the above

(Answer: a; p. 278; Moderate)

64. When a firm or store offers a price reduction to customers who buy during off-peak periods throughout the year, we say the firm is giving a(n) _____ discount.

a. functional

b. seasonal

c. annual

d. allowance

e. credit

(Answer: b; p. 278; Easy)

65. When General Motors provides payments or price reductions to its new car dealers as rewards for participating in advertising and sales support programs, it is granting a(n) _____.

a. trade discount

b. functional discount

c. allowance

d. promotional allowance

e. trade credit

(Answer: d; p. 279; Easy)

66. By definition, this type of pricing is used when a firm sells a product or service at two or more prices, even though the difference in price is not based on differences in cost.

a. segmented pricing

b. variable pricing

c. flexible pricing

d. cost-plus pricing

e. none of the above

(Answer: a; p. 279; Moderate)

67. The New Age Gallery has three admission prices for students, adults, and seniors. All three groups are entitled to the same services. This form of pricing is called _____.

a. time pricing

b. location pricing

c. customer-segmented pricing

d. revenue management pricing

e. generational pricing

(Answer: c; p. 279; Challenging)

68. When a firm varies its price by the season, month, day, or even hour, it is using _____ pricing.

a. revenue management

b. penetration

c. variable

d. time

e. value-added

(Answer: d; p. 279; Easy)

69. Common _____ objectives include survival, current profit maximization, market share leadership, and leadership building.

a. pricing

b. management

c. marketing mix

d. cost-plus pricing

e. image

(Answer: a; p. 268; Moderate)

70. Airlines, hotels, and restaurants call segmented pricing _____.

a. time pricing

b. yield management

c. location pricing

d. segmented

e. service pricing

(Answer: b; p. 279; Easy)

71. _____ that influence(s) pricing decisions include the nature of the market and demand and competitors’ prices.

a. Internal factors

b. Elasticity

c. External factors

d. Target factors

e. Domestic factors

(Answer: c; p. 268; Moderate)

72. Which of the following conditions should exist for segmented pricing to be an effective strategy?

a. The market must be segmentable.

b. The segments must show different degrees of demand.

c. Competitors can’t undersell in the segment being charged the higher price.

d. All of the above.

e. None of the above.

(Answer: d; p. 280; Challenging)

73. Consumers usually perceive higher-priced products as _____.

a. out of reach for most people

b. having high quality

c. having high profit margins

d. exclusive brands

e. being in the introductory stage of the product life cycle

(Answer: b; p. 280; Easy)

74. With target costing, marketers will first _____ and then _____.

a. build the marketing mix; identify the target market

b. identify the target market; build the marketing mix

c. design the product; determine its cost

d. use skimming pricing; penetrating pricing

e. determine a selling price; target costs to ensure that the price is met

(Answer: e; p. 268; Challenging)

75. Price is used less when judging the quality of a product when consumers _____.

a. lack information

b. lack skills to use it

c. have experience with it

d. either A or B

e. none of the above

(Answer: c; p. 280; Moderate)

True/False

76. Companies tend to set a pricing structure, rather than a single price, that covers different items in its line.

(True; p. 274; Moderate)

77. Companies that set a low initial price in order to get their “foot in the door” quickly and deeply, attract a large number of buyers quickly, and win a large market share practice market-skimming pricing.

(False; p. 275; Easy)

78. Pricing often plays an important role in helping to accomplish a company’s multi-level objectives.

(True; p. 263; Easy)

79. Melt-In-Your-Mouth Candy Stores prices its candy displays at ten different price levels, ranging from $2.00 per pound to $4.95 per pound. This is an illustration of price points.

(True; p. 276; Moderate)

80. Target costing reverses the usual marketing process.

(True; p. 269; Easy)

81. Overhead cost is another term for variable cost.

(False; p. 266; Easy)

82. When a major moving van company sells accessory products that must be used in moving a household’s furniture, it is practicing captive-product pricing.

(True; p. 277; Easy)

83. Some industries commonly use two-part pricing, where the price is broken down into a fixed fee and a fixed usage rate.

(False; p. 277; Moderate)

84. In industrial markets, salespeople outrank top management in determining the sales price of products.

(False; p. 269; Easy)

85. In industrial markets, product managers have an influence on the company’s price-setting decisions.

(True; p. 269; Easy)

86. Environmental elements are categorized as external factors that affect pricing decisions.

(True; p. 268; Easy)

87. When a manufacturer seeks a market for by-products and accepts a price that covers more than the cost of storing and delivering them, it is able to reduce the main product’s price to make it more competitive.

(True; p. 277; Moderate)

88. In a regulated monopoly, the government permits the company to set rates that will yield a “fair” return.

(True; p. 272; Easy)

89. Nonregulated monopolies do not always charge the full price because they do not desire to attract competition.

(True; p. 272; Moderate)

90. 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 normal cases, the higher the price, the higher the demand.

(False; p. 272; Easy)

91. If demand changes greatly, we say the demand is inelastic.

(False; p. 273; Easy)

92. The more elastic the demand, the more it pays for the seller to raise the price.

(False; p. 273; Challenging)

93. If Canon Camera Company follows a high-price, high-margin strategy, it may attract competition from Nikon, Minolta, and Pentax.

(True; p. 273; Moderate)

94. Product costs set a floor to the price; consumer perceptions of the product’s value set the ceiling.

(True; p. 263; Easy)

95. The simplest pricing method is break-even pricing—adding a standard markup to the cost of the product.

(False; p. 267; Easy)

96. All companies today now realize how valuable their by-products are for resale.

(False; p. 277; Easy)

97. The six major price-adjustment strategies include discount and allowance pricing, segmented pricing, psychographic pricing, promotional pricing, geographical pricing, and international pricing.

(False; p. 278; Moderate)

98. Value-based pricing is when costs vary directly with the level of product.

(False; p. 264; Moderate)

99. Value-based pricing is the reverse of cost-based pricing.

(True; p. 264; Challenging)

100. EDLP is very similar to competition-based pricing.

(False; p. 265; Easy)

101. Competitors’ prices and offers are external factors that companies have to deal with.

(True; p. 268; Easy)

102. Demand and consumer value perceptions set the floor for prices.

(False; p. 263; Moderate)

103. The difference between a discount and an allowance is that a discount is in its simplest terms a reduction in price.

(False; p. 278; Easy)

104. Cost-based pricing relies on consumer perception of value to drive pricing.

(False; p. 267; Easy)

105. A break-even chart shows the total cost and total revenue expected at various sales volume levels.

(True; p. 267; Easy)

Essay

106. Companies bringing out a new product can choose between two broad strategies: market-skimming pricing and market-penetration pricing. Distinguish between the two.

Market skimming is used to skim revenues layer by layer from the market by entering the market with high initial prices. 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 is used to penetrate the market quickly and deeply to attract a large number of buyers quickly and win a large market share by setting a low price initially when it enters the market. 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. The low price must help keep out competition and be maintained over time.

(p. 275; Moderate)

107. Compare pure competition with monopolistic competition.

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 who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers.

(p. 271; Challenging)

108. Compare oligopolistic competition with pure monopoly.

Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. There are few sellers because it is difficult for new sellers to enter the market. Under a pure monopoly, the market consists of one seller. Pricing is handled differently in each case. The seller may be a government monopoly, a private nonregulated monopoly, or a private regulated monopoly.

(p. 272; Challenging)

109. Describe what a demand curve is and how it helps business.

It estimates consumer demand at different prices. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.

(p. 272; Moderate)

110. Explain price elasticity of demand.

If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic.

(p. 273; Moderate)

111. Which pricing mix strategy should be used in relation to saleable scrap materials and how does it function?

By using by-product pricing, a manufacturer will seek a market for these scraps or by-products and should accept any price that covers more than the cost of storing and delivering them. This practice allows the seller to reduce the main product’s price to make it more competitive.

(p. 277; Easy)

112. When setting prices, the company must consider its external environment. Describe four parts of the external environment and how they affect businesses.

Economic conditions affect both the costs of producing a product and consumer perceptions of the product’s price and value. The company should encourage and support resellers and help them to sell the product effectively. The government is another important influence on pricing decisions. Social concerns impact pricing, especially when a company’s short-term sales, market share, and profit goals may have to be tempered by broader societal considerations.

(p. 274; Challenging)

113. Explain product line pricing.

With this option, 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 the products in a line, customer evaluations of their different features, and competitors’ prices. The seller’s task is to establish perceived quality differences that support the price differences between various price points.

(p. 276; Easy)

114. When would price cuts and price increases be necessary?

Price cuts may be necessary when there is excess capacity. Another reason is that market share may be falling in the face of strong price competition. A company may also cut prices in a drive to dominate the market through lower costs. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand. When a company cannot supply all its customers’ needs, it can raise its prices, ration products to customers, or both.

(p. 287; Challenging)

115. Explain the factors involved in setting international pricing.

In some cases, a company can set a uniform worldwide price. However, most companies adjust their prices to reflect local market conditions and cost considerations. A firm must consider economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system. Consumer perceptions and preferences also may vary from country to country, calling for different prices. The company may have different marketing objectives in various world markets. Costs play an important role in setting international prices. Management must prepare for price escalation that may result from the differences in selling strategies or market conditions. The additional costs of product modifications, shipping and insurance, import tariffs and taxes, exchange-rate fluctuations, and physical distributions must all be factored into the “price.”

(p. 286; Challenging)

APPLICATION CONTENT: Multiple-Choice Questions

116. Little Roses’ Floral Design sells flowers at one set price to all buyers. What is this an example of?

a. Total costs.

b. Fixed costs.

c. Variable costs.

d. Dynamic pricing.

e. Skimming pricing.

(Answer: b; p. 266; Moderate)

117. If demand hardly changes with a small change in price, we say the demand is _____.

a. variable

b. inelastic

c. value-based

d. at break-even pricing

e. none of the above

(Answer: b; p. 273; Easy)

118. If demand changes greatly with a small change in price, we say the demand is _____.

a. inelastic

b. variable

c. elastic

d. value-based

e. fixed

(Answer: c; p. 273; Easy)

119. When we are talking about price elasticity of demand, the less elastic the demand, the more it pays for the seller to _____.

a. drop the price

b. raise the price

c. leave the price where it is

d. discontinue the item

e. bundle the product with another product

(Answer: b; p. 273; Moderate)

120. If Canon Camera Company follows a high-price, high-margin strategy, what will likely happen to other companies such as Nikon, Minolta, and Pentax?

a. They will go out of business.

b. They will want to compete against Canon.

c. They will advertise less.

d. A or C

e. None of the above.

(Answer: b; p. 273; Challenging)

121. If Canon Camera Company follows a low-price, low-margin strategy, what will likely happen to other companies such as Nikon, Minolta, and Pentax?

a. They will not be able to compete or it may drive them out of the market.

b. They will want to compete against Canon.

c. They will advertise less.

d. They will advertise more.

e. None of the above.

(Answer: a; p. 273; Challenging)

122. As a manufacturer increases price, _____ volume drops.

a. target

b. break-even

c. cost-plus pricing

d. total cost

e. sales

(Answer: b; p. 267; Moderate)

123. _____ remains an important element in the marketing mix. It is the only element that produces revenue; all other elements represent costs.

a. Current profit maximization

b. Market share leadership

c. Price

d. Product quality leadership

e. The target market

(Answer: c; p. 263; Moderate)

124. With fixed costs of $100,000, a variable cost of $10, and expected sales of 50,000 units, what is the manufacturer’s unit cost?

a. $10

b. $12

c. $16

d. $20

e. None of the above.

(Answer: b; p. 267; Challenging)

125. Valeo Fashions has just introduced a new line of fashion dresses for teens. They will enter the market initially at high prices in a _____ pricing strategy.

a. market-penetration

b. market-skimming

c. competitive market

d. psychological

e. demographic

(Answer: b; p. 275; Moderate)

126. Which of the following does not support a market-skimming policy for a new product?

a. The product’s quality and image must support its higher price.

b. Enough buyers must want the products at that price.

c. Competitors should not be able to undercut the high price.

d. Competitors should be allowed to enter the market easily.

e. B and C

(Answer: d; p. 275; Challenging)

127. All of the following conditions support market-penetration pricing except one. Which one?

a. The market must be highly price sensitive.

b. Production and distribution costs must fall as sales volume increases.

c. The product’s quality and image must support the price.

d. The low price must help keep out the competition.

e. A and B

(Answer: c; p. 275; Challenging)

128. Latest Flicks offers weekly movie tickets for $15 and season tickets for $150. This theater is offering _____ pricing.

a. by-product

b. captive-product

c. product bundle

d. discounted

e. psychographic

(Answer: c; p. 278; Challenging)

129. Walsh Supply Company wants to improve its cash situation, reduce bad debts, and reduce credit-collection costs. Which form of pricing might management consider?

a. By-product.

b. Inflation-adjusted.

c. Discount and allowance.

d. Captive-product.

e. Penetration.

(Answer: c; p. 278; Challenging)

130. Vac ‘N’ Sew will give anyone $100 for the family’s old vacuum cleaner, regardless of condition, when purchasing a new vacuum or sewing machine. The end result is essentially reducing the price by $100. What is this type of discount called?

a. Functional discount.

b. Captive-product.

c. Seasonal discount.

d. Trade-in allowance.

e. By-product.

(Answer: d; p. 279; Easy)

131. Busch Stadium in St. Louis charges different prices for seats in different areas of the ballpark, even though their costs are the same. What is this form of pricing called?

a. Location.

b. Skimming.

c. Segmented.

d. Flexible.

e. Penetration.

(Answer: a; p. 279; Moderate)

132. Johnson Boats wants to introduce a new model of boat into mature markets in highly developed countries with the goal of quickly gaining mass-market share. As a consultant, you would recommend a _____ pricing strategy.

a. market-skimming

b. market-penetration

c. zone

d. loss-leader

e. captive-product

(Answer: b; p. 275; Moderate)

133. Market-skimming pricing will likely be most effective in selling _____.

a. any convenience item

b. an electronic device for which research and development must be recouped

c. shampoo and bath soap

d. anything easily copied by competitors

e. most items at Wal-Mart

(Answer: b; p. 275; Easy)

134. Market-penetration pricing will likely be used most in selling _____.

a. pharmaceuticals

b. an electronic device for which R&D must be recouped

c. convenience items for which there is much competition

d. any specialty item

e. none of the above

(Answer: c; p. 275; Easy)

135. Mach 3 razor blades must be used in the Mach 3 razor. Which type of pricing is used?

a. Product line pricing.

b. Optional-product pricing.

c. Captive-product pricing.

d. By-product pricing.

e. Product bundle pricing.

(Answer: c; p. 277; Moderate)

Short Answer

136. Explain how some catalog retailers can initiate dynamic pricing.

Such retailers can change prices according to changes in demand or costs, changing prices for certain items on a day-by-day basis.

p. 285; Easy)

137. Why is price considered to be one of the most flexible elements of the marketing mix?

Price can be changed quickly.

p. 263; Easy)

138. What costs make up total cost?

Fixed cost and variable cost make up total cost.

(p. 268; Easy)

139. What is the difference between pure competition and monopolistic competition?

Under pure competition, many buyers and sellers trade in a uniform commodity; no single buyer or seller has much effect on the going market price. Under monopolistic competition, many buyers and sellers trade over a range of prices rather than a single market price.

(p. 271; Challenging)

140. If demand is elastic, will sellers consider lowering their prices? Explain.

Yes. A lower price will produce more needed revenue.

(p. 273; Moderate)

141. Explain oligopolistic competition.

In an oligopoly, a market consists of a few sellers who are highly sensitive to each other’s pricing; there are few sellers because it is difficult for new sellers to enter the market.

(p. 272; Moderate)

142. Explain a pure monopoly.

The market consists of one seller that dominates the market.

(p. 272; Easy)

143. Explain the concept of a price floor.

A price floor is the lowest price charged at which the market still earns some profits.

(p. 263; Easy)

144. Explain the concept of a price ceiling.

A price ceiling is the highest price charged at which there is still some consumer demand.

(p. 263; Easy)

145. For what types of products will marketers use market-skimming pricing?

Such pricing works when the product’s quality and image support the higher price. In addition, such pricing is used when products pass through the life cycle quickly and the marketer, consequently, must recoup research and development costs early.

(p. 275; Easy)

146. For what types of products will marketers use market-penetration pricing?

Marketers use such pricing when attempting to attract a large number of buyers quickly and win a large market share; such pricing may be common when competition for products is high.

(p. 275; Easy)

147. Why is product line pricing used?

Such pricing is used to establish price ranges—or price points—within product lines.

(p. 276; Moderate)

148. Give two examples of products for which marketers may use optional-product pricing.

Such products may include refrigerators with icemakers and wallets with calculators.

(p. 276; Moderate)

149. Give two examples of products for which captive-product pricing may be used.

Pricing theater tickets for seniors and children and pricing game consoles along with video games.

(p. 277; Challenging)

150. Give two examples of by-product pricing.

Selling scrap metal after producing metal stampings or selling donut holes after producing donuts.

(p. 277; Challenging)

151. How do consumers benefit from product bundle pricing?

Several products are sold together at a reduced rate; vacations packages that include air and hotel or value meals in the fast-food industry are examples.

(p. 278; Moderate)

152. Give an example of a cash discount.

With a 2/10, net 30 arrangement, for example, the customer can deduct 2 percent if the bill is paid within 10 days.

(p. 278; Moderate)

153. List four types of segmented pricing.

Customer-segment pricing, product-form pricing, location pricing, and time pricing are all examples.

(p. 279; Moderate)

154. Explain the psychology behind a price of $9.99 instead of $10.00.

Consumers typically see the $9.99 product in the $9 range instead of the $10 range; the price appears to psychologically be cheaper.

(p. 281; Easy)

155. Explain how complete prime rib dinners for $5 in a Las Vegas casino may be considered a loss leader.

Loss leaders are priced below cost—such as the case with the prime rib dinner—in order to attract consumers in hopes that they will spend more after they arrive; in the casino, visitors may be enticed to gamble more either before or after dinner.

(p. 282; Moderate)

Scenario

Quills, Inc., is a manufacturer of ball-point pens, pencils, and stationery. The firm’s primary distribution strategy is to sell in large volumes to office supply stores and large discount chains. Charles Powell, CEO of Quills, had hoped to manufacture and sell in large enough quantities that prices could be held low. However, in the first several months, the firm experimented with the price portion of its marketing mix in an effort to cater to a number of markets.

156. In starting out with a market-penetration pricing strategy at Quills, what assumptions could be made about the market(s) it was serving?

Price would have been set low in an effort to attract large numbers of consumers in this highly competitive environment; Quills would have expected to sell a large amount of product to make the marketing effort worthwhile.

(p. 275; Easy)

157. Why might have Charles Powell avoided using market-skimming pricing at Quills?

The quality and the image of the products would not have likely supported the high price in the beginning.

(p. 275; Easy)

158. How might product line pricing be initiated at Quills?

Quills could arrange its writing utensils, for example, within three price points, which would allow buyers to select products based on their perceptions of low, medium, and high quality.

(p. 276; Moderate)

159. How could optional product pricing be used by Quills?

Quills could offer a pen refill pack with specific pens being sold.

(p. 276; Moderate)

160. How could product bundle pricing work for Quills?

Certain styles of stationery and matching envelopes could come packaged with a writing utensil. Or, certain pens could come packaged in a set with matching pencils.

(p. 278; Moderate)

161. Would quantity discounts be possible for Quills to offer? Why?

Absolutely! One of the firm’s strategies is to sell in large volumes to gain market share; therefore, offering quantity discounts would allow that to happen more quickly.

(p. 278; Moderate)

162. Explain how product form pricing may be a pricing option at Quills.

Quills may charge more for a pen packaged with a matching pencil in a gift box than what the firm charges for the pen when it is sold in bulk.

(p. 279; Challenging)

163. Explain how a reference price could partially build the firm’s image in the market.

If Quills offered the market a long-lasting, economically priced pen at $.39, for example, consumers would come to ask for “the 39-cent pen,” much the same as has happened with Wrigley’s 25-cent pack of chewing gum.

(p. 281; Challenging)

164. If Quills decided to introduce its products internationally, what factors may impact a change in price?

Economic conditions, competitive situations, laws and regulations, the foreign retailing and wholesaling system, and consumer perceptions of the products’ quality may impact price.

(p. 286; Moderate)

165. How can Quills avoid retail price maintenance?

Quills can propose a suggested retail price for its products.

(p. 291; Easy)

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