Marketing Management - 12th Edition - Kotler/Keller



Chapter 14: Developing Pricing Strategies and Programs

GENERAL CONCEPT QUESTIONS

Multiple Choice

1. ________ communicates to the market the company’s intended value positioning of its product or brand.

a. Packaging

b. Price

c. Place

d. Promotion

e. Physical evidence

Answer: b Page: 431 Level of difficulty: Easy

2. Price has operated as the major determinant of buyer choice among poorer nations, among poorer groups, and with ________ products.

a. identical

b. over the Internet

c. similar

d. commodity-type

e. none of the above

Answer: d Page: 432 Level of difficulty: Medium

3. Companies price their products in a number of ways. Small companies prices are set by the boss, in larger companies, pricing is handled by division and product-line managers. In industries where price is a key factor, companies often establish a ________ department reporting to other internal departments.

a. financial

b. pricing

c. sales

d. marketing

e. distribution

Answer: b Page: 433 Level of difficulty: Easy

4. Executives often complain that pricing is a big headache. One of the common mistakes made are: Price is not revised often enough to capitalize on market changes; price is set ________ of the rest of the marketing mix rather than an intrinsic element of a marketing-positioning strategy.

a. divergently

b. too high

c. intrinsically

d. independently

e. concurrently

Answer: d Pages: 433–434 Level of difficulty: Medium

5. “Power prices” use price as a key strategic tool. These “power pricers” have discovered the highly ________ effect of price on the bottom line.

a. dramatic

b. abrasive

c. leveraged

d. direct

e. soothing

Answer: c Page: 434 Level of difficulty: Medium

6. Purchase decisions are based on how consumers perceive prices and what they consider to be the ________ price—not the marketer’s stated price.

a. current actual

b. last purchased price

c. current sale price

d. referent price

e. none of the above

Answer: a Page 434 Level of difficulty: Medium

7. The definition of ________ prices is: In considering an observed price, consumers often compare it to an internal memory reference price or an external frame of reference (such as a posted “regular retail price”).

a. historical

b. reference

c. promotional

d. everyday low price

e. none of the above

Answer: b Page: 434 Level of difficulty: Hard

8. Many consumers use price as an indicator of ________. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars.

a. status

b. quality

c. ability

d. capability

e. size

Answer: b Page: 435 Level of difficulty: Easy

9. Pricing cues, such as sale signs and prices that end in a 9, become less effective the more they are employed. Anderson and Simester maintain that they must be used judiciously on those items where consumers’ price knowledge may be poor. Which of the following is NOT one of these signs?

a. Quality or sizes vary across stores.

b. Product designs vary over time.

c. The store caters to low-involvement shoppers.

d. Customers are new.

e. Customers purchase the item infrequently.

Answer: c Page: 437 Level of difficulty: Hard

10. A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it ________.

a. needs to increase bottom line results

b. raises prices due to cost escalation

c. rolls out an improved product

d. enters bids on new contract work

e. changes styles

Answer: d Page: 436 Level of difficulty: Medium

11. Consumers often rank brands according to price tiers in a category. Within any tier, there is a range of acceptable prices, called ________. These provide managers with some indication of the flexibility and breadth they can adopt in pricing their brands within a particular price tier.

a. price bands

b. price clusters

c. price groups

d. price cues

e. none of the above

Answer: a Page: 437 Level of difficulty: Medium

12. A firm has to consider many factors in setting its pricing policy. We list these as a six-step process. Which of the following is NOT one of these steps?

a. Determining demand.

b. Selecting the pricing objective.

c. Researching reference prices in the target market.

d. Selecting the final price.

e. Selecting a pricing method.

Answer: c Page: 437 Level of difficulty: Hard

13. A firm first decides where it wants to position its market offering. A company can pursue any of five major objectives through pricing. Which of the following is NOT one of these objectives?

a. Predatory pricing

b. Survival

c. Maximum current profit

d. Maximum market share

e. Product-quality leadership

Answer: a Page: 437 Level of difficulty: Medium

14. In market-penetration pricing, the company’s objective in pricing is to ________, believing that higher sales volume will lead to lower unit costs and higher long-run profits.

a. block competitive launches

b. maximize their market share

c. minimize their market share

d. maximize volume

e. none of the above

Answer: b Page: 438 Level of difficulty: Easy

15. Market-skimming prices make sense under the following conditions EXCEPT ________.

a. the high price communicates high value

b. the high initial price blocks competition from entering the market

c. the unit costs of producing a small number of units is high

d. the product is a “me-too” and contains no new technology or points of difference

e. a sufficient number of buyers have a high current demand

Answer: d Page: 438 Level of difficulty: Hard

16. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are most price sensitive to products that cost a lot or are ________.

a. priced low to begin with

b. low-cost

c. bought frequently

d. bought infrequently

e. none of the above

Answer: c Page: 439 Level of difficulty: Easy

17. Consumers ________ to low-cost products or items they buy infrequently.

a. prefer the lowest total cost of ownership

b. remember prices of products

c. are ambivalent to prices

d. are more price sensitive

e. are less price sensitive

Answer: e Page: 439 Level of difficulty: Easy

18. The concept of the lowest ________ means that a seller can charge a higher price if they can convince the customers that price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.

a. prestige pricing

b. total cost of ownership

c. convenience pricing

d. key price points

e. none of the above

Answer: b Page: 439 Level of difficulty: Medium

19. If demand hardly changes with a small change in price, we say that the demand is ________.

a. equal

b. marginal

c. inelastic

d. elastic

e. none of the above

Answer: c Page: 440 Level of difficulty: Easy

20. If demand changes considerably, we say that the demand is ________.

a. equal

b. elastic

c. inelastic

d. marginal

e. none of the above

Answer: b Page: 440 Level of difficulty: Easy

21. Price elasticity depends on the magnitude and direction of the price change. If may differ for a price cut versus a price increase. When the price changes have little or no effect there might exist a ________ for your product.

a. selective price

b. price indifference band

c. substitute product

d. promotional price

e. collective price

Answer: b Page: 441 Level of difficulty: Hard

22. ________ sets a ceiling on the price the company can charge for its products.

a. Government regulations

b. Market forces

c. Costs

d. Demand

e. Competition

Answer: d Page: 441 Level of difficulty: Easy

23. A company’s costs take two forms. ________ are costs that do not vary with production or sales revenue.

a. Fixed

b. Variable

c. Adjusted

d. Attributed

e. None of the above

Answer: a Page: 441 Level of difficulty: Easy

24. ________ costs amounts differ greatly depending upon the level of production.

a. Fixed

b. Adjusted

c. Attributed

d. Unknown

e. Variable

Answer: e Page: 441 Level of difficulty: Easy

25. ________ consists of the sum of the fixed and variable costs for any given level of production.

a. Total costs

b. Manufacturing costs

c. Delivery costs

d. Fixed costs

e. Variable costs

Answer: a Page: 442 Level of difficulty: Easy

26. Today’s companies try to adapt their offers and terms to different buyers. ________ accounting tries to identify the real costs associated with serving each customer. It allocates indirect costs to the activities that use them and are tagged back to each customer.

a. Cost accounting

b. Experience cost

c. Target costing

d. Direct product profitability

e. Activity-based cost

Answer: e Page: 443 Level of difficulty: Hard

27. The three major considerations in price setting includes, costs set as the “floor,” ________, and customers’ assessment of unique features establishing the price ceiling.

a. competitors’ prices and the price of substitutes provide an orientation point

b. competitors’ prices establishes a “target price” goal

c. the price of substitutes establishes a “target price”

d. the price of competitors and substitutes does not enter into the pricing considerations.

e. none of the above

Answer: a Page: 444 Level of difficulty: Hard

28. An increasing number of companies now base their price on the customer’s ________ of their products.

a. usage

b. EDLP pricing

c. everyday value pricing

d. perceived value

e. value proposition

Answer: d Page: 445 Level of difficulty: Easy

29. The key to perceived-value pricing is to deliver more value than your competitors and to ________ this to prospective buyers.

a. demonstrate

b. communicate

c. advertise

d. promote

e. convince

Answer: a Page: 446 Level of difficulty: Easy

30. Value pricing is not a matter of simply setting lower prices; it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality; and lowering prices significantly to attract a large number of ________ customers.

a. expert customers

b. price-orientated

c. value-conscious

d. product-orientated customers

e. none of the above

Answer: c Page: 447 Level of difficulty: Medium

31. When a firm charges the same, more, or less than its major competitors do, it is using a pricing strategy that is called ________.

a. perceived value pricing

b. value pricing

c. high-low pricing

d. everyday low pricing

e. going-rate pricing

Answer: e Page: 447 Level of difficulty: Medium

32. Auction-type pricing is becoming very popular today due to the Internet. The three types of auction-types of pricing include sealed-bid auctions, descending bids auctions, and ________.

a. EDLP

b. ascending bids

c. high-low bids

d. going-rate bidding

e. value pricing

Answer: b Page: 448 Level of difficulty: Medium

33. Pricing methods narrow the range from which the company selects its final price. In selecting that price, the company must consider additional factors, including the impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on ________.

a. other parties

b. channels of distribution

c. channel partners

d. marketing activities

e. none of the above

Answer: a Page: 448 Level of difficulty: Medium

34. In ________ pricing, the company decides how to price its products to different customers in different locations and countries.

a. specialty

b. geographical

c. offset

d. regional

e. none of the above

Answer: b Page: 450 Level of difficulty: Easy

35. A ________ is offered by a manufacturer to trade-channel members if they will perform certain functions, such as selling, storing, and record keeping.

a. functional discount

b. quantity discount

c. allowance

d. cash discount

e. none of the above

Answer: a Page: 452 Level of difficulty: Easy

36. ________ occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs

a. Psychological pricing

b. Loss-leader pricing

c. Product-form pricing

d. Customer-segment pricing

e. Price discrimination

Answer: e Page: 453 Level of difficulty: Medium

37. When supermarkets and department stores drop the price on well-known brands to stimulate store traffic, this is called ________.

a. EDLP

b. loss-leader pricing

c. special-event pricing

d. net pricing

e. none of the above

Answer: b Page: 453 Level of difficulty: Easy

38. Companies often adjust their basic price to accommodate differences in customers, products, locations, and so forth. Examples of these differentiated prices include all of the following EXCEPT ________.

a. new product pricing

b. customer-segment pricing

c. product form pricing

d. channel pricing

e. none of the above

Answer: a Pages: 453-454 Level of difficulty: Easy

39. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs. A price-cutting strategy involves possible traps. One of these “traps” is ________.

a. secure target market customer

b. consistent high quality consumer

c. dependence on a firm market

d. loyal customer market

e. shallow-pockets

Answer: e Page: 455 Level of difficulty: Hard

40. A major circumstance provoking price increases is ________.

a. market demand

b. profitability versus target

c. cost inflation

d. price versus competition

e. stock price versus target price

Answer: c Page: 455 Level of difficulty: Easy

41. Generally, consumers prefer ________ price increases on a regular basis to sudden, sharp increases.

a. large

b. consistent

c. small

d. reciprocal

e. trade

Answer: c Page: 457 Level of difficulty: Easy

42. Given strong consumer resistance to price hikes, marketers go to great lengths to find alternative approaches that will allow them to postpone a price increase. Which of the following is NOT one of these approaches?

a. Reduce or eliminate some product features.

b. Reduce or eliminate some services like free delivery.

c. Shrink package sizes.

d. Demand upfront payment before shipping goods.

e. None of the above.

Answer: d Page: 458 Level of difficulty: Hard

43. Your competitor has reduced prices on his entire line of products. You can interpret these price cuts by assuming that your competitor is trying to gain market share, that the company is doing poorly and wants to increase revenue quickly, and ________.

a. signals an end to price/promotion wars

b. signals that price is no longer a competitive advantage

c. wants the whole industry to reduce prices

d. wants you to reduce your prices below his

e. none of the above

Answer: c Page: 459 Level of difficulty: Medium

44. In markets that are characterized by products that are highly homogenous, how should a firm react to a competitor’s price decline?

a. Reduce product performance levels.

b. Enhance services.

c. Reduce services.

d. Reduce product characteristics.

e. Augment the product.

Answer: e Page: 460 Level of difficulty: Hard

45. There are ways that brand leaders can respond to competitors’ price declines. These include all of the following EXCEPT ________.

a. maintain your price

b. maintain your price and add value

c. reduce your price

d. increase price and improve quality

e. decrease price and decrease quality

Answer: e Page: 460 Level of difficulty: Medium

46. Some of the considerations that company’s face when deciding to match a competitor’s price decline include the product’s importance in the company’s portfolio, the competitor’s intentions, and the ________.

a. reaction by the channels of distribution

b. shareholder value

c. market’s price and quality sensitivity

d. ordering time frames for the product

e. ordering ease for the product

Answer: c Page: 461 Level of difficulty: Medium

47. Research on reference prices has found that “unpleasant surprises”—when perceived price is lower than the stated price—can have a ________ impact on purchase likelihood than pleasant surprises.

a. brand switching

b. less significant

c. greater

d. lesser

e. none of the above

Answer: c Page: 435 Level of difficulty: Hard

48. To maximize market share, a firm may use _____________ pricing which sits on the theory that as sales volume increases, unit costs will decrease.

a. market-penetration

b. market-skimming

c. value pricing

d. demand pricing

e. price bands

Answer: a Page: 438 Level of difficulty: Medium

49. ________ is the result of a concentrated effort by designers, engineers, and purchasing agents to reduce the product’s overall costs.

a. Learning curve

b. Target costing

c. Least cost producer

d. Experience curve

e. None of the above

Answer: b Page: 443 Level of difficulty: Hard

50. In recent years, companies have adopted ________ where they try to win loyal customers by charging a fairly low price for a high-quality offering.

a. EDLP

b. high-low pricing

c. value pricing

d. everyday low pricing

e. none of the above

Answer: c Page: 446 Level of difficulty: Easy

51. In ________ the retailer charges higher prices on an everyday basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level.

a. going-rate pricing

b. EDLP pricing

c. value pricing

d. high-low pricing

e. everyday low pricing

Answer: d Page: 447 Level of difficulty: Easy

52. ________ is the direct exchange of goods, with no money and no third party involved.

a. Co-optation

b. Buyback

c. Barter

d. Offset

e. Compensation

Answer: c Page: 451 Level of difficulty: Easy

53. The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment in a ________.

a. buyback arrangement

b. co-optation

c. barter

d. offset

e. none of the above

Answer: a Page: 451 Level of difficulty: Hard

54. Most companies will ________ their list price and give discounts and allowances for early payments, volume purchases, and off-season buying.

a. list two prices

b. increase

c. reduce

d. adjust

e. none of the above

Answer: d Page: 451 Level of difficulty: Medium

55. A(n) ________ is a price reduction to buyers who pay their bills promptly.

a. Allowance

b. seasonal allowance

c. dash discount

d. quantity discount

e. none of the above

Answer: c Page: 452 Level of difficulty: Easy

56. When different customer groups are charged different prices for the same product or service, it is called ________.

a. price discrimination

b. customer-segment pricing

c. illegal

d. product-form pricing

e. channel pricing

Answer: b Page: 453 Level of difficulty: Medium

57. Prices that vary by time of the day, the season of the year, or the day of the week are called ________.

a. discounting

b. time pricing

c. price discrimination

d. product form pricing

e. channel pricing

Answer: b Page: 454 Level of difficulty: Medium

58. One of the traps of instituting a price decrease is when that low price buys market share in the short term. The same customers will shift to any lower-priced product that may come along. This trap is called ________.

a. low price trap

b. market loyalty trap

c. shallow-pockets trap

d. low-quality trap

e. fragile-market-share trap

Answer: e Page: 455 Level of difficulty: Medium

59. All of the following EXCEPT _____________ are conditions that must exist for price discrimination to work.

a. the practice must not be illegal

b. the practice must not breed customer resentment

c. competitors must not be able to undersell the firm in the high segment

d. market must be homogeneous

e. none of the above

Answer: d Page: 455 Level of difficulty: Hard

60. The most elementary pricing method is to add a standard ________ to the product’s cost.

a. target margin

b. target price

c. markup

d. margin

e. target-return

Answer: c Page: 444 Level of difficulty: Easy

True/False

61. Price is one of the two elements of the marketing mix that produces revenue.

Answer: False Page: 431 Level of difficulty: Easy

62. A well-designed and marketed product can command a price premium and reap big profits.

Answer: True Page: 431 Level of difficulty: Easy

63. Companies, surprisingly, price their products in very similar ways.

Answer: False Page: 433 Level of difficulty: Medium

64. Traditionally, price has operated as the major determinant of a buyer’s choice.

Answer: True Page: 432 Level of difficulty: Medium

65. Effectively designing and implementing a successful pricing strategy is as much about luck as it is about understanding consumer-pricing psychology.

Answer: False Page: 434 Level of difficulty: Medium

66. Purchase decisions are based on how consumers perceive prices and what they consider the current actual price and not the marketer’s stated price.

Answer: True Page: 434 Level of difficulty: Medium

67. Many consumers use price as an indicator of quality and value.

Answer: True Page: 435 Level of difficulty: Medium

68. The price a firm charges for its product does not affect where it chooses to position the product in the marketplace.

Answer: False Page: 436 Level of difficulty: Hard

69. Consumers often rank brands according to price tiers in a category.

Answer: True Page: 437 Level of difficulty: Medium

70. Trying to maximize market share a firm would be best served to use a market-skimming pricing strategy.

Answer: False Page: 438 Level of difficulty: Medium

71. When prices start off high and are slowly lowered over time, this is called market-skimming pricing.

Answer: True Page: 438 Level of difficulty: Medium

72. If a firm tries to become the product-quality leader then the price they charge for their products may not be affected by consumer choice.

Answer: True Page: 438 Level of difficulty: Hard

73. Customers are most price sensitive to products that cost a lot or are bought frequently.

Answer: True Page: 439 Level of difficulty: Easy

74. Customers are less price sensitive to low-cost items or items they buy infrequently.

Answer: True Page: 439 Level of difficulty: Easy

75. If demand hardly changes with a small decline in price, we say that the demand is inelastic.

Answer: True Page: 440 Level of difficulty: Medium

76. If demand changes considerably with a small change in price, we say that the demand is elastic.

Answer: True Page: 440 Level of difficulty: Medium

77. Price elasticity depends upon the magnitude and direction of the contemplated price change.

Answer: True Page: 441 Level of difficulty: Medium

78. A price indifference band is that section of the price increase in which the consumer does not notice or does not have any effect in demand.

Answer: True Page: 441 Level of difficulty: Medium

79. Activity-based cost is just another method to distribute attributable costs across the product line.

Answer: False Page: 443 Level of difficulty: Medium

80. Total costs consist of the sum of the fixed and variable costs associated with the product.

Answer: True Page: 442 Level of difficulty: Easy

81. In target-return pricing, the firm determines the markup required and adds that amount to the fixed cost of the product.

Answer: False Page: 444 Level of difficulty: Hard

82. An increasing number of companies are basing their pricing on perceived value, which is the value that the consumer decides the product is worth and is the same across all incomes and regions of the company.

Answer: False Page: 445 Level of difficulty: Hard

83. The key to effectively using perceived-value pricing is to always to deliver the same or equal value as your competitors.

Answer: False Page: 446 Level of difficulty: Medium

84. Value pricing is a matter of reengineering the company’s operations to become a low-cost producer.

Answer: True Page: 447 Level of difficulty: Medium

85. EDLP pricing is a type of going-rate pricing in which the retailer sets low prices everyday on selected items.

Answer: False Page: 447 Level of difficulty: Medium

86. The final price charged by the company does not necessarily have to take into account the brand’s quality and advertising relative to competition.

Answer: False Page: 448 Level of difficulty: Hard

87. In some cases, price is not as important as quality and other benefits in the market offering.

Answer: True Page: 448 Level of difficulty: Medium

88. Management need not consider how the marketing/distribution channels will react to its pricing policies.

Answer: False Page: 450 Level of difficulty: Hard

89. When the seller receives full payment in cash and agrees to spend a substantial amount of the money in that country within a stated time period this is called offset.

Answer: True Page: 451 Level of difficulty: Easy

90. Discount pricing, is when companies adjust their list prices, and give discounts and

allowance for early payments, volume purchases, and off-season buying.

Answer: True Page: 451 Level of difficulty: Medium

91. A quantity discount is a price reduction given to those who buy a large volume of the manufacturer’s products.

Answer: True Page: 452 Level of difficulty: Medium

92. Price discrimination in all forms is illegal in the United States under the Robinson-Patman Act.

Answer: False Page: 453 Level of difficulty: Medium

93. Predatory pricing—selling below cost with the intention of destroying competition is legal under certain conditions.

Answer: False Page: 455 Level of difficulty: Hard

94. Companies sometimes initiate price cuts in a drive to dominate the market through lower costs.

Answer: True Page: 455 Level of difficulty: Easy

95. A major circumstance provoking price increases is cost inflation.

Answer: True Page: 455 Level of difficulty: Medium

96. A factor leading to price increases is overdemand by the market for the company’s product.

Answer: True Page: 457 Level of difficulty: Easy

97. Companies do not need to concern themselves with their competitors when executing a price change.

Answer: False Page: 459 Level of difficulty: Easy

98. A brand leader can respond to a competitor’s price decline by executing a “poison pill” strategy toward the competitor.

Answer: False Page: 460 Level of difficulty: Hard

99. Psychological discounting involves setting an artificially high price and then offering the product at substantial savings.

Answer: True Page: 453 Level of difficulty: Hard

100. When firms charge different prices to different consumer groups (senior citizens for example) this is a form of price discrimination and is illegal.

Answer: False Page: 453 Level of difficulty: Easy

Essay

101. Explain why and how the Internet is partially reversing the fixed price concept of retailing?

Suggested Answer: Computer technology is making it easier for sellers to use software that monitors customers’ movements over the Web and allows them to customize offers and prices. New software applications are also allowing buyers too compare prices instantaneously through online robotic shoppers or “shopbots.”

Page: 432 Level of difficulty: Easy

102. Prior research has shown that although consumers may have fairly good knowledge of the range of prices involved, surprisingly few can recall specific prices of products accurately. When examining products, consumers often employ reference prices. List the possible prices consumers’ use as their “reference.”

Suggested Answer: These reference prices include “fair price,” (what the product should cost); typical price; last price paid; upper-bound price (reservation price or what most consumers would pay); lower-bound price (lower threshold price or the least consumers would pay); competitor price; expected future price; and usual discounted price.

Page: 435 Level of difficulty: Hard

103. In setting the “price” for their products or services, firms must stop and pause to reflect on the many factors affecting its pricing policy. List these six factors and briefly the subsequent components of each one of them.

Suggested Answer: The six-step procedure includes: Step 1: selecting the price objective—there are five objectives available here: survival, maximum current profit, maximum market share, maximum market skimming, or product-quality leadership. Step 2: determining demand—price sensitivity, estimating demand curves, and price elasticity. Step 3: estimating costs—fixed and variable costs, accumulated production, activity-based cost accounting, and target costing. Step 4: analyzing competitors’ costs, prices, and offers—reviewing the market and noting competition. Step 5: selecting a pricing method—use markup or margin, perceived-value pricing, value pricing, EDLP, high-low, going-rate pricing, and auction-type pricing. Step 6: selecting the final price—impact on other marketing activities, company pricing policies, gain-and-risk sharing pricing, and impact of price on other parties.

Pages: 437–450 Level of difficulty: Hard

104. If the company has determined that the price for its product is “less elastic,” then one or more of the following conditions must exist. List these conditions for a product to have an inelastic demand.

Suggested Answer: Demand is likely to be less elastic under the following conditions: (1) there are few or no substitutes or competitors; (2) buyers do not really notice the higher price; (3) buyers are slow to change their buying habits; and (4) buyers think the higher prices are justified.

Page: 440 Level of difficulty: Hard

105. According to George E. Cressman Jr. at Strategic Pricing Group, marketers nurture three major marketing “myths” about pricing strategy. List these and briefly explain each

Suggested Answer: (1) Pricing our products to cover full costs will make us profitable—marketers often do not realize the value they actually do provide. (2) pricing our products to grow market share will make us profitable—market share is determined by value delivery at a competitive advantage. (3) pricing our products to meet customer demand will make us profitable—cutting prices to keep customers or beat competition offers encourages customs to demand further price concessions.

Page: 441 Level of difficulty: Hard

1 An increasing number of companies are basing their prices on the customer’s perceived value. Explain the concept of “perceived value” and what is the “key” to pricing in this manner.

Suggested Answer: Perceived value is made up of several elements, such as the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem. Each potential customer places different weights on these different elements, with the result that some will be price buyers, others value buyers, and others loyal buyers. Companies will need different strategies for each of these three groups.

The key to perceived value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers. The company can determine the value of its offering in several ways: managerial judgments, value of similar products, focus groups, survey, experimentation, analysis of historical data, and conjoint analysis.

Pages: 445–446 Level of difficulty: Hard

107. Explain why “value pricing” is not just a matter of simply setting lower prices?

Suggested Answer: Value pricing is not just a matter of simply setting lower prices, it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality, and lowering prices significantly to attract a large number of value-conscious consumers.

Page: 447 Level of difficulty: Easy

108. In a classic study, Farris and Reibstein examined the relationships among relative price, relative quality, and relative advertising for 227 consumer businesses. List and briefly explain their findings.

Suggested Answer: (1) Brands with average relative quality but high relative advertising budgets were able to charge premium prices. Consumers apparently were willing to pay higher prices for known products than for unknown products.

(2) Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low quality and low advertising charge the lowest prices. (3) The positive relationship between high prices and high advertising held most strongly in the later stages of the product life cycle for market leaders.

Page: 448 Level of difficulty: Hard

109. For price discrimination to work, certain conditions must exist. Please list and

briefly explain these conditions.

Suggested Answer: First, the market must be segmentable and the segments must show different intensities of demand. Second, members in the lower-price segment must not be able to resell the product to the higher-price segment. Third, competitors must not be able to undersell the firm in the higher-price segment. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination. Fifth, the practice must not breed customer resentment and ill will. Sixth, the particular form of price discrimination must not be illegal.

Page: 444 Level of difficulty: Hard

110. In responding to a competitor’s price cut, a firm in a nonhomogeneous market has more latitude and should consider what four issues before responding?

Suggested Answer: A nonhomogeneous market needs to consider the following issues: (1) Why did the competitor change the price? To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industry-wide price change? (2) Does the competitor plan to make the price change temporary or permanent? (3) What will happen to the company’s market share and profits if it does not respond? (4) What are the competitors’ and other firms’ responses likely to be to each possible reaction?

Page: 460 Level of difficulty: Medium

APPLICATION QUESTIONS

Multiple Choice

111. When a consumer buys a $100 bottle of perfume containing $10.00 worth of materials, the gift giver is communicating their high regard to the receiver and this represents the concept of ________ in pricing.

a. maximum current profit

b. price-quality relationship

c. reference prices

d. price cues

e. price leadership

Answer: b Page: 435 Level of difficulty: Easy

112. When a retailer puts a sign on a product that says “reduced” or a retailer points a sign on a product that says “compare to XXX at $10.00 more,” the retailer is encouraging what kind of pricing psychology for its shoppers?

a. Reference pricing

b. Price cues

c. Price leadership

d. Going-rate pricing

e. None of the above

Answer: a Page: 434 Level of difficulty: Medium

113. Research has shown that consumers tend to process prices in a “left-to-right” manner rather than by rounding. With this knowledge which of the following prices would seem to be a better physiological price?

a. $101.99

b. $109.50

c. $99.99

d. $100.00

e. none of the above

Answer: c Page: 436 Level of difficulty: Medium

114. You are introducing a new product to the market; in fact, you are first with this new product to the marketplace. In developing your pricing strategy, it was decided that the price of the product should be at the maximum the market would bear. This is an example of what type of pricing strategy?

a. Product-quality leadership

b. Market-skimming pricing

c. Market-penetration pricing

d. Going-rate pricing

e. Prestige pricing

Answer: b Page: 438 Level of difficulty: Easy

115. Texas Instruments builds a large plant to produce a great quantity of products, hoping that as prices decline, sales volume increases and thus costs decline. This market-penetration pricing is dependent upon three conditions existing in the marketplace. Which one of the following is NOT one of these conditions?

a. Low price discourages competition from entering the market.

b. Production and distribution costs actually fall with increases in production.

c. Low prices does not increase consumer demand but increases retailer

competition.

d. The market is stimulated by lower prices.

e. The market is highly price sensitive.

Answer: c Page: 438 Level of difficulty: Hard

116. When the price of a gallon of milk increases by $0.50, consumers notice this increase immediately. This is an example of what concept in the understanding of consumer price sensitivity.

a. Customers are most sensitive to products that are bought frequently.

b. Customers are less sensitive to disposable products.

c. Customers are most sensitive to food products.

d. Customers are most sensitive to grocery products.

e. None of the above.

Answer: a Page: 439 Level of difficulty: Medium

117. When the insurance industry recently announced a “hefty” price increase in the cost of term life insurance, sales of this type of insurance did not decrease. This is an example of what concept in understanding consumer price sensitivity?

a. Customers are most sensitive to products that are bought frequently.

b. Customers are less sensitive to disposable products.

c. Insurance sales reps can “really sell” their products.

d. Insurance demand is unitary.

e. Consumers are less price sensitive to products bought infrequently.

Answer: e Page: 439 Level of difficulty: Medium

118. The demand for your product fell 66 percent when the price increased by 50 percent. This is an example of what type of demand?

a. Coefficient

b. Inelastic

c. Elastic

d. Unitary

e. None of the above

Answer: c Page: 440 Level of difficulty: Easy

119. The quantity demanded of your firm’s product increased only 5 percent when the price of each unit was reduced by 33 percent. This is an example of what type of demand?

a. Elastic

b. Coefficient

c. Unitary

d. Inelastic

e. None of the above

Answer: d Page: 440 Level of difficulty: Easy

120. Manufacturing costs such as rent, utilities, interest expense, and some salaries are considered ________ and these costs do not vary with the production or sale of the item.

a. corporate overhead

b. division overhead

c. overhead

d. fixed costs

e. variable

Answer: d Page: 441 Level of difficulty: Easy

121. At 1,000 calculators per day, Texas Instrument’s factory is running at full capacity. This means that the cost of each calculator is now at its ________ cost.

a. total cost

b. average

c. lowest

d. highest

e. cannot tell

Answer: c Page: 442 Level of difficulty: Medium

122. As the lowest cost producer in the market, your firm has decided to reduce the price of your product again by 10 percent. This price decline has the effect of driving a competitor out of the market and of attracting price sensitive shoppers to your brands. This is an example of what type of pricing strategy?

a. Average

b. Target costing

c. Predatory

d. Experience curve

e. None of the above

Answer: b Page: 442 Level of difficulty: Medium

123. If variable costs are $10 per unit, fixed costs are $300,000, and expected unit sales are 50,000 the unit cost is ________.

a. $16.00

b. $6.00

c. $20.00

d. $10.00

e. none of the above

Answer: a Page: 444 Level of difficulty: Easy

124. Following the industry average, your firm accepts a 20 percent markup on sales. If the unit cost of your product is $20.00 then the retail price would be ________.

a. $48.00

b. $40.00

c. $44.00

d. $22.00

e. $24.00

Answer: e Page: 444 Level of difficulty: Easy

125. Your company has invested $1,000,000 in plant and equipment and wants to ensure that it receives a 20 percent ROI on the pricing of its products. This 20 percent translates into $200,000. At a $16.00 cost and a 50,000 expected sales volume, what price must your product “go out the door” at to satisfy this ROI return?

a. $24.00

b. $20.00

c. $40.00

d. $44.00

e. None of the above

Answer: b Page: 445 Level of difficulty: Medium

126. The formula for the break-even calculation is ________.

a. (price – variable costs)/fixed costs

b. fixed costs/(price – variable costs)

c. fixed costs/unit sales

d. fixed costs/(variable costs – price)

e. fixed costs X (variable costs – price)

Answer: b Page: 445 Level of difficulty: Hard

127. In exchange for the distribution of your products overseas, your firm has accepted to receive a shipment of imported products in trade. This is an example of what type of countertrade?

a. Offset

b. Barter

c. Compensation deal

d. Buyback agreement

e. None of the above

Answer: b Page: 451 Level of difficulty: Easy

128. The example of “2/10” net 30 is a type of cash discount and means ________.

a. the bill is due within 30 days and the seller will add 2 percent interest for every day over the 30 days that the bill is not paid

b. the bill is due within 30 days paid in full

c. payment is due within 30 days and that the buyer can deduct 2 percent for paying the bill within 10 days

d. payment is due within 10 days and the buyer can deduct 2 percent for paying within the 10 day period

e. none of the above

Answer: c Page: 452 Level of difficulty: Medium

129. Florida hotels discount the cost of their hotel rooms during the hot summer months. On the other hand, during the winter months, the price of these rooms increases. This is an example of what type of discounts?

a. Seasonal

b. Functional

c. Quantity

d. Promotional allowance

e. None of the above

Answer: a Page: 452 Level of difficulty: Easy

130. The popularity of “senior citizen” specials or “early-bird” specials at restaurants is an example of what type of price discrimination?

a. Time pricing

b. Channel pricing

c. Image pricing

d. Product-form pricing

e. Customer-segment pricing

Answer: a Page: 454 Level of difficulty: Easy

Short Answer

131. When is price discrimination legal?

Suggested Answer: Price discrimination is legal if the seller can prove that its costs are different when selling different volumes or different qualities of the same product to different retailers.

Page: 453 Level of difficulty: Hard

132. When a company initiates a price cut in an attempt to dominate the market through lower costs (such as the $1.00 special lunch menus at key fast food restaurants) the company must ensure that it does not fall into certain low cost traps. List these three “traps.”

Suggested Answer: There is the “low-quality trap,” the “fragile-market-share trap,” and the “shallow-pockets trap.”

Page: 455 Level of difficulty: Hard

133. Movie matinees are priced lower than the evening shows; afternoon ball games are sometimes priced cheaper than the evening games, television advertising costs less when run after midnight. These are examples of what type of price discrimination?

Suggested Answer: These are examples of time pricing discrimination.

Pages: 453–454 Level of difficulty: Easy

1 The final price of the product must take into account the brand’s quality and advertising relative to the competition. In the classic study conducted by Farris and Reibstein, which examined the relationships among relative price, relative quality, and relative advertising for 227 consumer businesses found certain findings. Please list the conclusions of these findings.

Suggested Answer: The findings suggested that price is not as important as quality and other benefits in the market offering

Page: 448 Level of difficulty: Hard

1 IKEA and Southwest Airlines are among the best practitioners of value pricing—win loyal customers by charging a fairly low-price for a high-quality offering. Why is value pricing not a matter of simply lowering prices?

Suggested Answer: Value pricing is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality, and lowering prices significantly to attract a large number of value-conscious customers.

Pages 446–447 Level of difficulty: Medium

136. Your local retailer has instituted an EDLP pricing program for his stores. What would one of the reasons be for the retailer to adopt an EDLP pricing policy?

Suggested Answer: Constant sales and promotions are costly and have eroded consumer confidence in the credibility of everyday shelf prices.

Page: 447 Level of difficulty: Easy

137. As a newly hired marketing associate, you have been given the responsibility to reduce the costs of your product by utilizing a process called “target costing.” Explain how you would go about implementing a “target costing” program.

Suggested Answer: Market research is used to establish a new product’s desired functions and the price at which the product will sell, given its appeal and competitors’ prices. Deducting the desired profit margin from this price levels the target cost that must be achieved. Each cost element—design, engineering, manufacturing, and sales must be examined to reduce costs to the target cost range.

Page: 443 Level of difficulty: Hard

138. How would you explain the concept of “price elasticity” to a co-worker?

Suggested Answer: Price elasticity is the responsiveness or demand of the product’s sales in relationship to price. Price elasticity depends on the magnitude and direction of the contemplated price change. It may be negligible with a small price change and substantial with a large price change. It may differ for a price cut versus a price increase, and there may be a price indifference band within which price changes have little or no effect.

Pages: 440–441 Level of difficulty: Medium

139. The importance of pricing for profitability was demonstrated in a 1992 study by McKinsey & Company. Summarize their findings.

Suggested Answer: McKinsey concluded that a 1 percent improvement in price created an improvement in operating profits of 11.1 percent.

Page: 434 Level of difficulty: Medium

140. Executives complain that pricing is a big headache. Many companies determine their costs then add the industry’s traditional margin. Your firm decides to use price as a “strategic tool” in the marketing mix. What is it that your firm needs to do to be able to use price as a “strategic tool”?

Suggested Answer: You must customize prices and offerings based on segment value and costs. This requires a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.

Page: 433- 434 Level of difficulty: Hard

141. In the description of the “newest product” by your firm, is the phrase “we want this brand to be priced like a Starbucks, and other premium products.” What pricing strategy will your company employ to deliver on this objective?

Suggested Answer: Your strategy should be pricing the product as the product-quality leader in the market. Perhaps an “affordable luxury.”

Page: 438 Level of difficulty: Medium

142. When the salesperson at the local “luxury” car dealer pitches a customer on the dealer’s “free maintenance for 36 months or 36,000 miles whichever comes first,” the salesperson is trying to overcome the car’s initial high cost by using what method?

Suggested Answer: The salesperson is trying to convince the customer that if offers the lowest total cost of ownership (TCO).

Page: 439 Level of difficulty: Easy

143. How would you (citing George Cressman’s advise) counter-argue this pricing strategy myth: “pricing our products to grow market share will make us profitable”?

Suggested Answer: Cressman reminds marketers that share is determined by value delivery at competitive advantage, not just price cuts.

Page: 441 Level of difficulty: Hard

144. In deciding on the price for your product’s introduction, you must consider what is best described as the “three Cs.” Define and explain what is meant by this statement?

Suggested Answer: The “three Cs” mean the customers’ demand schedule, the cost function, and the competitors’ prices. Costs set a floor to the price. Customer demand sets the ceiling and competitors’ prices and the price of substitutes provide an orientation point.

Page: 444 Level of difficulty: Medium

145. As a small firm in a commodity industry, you are often faced with a pricing policy that can best be described as “going-rate pricing.” Explain how this pricing policy works.

Suggested Answer: With “going-rate,” pricing the firm bases its price largely on competitors’ prices. The firm might charge the same, more, or less than major competitors.

Page: 447 Level of difficulty: Medium

146. Explain the type of auction found on eBay.

Suggested Answer: This is an English auction in which the seller puts up an item and bidders raise the offer price until the top price is reached—ascending bid auction.

Page: 448 Level of difficulty: Medium

147. As the marketing manager for your product, you have been forced to take a price increase due to cost pressures from your suppliers. After adjusting for customer and consumer demand fluctuations and elasticity, you feel that you have accounted for all possible reactions. Your boss, however, feels differently and says that your recommendations are not complete. What other factors, besides consumer/customers, are affected by price changes?

Suggested Answer: Other parties that must be accounted for include distributors and wholesalers, dealers, the sales force, government agencies, and your competitors’ reactions.

Page: 450 Level of difficulty: Medium

148. Your company has recently sold its resin producing plant in India to a local concern. As part of the sales price, your company agrees to accept as partial payment the production of the resin at an agreed upon price for six years. This is an example of what type of countertrade?

Suggested Answer: This is an example of a buyback arrangement.

Page: 451 Level of difficulty: Medium

149. In attempt to “rein in” the continued discounting by the sales force, you implement a net price analysis program to arrive at the “real price” of your products. Describe the steps necessary to implement such a program.

Suggested Answer: A net price analysis should adjust for discounts and promotional allowances/pricing such as loss-leader pricing, special-events pricing, cash rebates, low-interest financing, longer payment terms, warranties and service contracts, and psychological discounting employed by the sales force.

Pages: 452–543 Level of difficulty: Medium

150. As the marketing manager for a “brand leader” in your industry, you noticed that a competitor has just reduced his prices by 15 percent on his number one selling product. In a memo to your boss, you must outline how (or if you wish to) respond to this latest threat. In creating your letter, you outline five possible response alternatives that are available to you. These five responses are?

Suggested Answer: You can maintain price; maintain price and add value to the brand; reduce price to match competitor (or go even below his price); increase price and improve quality; and finally you can launch a low-price fighter/flanker brand/line.

Page: 460 Level of difficulty: Medium

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