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
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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
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Chapter 14: Developing Pricing Strategies and Programs
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
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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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
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Chapter 14: Developing Pricing Strategies and Programs
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 marketskimming 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 marketskimming 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
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Part 5: Shaping the Market Offerings
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 lowcost 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
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Chapter 14: Developing Pricing Strategies and Programs
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 RobinsonPatman 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
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Part 5: Shaping the Market Offerings
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.
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Chapter 14: Developing Pricing Strategies and Programs
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
106.
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 lowcost producer without sacrificing quality, and lowering prices significantly to
attract a large number of value-conscious consumers.
Page: 447
Level of difficulty: Easy
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Part 5: Shaping the Market Offerings
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 industrywide 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
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Chapter 14: Developing Pricing Strategies and Programs
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
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
112.
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
113.
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
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Part 5: Shaping the Market Offerings
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
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
117.
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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
408
Chapter 14: Developing Pricing Strategies and Programs
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
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
128.
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
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Part 5: Shaping the Market Offerings
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
134.
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
135.
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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
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 productquality 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
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Chapter 14: Developing Pricing Strategies and Programs
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
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Part 5: Shaping the Market Offerings
price and improve quality; and finally you can launch a low-price fighter/flanker
brand/line.
Page: 460
Level of difficulty: Medium
414