Marketing Management, 14e (Kotler/Keller) Chapter 14 Developing Pricing Strategies and Programs 1) When consumers examine products, they often compare an observed price to an internal price they remember This is known as a(n) price A) markup B) reference C) market-skimming D) accumulated E) target Answer: B Page Ref: 387 Objective: Difficulty: Easy 2) price refers to what the consumers feel the product should cost A) Fair B) Typical C) Usual discounted D) List E) Maximum retail Answer: A Page Ref: 387 Objective: Difficulty: Easy 3) While shopping at the mall, Jane was asked by one of the sales representatives at the cosmetics counter to try out a new lipstick that her company was test marketing The company representative asks her how much she would be willing to pay for the lipstick After trying it out, Jane is of the opinion that $5 is just the right price for it What type of a reference price is Jane using? A) usual discounted price B) fair price C) maximum retail price D) last price paid E) historical competitor price Answer: B Page Ref: 387 Objective: AACSB: Analytic skills Difficulty: Moderate Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 4) The reservation price or the maximum that most consumers would pay for a given product is known as the price A) expected future B) usual discounted C) upper-bound D) typical E) historical competitor Answer: C Page Ref: 387 Objective: Difficulty: Easy 5) A company decided to conduct a market survey for its new MP3 player which it had priced at $150 However, in the survey, 95 percent of the participants said that the maximum they would pay for the MP3 player is $100 This is an example of which of the following possible consumer reference prices? A) historical competitor price B) expected future price C) usual discounted price D) upper-bound price E) last price paid Answer: D Page Ref: 387 Objective: AACSB: Analytic skills Difficulty: Moderate 6) The minimum price that most consumers would pay for a given product is known as the price A) everyday low B) usual discounted C) fair D) typical E) lower-bound Answer: E Page Ref: 387 Objective: Difficulty: Easy Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 7) A company has developed the prototype of a mobile phone which it plans to launch in the next few months The phone comes equipped with the most advanced technological features As part of its test marketing efforts, it allows customers to examine and use the prototype and also gathers feedback regarding product features and price The results of this test marketing effort show that customers are willing to pay at least $500, considering the phone's various features As such, the company has found out about the customers' A) last paid price B) expected future price C) lower-bound price D) upper-bound price E) typical price Answer: C Page Ref: 387 Objective: AACSB: Analytic skills Difficulty: Moderate 8) Many consumers are willing to pay $100 for a perfume that contains $10 worth of scent because the perfume is from a well-known brand What kind of a pricing is the company depending on? A) going-rate pricing B) image pricing C) market-skimming pricing D) target pricing E) markup pricing Answer: B Page Ref: 388 Objective: Difficulty: Easy 9) Pricing cues such as sale signs and prices that end in are more influential A) when customers have substantial knowledge about prices B) when customers purchase the particular item regularly C) when product quality is standardized D) when product designs vary over time E) when prices not vary from time to time Answer: D Page Ref: 388 Objective: Difficulty: Moderate Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 10) Which of the following is the first step in setting a pricing policy? A) selecting a pricing method B) selecting the pricing objective C) determining demand D) estimating cost E) analyzing competitors' costs, prices, and offers Answer: B Page Ref: 389 Objective: Difficulty: Easy 11) After determining its pricing objectives, what is the next logical step a firm should take in setting its pricing policy? A) It should analyze its competitors' costs, prices, and offers B) It should select its pricing method C) It should select its final price D) It should determine the demand for its product E) It should estimate the cost of its product Answer: D Page Ref: 389 Objective: Difficulty: Easy 12) A firm that is plagued with overcapacity, intense competition, or changing wants would better if it pursues as its major objective A) market skimming B) product-quality leadership C) survival D) profit maximization E) market penetration Answer: C Page Ref: 389 Objective: Difficulty: Easy 13) After estimating the demand and costs associated with alternative prices, a company has chosen to price its product in such a way that it gains the highest rate of return on its investment The company is looking to A) maximize its market share B) skim the market C) become a product-quality leader D) survive in the market E) maximize its current profit Answer: E Page Ref: 389 Objective: Difficulty: Easy Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 14) Companies who believe that a higher sales volume leads to lower unit costs and higher longrun profits are attempting to A) maximize their market share B) skim the market C) become a product-quality leader D) merely survive in the market E) maximize their current profits Answer: A Page Ref: 389 Objective: Difficulty: Easy 15) A company that is looking to maximize its market share would well to follow pricing A) markup B) market-penetration C) market-skimming D) survival E) target-return Answer: B Page Ref: 389 Objective: Difficulty: Easy 16) A market-penetration pricing strategy is most suitable when _ A) a low price slows down market growth B) production and distribution costs fall with accumulated production experience C) a high price dissuades potential competitors from entering the market D) the market is characterized by inelastic demand E) a low price encourages actual competition Answer: B Page Ref: 389 Objective: Difficulty: Moderate 17) When a company introduces a product at a very high price and then gradually drops the price over time, it is pursuing a strategy A) market-penetration pricing B) market-skimming pricing C) value-pricing D) switching cost E) loss-leader pricing Answer: B Page Ref: 390 Objective: Difficulty: Easy Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 18) When Apple introduced its iPhone, it was priced at $599 This allowed Apple to earn the maximum amount of revenue from the various segments of the market Two months after the introduction, the price has come down to $399 What kind of a pricing did Apple adopt? A) loss-leader pricing B) market-penetration pricing C) market-skimming pricing D) target-return pricing E) value pricing Answer: C Page Ref: 390 Objective: AACSB: Analytic skills Difficulty: Moderate 19) Market skimming pricing makes sense under all the following conditions, EXCEPT A) if a sufficient number of buyers have a high current demand B) if the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear C) if the high initial price does not attract more competitors to the market D) if consumers are likely to delay buying the product until its price drops E) if the high price communicates the image of a superior product Answer: D Page Ref: 390 Objective: Difficulty: Easy 20) Companies that aim to strive to be affordable luxuries A) survive in the market B) partially recover their costs C) maximize their market share D) pursue value pricing E) be product-quality leaders Answer: E Page Ref: 390 Objective: Difficulty: Moderate Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 21) Starbucks, Aveda, and BMW have been able to position themselves within their categories by combining quality, luxury, and premium prices with an intensely loyal customer base These companies are employing a strategy A) market-skimming B) market-penetration C) survival D) market share maximization E) product-quality leadership Answer: E Page Ref: 390 Objective: Difficulty: Easy 22) The first step in estimating demand is to A) analyze competitors' cost B) select a pricing method C) understand what affects price sensitivity D) calculate fixed costs E) decipher the experience curve Answer: C Page Ref: 390 Objective: Difficulty: Moderate 23) Consumers are less price sensitive A) to high cost items B) when they frequently change their buying habits C) when there are more substitutes D) when there are more competitors E) when they not readily notice higher prices Answer: E Page Ref: 390-391 Objective: Difficulty: Moderate 24) Consumers are less price sensitive when A) price is only a small part of the total cost spent on the product over its lifetime B) they perceive the higher prices to be unjustified C) they change their buying habits regularly D) there are many substitutes and competitors in the market E) they are buying high-cost items Answer: A Page Ref: 391 Objective: Difficulty: Moderate Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 25) If demand hardly changes with a small change in price, the demand is said to be A) strained B) marginal C) inelastic D) flexible E) unit elastic Answer: C Page Ref: 392 Objective: Difficulty: Easy 26) If demand changes considerably, with a small change in price, the demand is said to be A) unit elastic B) elastic C) inelastic D) marginal E) strained Answer: B Page Ref: 392 Objective: Difficulty: Easy 27) If consumers were largely indifferent to a $0.5 increase in the price of a gallon of milk, the price rise is said to fall within customers' A) price indifference band B) experience curve C) arm's-length price D) learning curve E) net price index Answer: A Page Ref: 392 Objective: AACSB: Analytic skills Difficulty: Moderate 28) Which of the following is true regarding price elasticity? A) The higher the elasticity, the lesser is the volume growth resulting from a percent price reduction B) Within the price indifference band, price changes have little or no effect on demand C) If demand is elastic, sellers will consider increasing the price D) Price elasticity does not depend on magnitude and direction of the contemplated price change E) When demand is inelastic, sellers should lower prices in order to increase total revenue Answer: B Page Ref: 392 Objective: Difficulty: Moderate Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 29) Costs that not vary with production levels or sales revenue are known as A) overhead costs B) variable costs C) average costs D) opportunity costs E) total costs Answer: A Page Ref: 393 Objective: Difficulty: Easy 30) A company must make payments each month for rent, heat, interest, and salaries These are A) total costs B) fixed costs C) variable costs D) opportunity costs E) target costs Answer: B Page Ref: 393 Objective: Difficulty: Easy 31) Costs that differ directly with the level of production are known as A) fixed costs B) overhead costs C) opportunity costs D) target costs E) variable costs Answer: E Page Ref: 393 Objective: Difficulty: Easy 32) consist of the sum of the fixed and variable costs for any given level of production A) Total costs B) Average costs C) Opportunity costs D) Learning costs E) Target costs Answer: A Page Ref: 393 Objective: Difficulty: Easy Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 33) is the cost per unit at that level of production A) Target cost B) Average cost C) Marginal cost D) Opportunity cost E) Fixed cost Answer: B Page Ref: 393 Objective: Difficulty: Easy 34) The decline in the average cost of production with accumulated production experience is called the A) demand curve B) supply chain C) learning curve D) value chain E) indifference curve Answer: C Page Ref: 393 Objective: Difficulty: Easy 35) Experience-curve pricing A) assumes competitors are weak followers B) allows products to project a high quality image C) is applicable only to manufacturing costs D) focuses on reducing fixed costs E) is generally risk-free Answer: A Page Ref: 394 Objective: Difficulty: Moderate 36) Deducting the desired profit margin from the price at which a product will sell, given its appeal and competitors' prices, is known as A) overhead costing B) target costing C) activity based costing D) benefit analysis E) estimate costing Answer: B Page Ref: 394 Objective: Difficulty: Easy 10 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 95) Price elasticity depends upon the magnitude and direction of the contemplated price change Answer: TRUE Page Ref: 392 Objective: Difficulty: Easy 96) A small change in price of a product within the price indifference band causes a substantial change in the demand of that product Answer: FALSE Page Ref: 392 Objective: Difficulty: Easy 97) Total costs consist of the sum of the fixed and variable costs for any given level of production Answer: TRUE Page Ref: 393 Objective: Difficulty: Easy 98) In target-return pricing, the firm adds a standard markup to the product's cost Answer: FALSE Page Ref: 397 Objective: Difficulty: Easy 99) The key to effectively using perceived-value pricing is to deliver value that is on par with your competitors Answer: FALSE Page Ref: 399 Objective: Difficulty: Easy 100) Value pricing requires a company to reengineer its operations to become a low-cost producer Answer: TRUE Page Ref: 400 Objective: Difficulty: Easy 101) In high-low pricing, retailers charge low prices on an everyday basis with occasional price increases Answer: FALSE Page Ref: 401 Objective: Difficulty: Easy 26 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 102) The U.S government often uses Dutch auctions to procure supplies Answer: FALSE Page Ref: 402 Objective: Difficulty: Easy 103) In a compensation deal, the seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment Answer: FALSE Page Ref: 404 Objective: Difficulty: Easy 104) Offset is a form of countertrade where sellers receive full payment in cash and agree to spend a substantial amount of the money in the country where they are trading within a stated time period Answer: TRUE Page Ref: 404 Objective: Difficulty: Easy 105) A quantity discount is a price reduction given to those who pay their bills promptly Answer: FALSE Page Ref: 404 Objective: Difficulty: Easy 106) Trade-in allowances reward dealers for participating in advertising and sales support programs Answer: FALSE Page Ref: 404 Objective: Difficulty: Easy 107) Psychological discounting involves setting an artificially high price and then offering the product at substantial savings Answer: TRUE Page Ref: 405 Objective: Difficulty: Easy 108) Loss leader pricing dilutes a company's brand image Answer: TRUE Page Ref: 405 Objective: Difficulty: Easy 27 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 109) In first-degree price discrimination, the seller charges less to buyers of larger volumes Answer: FALSE Page Ref: 406 Objective: Difficulty: Easy 110) When firms charge different prices to different customer groups for the same product or service, it is a case of second-degree price discrimination Answer: FALSE Page Ref: 406 Objective: Difficulty: Easy 111) The airline industries implement yield pricing by offering discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires Answer: TRUE Page Ref: 406 Objective: Difficulty: Easy 112) Price discrimination in all forms is illegal in the United States Answer: FALSE Page Ref: 407 Objective: Difficulty: Easy 113) Predatory pricing, which refers to the concept of selling below cost with the intention of destroying competition, is lawful under certain conditions Answer: FALSE Page Ref: 407 Objective: Difficulty: Easy 114) Companies sometimes initiate price cuts in an attempt to dominate the market through lower costs Answer: TRUE Page Ref: 407 Objective: Difficulty: Easy 115) Cost inflation provokes price increases Answer: TRUE Page Ref: 408 Objective: Difficulty: Easy 28 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 116) In a price-war trap, higher-priced competitors match the firm's lower prices but have longer staying power because of deeper cash reserves Answer: FALSE Page Ref: 408 Objective: Difficulty: Easy 117) Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building Answer: TRUE Page Ref: 408 Objective: Difficulty: Easy 118) Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases Answer: TRUE Page Ref: 409 Objective: Difficulty: Easy 119) Shrinking the amount of product instead of raising the price is a good way to counteract consumer resistances to price increases Answer: TRUE Page Ref: 409 Objective: Difficulty: Easy 120) A company must consider the product's stage in the life cycle and its importance in the company's portfolio before responding to a competitor's price cut Answer: TRUE Page Ref: 409 Objective: Difficulty: Easy 29 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 121) How does the Internet help sellers discriminate between buyers and vice-versa? Answer: The Internet helps buyers to: • Get instant price comparisons from thousands of vendors • Name their price and have it met • Get products free The Internet helps sellers to: • Monitor customer behavior and tailor offers to individuals • Give certain customer access to special prices The Internet helps both buyers and sellers to negotiate prices in online auctions and exchanges or even in person Page Ref: 384-386 Objective: Difficulty: Moderate 122) What are the different possible consumer reference prices? Answer: Although consumers have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices When examining prices, consumers often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted "regular retail price." These reference prices include: • Fair price - what consumers feels the product should cost • Typical price • Last price paid • Upper-bound price - reservation price or the maximum most consumers would pay • Lower-bound price - lower threshold price or the minimum most consumers would pay • Historical competitor price • Expected future price • Usual discounted price Page Ref: 387 Objective: Difficulty: Moderate 30 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 123) Briefly describe the different types of pricing objectives Answer: When a company is preparing to sets its price, first of all it has to select its pricing objectives The five major objectives available to a company are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership • Survival - Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants As long as prices cover variable costs and some fixed costs, the company stays in business • Maximum current profit - Companies who try to maximize their current profit, estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment This strategy assumes the firm knows its demand and cost functions, but in reality, these are difficult to estimate • Maximum market share - Companies that want to maximize their market share believe that a higher sales volume will lead to lower unit costs and higher long-run profit They set the lowest price, assuming the market is price sensitive This is a market-penetration pricing strategy • Maximum market skimming - Companies unveiling a new technology favor setting high prices to maximize market skimming Companies that use this, introduce their products at a high price and slowly drop the price over time • Product-quality leadership - Companies that aim to be product quality leaders strive to be affordable luxuries, i.e., they want their products and services to be characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of the consumer's reach Page Ref: 389-390 Objective: Difficulty: Moderate 31 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 124) What are the different price-setting methods? Briefly describe each of them Answer: The six major price-setting methods are: markup pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing, and auction-type pricing • Markup pricing - This is the most elementary pricing method wherein a standard markup is added to the product's cost • Target-return pricing - Here, the firm determines the price that yields its target rate of return on investment • Perceived-value pricing - Perceived value is made up of a host of inputs, 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 Companies must deliver the value promised by their value proposition, and the customer must perceive this value • Value pricing - Companies win loyal customers by charging a fairly low price for a highlyquality offering Value price is just not a matter of lowering the prices but also it is a matter of reengineering the company's operations to become a low-cost producer without sacrificing quality, to attract a large number of value conscious customers • Going-rate pricing - Here, the firm bases its price largely on competitors' prices • Auction-type pricing - There are three major types of auctions and their separate pricing procedures: i English auctions - These have one seller and many buyers The highest bidder gets the item ii Dutch auctions - This features one seller and many buyers, or one buyer and many sellers In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts In the other, the buyer announces something he wants to buy, and potential sellers compete to offer the lowest price iii Sealed-bid auction - This lets would-be suppliers submit only one bid The suppliers have no knowledge about the other bids Page Ref: 396-402 Objective: Difficulty: Moderate 125) What are the different forms of countertrade? Answer: Countertrade can take the following forms: • Barter - The buyer and seller directly exchange goods, with no money and no third party involved • Compensation deal - The seller receives some percentage of the payment in cash and the rest in products • Buyback arrangement - The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment • Offset - The seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period Page Ref: 404 Objective: Difficulty: Moderate 32 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 126) What are the different types of price discounts and allowances? Answer: The different types of price discounts and allowances are: • Discount - This is a price reduction given to buyers who pay their bills promptly • Quantity discount - This is a price reduction offered to those who buy in large volumes • Functional discount - This is offered by a manufacturer to trade-channel members if they perform certain functions like selling, storing, and record keeping • Seasonal discount - This is a price reduction given to those who buy merchandise or services out of season • Allowance - This is an extra payment designed to gain reseller participation in special programs These are of two types: i Trade-in allowances - These are granted for turning in an old item when buying a new one ii Promotional allowances - These reward dealers for participating in advertising and sales support programs Page Ref: 404 Objective: Difficulty: Moderate 127) What are the different types of promotional pricing? Answer: Companies can use any of the following pricing techniques to stimulate early purchase: • Loss-leader pricing - Supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items • Special event pricing - Sellers can establish special prices in certain seasons to draw in more customers • Special customer pricing - Sellers can offer special prices exclusively to certain customers • Cash rebates - Auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers' products within a specified time period Rebates can help clear inventories without cutting the stated list price • Low-interest financing - Instead of cutting its price, the company can offer customers lowinterest financing • Longer payment terms - Sellers stretch loans over longer periods and thus lower the monthly payments Consumers often worry less about the interest rate of a loan, and more about whether they can afford the monthly payment • Warranties and service contracts - Companies can promote sales by adding a free or low-cost warranty or service contract • Psychological discounting - This strategy sets an artificially high price and then offers the product at substantial savings Page Ref: 405 Objective: Difficulty: Moderate 33 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 128) What is third-degree price discrimination? Answer: In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases: • Customer-segment pricing - Different customer groups pay different prices for the same product or service For example, museums often charge a lower admission fee to students and senior citizens • Product-form pricing - Different versions of the product are priced differently, but not proportionately to their costs • Image pricing - Some companies price the same product at two different levels based on image differences A perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at $10 an ounce The same perfume in another bottle with a different name and image and price can sell for $30 an ounce • Channel pricing - Coca-Cola carries a different price depending on whether the consumer purchases it in a fine restaurant, a fast-food restaurant, or a vending machine • Location pricing - The same product is priced differently at different locations even though the cost of offering it at each location is the same A theater varies its seat prices according to audience preferences for different locations • Time pricing - Prices are varied by season, day, or hour Public utilities vary energy rates to commercial users by time of day and weekend versus weekday Page Ref: 406 Objective: Difficulty: Moderate 34 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 129) How can companies initiate price cuts and what are the traps that companies can fall into because of this? Answer: Several circumstances prompt a firm to cut its prices One is excess plant capacity: The firm needs additional business and cannot generate it through increased sales effort, product improvement, or other measures Companies sometimes initiate price cuts in a drive to dominate the market through lower costs Either the company starts with lower costs than its competitors, or it initiates price cuts in the hope of gaining market share and lower costs Cutting prices to keep customers or beat competitors often encourages customers to demand price concessions Other than this, a price-cutting strategy can also lead to the following possible traps: • Low-quality trap - Consumers assume quality is low • Fragile-market-share trap - A low price buys market share but not market loyalty The same customers will shift to any lower-priced firm that comes along • Shallow-pockets trap - Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves • Price-war trap - Competitors respond by lowering their prices even more, triggering a price war Customers often question the motivation behind price changes They may assume the item is about to be replaced by a new model; the item is faulty and is not selling well; the firm is in financial trouble; the price will come down even further; or the quality has been reduced The firm must monitor these attributions carefully while initiating a price cut Page Ref: 408 Objective: Difficulty: Moderate 130) Explain the concept of overdemand Answer: One of the factors that prompts a firm to increase its prices is overdemand When a company cannot supply all its customers, it can raise its prices, ration supplies, or both It can increase its price in the following ways: • Delayed quotation pricing - The company does not set a final price until the product is finished or delivered This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment • Escalator clauses - The company requires the customer to pay today's price and all or part of any inflation increase that takes place before delivery Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building • Unbundling - The company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation Car companies sometimes add higher-end audio entertainment systems or GPS navigation systems as extras to their vehicles • Reduction of discounts - The company instructs its sales force not to offer its normal cash and quantity discounts Page Ref: 408 Objective: Difficulty: Moderate 35 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 131) When Abe goes shopping, he comes across a T-shirt that is priced at $35 Although he wants to buy it, judging from the material used, he feels that the T-shirt should only cost $20 What reference price is Abe using here? Answer: $20 is what Abe perceives to be the "fair price" for the product Page Ref: 387 Objective: AACSB: Analytic skills Difficulty: Moderate 132) NV Inc has launched a touch sensitive handset in the Indian market and priced the same at INR 9500 Although many people are checking it out and showing interest about purchasing it, majority of them are holding themselves back because they feel that it is not worth INR 9500 They compare the handsets' feature with that of its other competitors offering the same features and come to a conclusion that it is worth INR 8500 and nothing more than that What kind of a reference price are the consumers using? Answer: The consumers are using the upper-bound price Upper-bound price refers to the reservation price or the maximum that most consumers would pay Page Ref: 387 Objective: AACSB: Analytic skills Difficulty: Moderate 133) When Cathy went shopping, she paid a lot to buy a jacket that had a well-known designer's tag attached to it After a few days, she came across a jacket which was undistinguishable from the one she had bought but was priced times lesser than the earlier one She didn't give this a second thought because she was convinced that the designer label she had bought was worth it What can be deduced from this? Answer: Cathy was using the price as an indicator of quality She was using image pricing This kind of pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing Page Ref: 388 Objective: AACSB: Analytic skills Difficulty: Moderate 134) Agatha's Inc is about to introduce a new product in the market, but is not sure as to how it should price the product The company is facing intense competition from other companies In the past, it has also failed to keep up with the changing consumer wants In such a situation, what should be its main objective? Answer: The main objective for Agatha's Inc should be survival As long as prices cover variable costs and some fixed costs, the company will stay in business But, it is worthwhile to remember that survival is a short-run objective In the long run, the company has to add value to its product or face extinction Page Ref: 389 Objective: AACSB: Analytic skills Difficulty: Moderate 36 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 135) Bella's Inc has estimated the demand and costs associated with alternative prices It has finally chosen to price its new offering in such a way that it will maximize the rate of return on investment What can be deduced about the company's objective? Answer: It can be deduced that the company's main objective is to maximize its maximum current profit Page Ref: 389 Objective: AACSB: Analytic skills Difficulty: Moderate 136) When Carl's company introduced its new product in the market, it introduced it at the lowest possible price assuming that the demand for the product is going to be highly responsive to the price it is being introduced at It also believes that a higher sales volume will lead to lower unit costs and higher long-run profit What can be said about the company's objective? Answer: The company's objective is to maximize its market share Page Ref: 389 Objective: AACSB: Analytic skills Difficulty: Moderate 137) When Sony introduced the world's first high-definition television to the Japanese market in 1990, it was priced at $43,000 This helped Sony to scoop the maximum amount of revenue from the various segments of the market The price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $600 in 2010 What pricing strategy did Sony use here? Answer: Sony used a market-skimming pricing strategy This is a favorite for companies unveiling a new technology Companies using this introduce their product at a high price and slowly drop the price over time Page Ref: 390 Objective: Difficulty: Moderate 138) Daryl convinced his prospective client that Car A was the best for him But, the client insisted that the car cost him a good $10,000 more than Car B, the one which he was thinking of buying Daryl told him that the amount he would have to spend on the fuel, insurance, repairs, and maintenance for Car B would be times more than what he would have to spend on Car A Finally convinced, the client consented to buy Car A What technique did Daryl use to convince his customer? Answer: Daryl convinced his customer that Car A offers him the lowest total cost of ownership Page Ref: 391 Objective: AACSB: Analytic skills Difficulty: Moderate 37 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 139) A company that pays its bills each month for its rent, heat, interest, and salaries regardless of its output is said to be incurring what type of costs? Answer: These are said to be a company's fixed costs Page Ref: 393 Objective: AACSB: Analytic skills Difficulty: Moderate 140) Ellie's manager has asked her to come up with ways to reduce costs of their new product by utilizing a process called "target costing." What should Ellie do? Answer: Ellie will have to ask the marketing research department to establish the 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 leaves the target cost that must be achieved Her company will then have to examine each cost element like the design, engineering, manufacturing, and sales and bring down costs so that the final cost projections are in the target range Page Ref: 394 Objective: AACSB: Analytic skills Difficulty: Moderate 141) What should a company if its competitor's product contains some features that are not available in its product? Answer: In such a situation, the company should subtract the value of those features from the price of its product Page Ref: 395 Objective: Difficulty: Moderate 142) A toaster manufacturer who has invested $1 million in the business wants to set a price to earn a 20 percent return on investment, specifically $200,000 What pricing method should it choose? Answer: The toaster manufacture should go for a target-return pricing While using this pricing method, companies determine the price that yield its target rate of return on investment Page Ref: 397 Objective: Difficulty: Moderate 143) In oligopolistic industries, all firms normally charge the same price What kind of a pricing method are they said to be following? Answer: Oligopolistic industries follow going-rate pricing Firms following this pricing method, base their prices largely on competitors' prices Page Ref: 401 Objective: Difficulty: Moderate 38 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 144) On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise the offer price until the top price is reached What kind of auctions are these? Answer: eBay and Amazon.com are perfect examples of English auctions Such auctions have one seller and many buyers and the highest bidder gets the item Page Ref: 402 Objective: Difficulty: Moderate 145) A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee This is an example of what kind of a countertrade? Answer: This is an example of a compensation deal In such deals, the seller receives some percentage of the payment in cash and the rest in products Page Ref: 404 Objective: Difficulty: Moderate 146) Fred's company has recently sold its resin-producing plant to a local concern in India As part of the sales price, his 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? Answer: This is an example of a buyback arrangement In such arrangements, the seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment Page Ref: 404 Objective: AACSB: Analytic skills Difficulty: Moderate 147) Pepsi Co sold its cola syrup to Russia and agreed to buy Russian vodka at a certain rate for sale in the United States for the next years What kind of a countertrade did both the parties indulge in? Answer: Both the parties indulged in an offset In such countertrade, the seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period Page Ref: 404 Objective: Difficulty: Moderate 148) When Gina's company printed the ad for their Perfume in the newspapers, the caption read, "WAS $100, NOW $75" What kind of a promotional pricing did her company use? Answer: Gina's company used psychological discounting This strategy sets an artificially high price and then offers the product at substantial savings Page Ref: 405 Objective: Difficulty: Moderate 39 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall 149) Movie matinees are priced lower than the evening shows; television advertising costs less when run after midnight These are examples of what type of price discrimination? Answer: These are examples of time pricing or price discrimination based on time Page Ref: 406 Objective: AACSB: Analytic skills Difficulty: Moderate 150) When the airline industries offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires, what kind of a pricing technique are they said to be using? Answer: The airline industries are using yield pricing Page Ref: 406 Objective: Difficulty: Moderate 40 Copyright © 2012 Pearson Education, Inc Publishing as Prentice Hall ... from a well-known brand What kind of a pricing is the company depending on? A) going-rate pricing B) image pricing C) market-skimming pricing D) target pricing E) markup pricing Answer: B Page... down to $399 What kind of a pricing did Apple adopt? A) loss-leader pricing B) market-penetration pricing C) market-skimming pricing D) target-return pricing E) value pricing Answer: C Page Ref:... the following is the most elementary pricing method? A) value pricing B) going-rate pricing C) markup pricing D) target-return pricing E) perceived-value pricing Answer: C Page Ref: 396 Objective: