Chapter 11 Pricing Concepts and Strategies: Establishing Value

Chapter 11 - Pricing Concepts and Strategies: Establishing Value Chapter 11 Pricing Concepts and Strategies: Establishing Value Multiple Choice Questions Which of the following is NOT true about pricing? A It is the only element of marketing mix that generate revenue B Implementing a good pricing strategy is challenging but can last effective for a very long time C Price is broader than the money customers pay to purchase a product D Price is one of the most important factors in customer purchase decisions E Pricing decisions should be viewed as opportunity to create value for customers Even if a pricing strategy is implemented well, consumers, economic conditions, markets, competitors, government regulations, and even a firm's own products change constantly and that means a good pricing strategy today may not remain an effective strategy tomorrow 11-1 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-01 Explain what price is and its importance in establishing value in marketing Topic: 11-01 The Importance of Pricing The followings are critical components of pricing strategies EXCEPT: A Promotions B Objectives C Competitions D Costs E Customers The five critical components of successful pricing strategies are: company objectives, competition, costs, customers, channel members Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-02 The Five Cs of Pricing A firm with a company objective that can be implemented by focusing on target return pricing is using a: A sales orientation B customer orientation C profit orientation D demand orientation E competitor orientation Even though all company objectives may ultimately be oriented toward making a profit, firms implement a profit orientation as a part of their company objective by focusing on target profit pricing, maximizing profits, or target return pricing 11-2 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives The usual pricing strategy implemented by firms when they have a particular gain goal as their overriding concern is the: A market penetration strategy B target return pricing strategy C improvement value strategy D competitive parity strategy E target profit pricing strategy Firms usually implement target profit pricing when they have a particular profit goal as their overriding concern To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives What is implemented by firms that focus on the rate at which their profits are generated relative to their investments rather than the absolute level of profits? A Maximizing profits strategy B Target return pricing strategy C Value-based strategy D Competitive parity strategy E Target profit pricing strategy Target return pricing is a pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments It is designed to produce a specific return on investment, usually expressed as a percentage of sales 11-3 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives The maximizing profits strategy primarily relies on: A advertising theory B management theory C marketing theory D relativity theory E economic theory The maximizing profits strategy relies primarily on economic theory If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives Slate Inc is the parent company of five brands Slate decides that all the products under every brand must make a 20 percent gain margin in the upcoming financial year This is an example of: A profit orientation B customer orientation C sales orientation D cost orientation E competitor orientation This is an example of profit orientation Profit orientation is a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing 11-4 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives When determining its pricing strategy, if a firm is willing to let profits suffer in order to increase its customer base, the company objective is most likely to be: A sales oriented B customer oriented C profit oriented D cost oriented E quality oriented Firms using a sales orientation to set prices believe that increasing sales will help the firm more than increasing profits Such firm could choose to set prices very low to generate a large volume of sales, even if that would cause profits to suffer initially Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives Blue Corp., a company that manufactures high quality mobile phones, is set to launch a new series of tablets In order to reduce competition and increase the demand for the new products, the company launches them at a very low price Blue's objective is most likely to be: A sales orientation B customer orientation C profit orientation D quality orientation E competitor orientation Blue's objective is most likely to be sales oriented Firms using a sales orientation to set prices believe that increasing sales will help the firm more than increasing profits Setting prices very low to generate new sales and take sales away from competitors, even if profits suffer, is an example of sales-oriented objectives 11-5 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 10 A company launches a new car in the luxury segment It studies the quality and price of other luxury cars available in the market and ensures that the price and features of the new launch are similar to the existing cars The company's objectives are most likely to be: A sales oriented B customer oriented C profit oriented D cost oriented E competitor oriented In this case, the company's objective is likely to be competitor oriented When firms undertake a competitor orientation, they strategize according to the premise that they should measure themselves primarily against their competition Some firms focus on competitive parity, which means they set prices that are similar to those of their major competitors Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 11 A company objective that is based on the premise that the firm should measure itself primarily against its rivals is: A sales oriented B customer oriented C profit oriented D cost oriented E competitor oriented When firms undertake a competitor orientation, they strategize according to the premise that they should measure themselves primarily against their competition Some firms focus on competitive parity, which means they set prices that are similar to those of their major competitors 11-6 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 12 Which of the following is true of pricing based on competitor-oriented strategies? A Value is only implicitly considered in this type of strategies B Prices are decided based on the value perceived by customers C Prices for new products are always low to reduce competition D Products are priced to ensure a standard return on investment E A profit margin is set, which determines the price of products Competitive parity is a firm's strategy of setting prices that are similar to those of their major competitors Value is only implicitly considered in competitor-oriented strategies, in the sense that competitors may be using value as part of their pricing strategies, so copying their strategy might provide value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 13 A company specializing in bathroom fittings offers state-of-the-art products The products are highly priced, and the company is aware that sales will be limited The main objective is to enhance its reputation and image and thereby increase the company's value in the minds of consumers This is an example of: A sales orientation B customer orientation C profit orientation D cost orientation E competitor orientation When a company's objective is customer oriented, it focuses on enhancing the image and reputation and thereby increasing the company's value in the minds of consumers 11-7 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 14 Amazon selling its Kindle product at a price lower than the cost in a hope that customers will choose Kindle over competitors and purchase eBooks later on Amazon pricing objective in this case is most likely to be: A Profit orientation B Sales orientation C Long term orientation D Customer orientation E Competitive parity Amazon wants to increase its market share The company is hoping to recover the cost later on by selling eBooks Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 15 The pricing orientation that explicitly invokes the concept of value for the users of the product and in which prices are set to match the users' expectations is called: A sales orientation B customer orientation C profit orientation D market share orientation E competitor orientation Customer orientation is the pricing method that explicitly invokes the concept of customer value and setting prices to match consumer expectations A firm can use a "no-haggle" price structure to make the purchase process simpler and easier for consumers, thereby lowering the overall price and ultimately increasing value 11-8 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 16 Which of the following shows how many units of a product or service consumers will request for during a specific period of time at different prices? A A supply graph B The break-even point C The input-output ratio D A demand curve E A workflow analysis A demand curve shows how many units of a product or service consumers will demand during a specific period of time at different prices Although in general as price increases, demand for the product or service decreases, not all products or services follow this downward-sloping demand curve for all levels of price Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 17 Which of the following refers to those products that consumers purchase for status rather than functionality? A Consumer goods B Prestige products C Utility products D Convenience products E Standard products Prestige products or services are those that consumers purchase for their status rather than their functionality The higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it For such products, a higher price also leads to a greater quantity sold—up to a certain point 11-9 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 18 A wealthy industrialist purchases a Van Gogh painting for his new home He pays $140 million to procure this piece of work In this case, the painting is an example of a(n): A consumer good B prestige product C utility product D convenience product E standard product Prestige products or services are those that consumers purchase for their status rather than their functionality The higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 19 Those products whose demand curves are positively related, such that they rise or fall together, are called: A substitute products B complementary products C inverse products D convenience products E prestige products Products whose demand curves are positively related, such that they rise or fall together are called complementary products; a percentage increase in demand for one results in a percentage increase in demand for the other 11-10 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 102 Target profit pricing is designed to produce a specific return on investment, usually expressed as a percentage of sales FALSE Firms usually implement target profit pricing when they have a particular profit goal as their overriding concern To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 103 In any given market, the firm that offers the lowest price tends to be the dominant brand FALSE Adopting a market share objective does not always imply setting low prices Rarely is the lowest-price offering the dominant brand in a given market Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-06 Competition 104 Value is only implicitly considered in customer-oriented strategies FALSE A customer orientation explicitly invokes the concept of value In this strategy, offerings are designed to enhance the company's reputation and image and thereby increase the company's value in the minds of consumers 11-53 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-03 Company Objectives 105 Demand curves are downward sloping for prestige products FALSE For prestige products or services, which consumers purchase for their status rather than their functionality, the higher the price, the greater the status associated with it and greater the exclusivity In this case, a higher price also leads to a greater quantity sold—up to a certain point Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 106 Cost-based methods recognize the role that consumers or competitors' prices play in the marketplace FALSE Cost-based pricing methods determine the final price to charge by starting with the cost Costbased methods not recognize the role that consumers or competitors' prices play in the marketplace 11-54 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-10 Cost-based Methods 107 For price skimming to work, the product or service must offer consumers new benefits currently unavailable in alternative products TRUE Price skimming is a strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it For price skimming to work, the product or service must offer consumers new benefits currently unavailable in alternative products Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-16 New Product Pricing Strategies 108 When consumers view the sale price and compare it with the provided external reference price, their perceptions of the value of the deal is likely to decrease FALSE A reference price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process The seller labels the reference price as the "regular price" or an "original price." When consumers view the "sale price" and compare it with the provided external reference price, their perceptions of the value of the deal is likely to increase 11-55 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-17 Consumers' Use of Reference Pricing 109 Generally, a pricing tactic represents a long-term response to a competitive threat FALSE Generally, a pricing tactic represents either a short-term response to a competitive threat (e.g., lowering price temporarily to meet a competitor's price reduction) or a broadly accepted method of calculating a final price for the customer that is short term in nature Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers Topic: 11-18 Pricing Tactics 110 Leader pricing is an illegal attempt to increase store traffic by pricing a regularly purchased item much higher than the store's cost FALSE Leader pricing is a tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store's cost The rationale behind this tactic is that, while in the store to get the great deal on one item, the consumer will also probably pick up other items he or she needs 11-56 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-19 Consumer Pricing Tactics 111 Laws against bait and switch practices are difficult to enforce because salespeople, simply as a function of their jobs, are always trying to get customers to trade up to a higherpriced model without necessarily deliberately baiting them TRUE The laws against bait and switch practices are difficult to enforce because salespeople, simply as a function of their jobs, are always trying to get customers to trade up to a higher-priced model without necessarily deliberately baiting them The key to proving deception centres on the intent of the seller, which is also difficult to prove Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-23 Deceptive or Illegal Price Advertising 112 Predatory pricing, although representative of a form of unfair competition, promotes free trade FALSE When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business, it is using predatory pricing Predatory pricing is illegal under the Competition Act because it constrains free trade and represents a form of unfair competition 11-57 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-24 Predatory Pricing 113 It is illegal to charge a different price to a reseller if the firm is attempting to meet a specific competitor's price FALSE The Competition Act requires companies to demonstrate only that their price discounts not restrict competition While quantity discounts may be a grey area, it is perfectly legitimate to charge a different price to a reseller if the firm is attempting to meet a specific competitor's price Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-25 Price Discrimination Short Answer Questions 114 Differentiate between an elastic and an inelastic market Provide one example for each market An elastic market refers to a market for a product or service that is price sensitive It means that relatively small changes in price will generate fairly large changes in the quantity demanded An inelastic market refers to a market for a product or service that is price insensitive It means that relatively small changes in price will not generate large changes in the quantity demanded 11-58 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 115 Differentiate between complementary products and substitute products Provide examples to support your answer Complementary products are those whose demand curves are positively related, such that they rise or fall together It means that a percentage increase in demand for one results in a percentage increase in demand for the other Substitute products are those for which changes in demand are negatively related It means that a percentage increase in the quantity demanded for Product A results in a percentage decrease in the quantity demanded for Product B Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 116 Explain the limitations associated with a break-even analysis The price used in a break-even analysis could probably represent an average price that attempts to account for variances in the price of a product Second, prices often get reduced as quantity increases because the costs decrease, so firms must perform several break-even analyses at different quantities Third, a break-even analysis cannot indicate for sure, in the case of products, how many units will sell at a given price It tells the firm only what its costs, revenues, and profitability will be given a set price and an assumed quantity To determine how many units the firm actually will sell, it must bring in the demand estimates 11-59 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 117 Explain what motivates firms to enter price wars New entrants might want to gain market share, whereas established firms may drop their prices to preserve their market share Other reasons include avoiding the appearance of being insensitive to consumers and simply overreacting to a price decrease offered by competitors Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-06 Competition 118 Explain the drawbacks associated with the market penetration strategy A market penetration strategy has drawbacks First, the firm must have the capacity to satisfy a rapid rise in demand—or at least be able to add that capacity quickly Second, low price does not signal high quality Of course, a price below customers' expectations decreases the risk for consumers to purchase the product and test its quality for themselves Third, firms should avoid a penetration pricing strategy if some segments of the market are willing to pay more for the product; otherwise, the firm is just "leaving money on the table." 11-60 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-16 New Product Pricing Strategies 119 Briefly explain reference price and external reference price A reference price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process The seller labels the reference price as the "regular price or an original price When consumers view the "sale price" and compare it with the provided external reference price, their perceptions of the value of the deal will likely increase Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-17 Consumers' Use of Reference Pricing 120 Explain the difference between a cumulative quantity discount and a noncumulative quantity discount A cumulative quantity discount uses the amount purchased over a specified time period and usually involves several transactions This type of discount encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount A noncumulative quantity discount, though still a quantity discount, is based only on the amount purchased in a single order Therefore, it provides the buyer with an incentive to purchase more merchandise immediately Such larger, less frequent orders can save manufacturers order processing, sales, and transportation expenses 11-61 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers Topic: 11-21 Business-to-Business Pricing Tactics 121 Explain the difference between predatory pricing and price discrimination Provide one example for each Predatory pricing refers to a firm's practice of setting a very low price for one or more of its products with the intent of driving its competition out of business On the other hand, price discrimination refers to the practice of selling the same product to different resellers— wholesalers, distributors, or retailers—or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-24 Predatory Pricing 122 Differentiate between horizontal price fixing and vertical price fixing Provide one example for each Horizontal price fixing occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers Vertical price fixing occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) collude to control the prices passed on to consumers 11-62 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11-05 Summarize the legal and ethical issues involved in pricing Topic: 11-26 Price Fixing 123 Ben wants to open a restaurant in his hometown What would be the fixed and variable costs that he would need to take care of while setting up the restaurant? Student answers will vary but must include the following Variable costs are those costs, primarily labour and materials, which vary with production volume As each unit of the product produced incurs the same cost, marketers generally express variable costs on a per-unit basis Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-05 Costs 124 Meg wants to start a gym in her hometown Two other gyms already exist in the town What kind of pricing method could she employ to establish herself? Student answers will vary They should reference at least one of the following · Cost-based methods: As the name implies, cost-based pricing methods determine the final price to charge by starting with the cost Cost-based methods not recognize the role that consumers or competitors' prices play in the marketplace Although relatively simple compared with other methods used to set prices, cost-based pricing requires that all costs can be identified and calculated on a per-unit basis · Competitor-based methods: Most firms know that consumers compare the prices of their products with the different product/price combinations that competitors offer Thus, using a competitor-based pricing method, they may set their prices to reflect the way they want consumers to interpret their own prices relative to the competitors' offerings · Value-based methods: Value-based pricing methods include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer Consumers determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product 11-63 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-09 Pricing Methods 125 Explain the concept of price skimming In what markets price skimming is recommended? In many markets, and particularly for new and innovative products or services, innovators and early adopters are willing to pay a higher price to obtain the new product or service This strategy, known as price skimming, appeals to these segments of consumers who are willing to pay the premium price to have the innovation first After this high-price market segment becomes saturated and sales begin to slow down, companies generally lower the price to capture (or skim) the next most price-sensitive market segment, which is willing to pay a somewhat lower price This process can continue until the demand for the product has been satisfied, even at the lowest price points Luxury products are often an exception For price skimming to work, the product or service must be perceived as breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products Firms use skimming strategies for a variety of reasons Some may start by pricing relatively high to signal high quality to the market Others may decide to price high at first to limit demand, which gives them time to build their production capacities Similarly, some firms employ a skimming strategy to try to quickly earn back some of the high R&D investments they made for the new product Finally, firms employ skimming strategies to test consumers' price sensitivity A firm that prices too high can always lower the price But if the price is initially set too low, it is almost impossible to raise it without significant consumer resistance For a skimming pricing strategy to be successful, competitors should not be able to enter the market easily; otherwise, price competition will likely force lower prices and undermine the whole strategy Competitors might be prevented from entering the market through patent protections, their inability to copy the innovation (because it is complex to manufacture, its raw materials are hard to get, or the product relies on proprietary technology) or the high costs of entry 11-64 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-16 New Product Pricing Strategies 126 Ryan owns a store that sells shoes and clothes Explain how he could use price lining, price bundling, and leader pricing to attract customers Student answers will vary However, they must include the following concepts: · Price lining: When marketers establish a price floor and a price ceiling for an entire line of similar products and then set a few other price points in between to represent distinct differences in quality, the tactic is called price lining · Price bundling: When firms are stuck with a slow-moving item, to encourage sales, they sometimes will "bundle" it with a faster-moving item and price the bundle below what the two items would cost separately · Leader pricing: Leader pricing is a tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store's cost 11-65 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; competitorbased methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-19 Consumer Pricing Tactics 127 A company manufactures tires that are sold to retailers as well as automobile companies What kind of pricing tactics is likely to be advantageous for different customers? Student answers will vary However, they must include the following concepts The pricing tactics employed in business-to-business settings are seasonal and cash discounts, allowances, quantity discounts, and uniform delivered versus geographic pricing · Seasonal discounts: A seasonal discount is an additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season · Cash discounts: A cash discount reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period · Allowances: Another pricing tactic that lowers the final cost to channel members is allowances, such as advertising or listing allowances, offered in return for specific behaviours · Quantity discounts: A quantity discount provides a reduced price according to the amount purchased · Uniform delivered pricing: The shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer · Geographic pricing: The setting of different prices depending on a geographical division of the delivery areas 11-66 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers Topic: 11-21 Business-to-Business Pricing Tactics 128 Susan has a children hair salon in Toronto She pays $70,000 per year rent and utilities She hires a part time assistant and pay her $35,000 a year On average, she uses $5 worth of material for each child haircut Her rate is $20 per child and receives on average 20% tip A) How many clients per month does she need to have to breakeven? B) If she increases the price to $25 and receives 15% tip, how many client she should have to make $80,000 profit a year? A) Fixed costs = $70,000 + $35,000 = $105,000/year Contribution per unit = $24 - $5 = $19 BE = $105,000/$19 = 7527 units per year BE per month = 461 She needs to have 461 clients a month to break even at $20 B) Total profit = Total Revenue - Total Costs (Fixed costs + Total variable costs) $80,000 = X * ($25 * 1.15) - ($105,000 + X * 5) 185,000 = 23.85 X => X = 7,790 She needs to have 7,790 clients a year to make $80,000 profit Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Difficult Learning Objective: 11-02 Illustrate how the five Cs—company objectives; customers; costs; competition; and channel members—influence pricing decisions Topic: 11-04 Customers 11-67 ... merchandise 11- 34 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Moderate Learning Objective: 11- 04 Identify pricing. .. purchase process simpler and easier for consumers, thereby lowering the overall price and ultimately increasing value 11- 8 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility:... other valued benefit 11- 24 Chapter 11 - Pricing Concepts and Strategies: Establishing Value Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11- 03 Understand