TOP 10 Learning Questions forChapter 14

Developing Pricing Strategies and Programs

Zhou Xue (Vicky)Dec.13,2010

1. “Estimate costs” is one of the six steps in setting price. In the following steps, _____is the step after “estimate costs”?

A. Determine demandB. Select pricing methodC. Analyze competitor price mixD. Select the price objectiveE. Select final price

Steps in Setting Price

1. Select the price objective2. Determine demand3. Estimate costs4. Analyze competitor price mix5. Select pricing method6. Select final price

Step 4: Analyzing competitor price mix

Within the range of possible prices determined by market demand and company costs, the firm must take competitors’ costs, price, and possible price relations into account

1. “Estimate costs” is one of the six steps in setting price. In the following steps, _____is the step after “estimate costs”?

A. Determine demandB. Select pricing methodC. Analyze competitor price mixD. Select the price objectiveE. Select final price

2.When Sony introduced the world’s first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. Then the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993 and a 40-inch Sony HDTV about $1,200 in 2007. This is an example of___?

A. SurvivalB. Maximum current profitC. Maximum market shareD. Maximum market skimmingE. Product-quality leadership

Setting the price objective

Survival: if the companies are plagued with overcapacity, intense competition, or changing consumer wants.

Maximum current profit: if the companies estimate the demand and costs associated with alternative prices

Maximum market share: if they believe that a higher sales volume will lead to lower unites costs and higher long-run profit.

Setting the price objective Maximum market skimming: companies

unveiling a new technology favor setting high prices, and slowly drop price over time.

Product-quality leadership: products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.

Maximum market skimming

Under the following conditions: (1) A sufficient number of buyers have a

high current demand; (2) the unit cost of producing a small

volume are not so high that they cancel the advantage of charging what the traffic will bear;

Maximum market skimming

(3) the high initial price does not attract more competitors to the market;

(4) the high price communicates the image of a superior product.

2.When Sony introduced the world’s first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. Then the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993 and a 40-inch Sony HDTV about $1,200 in 2007. This is an example of___?

A. SurvivalB. Maximum current profitC. Maximum market shareD. Maximum market skimmingE. Product-quality leadership

3. nowadays, auction-type pricing is growing more popular, especially with the growth of internet. The followings are major types of auctions EXCEPT_____?

A. English auctionsB. French auctionsC. Dutch auctionsD. Sealed-bid auctionsE. None of the above

Three major types of auctions

English auctions

Dutch auctions

Sealed-bid auctions

Three major types of auctions

•ascending bids;•one seller and many buyers

English auctions

•descending bids;•one seller and many buyers, or one buyer and many sellers

Dutch auctions

•U.S. method;•suppliers can submit only one bid and cannot know the other bids

Sealed-bid auctions

3. nowadays, auction-type pricing is growing more popular, especially with the growth of internet. The followings are major types of auctions EXCEPT_____?

A. English auctionsB. French auctionsC. Dutch auctionsD. Sealed-bid auctionsE. None of the above

4. Which of the following is NOT true?

A. The amount of fixed-cost per unit of activity decrease as volume increase.

B. Variable costs, also known as overhead, differ greatly depending upon the level of production.

C. The cost of electricity can be viewed as semi-variable cost.

D. Total costs consist of the sum of the fixed and variable costs for any given level of production.

E. Average cost is the cost per unit at that level production; it equals total costs divided by production.

Types of costs

Fixed costs

Variable costs

Semi-variable costs

Total costs

Average cost

Types of costs

1. Fixed costs: (also known as overhead) are items of cost that, in total, do not vary at all with volume. The fixed-cost per unit equals total fixed-cost divided by the number of units of volume.

2. Variable costs: are items of cost that vary, in total, directly and proportionately with volume.

Types of costs

Semi-variable costs: those costs include a combination of variable-cost and fixed-cost items. Electrical power is essential for the basic operation of the business in lighting and heating - this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase.

4. Which of the following is NOT true?

A. The amount of fixed-cost per unit of activity decrease as volume increase.

B. Variable costs, also known as overhead, differ greatly depending upon the level of production.

C. The cost of electricity can be viewed as semi-variable cost.

D. Total costs consist of the sum of the fixed and variable costs for any given level of production.

E. Average cost is the cost per unit at that level production; it equals total costs divided by production.

5. Companies often adjust their basic price to accommodate differences in market situations. The following are differentiated pricings EXCEPT______?

A. New-product pricing B. Customer-segment pricing C. Product-form pricingD. Channel pricing E. Location pricing

Differentiated pricing

I. Customer-segment pricing II. Product-form pricingIII. Channel pricing IV. Location PricingV. Image pricingVI. Time pricing

Differentiated pricingTypes Definition Example

Customer-segment pricing Different customer groups pay different prices for the same product or service.

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.

In America, Evian prices a 48-ounce bottle of its mineral water at $2.00. It takes the same water and packages 1.7 ounces in a moisturizer spray for $6.00.

Image pricingSome companies price the same product at two different levels based on images differences.

A perfume manufacture can put the perfume in one bottle, give it a name and image, and price it at €10 an ounce; put the same perfume in another bottle with a different name and image and price it at €30 an ounce.

Differentiated pricingTypes Definition Example

Channel pricing Price the same product by different channels.

Coca-Cola carries a different price depending on whether the consumer purchase 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 through the cost of offering it at different location is the same.

A theater varies its seats prices according to audience preferences for different locations.

Time pricing Prices are varied by seasons, day, or hour.

Restaurant charge less to “early bird” customers, and some hotels charge less on weekends.

5. Companies often adjust their basic price to accommodate differences in market situations. The following are differentiated pricings EXCEPT______?

A. New-product pricing B. Customer-segment pricing C. Product-form pricingD. Channel pricing E. Location pricing

6. 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. QualityC. QuantityD. Ability E. Capability

Consumer psychology and pricing

Consumers often actively process

price information, interpreting prices in terms of their

knowledge

Three consumer

psychology key topics:

Reference prices Price-quality

inferences Price endings

Price-quality inferences

Many consumers use price as an indicator of quality. They think if an item has a high price, it has a good quality.

Some brands adopt exclusivity and scarcity as a means to signify uniqueness and justify premium pricing. Luxury-goods makers of watches, jewelry, perfume and other products often emphasize exclusivity in their communication massages and channel strategies.

6. 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. QualityC. QuantityD. Ability E. Capability

7.Which of the followings is TRUE? A. markup pricing works only if the marked-up price

actually brings in the expected level of sales.B. Value pricing is made up of several elements, such

as the buyers’ image of the product performance, the channel deliverables, the warranty quality, customer support, etc.

C. Perceived value win loyal customers by charging a fairly low price for a high quality offering.

D. In going-rate pricing, the firm bases its price largely on competitors' prices, charging less price than major competitors.

E. In target-return pricing, the firm determines the price that would yield its target rate of return on equity.

Selecting a price method

I. Markup pricingII. Target-return pricingIII. Perceived-value pricingIV. Value pricingV. Going-rate pricingVI. Auction-type pricing

Selecting a price method

Markup pricing is the most elementary pricing method which is to add a standard markup to the product’s cost.

Perceived value is made up of several elements, such as the buyers’ image of the product performance, the channel deliverables, the warranty quality, customer support, etc.

Selecting a price method

Value pricing win loyal customers by charging a fairly low price for a high quality offering.

In going-rate pricing, the firm bases its price largely on competitors' prices, charging the same, more or less than major competitors.

In target-return pricing, the firm determines the price that would yield its target rate of return on investment.

7.Which of the followings is TRUE? A. markup pricing works only if the marked-up price

actually brings in the expected level of sales.B. Value pricing is made up of several elements, such

as the buyers’ image of the product performance, the channel deliverables, the warranty quality, customer support, etc.

C. Perceived value win loyal customers by charging a fairly low price for a high quality offering.

D. In going-rate pricing, the firm bases its price largely on competitors' prices, charging less price than major competitors.

E. In target-return pricing, the firm determines the price that would yield its target rate of return on equity.

8. Supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic. This is an example of ____?

A. Special-event pricing B. Cash rebates C. Low-interest financing D. Psychological discounting E. Loss-leader pricing

Promotional pricing tactics

I. Special-event pricingII. Cash rebatesIII. Low-interest financingIV. Psychological discountingV. Loss-leader pricingVI. Longer payment termsVII. Warranties and service contracts

Loss-leader pricing

A loss leader or leader is a product sold at a low price (at cost or below cost) to stimulate other,

profitable sales. It is a kind of sales

promotion.

One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.

8. Supermarkets and department stores often drop the price on well-known brands to stimulate additional store traffic. This is an example of ____?

A. Special-event pricing B. Cash rebates C. Low-interest financing D. Psychological discounting E. Loss-leader pricing

9. A British aircraft manufacture sold planes to Brazil for 70% cash and the rest in coffee. The manufacture applies ______ as a countertrade form?

A. Barter B. compensation deal C. Buyback arrangement D. Offset E. Allowance

Countertrade

Barter Compensation deal

OffsetBuyback arrangem

ent

Countertrade

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 product.

Countertrade

Buyback arrangement: the seller sales a plant, equipment or technology in other 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.

9. A British aircraft manufacture sold planes to Brazil for 70% cash and the rest in coffee. The manufacture applies ______ as a countertrade form?

A. Barter B. compensation deal C. Buyback arrangement D. Offset E. Allowance

10. Car companies sometimes add antilock brakes and passenger-side airbags as supplementary extras to their vehicles. This is used ____ way to increase their price?

A. Delayed quotation pricingB. Escalator clausesC. UnbundlingD. Reduction of discountE. Anticipatory pricing

Increasing prices

Delayed quotation pricing Escalator clauses Unbundling Reduction of discount

Increasing prices

Delayed quotation pricing: the company does not set a final price until the product is finished or delivered.

Escalator clauses: the company requires the customers to pay today’s price and all or part of any inflation increase that takes place before delivery.

Increasing prices

Unbundling: the company maintains its price but removes or price separately one or more elements that are part of the former offer, such as free delivery or installation.

Reduction of discount: the company instructs its sales force not to offer its normal cash and quality discount.

10. Car companies sometimes add antilock brakes and passenger-side airbags as supplementary extras to their vehicles. This is used ____ way to increase their price?

A. Delayed quotation pricingB. Escalator clausesC. UnbundlingD. Reduction of discountE. Anticipatory pricing

TOP 10 Learning Questions forChapter 14

Developing Pricing Strategies and Programs

Zhou Xue (Vicky)Dec.13,2010