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 me

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Chapter 11 Pricing Concepts and Strategies: Establishing Value

Multiple Choice Questions

1 Which of the following is NOT true about pricing?

B Implementing a good pricing strategy is challenging but can last effective for a very long

time

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

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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

2 The followings are critical components of pricing strategies EXCEPT:

The five critical components of successful pricing strategies are: company objectives,

competition, costs, customers, channel members

Blooms: Remember

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

3 A firm with a company objective that can be implemented by focusing on target return pricing is using a:

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Blooms: Remember

Difficulty: Easy

Topic: 11-03 Company Objectives

4 The usual pricing strategy implemented by firms when they have a particular gain goal as their overriding concern is the:

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

Blooms: Remember

Difficulty: Easy

5 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?

B Target return 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

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Blooms: Remember

Difficulty: Easy

6 The maximizing profits strategy primarily relies on:

Blooms: Remember

Difficulty: Easy

7 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:

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Blooms: Apply

Difficulty: Difficult

8 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:

9 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:

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Blooms: Apply

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:

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

Blooms: Apply

11 A company objective that is based on the premise that the firm should measure itself primarily against its rivals is:

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Blooms: Remember

Difficulty: Easy

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.

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 sensethat competitors may be using value as part of their pricing strategies, so copying their

strategy might provide value

Difficulty: Easy

13 A company specializing in bathroom fittings offers state-of-the-art products The productsare 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:

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Blooms: Apply

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:

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:

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Blooms: Remember

Difficulty: Easy

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?

D A demand curve

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

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E income effect.

Income effect refers to the change in the quantity of a product demanded by consumers because of a change in their income Generally, as people's income increases, they tend to shift their demand from lower-priced products to higher-priced alternatives Conversely, whenincomes drop, consumers turn to less expensive alternatives or purchase less

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22 Consumers' ability to replace the focal brand with other products is called:

A the substitution effect.

The substitution effect refers to consumers' ability to substitute other products for the focal brand The greater the availability of substitute products, the higher will be the price elasticity

of demand for any given product

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The demand for the regular coffee is inelastic as %change in quantity demanded is

significantly lower than %change in price

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or decrease at the same time

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Fixed costs are those costs that remain essentially at the same level, regardless of any changes

in the volume of production Typically, these costs include items such as rent, utilities, insurance, administrative salaries, and depreciation

31 Which of the following is NOT true of the break-even point?

D It represents the number of units required to be produced to meet the annual profit goal.

Break-even point is the point at which the number of units sold generates just enough revenue

to equal the total costs At this point, profits are zero

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32 The price excluding the variable costs per unit is referred to as the:

C contribution per unit.

Contribution per unit equals the price less the variable cost per unit It is a variable used to determine the break-even point in units

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33 What would be the fixed cost of Joe's store?

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E price war.

Price war occurs when two or more firms compete primarily by lowering their prices in an oligopolistic market Price wars often appear in the airline industry when a low-cost provider enters a market in which established carriers already exist

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41 When different companies sell commodity products that consumers perceive as

substitutable, this is called:

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Cross-shopping is the pattern of buying both premium and low-priced merchandise or

patronizing both expensive, status-oriented retailers and price-oriented retailers These stores offer fashionable merchandise at great values—values so good that if items last for only a fewwearings, it doesn't matter to the customers

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A Cost-based pricing method

Cost-based pricing methods determine the final price to charge by starting with the cost These methods do not recognize the role that consumers or competitors' prices play in the marketplace

Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based 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

competitor-46 Which of the following approaches attempts to reflect how a firm wants consumers to interpret its products relative to the offerings of rival companies?

C Competitor-based pricing method

Competitor-based pricing method is an approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors' offerings For example, setting

a price very close to a competitor's price signals to consumers that the product is similar, whereas setting the price much higher signals greater features, better quality, or some other valued benefit

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Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-11 Competitor-based Methods

competitor-47 Which of the following pricing methods focuses on the overall worth of the product offering as perceived by consumers, who compare it what they need to sacrifice in order to acquire the product?

B Value-based pricing 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

Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-12 Value-based Methods

competitor-48 The method in which a manager must estimate how much more, or less, consumers are willing to pay for a product relative to other comparable products is called the:

A improvement value method.

In the improvement value method, the manager must estimate the improvement value of a new product or service This improvement value represents an estimate of how much more, or

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Blooms: Remember

Difficulty: Easy

competitor-49 A method for setting prices that determines the total expense of possessing a product over its useful life is called the:

E cost of ownership method.

The cost of ownership method is a value-based method for setting prices that determines the total cost of owning the product over its useful life Using the cost of ownership method, consumers may be willing to pay more for a particular product because, over its entire

lifetime, it will eventually cost less to own than a cheaper alternative

Blooms: Remember

Difficulty: Easy

competitor-50 A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain is called:

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Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based 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

competitor-51 Which of the following pricing strategies sets the initial price low for the introduction of anew product or service, with the objective of building sales, market share, and profits

quickly?

E Market penetration pricing

Firms using market penetration pricing set the initial price low for the introduction of the new product or service Their objective is to build sales, market share, and profits quickly The lowmarket penetration price encourages consumers to purchase the product immediately

Blooms: Remember

Difficulty: Easy

competitor-52 A car company introduces a new car in the market It maintains a low introductory price toreach the middle-income group The main objective of the company is to build sales and profits quickly This is an example of:

D market penetration pricing.

Firms using market penetration pricing set the initial price low for the introduction of the new product or service Their objective is to build sales, market share, and profits quickly The low

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competitor-53 Blue Corp., a laptop manufacturer, introduces a new model in the market Since the target audience for this product is students, Blue Corp launches the model at a low price The main objective of the company is to build sales and profits quickly This is an example of:

D market penetration pricing.

Firms using market penetration pricing set the initial price low for the introduction of the new product or service Their objective is to build sales, market share, and profits quickly The lowmarket penetration price encourages consumers to purchase the product immediately

Blooms: Apply

competitor-54 Ochre Inc had marked its refrigerators at $729.94 as the original price This was close to the standard price for refrigerators of the same quality in the market Later, the price is

brought down to $650.99 A customer compares Ochre's marked-down price with the original price and perceives an increased value This is an example of:

B external reference price.

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Blooms: Apply

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based 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

competitor-55 Jared's, an exclusive deli, marked down its smoked sausages from $9.99 to $6.99 in a prominently displayed poster at its smoked meats section When consumers viewed the sale price, they tended to pick more smoked sausages than they required This is an example of strategy using:

B external reference price.

Blooms: Apply

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based 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

competitor-56 A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their

competitors may offer is called:

A everyday low pricing.

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Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-14 Everyday Low Pricing (EDLP)

competitor-57 A company sells shoes at a price somewhere between the regular, nonsale price and the deep-discount sale prices that its competitors may offer This is an example of:

A everyday low pricing.

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-14 Everyday Low Pricing (EDLP)

competitor-58 A store that sells childrens' clothes reduces its prices drastically during promotional sales This is an example of:

C high/low pricing.

A high/low pricing strategy relies on the promotion of sales, during which prices are

temporarily reduced to encourage purchases

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Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-15 High Low Pricing

competitor-59 A pricing strategy that relies on the promotion of sales, during which prices are

temporarily reduced to encourage purchases, is called:

C high/low pricing.

Blooms: Remember

Difficulty: Easy

Learning Objective: 11-03 Understand the considerations for setting prices; three pricing methods (e.g.; cost-based methods; based methods; and value-based methods); and various strategies (e.g.; EDLP; high/low; and new product pricing) used in marketing Topic: 11-15 High Low Pricing

competitor-60 As the number of tourists in a village increases during Christmas, the hotels in the locality temporarily increase the rates of accommodation to make profit This is an example of:

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Blooms: Apply

Learning Objective: 11-04 Identify pricing tactics targeted to channel members and consumers.

Topic: 11-15 High Low Pricing

61 A shoe manufacturer produces shoes for customers in the middle-range segment and the upper-range segment It also has shoes in between these segments, at different prices, to represent distinct differences in quality This is an example of:

Blooms: Apply

Topic: 11-19 Consumer Pricing Tactics

62 A car manufacturer offers cars in the luxury segment It establishes a price floor and a price ceiling for its entire line of cars and then sets a few other price points in between to represent distinct differences in quality It helps the manufacturer to satisfy a wide range of tastes and budgets This is an example of:

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63 A department store offers a discount if a shirt is purchased with a pair of trousers The combined purchase would cost less than it would cost the customer to purchase the two individually This is an example of:

This practice of selling more than one product for a single, lower price is called price

bundling Firms bundle products together to encourage customers to stock up so they won't purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle

Blooms: Apply

64 A store that sells hockey equipment offers a discount if a customer also buys a pair of skates The combined purchase costs less than it would cost the customer to buy the products individually This is an example of:

This practice of selling more than one product for a single, lower price is called price

bundling Firms bundle products together to encourage customers to stock up so they won't purchase competing brands, to encourage trial of a new product, or to provide an incentive to

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