Exam 17: Price Setting in the Business World

"Psychological pricing" involves setting prices which end in certain numbers, while "odd-even pricing" is setting prices which have special appeal to target customers.

A computer store regularly advertises a very low price for a well-known brand of disks. When the customers come in, however, the salespeople point out the disadvantages of this particular brand and try to persuade them to buy other disks at much higher prices. This retailer is using:

A low stockturn rate

If a producer selects an output level and price where marginal revenue is equal to marginal cost:

At zero output, total variable cost is zero.

According to the rule for maximizing profit, the highest profit is earned at the price where

_____ is setting a few price levels for a product line and then marking all items at these prices.

Regarding break-even analysis, a good marketing manager knows that:

Leader pricing is typically used with well-known, widely used items which are not stocked heavily by consumers.

A producer sells an item to a wholesaler for $4.00, and the wholesaler uses a markup of 25 percent on its selling price. What will be the cost to the retailer?

Which of the following statements concerning "reference prices" is FALSE?

Customers are likely to be less price sensitive

Retailers who earn high profits generally use higher markups than retailers who have low profits.

All of the following observations concerning markups are true except

Value in use pricing

Randy Todd, marketing manager for Sporting Products, Inc. (SPI), is thinking about how changes taking place among retailers in his channel might impact his strategy. SPI sells the products it produces through wholesalers and retailers. For example, SPI sells basketballs to Wholesale Supply for $8.00. Wholesale Supply uses a 20 percent markup and most of its "sport shop" retailer customers, like Robinson's Sporting Goods, use a 33 percent markup to arrive at the price they charge final consumers. However, one fast growing retail chain, Sports Depot, only uses a 20 percent markup for basketballs, even though it pays Wholesale Supply the same price as other retailers. Furthermore, Sports Depot occasionally lowers the price of basketballs and sells them at cost-to draw customers into its stores and stimulate sales of its pricey basketball shoes. Sports Depot is also using other pricing approaches that are different from the sports shops that usually handle SPI products. For example, Sports Depot prices all of its baseball gloves at $20, $40, or $60-with no prices in between. There are three big bins - one for each price point. Todd is also curious about how Sports Depot's new strategy to increase sales of tennis balls will work out. The basic idea is to sell tennis balls in large quantities to nonprofit groups who resell the balls to raise money. For example, a service organization at a local college bought 2,000 tennis balls printed with the college logo. Sports Depot charged $.50 each for the tennis balls-plus a $500 one-time charge for the stamp to print the logo. The service group plans to resell the tennis balls for $2.50 each and contribute the profits to a shelter for the homeless. Todd is not certain if Sports Depot ideas will affect SPI's plans. For example, SPI is considering adding tennis racquets to the lines it produces. This would require a $500,000 addition to its factory as well as the purchase of new equipment that costs $1,000,000. The variable cost to produce a tennis racquet would be $20, but Todd thinks that SPI could sell the racquet at a wholesale price of $40 each. That would allow most retailers to add their normal markup and make a profit. However, if Sports Depot sells the racquet at a lower than normal price other retailers might decide to carry it. If SPI produces tennis racquets, how many racquets must it sell at $40 to break even?

Customers are likely to be more price sensitive when:

A producer with only one product has total fixed costs of $15,000 per month. In addition, it cost the producer $100 in variable costs to produce each unit of his product (raw materials and direct labor cost). The producer charges his wholesalers $125 per unit. How many units of the product does the producer have to sell each month in order to break even?

When CenturyLink attracts residential customers by setting one monthly fee for high-speed Internet, cable TV, and long-distance phone services that is $40 less than the price of purchasing these three services separately, this is an example of:

Total fixed cost: