Deck 8: Value-Based Pricing and Pricing Strategies

Question 1

Price elasticity is almost always a negative number due to the inverse relationship between price and volume.

Answer 1

True

Question 2

When a business's product has no considerable and sustainable differential advantage in a quality-sensitive market,with many competitors,many substitutes and easy competitor entry,conditions are favorable for a skim pricing strategy.

Answer 2

False

Question 3

Which of the following is most likely to be considered when using a cost-based pricing strategy?

A)price sensitivity in the market
B)company product-price positioning
C)competitors' product-price positioning
D)customer performance needs
E)desired profit margin

Answer 3

E

Question 4

A plus-one market-based pricing strategy means a business sets its price 1% higher than the competitors' price.

Question 5

As a business adds more products to its product line,it decreases the risk of cannibalizing existing product sales.

Question 6

In ________,the price of a product is set to provide customers with an attractive savings after considering the life-cycle costs of acquiring,owning,using,maintaining,and disposing of a product.

A)value-in-use pricing
B)customerization value pricing
C)perceived-value pricing
D)performance-based pricing
E)cost-based pricing

Question 7

Products that complement a certain product will not be affected whenever that product's price changes.

Question 8

When a price is inelastic,a price increase improves all aspects of performance.

Question 9

A company that sells its product for a higher price than its competitor can offer a higher economic value to customers.

Question 10

When the total contribution produced by a pricing strategy is lower,overall profits will also be lower because fixed costs are deducted from the total contribution.

Question 11

A reduce-focus pricing strategy calls for price increases with the intent of reducing volumes and market share in exchange for higher margins.

Question 12

Which of the following is true of value-based pricing?

A)The cost of making a product and the desired profit margin are the two primary determinants in setting a value-based price.
B)Value-based pricing does not consider what customers require from a product in terms of performance and price.
C)Value-based pricing takes customer needs into account,but fails to consider customers' price sensitivity.
D)In value-based pricing,price is developed around a product's relative strengths to give customers greater benefits than competing products offer.
E)Value-based pricing is based on features of the product,but fails to consider the prices of similar products in the market.

Question 13

Which of the following types of pricing considers neither what the buyer would be willing to pay for product performance nor the pricing of competitive products in the market?

A)cost-based pricing
B)perceived-value pricing
C)customerization-based pricing
D)value-in-use pricing
E)performance-based pricing

Question 14

To use single-segment pricing,a company bases the price of a product on the costs of manufacturing and marketing the product,not on the attractive savings the customers realize over the life of the product.

Question 15

Market-based pricing does not consider what the customer would be willing to pay for product performance,but depends on the costs of manufacturing the product.

Question 16

A low-cost leader in a market is by definition the volume leader.

Question 17

The number of performance aspects that can be evaluated in a price-performance trade-off analysis is limited.

Question 18

Which of the following statements is true of pricing decisions?

A)Market-based pricing starts with a good understanding of customer needs and the benefits that a product offers relative to competitors' products.
B)The business with the lowest price will always offer customers the best economic value.
C)It is possible to implement market-based pricing with low levels of customer and competitor intelligence.
D)Competitors' product-price positioning and company product-price positioning are the two primary determinants in setting a cost-based price.
E)Cost-based pricing takes into account what the customer would be willing to pay for a certain level of product performance.

Question 19

Life-cycle costs of ownership include acquisition cost,ownership cost,usage cost,repair/maintenance cost and disposal cost/value.

Question 20

Market-based pricing is not possible without extensive customer and competitor intelligence.

Question 21

Which of the following is a favorable condition for implementing penetration pricing?

A)quality-sensitive customers
B)less competitors
C)less substitutes
D)high sustainable advantage
E)easy competitor entry

Question 22

Reduce-focus pricing is most likely to occur in the ________ stage of the product life cycle.

A)early
B)growth
C)mature
D)extinction
E)decline

Question 23

In which of the following situations would a firm most likely pursue a low-cost leader strategy?

A)There are no competitors in the market and the firm is the market leader.
B)The nature of its products does not allow the firm to maintain a volume advantage in the market.
C)The company's product is a niche product and appeals to only a few customers.
D)The market is quality-sensitive rather than price-sensitive.
E)The firm can minimize its operational expenses in order to sell higher volumes of products.

Question 24

Which of the following is true of penetration pricing?

A)Penetration pricing is a variation of a premium pricing strategy.
B)Penetration pricing is a mass-market strategy rather than a niche strategy.
C)Penetration pricing is best used when there are no competitors in the market and entry is difficult.
D)Penetration pricing is used in a market where product differentiation is high.
E)Penetration pricing is most effective when potential customers are quality-sensitive rather than price-sensitive.

Question 25

Which of the following is true of the value-in-use pricing method?

A)The product price is set to provide customers with an attractive savings after considering the life-cycle costs of the product.
B)The cost of making a product and the desired profit margin are the two primary determinants in setting a value-in-use price.
C)Price is set by unbundling a product's features,placing a price on each,and then allowing customers to select the features they want at a price that they are willing to pay.
D)It considers neither what the buyer would be willing to pay for product performance nor the cost of other similar products in the market.
E)Price is set on the basis of the value that customers realize when they compare the price and benefits of the company's product with those of a key competitor's product.

Question 26

A ________ market-based pricing strategy product position is one in which a business can equal competitors on all areas of product and service quality but can find one area of meaningful performance in which it is clearly superior.

A)penetration
B)multi-segment
C)plus-one
D)reduce-focus
E)harvest

Question 27

When the management team noted the increased interest in bikes as a mode of commuting,bicycle manufacturer Sensta introduced utility bikes aimed at the urban commuter.In which of the following cases is the company following a plus-one pricing strategy?

A)Sensta entered the market with a bike priced at $2,500,and later,as more competitors entered the market,reduced the price to $1,000.
B)As the market for bikes in a particular city became saturated,Sensta raised the prices of its bikes hoping to gain maximum profit before exiting the market.
C)With several competitors with similar product features in the utility bike market,Sensta concentrated on the sturdiness of its bikes,and raised the price of the basic model from $500 to $1,000.
D)Sensta manufactures a basic model priced at $500,a bike with more features,priced at $1,500 and a deluxe model priced at $3,000.
E)When Sensta entered the market,there were already competitors in the $1,000-$2,000 price range.Sensta introduced three bike models in the $500-$700 price range in order to capture market share,and later raised the prices of its products.

Question 28

When sales figures for one of the products of Silkskin Cosmetics,a moisturizer,began to fall with low margins and declining volumes,the company decided to raise the price of the moisturizer.As volumes fell further,the company continued to raise prices,thus increasing margins,until it reached a price at which customers refused to buy the product.This pricing strategy is known as ________ pricing.

A)harvest
B)penetration
C)low-cost leader
D)plus-one
E)skim

Question 29

Which of the following is true of skim pricing?

A)Skim pricing is most profitably used in the decline stage of the product life-cycle.
B)Skim pricing is most useful to a business when there are many competitors in the market offering equivalent products.
C)Skim pricing is most effective when product differentiation is diminishing,potential customers are price sensitive,and many competitors or substitutes exist.
D)In skim pricing,a company tries to keep its costs as low as possible and to offer a low price that no competitor can beat.
E)Skim pricing is viable when a business has a sustainable differentiation advantage in a quality-sensitive market with few competitors.

Question 30

When the management team noted the increased interest in bikes as a mode of commuting,bicycle manufacturer Sensta introduced utility bikes aimed at the urban commuter.In which of the following cases is the company following a multiple-segment pricing strategy?

A)Sensta entered the market with a bike priced at $2,500,and later,as more competitors entered the market,reduced the price to $1,000.
B)As the market for bikes in a particular city became saturated,Sensta raised the prices of its bikes hoping to gain maximum profit before exiting the market.
C)With several competitors with similar product features in the utility bike market,Sensta concentrated on the sturdiness of its bikes,and raised the price of the basic model from $500 to $1,000.
D)Sensta manufactures a basic model priced at $500,a bike with more features,priced at $1,500 and a deluxe model priced at $3,000.
E)When Sensta entered the market,there were already competitors in the $1,000-$2,000 price range.Sensta introduced three bike models in the $500-$700 price range in order to capture market share,and later raised the prices of its products.

Question 31

In order for a company to use single-segment pricing,it is necessary that ________.

A)the company set a higher price than competitors for its product
B)the company first use a price skimming strategy when entering the market
C)the total cost of ownership of the company's product be less than that of competing products
D)the company set the lowest product price among similar products
E)there be no other competitor in the market

Question 32

________ programs allow a business to test price-performance preferences and to evaluate its product's value on the basis of the business's competitive position.

A)Harvest technique
B)TURF analysis
C)Discourse analysis
D)Conjoint analysis
E)SWOT analysis

Question 33

________ pricing involves raising prices incrementally to the point where the best combination of volume and margin is achieved during the mature stage of the product life-cycle.

A)Low-cost-leader
B)Penetration
C)Harvest
D)Reduce-focus
E)Skim

Question 34

GTB Electronics enters a new market and needs to set its pricing strategy for the market.Which of the following is a favorable condition for implementing skim pricing?

A)There is little differentiation between competing products in the market.
B)The market has many well-established competitors.
C)Entry into that particular market is difficult.
D)There are many substitute products available,with a wide range of prices and features.
E)GTB's product position is about the same as competitors' positions in every area of product and service quality.

Question 35

________ pricing allows buyers of a product to select the performance configurations that best fit their needs and price budgets.

A)Customerization value
B)Performance-based
C)Perceived-value
D)Life-cycle value
E)Value-in-use

Question 36

In ________ pricing,the price is set on the basis of the value that customers realize when they compare the price and benefits of the company's product with those of a key competitor's product.

A)life-cycle value
B)customerization
C)perceived-value
D)value-in-use
E)cost-based

Question 37

Which of the following is the primary objective of penetration pricing?

A)to increase profit by increasing prices
B)to gain higher margins by reducing market share
C)to build sales volume in a market
D)to increase product differentiation
E)to increase price in order to reduce volumes

Question 38

Which of the following is true of single-segment pricing strategy?

A)A single-segment pricing strategy is most likely to be employed during the decline stage of the product life-cycle.
B)A single-segment pricing strategy is a cost-based pricing strategy rather than a value-based one.
C)The company does not base the price of a product on the savings that customers realize over the life of the product.
D)The main goal of single-segment pricing is to lower the cost to potential customers in order to attract their purchase volume.
E)A single-segment pricing strategy overlooks both competitor's offerings and price sensitivity.

Question 39

A business with a competitive price and a large value advantage is most likely to ________.

A)lower its price to create a comparable value on the basis of positioning
B)choose not to compete in this segment of the market
C)improve performance on the basis of customer price-performance preferences to create customer value
D)charge more for its product and still offer a good value
E)lower its price,as its price is high relative to the value it offers

Question 40

For which of the following products or services is the seller most likely to use life-cycle value pricing?

A)lottery tickets
B)a hotel reservation
C)shampoo
D)a meal at a restaurant
E)a car

Question 41

MINI-CASE
Smith Automotive is a company that produces component parts for automobile engines.A margin of $4 per unit produces fixed expenses of $80 million.The market demand for the component parts is 400 million units per year.
Mini-Case Question.Determine the margin per unit if the company needs to sell 40 million units in order to break even.

A)$10 per unit
B)$8 per unit
C)$4 per unit
D)$2 per unit
E)$1 per unit

Question 42

Calculate the price elasticity if a business maintains its current gross profit with a 5 percent price reduction and a 20 percent volume gain.

A)-15
B)-4
C)4
D)15
E)25

Question 43

Compare and contrast skim pricing strategy and penetration pricing strategy.

Question 44

A company has an operating income of $20 million and total fixed expenses of $10 million.5 million units are produced at a margin of $6 per unit.What should the margin per unit be if the company needs to achieve a break-even volume for the same number of units?

A)$1 per unit
B)$2 per unit
C)$3 per unit
D)$4 per unit
E)$5 per unit

Question 45

A price elasticity of -2 means that a price reduction of one percent will result in ________.

A)a decrease in volume by 2%
B)a decrease in volume by 20%
C)an increase in volume by 2%
D)an increase in market share by 20%
E)a decrease in market share by 2%

Question 46

The market demand for a certain product from Silkskin Cosmetics is 10,000 units.The market share is 20%.The average selling price of a unit is $10 and the average cost price is $5.Calculate the gross profit for the product.

A)$10,000
B)$5,000
C)$20,000
D)$15,000
E)$30,000

Question 47

Juliet repairs,buys,and sells old video games to a growing customer base of collectors and fans.She finds that as the products get scarcer,she can charge higher prices for her services and products.This is an example of ________.

A)reduce-focus pricing
B)skim pricing
C)low-cost-leader pricing
D)plus-one pricing
E)harvest pricing

Question 48

Harvest pricing is usually used in the ________ stage of the product life cycle.

A)introduction
B)growth
C)mature
D)decline
E)conception

Question 49

To calculate break-even volume,operating income in the formula is ________.

A)multiplied by 100
B)equal to zero
C)equal to industry operating income
D)equal to variable costs
E)equal to fixed costs

Question 50

MINI-CASE
Smith Automotive is a company that produces component parts for automobile engines.A margin of $4 per unit produces fixed expenses of $80 million.The market demand for the component parts is 400 million units per year.
Mini-Case Question.Determine the required volume if the company's operating income is $20 million.

A)10 million units
B)20 million units
C)25 million units
D)30 million units
E)35 million units

Question 51

The break-even market share for a company is ________.

A)break-even volume divided by fixed expenses
B)break-even volume divided by market demand
C)market demand divided by break-even volume
D)fixed expenses divided by break-even volume
E)market share divided by break-even volume

Question 52

Which of the following is most likely to occur when price is inelastic?

A)A price decrease increases unit margin.
B)A price decrease increases gross profit.
C)A price increase reduces gross profit.
D)A price decrease hurts sales.
E)A price decrease reduces unit volume.

Question 53

________ is the ratio of the percentage change in volume to the percentage change in price.

A)Market demand
B)Market share needed
C)Price elasticity
D)Average selling price
E)Volume sold

Question 54

Price is the most visible cost of any purchase.List the seven types of non-price life-cycle costs.How can an understanding of these costs enable a business to charge a higher price than the competition?

Question 55

Javier's Pizza Point has a margin per unit of $2.00 for a typical pizza,total fixed expenses of $10,000,and average variable costs of $3.00 per pizza.How many pizzas must Javier sell to break even?

A)2,000
B)3,334
C)5,000
D)20,000
E)30,000

Question 56

Which of the following is true of product line pricing?

A)As a business adds more products to its product line,it decreases the risk of cannibalizing existing product sales.
B)Adding more products to a business's product line enhances sales growth.
C)Products that have a negative cross-price elasticity are substitutes.
D)It is not necessary to know the degree to which a product has cross-price elasticity with other products.
E)Products that have a positive cross-price elasticity are complementary products.

Question 57

MINI-CASE
Smith Automotive is a company that produces component parts for automobile engines.A margin of $4 per unit produces fixed expenses of $80 million.The market demand for the component parts is 400 million units per year.
Mini-Case Question.Calculate the break-even market share if the break-even volume is 40 million units.

A)5%
B)10%
C)12.5%
D)15%
E)20%

Question 58

The break-even volume for a company is ________.

A)operating income minus fixed expenses
B)operating income plus fixed expenses divided by margin per unit
C)fixed plus variable expenses minus sales
D)fixed expenses divided by margin per unit
E)company sales divided by industry sales

Question 59

Crissel Food products has a margin per unit of $5.00 for a high-end brand of pasta,total fixed expenses of $50 million,and a market demand of 400 million packs per year.Calculate the break-even market share of the company.

A)2.5%
B)5%
C)7.5%
D)10%
E)12.5%

Question 60

Which of the following is true of price elasticity?

A)When the price elasticity equals 0,we have unitary elasticity where the percentage change in volume is equal to the percentage change in price.
B)Price elasticity is almost always a negative number due to the inverse relationship between price and volume.
C)Prestige products that can see an increase in demand when their prices are increased have negative price elasticity.
D)Price elasticities between -1 and -10 are inelastic because the percentage change in volume is greater than the percentage change in price.
E)Price elasticities between zero and -1 are considered elastic,as the percentage change in volume is less than the percentage change in price.