Deck 12: Pricing Concepts and Management

Question 1

What is bundle pricing? Give three examples, each one from a different industry.

Answer 1

Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price. To be attractive to customers, the single price usually is considerably less than the sum of the prices of the individual products. Being able to buy the bundled combination in a single transaction may be of value to the customer, increasing convenience and a sense of value. Bundle pricing is used commonly for banking and travel services, computers, and automobiles with option packages. Bundle pricing can help to increase customer satisfaction. It can also help firms to sell slow-moving inventory and increase revenues by bundling it with products with a higher turnover.
Examples: i) An airlines company that offers accommodation for cheap when reserving tickets to a particular place ii) A fast-food chain offering soda with a burger for a cheaper price than the price of the two when purchased separately iii) A computer retailer offering accessories for a lower price, when combined with the purchase of a laptop

Question 2

How are pricing objectives similar to a corporation's overall goals? How are they different?

Answer 2

Developing pricing objectives is an important task because they form the basis for decisions for other stages of the pricing process. Thus, pricing objectives must be stated explicitly and in measurable terms, and should include a time frame for accomplishing them.
Marketers must ensure that pricing objectives are consistent with the firm's marketing and overall objectives because pricing objectives influence decisions in many functional areas of a business, including finance, accounting, and production. A marketer can use both short- and long-term objectives and can employ one or multiple pricing objectives.

Question 3

Identify and describe six types of psychological pricing.

Answer 3

The six types of psychological pricing are odd-number pricing, multiple-unit pricing, reference pricing, bundle pricing, everyday low pricing, and customary pricing. Odd- number pricing is the setting of prices using odd numbers that are slightly below whole-dollar amounts. Odd-number prices increase sales because consumers register the dollar amount, not the cents. Multiple-unit pricing involves setting a single price for two or more units of a product, especially for frequently-purchased products. This strategy increases sales by encouraging consumers to purchase multiple units when they might otherwise have only purchased one. Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive model or brand in the hope that a customer will use the higher price as a reference point. Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price which is usually less than the sum of prices of the individual products. When everyday low pricing is used, a marketer sets a low price for its products on a consistent basis, rather than setting higher prices and frequently discounting them. In customary pricing, certain goods are priced on the basis of tradition.

Question 4

What are the terms of F.O.B. pricing?

Question 5

Compare and contrast price skimming and penetration pricing.

Question 6

What are reference prices and how do customers use them?

Question 7

Identify and describe the major factors that affect pricing decisions.

Question 8

Explain differential pricing and then describe the four major types.

Question 9

Describe the eight stages of the process that marketers can use to establish prices.

Question 10

What are the components of total cost? Give specific examples.

Question 11

Explain what is meant by price elasticity of demand.

Question 12

How might a marketer find information about a competitor's prices? Why is this information important?

Question 13

What are the implications of a downward-sloping demand curve?

Question 14

Why is the marginal revenue of a product important to the marketer?

Question 15

Under what conditions would a marketer most likely use a price leader strategy?

Question 16

What are some issues to consider when determining a specific price?

Question 17

Identify and describe the three types of product-line pricing.

Question 18

Identify and describe the major types of discounts used for business markets. Then explain the reasons for using each type.

Question 19

How can a marketer use product quality as a pricing objective to influence purchasing decisions?

Question 20

What are some of the objectives a firm might hope to achieve when setting prices?

Question 21

Under Armor is establishing a pricing objective to maintain or increase its product's sales in relation to total industry sales.

A) return on investment
B) survival
C) product quality
D) market share
E) status quo

Question 22

Price is a key element in the marketing mix because it relates directly to:

A) the size of the sales force.
B) the speed of an exchange.
C) quality controls.
D) the generation of total revenue.
E) brand image.

Question 23

Maintaining a certain market share, meeting competitors' prices, maintaining a favorable image, and achieving price stability are all associated with a pricing objective.

A) product quality
B) market share
C) survival
D) profit
E) status quo

Question 24

Sellers that emphasize distinctive product features to encourage brand preferences among customers are practicing:

A) product competition.
B) non-price competition.
C) demand-based pricing.
D) price competition.
E) supply-based pricing.

Question 25

Running a big sale in order to generate enough cash flow to pay creditors is typical in a situation in which a firm's primary pricing objective is to:

A) maintain the status quo.
B) increase profit.
C) survive.
D) increase market share.
E) recover.

Question 26

How can transfer prices be calculated?

Question 27

Safe Auto advertises its automobile insurance as "minimum coverage for minimum budgets." Safe Auto is engaging in:

A) non-price competition.
B) demand-based pricing.
C) competitive pricing.
D) price differentiation.
E) price competition.

Question 28

Which of the following statements about non-price competition is false?

A) Companies that use non-price competition do not need to keep track of their competitor's prices.
B) A company must be able to distinguish its brand through some unique feature in order to successfully engage in non-price competition.
C) A firm using non-price competition can build loyalty to both its company and its products.
D) When using non-price competition, a company should promote the distinguishing characteristics of its brand.
E) Companies that use non-price competition can distinguish their products through promotion and packaging.

Question 29

A market share objective:

A) is not recommended when sales for the total industry are declining.
B) is not especially useful when sales for the total industry are increasing.
C) is not especially useful when sales for the total industry are flat.
D) can be used primarily in an industry where total sales are increasing.
E) can be used effectively whether total industry sales are rising or falling.

Question 30

Maintaining or increasing market share:

A) can be achieved even if industry sales are flat or decreasing.
B) is an infrequently used pricing objective in most industries.
C) depends upon the overall growth of the total industry.
D) is a profit-related objective based on price.
E) is directly tied to leading an industry in product quality.

Question 31

Nabisco is considering two pricing objectives. The first is to sell one out of every three crackers consumed in the world, an objective based on ; the second is to meet, but not beat, competitor's prices of cookie products, which is a objective.

A) cash flow; market share
B) market share; cash flow
C) survival; status quo
D) market share; survival
E) market share; status quo.

Question 32

Westin Hotels, Inc. has an objective of achieving a 25 percent return from its overall sales. This is an example of a pricing objective.

A) market share
B) cash flow
C) return on investment
D) profit
E) status quo

Question 33

One advantage of non-price competition is that:

A) a firm can react quickly to competitive efforts.
B) market share becomes less important.
C) a firm can build customer loyalty.
D) marketing efforts are completely eliminated.
E) pricing is no longer a factor.

Question 34

Gambrel Designs thinks its new product, the Automatic Dog Walker, will have a short product life cycle. Therefore, its marketing department sets its primary pricing objective as:

A) market share.
B) cash flow.
C) profit.
D) product quality.
E) status quo.

Question 35

When establishing prices, a marketer's first step is to:

A) determine demand.
B) develop pricing objectives.
C) select a pricing policy.
D) evaluate competitors' prices.
E) determine a pricing method.

Question 36

Most pricing objectives based on are achieved by trial and error because not all cost and revenue data are available when prices are set.

A) market share
B) cash flow
C) return on investment
D) survival
E) profit

Question 37

A product under non-price competition would most likely not succeed in the market if:

A) a new advertising campaign is established for it.
B) it is easy to duplicate.
C) it is packaged differently from similar products.
D) it is priced near the competitors' price.
E) its quality has been upgraded.

Question 38

When marketers emphasize price as an issue and match or beat the prices of other companies, they are engaging in:

A) price competition.
B) non-price competition.
C) comparative pricing strategies.
D) demand-based pricing.
E) supply-based pricing.

Question 39

If Wrigley set its pricing objective as attaining 38 percent of the chewing gum market, what else would be needed to make this a true pricing objective?

A) Statement of demand elasticity
B) Identification of cost structure
C) Breakeven analysis
D) Identification of a time period for accomplishment
E) Establishment of a subsequent pricing policy

Question 40

The Office Place is an office supplies company which has adjusted its price levels so that it can increase its sales volume to match its expenses. The Office Place is most likely employing a objective.

A) market share
B) cash flow
C) return on investment
D) survival
E) profit

Question 41

A measure of the sensitivity of demand in relation to changes in price is:

A) a demand curve.
B) a prestige graph.
C) marginal analysis.
D) price elasticity of demand.
E) quantity elasticity.

Question 42

What type of pricing objective would an organization use if it were in a favorable position and desired nothing more?

A) Return on investment
B) Cash flow
C) Profit
D) Status quo
E) Survival

Question 43

If Seagram's marketers found that the firm's Crown Royal bourbon was a prestige product and raised its price, which of the following would most likely happen?

A) The quantity demanded would immediately fall.
B) The quantity demanded would always increase.
C) Above some price level, the quantity demanded would begin to decrease.
D) The demand curve for the product would always shift to the right.
E) The demand curve for the product would always shift to the left.

Question 44

When marketers at Consolidated Mustard Company tried to determine demand for their product, they found that at 50 cents, consumers wanted 2,000 jars; at $1.00, they wanted 6,000 jars; and at $1.50, they wanted 4,000 jars. What can Consolidated conclude?

A) Consolidated did poor market demand research.
B) Consolidated has an elastic product.
C) Consolidated has an inelastic product.
D) Consolidated mustard is a prestige product.
E) Consolidated mustard has a normal demand curve.

Question 45

The pricing of Clinique makeup, considerably higher than brands such as Cover Girl, Revlon, and Maybelline, is most likely used to communicate .

A) market share
B) product quality
C) status quo
D) profitability
E) cash flow

Question 46

A graph of the quantity of products marketers expect to sell at various prices if other factors remain constant is a:

A) price graph.
B) supply curve.
C) price/quantity graph.
D) marginal revenue curve.
E) demand curve.

Question 47

If a product has an inelastic demand and the manufacturer raises its price:

A) total revenue will increase.
B) quantity demanded will decrease.
C) the demand schedule will shift.
D) the demand will become more inelastic.
E) total revenue will decrease.

Question 48

Since Victoria's Secret has decided to use non­price competition, it distinguishes its brand through all of the following except .

A) distinctive product features.
B) exceptional service.
C) rebates.
D) variety and selection.
E) product quality and style.

Question 49

For most products, a(n) relationship exists between the price of a particular product and the quantity demanded.

A) inelastic
B) inverse
C) positive
D) unknown
E) elastic

Question 50

The PIMS studies indicates that both market share and are good indicators of profitability.

A) low pricing
B) product quality
C) limited competition
D) sales growth
E) ROI pricing

Question 51

Marginal analysis involves examining:

A) what happens to a firm's costs and revenues when production is changed by one unit.
B) the sensitivity of consumer demand for a product or product category.
C) the quantity of products expected to be sold at different prices.
D) the difference between marginal revenue and total revenue.
E) the difference between marginal cost and total cost.

Question 52

If Pacific Power and Light increased its rates by 10 percent and the demand for power remained the same, the demand would be:

A) elastic.
B) minimal.
C) minor elasticity.
D) variable.
E) inelastic.

Question 53

Which pricing objective de-emphasizes price and can lead to a climate of non-price competition in an industry?

A) Status quo
B) Return on investment
C) Market share
D) Survival
E) Cash flow

Question 54

If Wilson Sporting Goods faces a standard demand curve that exists for most products, as it raises the price of its tennis rackets, the:

A) quantity demanded goes down.
B) demand remains constant.
C) quantity demanded increases.
D) demand increases.
E) break-even increases.

Question 55

Which of the following statements about price elasticity is false?

A) Steak is an example of a product that has an elastic demand for most people, because when price goes up quantity demanded goes down.
B) Elasticity of demand is the relative responsiveness of a change in quantity demanded to change in price.
C) If marketers can determine price elasticity, then setting prices at optimum levels is much easier.
D) When price is raised on a product that has an inelastic demand, then total revenue will decrease.
E) Electricity is an example of a product that has elastic demand.

Question 56

Which type of pricing objective can reduce a firm's risk by helping to stabilize demand for its products?

A) Status quo
B) Market share
C) Survival
D) Cash flow
E) Return on investment

Question 57

If Carnival Cruise Lines increased the price of its seven-day cruise package by 10 percent and, as a result, experienced a 20 percent decline in customer bookings, Carnival's demand would be:

A) steady.
B) inelastic.
C) elastic.
D) prestige.
E) marginal.

Question 58

French Quarter Inns reduces the price of a suite from $225 to $195 per night and experiences a reduction in the quantity of rooms demanded by an average of five per night. This is an indication that suites at this hotel are an example of a(n) product.

A) reverse-demand
B) inferior
C) standard
D) secondary-demand
E) prestige

Question 59

Dividing the percentage change in quantity demanded by the percentage change in price gives the:

A) prestige demand curve.
B) break-even point.
C) marginal cost curve.
D) price sensitivity curve.
E) price elasticity of demand.

Question 60

What does the demand curve for a prestige product look like?

A) It is a straight line where the quantity sold continues to increase as the price of each product increases.
B) It is a curve where the highest and the lowest prices yield the greatest quantity sold and mid-range prices produce the fewest sales.
C) It forms a curve where the greatest quantity sold comes at a medium price and the quantities fall as the price increases or decreases.
D) It forms a straight vertical line because of the prestige of the product, and quantity sold will remain stable regardless of the price.
E) It slopes from left to right at a very mild slope, and as quantity increases, price decreases slowly.

Question 61

Michelin notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total revenue rises $35. The $35 represents the firm's:

A) average revenue.
B) marginal revenue.
C) price elasticity.
D) average variable revenue.
E) average total cost.

Question 62

At what point does a firm maximize profit?

A) The point at which marginal cost equals marginal revenue
B) The point at which the firm sells its product at the highest price
C) The break-even point plus the adjusted marginal cost
D) The point at which marginal profits equal marginal revenue
E) The point at which marginal cost equals marginal profits

Question 63

If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where:

A) total costs and total revenues are equal.
B) marginal revenue is at its highest level.
C) marginal revenue exceeds marginal cost.
D) marginal revenue equals marginal cost.
E) demand is most elastic.

Question 64

If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000, what is the break-even point?

A) 500 units
B) 2,000 units
C) 1,200 units
D) 300 units
E) 3,000 units

Question 65

Markum Industries determines that, for its air compressors, the following results are achieved at a price of $250: total costs = $250; variable costs per unit = $100; fixed costs = $175,000. Given these figures, Markum would break even at units.

A) 1,167
B) 1,000
C) 1,750
D) 2,500
E) 700

Question 66

At the break-even point:

A) the money a company brings in from selling products equals the amount spent producing the products.
B) the total fixed costs are exactly equal to the total variable costs.
C) profits are exactly equal to the difference between revenue and total variable costs.
D) the marginal revenue of a product is exactly equal to the marginal cost of producing one more unit.
E) the marginal cost curve and the average cost curve will be identical for a particular product.

Question 67

If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur:

A) more fixed costs.
B) higher average fixed costs.
C) fewer variable costs.
D) a marginal cost.
E) higher average variable costs.

Question 68

Managers at Caterpillar have determined the costs associated with producing hay balers are equal to the price that they charge for the hay balers. This indicates that Caterpillar is producing at the point.

A) break-even
B) marginal cost
C) profit margin
D) competitive price
E) profit maximizing

Question 69

The Highland Racquet Club found that with annual fixed costs of $60,000, its break-even point is 2,000 members when the membership charge is $60 per person per year. What is the variable cost per person for Highland?

A) $45
B) $50
C) $30
D) $25
E) $40

Question 70

To determine the break-even point in units, divide the fixed costs by:

A) total costs.
B) variable costs multiplied by price.
C) price minus variable costs.
D) price per unit.
E) total revenue minus fixed costs.

Question 71

What assumption does break-even analysis make that limits its overall usefulness?

A) It focuses on how to achieve a price objective.
B) It assumes a company wants to gain a certain market share.
C) It relies on demand for a product being inelastic.
D) It focuses only on competitive factors and not costs.
E) It assumes that demand is elastic for the product.

Question 72

Jared is developing a business plan for a new type of bicycle helmet. He is interested in finding the point at which the costs of producing the helmet will equal the revenue earned from selling the product. Jared is interested in finding the:

A) elasticity of demand.
B) break-even point.
C) variable costs.
D) price elasticity.
E) the sum of fixed costs.

Question 73

Roberts Electronics calculates that if it produces 15 radar detectors, its costs are $1,500, and if it produces 16 radar detectors, its costs are $1,590. In this instance, $90 is the firm's cost.

A) average
B) fixed
C) variable
D) marginal
E) average variable

Question 74

If Roberts Electronics finds that the average total cost of its radar detectors and the marginal cost of its radar detectors are both $85, then its:

A) marginal costs are falling.
B) average total cost is at its maximum.
C) average total costs are rising.
D) demand is elastic.
E) average total cost is at its lowest point.

Question 75

The owner of Big Bike Motorcycles is opening a retail outlet at a new location. Which of the following is most likely to be a fixed cost for Big Bike Motorcycles?

A) Retail personnel salaries
B) Advertising on social networks
C) Building rent
D) Electricity
E) Transportation of sold bikes

Question 76

When marginal cost is equal to marginal revenue, the firm should:

A) produce more to increase profits.
B) produce less to decrease total costs.
C) stop producing additional units.
D) provide discounts to encourage purchases.
E) intensify distribution to increase sales.

Question 77

Ethan is an operations unit manager for Morningstar Foods. When developing his monthly budget, he has identified the following costs: Overhead at $120,000; Packaging at $70,000; Advertising at $60,000; Salaries at $400,000; Food production at $90,000, and Distribution at $22,000. The fixed costs in this situation would be:

A) overhead, packaging, advertising, salaries, food production, and distribution
B) overhead, packaging, advertising, salaries, and distribution
C) overhead, advertising, distribution, and salaries
D) packaging and distribution
E) food production

Question 78

A certain location of O'Charley's Restaurant has annual fixed costs of $200,000. If an average tab at the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must O'Charley's serve per year in order to break even?

A) 2,000
B) 5,000
C) 10,000
D) 3,333
E) 2,500

Question 79

Abby is a marketing consultant who specializes in small businesses. Her current client is very interested in estimating the costs for the coming year, in order to find the break-even point. Abby knows this is an important financial statistic because below the break-even point, the firm operates:

A) with fixed costs only.
B) with minimal variable costs.
C) with no revenue.
D) with minimal profit.
E) at a loss.

Question 80

The Palasi Candy Company is a small business located in the United States. The owner of Palasi Candy is calculating the projected costs for the coming year. There is rent for the building, salaries for the retail employees, raw materials of sugar, chocolate, and other ingredients, wrappers for packaging of individual pieces of candy, boxes, and radio advertising. Palasi's are most likely to be the raw materials of sugar, chocolate, and other ingredients, as well as the wrappers.

A) sunk costs.
B) variable costs.
C) direct costs.
D) fixed costs.
E) marginal costs.