Ch11. Pricing and Credit Flashcards by T Jo

1) Setting prices for products and services requires entrepreneurs to balance a multitude of complex forces as entrepreneurs determine prices for their goods and services that will draw customers and ________.
A) position prices lower than all competitors
B) produce a profit
C) effectively compete with online alternatives
D) have high volume/high margin sales

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2) Which of the following statements about price is true?
A) Price measures what the customer must exchange to obtain goods and services in the marketplace.
B) Target market, business image, and price are closely related.
C) For most goods and services, there is an acceptable price range and not a single “ideal price.”
D) All of the above

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3) A common pricing mistake entrepreneurs make is lowering prices because they fail to recognize the ________.
A) extra value, convenience, service, and quality they offer their customers
B) advantages they have due to their lower cost structure
C) complexities that larger competitors have to face
D) driving need that all customers have to find the lowest price possible

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4) The top business challenge that drives pricing decisions is the ________.
A) increased price transparency
B) increased price sensitivity of customers
C) need to protect the brand’s image
D) increased pricing aggressiveness from competitors

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5) \_\_\_\_\_\_\_\_ frequently convey the idea of quality, prestige, and uniqueness to customers. 
A) Effective packaging
B) Low prices
C) High prices
D) High profile promotions

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6) A key ingredient to setting prices properly is to understand a company's \_\_\_\_\_\_\_\_.
A) cost structure
B) most aggressive price competitor
C) target market
D) profit expectations

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7) An entrepreneurial company can differentiate itself by creating a distinctive image in customers' minds or by offering \_\_\_\_\_\_\_\_.
A) superior service and quality
B) exceptional design and convenience
C) speed and performance
D) All the above

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8) Generally, entrepreneurs should avoid head-to-head price competition with other firms that can more easily achieve lower prices through ________.
A) offering lower value products and services
B) a better designed Web site
C) geographic advantages
D) lower cost structures

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9) Which of the following statements concerning the impact of competition on a small company’s prices is true?
A) When setting prices, a business owner must either match or beat competitors’ prices on similar products or services.
B) Because federal laws prohibit the practice as an unfair trade practice, business owners should not monitor their rivals’ prices on identical items.
C) When going up against larger, more powerful rivals, small firms should consider using nonprice competition as a way to differentiate their products or services rather than head-to-head price competition.
D) All of the above

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10) One key to setting prices properly is based on understanding a company's \_\_\_\_\_\_\_\_.
A) buying power
B) competitive position
C) target market
D) cost structure

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11) \_\_\_\_\_\_\_\_ value is the price customers would be willing to pay if they perfectly understood the benefits offered, while \_\_\_\_\_\_\_\_ value is what determines the price they are willing to pay.
A) Objective; perceived
B) Perceived; objective
C) Objective; quantitative
D) Perceived; real

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12) Ultimately, the “right” price for a product or service depends on one factor — ________.
A) the lowest price possible
B) premium prices
C) the value that it provides for a customer
D) the most effective advertising campaign

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13) One of the most important determinants of customers’ response to a price is whether they perceive the price to be a fair exchange ________.
A) compared to what they have paid in the past
B) regardless of their actual experience with the product
C) based on their expectation, not reality
D) for the value they receive from the product or service

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14) The final price a business owner sets within the acceptable price range depends on ________.
A) the cost of the product or service
B) the desired “image” he wants to create in the customer’s mind
C) the maximum price customers are willing to pay
D) All of the above

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15) Businesses facing rapidly rising costs should consider ________.
A) offering products in smaller sizes or quantities
B) communicating with customers about the cost increases
C) anticipating rising material costs and try to lock in prices early
D) All the above

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16) The prices a small business charges influence its image in the marketplace.

TRUE

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17) The desired image for the business, the target market the owner is trying to reach, and the prices charged are all closely related to one another

TRUE

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18) A study by Rafi Mohammed, author of The Art of Pricing, found that companies that raised prices by 1 percent saw profits increase by 11 percent and those that raised prices by 10 percent realized profit increases of 100 percent.

TRUE

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19) To avoid major pricing mistakes, business owners should “shop” their competitors and assess their prices, especially on identical products.

TRUE

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20) Without the advantage of a unique business image, a small business must match local competitors’ prices or risk losing sales and customers.

TRUE

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21) The most common pricing mistake small business owners make is setting the price for the products and services they sell too high.

FALSE

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22) The best way to survive a price war is to engage in the battle and emphasize the unique features, benefits, and value your company offers its customers.

FALSE

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23) The most effective technique by which small companies can gain a competitive edge over their larger rivals is to charge lower prices for the goods and services they sell.

FALSE

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24) Price is a measure of what the customer must exchange to obtain goods and services, and is an indicator of value to the customer.

TRUE

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25) A common pricing mistake entrepreneurs often make is failing to recognize the extra value, convenience, service, and quality they offer their customers — all of which customers are willing to pay for

TRUE

26) Perceived value is the price customers would be willing to pay if they perfectly understood the benefits offered, while objective value is what determines the price they are willing to pay.

FALSE

27) The "right" price depends on one factor — the value that it provides for customers.

TRUE

28) Entrepreneurs that face rapidly rising costs in their business should consider strategies that facilitate better customer communication, efficiencies, passing along cost increases, emphasizing value, and anticipating rising costs to lock in prices.

TRUE

29) When pricing any new product, the owner should try to accomplish three objectives: 1) get the product accepted; 2) maintain market share; and 3) earn a profit.

TRUE

30) What does it mean to "focus on value" in relationship to establishing a price? In your response, discuss how customers recognize and evaluate value. There are two aspects of value — objective value and perceived value.

Answer: The "right" price for a product depends on the value that it provides for customers. One of the most important determinants is a customer's response to a price where they perceive the price to be a fair exchange for the value they receive from the product or service. Objective Value of the products and services is what customers would be willing to pay if they understood perfectly the benefits that a product or service delivers. In reality, customers rarely have access to perfect information. Perceived Value is what customers base their assessment upon when they do not have access to "perfect information" and, therefore, depend upon their perception of what the product or service is worth. Companies can influence customers' perception of value, and price is one way a company can communicate value to customers.

``` 31) In general, entrepreneurs should ________ head-to-head price competition with firms that can more easily achieve lower prices through lower cost structures. A) avoid B) take on C) meet D) exit the market when faced with ```

``` 32) A business with a 25 percent gross profit margin that reduces its price by 10 percent would have to ________ its sales volume just to break even. A) double B) triple C) quadruple D) match ```

``` 33) The acceptable price range of a product or service is the area between the ________ defined by customers in the market and the ________ established by the company's cost structure. A) price floor; price ceiling B) image; quality C) price ceiling; price floor D) price floor; value ```

34) The "ideal price" for a product ________. A) is high enough to cover costs and to generate a profit B) is low enough to produce adequate sales volume C) today may be different from the "ideal price" tomorrow D) All of the above

``` 35) Management consulting firm McKinsey and Company states that more than ________ percent of the pricing problems on new products are the result of companies setting prices that are too low. A) 20 B) 40 C) 60 D) 80 ```

36) When pricing a new product, a small business owner should strive to always satisfy which three objectives? A) Product acceptance, maintaining market share, and earning a profit. B) Quick acceptance, extensive distribution, and quickly recovering costs. C) Recovering initial development costs, recovering initial promotional costs, and discouraging competition. D) Discouraging competition, recovering development costs, and developing a prestige image.

``` 37) A pricing technique that sets different prices on the same products and services for different customers using the information that a company collects about its customers is called ________. A) market penetration B) customized or dynamic pricing C) predatory pricing D) price skimming ```

``` 38) ________ pricing strategies work best in markets where no "elite" segments exist or in highly competitive markets where similar products are trying to gain a foothold. A) Skimming B) Sliding-down-the-demand-curve C) Odd D) Penetration ```

``` 39) Once a company has invested time and money developing a unique new product, to recoup some of the high R&D costs, they will likely use a ________ pricing strategy. A) skimming B) penetration C) sliding-down-the-demand-curve D) discount ```

``` 40) ________ is a short-term strategy that assumes that competition will eventually emerge. A) Life cycle pricing B) Odd pricing C) Price lining D) Penetration pricing ```

``` 41) A pricing technique that sets prices that always end in numbers like "99" for prices such as $9.99 and $19.99 is an example of ________ pricing. A) odd B) price C) customized D) zone ```

``` 42) CD Connection sells popular CDs at three price levels: $11, $14, and $17. This illustrates which of the following pricing techniques? A) Odd pricing B) Leader pricing C) Price lining D) Suggested retail pricing ```

52) For most products, there is an acceptable price range, not a single ideal price.

TRUE

53) Customized or dynamic pricing sets different prices on the same products and services for different customers using the information that a company collects about its customers.

TRUE

54) Dynamic pricing may raise ethical questions.

TRUE

55) Market penetration pricing is a short-term pricing strategy that achieves high profits quickly.

FALSE

56) Entrepreneurs have three basic strategies to choose from when establishing a new product's price: a penetration pricing strategy; a skimming pricing strategy; and life cycle pricing strategy.

TRUE

57) If a company wants quick acceptance and extensive distribution when introducing a new product into a highly competitive market with a large number of similar products, a market penetration pricing is the best strategy.

TRUE

58) A market penetration pricing strategy is designed to recover a company's development and promotional cost of a new product very quickly.

FALSE

59) A skimming price strategy is used to introduce relatively low-priced goods into a market where no "elite" segment exists.

FALSE

60) A skimming pricing strategy sets a relatively high price for a product to appeal to the segment of the market that is not sensitive to price

TRUE

61) Life cycle pricing is a short-term pricing strategy that assumes that competition will eventually emerge and the price will be lowered.

TRUE

62) James decides to price his products in his small hardware store with ".95," thinking that customers will perceive a price of $9.95 is much lower than a price of $10. This is an example of odd pricing.

TRUE

63) A technique that greatly simplifies the pricing function by pricing different products in a product line at different price points, depending on their quality, features and cost, is referred to as odd pricing.

FALSE

64) Price lining occurs when a small company raises the price of all of its goods by the same percentage to cover operating expenses.

FALSE

73) Name and explain the three basic pricing strategies a small business owner has in establishing a new product's price

Answer: Three basic strategies to choose from in establishing the new product's price include: 1. Market Penetration-Set price just above total unit cost to develop a wedge in the market and quickly achieve a high volume of sales. 2. Skimming-Set a higher-than-normal price in an effort to quickly recover the initial developmental and promotional costs of the product. 3. Life Cycle Pricing-Set product price high, but with technological advancement, the firm can lower costs quickly and reduce the product's price sooner than the competition can. When introducing a new product, the owner should seek to satisfy three objectives: 1. Getting the product accepted 2. Maintaining market share as competition grows 3. Earning a profit

74) Describe two situations — one where you consider dynamic pricing is ethical and the other where dynamic pricing is unethical.

hotels and airlines

75) There are at least eight different pricing strategies for established goods and services. Explain four of those strategies and under what conditions a business owner should use them

1. Odd Pricing Establish prices that end in odd numbers with the belief that merchandise selling with an odd ending number ($12.95) is cheaper than an item evenly priced ($13.00). 2. Price Lining Manager stocks merchandise in several different price ranges, or price lines. Each category of merchandise contains items that are similar in appearance, quality, cost, performance, or other features making it less complicated for the customer. 3. Dynamic Pricing Setting different prices for the same products and services for different customers based on information collected. 4. Leader Pricing Small retailer marks down the customary price of a popular item in an attempt to attract more customers. 5. Geographic Pricing Pricing based on the geographic area also referred to as zone pricing 6. Discounts When products make reductions from normal list prices to move stale, outdated, damaged, or slow-moving merchandise. This includes multiple unit pricing. 7. Bundling A pricing method that involves grouping together several products or services, or both, into a package that offers customers extra value at a special price. 8. Optional-Product Pricing This is a technique that involves selling the base product for one price but selling the options or accessories for it at a much higher markup. 9. Captive-Product Pricing This technique involves selling a product for a low price and charging a higher price for the accessories that accompany it. 10. Byproduct Pricing This technique uses the revenue from the sale of byproducts to be more competitive in pricing the main product. 11. Suggested Retail Prices Accepting the manufacturer's suggested price does not take into consideration the small firm's cost structure, image, or competitive situation. This approach does simplify pricing. 12. Follow the Leader Pricing

``` 76) ________ is the difference between the cost of a product or service and its selling price. A) Markup B) Break-even price C) Contribution margin D) Absorption costing ```

``` 77) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's percentage (of cost) markup is ________ percent. A) 46.7 B) 87.5 C) 53.3 D) 114.3 ```

``` 78) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's percentage (of retail price) markup is ________ percent. A) 46.7 B) 87.5 C) 53.3 D) 114.3 ```

``` 79) The Sound Shop buys a popular programmable telephone from a supplier for $12.19. If the desired markup of retail price on the telephone is 35 percent, the retail price should be ________. A) $34.83 B) $18.75 C) $16.46 D) $20.11 ```

80) Which of the following is/are true regarding cost-plus pricing? A) It encourages the manufacturer to operate efficiently. B) It fails to consider competitors' prices appropriately. C) It fails to guarantee the manufacturer a desired profit margin. D) Only A and C.

``` 81) A reliable cost accounting system is necessary for accurate pricing. The traditional method of product costing, where the costs of direct materials, direct labor, and factory overhead are included in a finished product's total cost is called ________. A) absorption costing B) break-even pricing C) direct costing D) absorption pricing ```

``` 82) Pandecker, Inc., estimates the variable costs of producing one unit to be $11.26. The company plans to produce 26,500 units. The fixed costs the company expects to incur are $82,770. If Pandecker's profit target is $75,000, what price should it charge? A) $14.38 B) $35.17 C) $17.21 D) $11.26 ```

85) Which of the following is/are not true regarding pricing for service firms? A) A service firm must establish a price based on the materials used to provide the service, the labor employed, an allowance for overhead, and a profit. B) Most service firms base their prices on an hourly rate (usually actual hours), but sometimes standard hours are used. C) For most service firms, labor and profit comprise the largest portion of the cost of the service. D) None of the above

86) Markup is the difference between the cost of a product or service and its selling price.

TRUE

87) Most stores find it most practical to use a flexible markup, which assigns various markup percentages to different types of products.

FALSE

88) Below-market pricing strategies can be risky for small companies because they require businesses to constantly achieve high sales volume to remain competitive.

TRUE

89) Even though cost-plus pricing is simple, it does not encourage a small business to use its resources efficiently.

TRUE

90) For setting prices, full absorption financial statements are much more useful to the small business owner than are direct cost statements.

FALSE

91) Direct (variable) costing includes in the unit cost of a product only those costs that vary with the quantity of units produced.

TRUE

92) Break-even pricing will determine the price that will cover total fixed and variable costs and generate a reasonable profit.

FALSE

93) Because the manufacturer's capacity in the short run is fixed, pricing decisions should be aimed at employing these resources most efficiently.

TRUE

94) For most service firms, labor and profit comprise the greatest portion of the cost of the service.

FALSE

96) The interchange fee is a bank charge that retailers pay whenever customers use a credit or a debit card to pay for a purchase.

TRUE

98) Because installment credit absorbs a company's cash, many small businesses rely on financial institutions to provide it for their customers.

TRUE

101) Explain the difference between absorption costing and variable (or direct) costing. Which one is more useful when establishing prices? Why?

Answer: Full absorption costing is the traditional method of product costing. It "absorbs" the cost of direct materials, direct labor, plus a portion of fixed and variable factory overhead into each unit manufactured. Absorption costing is not very helpful in setting prices because it confuses the true relationships among price, volume, and costs by including fixed expenses in unit-cost computations. Direct costing includes only those costs of production that vary directly with the volume of production. Fixed overhead expenses are considered to be expenses of the period, thus, constant unit cost for the product regardless of the production level. The result is a clear picture of the price-costs-volume relationship

``` 106) It has been reported that the use of credit cards increases the ________ of customer spending. A) probability B) speed C) magnitude D) All of the above ```

107) Small companies have the following three options for selling to customers on credit ________. A) credit cards, manufacturer credit, and trade credit B) credit cards, installment credit, and trade credit C) credit cards, installment credit, and poor credit D) debit cards, installment credit, and trade credit

``` 108) The fee that banks collect from retailers whenever customers use a credit or a debit card to pay for a purchase is known as the ________ fee. A) interchange B) chargeback C) processing D) installment ```

109) The use of credit cards by consumers ________. A) has little real impact on sales B) broadens a small company's customer base C) costs businesses nothing and adds significantly to their sales D) has no impact on pricing decisions

``` 110) A customer who purchases a television from Ace Appliance Store and pays for it in 36 monthly payments is most likely using ________ credit. A) trade B) charge account C) installment D) debit card ```

111) One of the requirements to be able to offer ________ credit is to make certain that the firms' cash position is ________.

``` 112) Which of the following businesses would be most likely to offer installment credit to its customers? A) A retailer of major appliances B) A convenience store C) A printer D) A clothing retailer ```

113) Explain the different kinds of credit a small business can offer its customers and the impact each has on pricing.

Answer: ∙ Credit Cards Businesses should consider the one to six percent of the purchase price they will pay as a fee for their service. ∙ Installment Credit Is financed over time and often requires small business owners to turn to local banks and credit unions. If they have the financial strength to carry their "own paper," it can be a major source of interest income, which technically can subsidize prices. ∙ Trade Credit Also referred to as customer charge accounts, can be a drain on small business cash reserves.

Ch11. Pricing and Credit Flashcards

(86 cards)