Chapter 19: Pricing Concepts

Question 1

What is the purpose of creating a pricing infrastructure in a company?

Answer 1

1. Defining pricing goals
2. Creating customer value
3. Assigning responsibility for pricing
4. Improving pricing tools and systems

Question 2

Why is price setting a significant challenge for marketing managers?

Answer 2

Because it impacts the firm’s bottom line and involves setting the right price to balance revenue and customer satisfaction

Question 3

What is the ‘value’ in terms of price?

Answer 3

It’s based on perceived satisfaction, where consumers seek reasonable value at purchase

Question 3

How is ‘price’ defined in marketing?

Answer 3

As the amount given up in exchange for acquiring a good or service

Question 4

How does the ‘information effect’ influence consumer perception of price?

Answer 4

Consumers may infer quality from price; higher prices can imply higher quality, prestige, or status

Question 5

What is the ‘sacrifice effect’ of price?

Answer 5

It reflects the consumers’ trade-offs, usually money, time, or other products foregone

Question 6

How is revenue calculated?

Answer 6

Revenue equals the price charged multiplied by the number of units sold

Question 7

What are the characteristics of effective pricing objectives?

Answer 7

Objectives should be specific, attainable, and measurable

Question 7

What must managers consider to achieve profitability?

Answer 7

They must select a price that aligns with perceived value without being too high or low

Question 8

What is ‘profit maximization’?

Answer 8

Setting prices to maximize revenue relative to costs while staying competitive

Question 9

What are ‘satisfactory profits’?

Answer 9

Profits that are adequate for stockholders and management, based on industry risk

Question 10

How is ‘target return on investment’ (ROI) used in pricing?

Answer 10

By setting prices to achieve a desired ROI, often compared to industry standards

Question 11

What is ‘market share’ in sales-oriented objectives?

Answer 11

The percentage of a company’s sales relative to total industry sales

Question 11

What is ‘status quo pricing’?

Answer 11

A strategy that maintains existing prices or matches competitors’ prices

Question 12

What is ‘sales maximization’?

Answer 12

Focusing on maximizing sales volume, often ignoring profit or competition factors

Question 13

What is ‘demand’ in pricing?

Answer 13

The quantity of a product that will be sold at various prices over a set period

Question 14

What is dynamic pricing?

Answer 14

The ability to adjust prices quickly, often in real-time, in response to market demand

Question 14

How does ‘elasticity of deman’ impact pricing?

Answer 14

It measures consumer sensitivity to price changes, affecting demand based on price shifts

Question 15

What are variable and fixed costs?

Answer 15

Variable costs change with output
Fixed costs remain constant regardless of output

Question 16

How does AI improve dynamic pricing?

Answer 16

By using large amounts of data to personalize pricing based on consumer behavior and market trends

Question 16

What is markup pricing?

Answer 16

Setting prices by adding profit and expenses to the cost of purchasing the product

Question 17

What is break-even pricing?

Answer 17

Determining the sales volume needed to cover total costs

Question 18

How does the internet affect pricing strategies?

Answer 18

It increases price transparency, allowing consumers to compare prices easily and driving competitive pricing

Question 19

How does the product life cycle affect pricing?

Answer 19

Prices often start high in the introductory stage and may decrease in maturity and decline stages

Question 20

What role does competition play in pricing?

Answer 20

It influences prices through market dynamics, potentially leading to price matching and customer loyalty efforts

Question 21

What are the steps in setting the right price on a product?

Answer 21

1. Establish pricing goals 2. Estimate demand, costs & profits 3. Choose a price strategy to determine the base price 4. Fine-tune the base price with pricing tactics

Question 22

What is the relationship between price and quality perception?

Answer 22

High prices often lead consumers to assume better quality, particularly in uncertain purchasing situations

Question 23

What are the 3 categories of pricing objectives?

Answer 23

1. Profit-oriented 2. Sales-oriented 3. Status quo

Question 24

What is common trade-off for the profit-maximization pricing objective?

Answer 24

It may require a larger initial investment than the firm can or wants to commit to

Question 25

What is the trade-off of pursuing a market-share objective?

Answer 25

It often involves sacrificing short-term profit to meet long-term goals, which may not be achieved without careful management

Question 26

What is a major advantage and disadvantage of the status quo pricing goal?

Answer 26

- Advantage: easiest to implement - Disadvantage: it may ignore demand and costs

Question 27

What factors influence total revenue in relation to pricing?

Answer 27

Total revenue is a function of price and quantity demanded, which depends on demand elasticity

Question 28

After establishing pricing goals, what should managers estimate next?

Answer 28

1. Total revenue at various prices 2. Determine costs for each price 3. Estimate possible profit and market share for each price

Question 29

What is price skimming?

Answer 29

A pricing policy where a high introductory price is charged, often with heavy promotion, usually for new products with unique advantages

Question 29

What is a price strategy?

Answer 29

A long-term pricing framework that sets the initial price and direction for price changes over the product's life cycle

Question 30

Under what conditions is price skimming most effective?

Answer 30

1. When there's strong demand 2. The product has legal protections 3. Represents a technological breakthrough 4. Blocks competitor entry

Question 31

What is penetration pricing?

Answer 31

A policy where a firm charges a relatively low price initiallyy to reach a mass market?

Question 32

What is status quo pricing?

Answer 32

Setting a price identical or very close tot he competitions' price, which is simple but may overlook demand and costs

Question 33

What are the pros and cons of penetration pricing?

Answer 33

- Pros: effective in price-sensitive markets, discourages competitions - Cons: lower profit per unit, requires higher sales volume to reach break-even

Question 34

What is a cumulative quantity discount?

Answer 34

A price reduction that applies to a buyer's total purchases over a specific period to encourage customer loyalty

Question 34

What is a base price?

Answer 34

The general price level at which a company expects to sell its product or service

Question 35

Name some fine-tuning techniques for base pricing

Answer 35

1. Discounts 2. Allowances 3. Rebates 4. Value-based pricing

Question 36

What is a cash discount?

Answer 36

A price reduction offered to customers for promt payment of a bill

Question 37

What is value-based pricing?

Answer 37

Pricing at a level that customers perceive as a good price based on the value compared to other options

Question 38

What is uniform delivered pricing?

Answer 38

The seller pays the actual freight charges but bills every purchaser a flat rate for shipping

Question 38

What is FOB origin pricing?

Answer 38

A pricing tactic where the buyer absorbs the freight costs from the shipping point

Question 39

What is the single-price tactic?

Answer 39

Offering all goods/services at the same price, or sometimes at one of two or three set prices

Question 40

What is flexible pricing?

Answer 40

Different customers pay different prices for the same merchandise in equal quantities, allowing price adjustments for competition

Question 41

What is price lining?

Answer 41

Offering a product line with several items at specific price points to reduce consumer confusion and simplify purchasing

Question 42

What is leader pricing?

Answer 42

Selling a product near or below cost to attract shoppers, hoping they'll buy other items

Question 43

What is odd-even pricing?

Answer 43

Setting prices at odd numbers to suggest bargains and even numbers to imply quality

Question 44

What is price bundling?

Answer 44

Marketing 2 or more products in a single package for a special price to stimulate demand

Question 45

What is predatory pricing?

Answer 45

Setting very low prices with the intent of driving competitors out of the market, then raising prices