MKTG 448 Exam 2 - FLASHCARDS - Developing Pricing Policy Flashcards by Stu Diaz

What are the three critical inputs to a value pricing decision?

(1) the true economic value (TEV) of the product to the customer, (2) the perceived value (PV) of the product to that same customer, and (3) the firm’s cost of goods sold (COGS)

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What is the value that a fully informed buyer would or should ascribe to the product?

True economic value

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What is TEV?

True economic value

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What is the formula for TEV?

cost of the next-best alternative + value of the performance differential

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How do marketers assess TEV?

Marketers often assess TEV by using a cost-structure study to understand the customer’s underlying perceptions of economic value of the product, the performance of competitors’ products and the relative advantage or disadvantage offered by the product

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True or false: the TEV approach is more useful when there is a performance differential to be considered?

TRUE

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What is the easiest input to a pricing decision for most firms to understand and obtain?

Cost of goods sold (COGS)

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What represents the fully loaded variable cost of producing the product being sold?

Cost of goods sold (COGS)

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If a firm sells at a price that is equal to or below its COGS, does it stand any chance of ever turning a profit?

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True or false: only if a firm’s product sells at a price above its COGS will it begin to contribute to profitability?

TRUE

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What are the product indicators?

Low differentiation of alternatives
Easy product comparability
Will perform as expected
Not mission critical

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What are the price indicators?

Easy price comparability
High in a relative sense
Reference prices exist
Not needed as a quality cue

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What are the buyer indicators?

Sophisticated, deliberative
Bearing costs
Able to switch easily
Not motivated by prestige

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True or false: price sensitivity is high if there is low differentiation of alternatives?

TRUE

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True or false: price sensitivity is high if products have easy comparability?

TRUE

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True or false: price sensitivity is high if the product will perform as expected?

TRUE

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True or false: price sensitivity is high if the product is not mission critical?

TRUE

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True or false: price sensitivity is high if price has easy comparability?

TRUE

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True or false: price sensitivity is high if price is high?

TRUE

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True or false: price sensitivity is high if reference prices exist?

TRUE

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True or false: price sensitivity is high if price is needed as a quality cue?

FALSE

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True or false: price sensitivity is high if the buyer is sophisticated?

TRUE

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True or false: price sensitivity is high if there are significant bearing costs associated with a product or service?

TRUE

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True or false: price sensitivity is high if substitutes are readily available or a buyer can easily switch between products?

TRUE

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True or false: price sensitivity is high if the buyer is motivated by prestige?

FALSE

True or false: profit is the difference between the total revenue generated and the total costs incurred in making and selling the product?

TRUE

What is the amount of money coming into the firm from the sale of the product?

Total revenue

What is the formula for total revenue?

price per unit x quantity sold

What is the formula for profit?

Total revenue - total costs

For firms that sell directly to consumers, what is the price used in total revenue calculation?

The retail price at which the consumer purchases the product

For firms that do not sell directly to consumers, what is the price used in total revenue calculation?

For firms that do not sell directly to consumers but rather to a wholesaler or retailer, the price used in the calculation is the wholesale price at which the firms sell their products to that channel partner

True or false: fixed costs remain constant, regardless of the amount of a product produced and sold?

TRUE

True or false: examples of fixed costs are rent for administrative office space, management salaries, and advertising?

TRUE

What type of costs change depending on the amount of product produced and sold?

Variable costs

What do variable costs equal for a manufacturing firm?

The costs of raw materials and direct manufacturing labor

What is the formula for variable costs?

Variable cost per unit x total number of units

What is the formula for total costs?

Fixed costs + variable costs

What are the two most common new product pricing strategies?

Skimming and penetration

What pricing strategy sets a high price for a new product to take maximum revenues layer-by-layer from the segments willing to pay the high price?

Skimming

True or false: with skimming, the company makes fewer but more profitable sales?

TRUE

True or false: to engage in skimming firms typically need some form of barrier to entry of competitors?

TRUE

What pricing strategy sets a low price for a new product to attract a large number of buyers and a large market share?

Penetration

What pricing strategy involves setting prices across an entire product line?

Product line pricing

What pricing strategy involves pricing optional or accessory products sold with the main product?

Optional product pricing

What pricing strategy involves pricing products that must be used with the main products?

Captive product pricing

What pricing strategy involves pricing low-value by-products to get rid of or make money on them?

By-product pricing

What pricing strategy involves pricing bundles of products sold together?

Product bundle pricing

What pricing strategy involves reducing prices to reward customer responses such as paying early or promoting the product?

Discount and allowance pricing

What pricing strategy involves adjusting prices to allow for differences in customers, products, or locations?

Segmented pricing

What pricing strategy involves adjusting prices for psychological effects?

Psychological pricing

What pricing strategy involves temporarily reducing prices to spur short-run sales?

Promotional pricing

What pricing strategy involves adjusting prices to account for the geographic location of customers?

Geographic pricing

What pricing strategy involves adjusting prices continually to meet the characteristics and needs of individual customers and situations?

Dynamic pricing

What pricing strategy involves adjusting prices for international markets?

International pricing

What type of pricing strategy is this: an airline may price its ticket at one price, and then offer options for additional fees, such as reserving a specific seat, bringing luggage on board, etc?

Optional product pricing

What type of pricing strategy is this: an athletic footwear company could offer a product at $89, $109, $129, $149, etc?

Product line pricing

What type of pricing strategy is this: pricing a printer at a very low price, but then pricing toner cartridges at a very high price?

Captive product pricing

What type of pricing strategy is this: a lumber mill may sell sawdust created during the processing of wood?

By-product pricing

What type of pricing strategy is this: offering a price for the joint purchase of a firm’s shampoo and conditioner?

Product bundle pricing

What type of pricing strategy is this: offering lower prices for senior citizens than for other customers?

Segmented pricing

What type of pricing strategy is this: luxury products could be priced at significant mark-ups as consumers believe that such product should be more costly?

Psychological pricing

What pricing is setting prices based on buyers’ perceptions of value rather than on the seller’s costs?

Customer value based pricing

What pricing is setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk?

Cost based pricing

What pricing is setting prices based on competitors’ strategies, prices, costs and market offerings?

Competition based pricing

True or false: Setting a product’s price affects the allocation of value between a customer and the firm?

TRUE

What is the quantity at which total costs are equal to total revenue and there is no profit?

Break even point

What is the formula for break even point?

Fixed costs / (unit price - unit variable cost)

According to Markstrat, what are differences between margins obtained by stores in each of the three channels due to?

Due to differences in the level of service and volume sold

In Markstrat, what percent are distributor margins for mass merchandisers?

30%

In Markstrat, what percent are distributor margins for department stores?

40%

In Markstrat, what percent are distributor margins for the other ones besides mass merchandisers and department stores?

35%

Miranda owns a new retail start-up. She purchased 125 dresses for $110 each from a supplier. She wishes to use a 40% mark-up on cost pricing strategy. What price should be placed on each dress?

Price = cost * (1 + mark-up percentage) Price = 110 * (1.40) The dresses should be priced at $154.00

Miranda owns a new retail start-up. She purchased 125 dresses for $110 each from a supplier. She wishes to use a 40% mark-up on selling price strategy. What price should be placed on each dress?

Price = cost / (1 - mark-up selling price) Price = 110 / (1-.4) The dresses should be priced at $183.33

Your firm’s variable costs are $5 per unit, and you have $6,000,000 in fixed costs. How many units do you need to sell at a price of $15 to break even?

Break-even point in units Fixed costs/(sale price-variable costs) 6,000,000/(15-5) 6,000,000/10 600,000 units

Your firm’s variable costs are $5 per unit, and you have $6,000,000 in fixed costs. Your selling price is $15 per unit. How many units do you need to sell to make $2,000,000 profit?

Break-even point in units (FC + profit)/(SP-VC) (6,000,000+2,000,000)/(15-5) 8,000,000/10 800,000 units

You work for Optimum Nutrition and need to determine the number of products that still need to be sold for the year in order to break even. The firm has sold 200,000 units at $15.00. Fixed costs are $2,000,000 and variable cost per unit is $10.00. If production needs exceed 300,000 units, the firm will invest in scaling its production facilities. Additional production facilities would bring with it fixed costs of ½ of prior fixed costs (i.e., an additional $1,000,000) to construct the additional production facility. How many units need to be sold for the year to break even?

BEP = (2,000,000)/(15-10) = 2,000,000/5 = 400,000 units need to be sold for the year to break even BEP = (2,000,000+1,000,000)/(15-10) = 3,000,000/5 = 600,000 units need to be sold for the year to break even 600,000 units need to be sold for the year to break even and the firm has already sold 200,000 units Need to sell an additional 400,000 units for the year to break even

Elizabeth wishes to go into business in her spare time making and selling decorative wooden vases. How many units would she have to sell in the first year to achieve a specific pre-tax annual profit given the following information? Her fixed costs will be $2,000 (purchase of woodworking tools), her variable cost of materials for each vase is $4, she plans on offering free shipping to U.S. customers (the average USPS charge would be $5 per item), the online marketplace she intends to offer her products through charges a 5% transaction fee to the seller on the sale price for each product sold, and the selling price of each wooden vase will be $20 (based upon competitive market pricing). She would like to make at least $1,000 a month pre-tax from this venture.

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