04 - Adapting the Price and Pricing Strategies for New Offerings

Question 1

Types of Price Adaptation (12)

Answer 1

1) Geographical Pricing
2) Price Discounts
3) Allowances
4) Loss-leader
5) Special event
6) Special customer
7) Cash rebates
8) Low-interest financing
9) Longer payment terms
10) Warranties/Service contracts
11) Psychological discounting
12) Price discrimination

Question 2

Ways to Initiate and Respond to Price Changes (5)

Answer 2

1) Initiating price cuts due to excess plant capacity or domination of market
2) Price-cutting traps
3) Initiating price increases
4) anticipating competitive responses
5) Responding to competitors’ price changes

Question 3

Definition: Product-Line Pricing

Answer 3

A concept where products of the same line are priced according to their cross-elasticity of demand. Here products are considered to be complements, where some products are even sold at a loss to entice buyers and these products ensure that the organization can offer potential buyers complete product lines.

Question 4

Prices required for Product-Line Pricing (3)

Answer 4

1) Lowest-priced product price
2) Highest-priced product & price
3) Price differentials for all other products in the line.

Question 5

Ways to estimate the profit impact caused by price changes (2)

Answer 5

1) Break-even analysis principles

2) Looking at cost, price, and volume data for individual products

Question 6

Equation: % Change in Unit Volume to Break Even on a price Change

Answer 6

-% price change/(Original contribution margin + percentage price change)

Question 7

New Product Pricing Strategies (3)

Answer 7

1) Skimming Pricing Strategy
2) Penetration Pricing Strategy
3) Intermediate Pricing Strategy

Question 8

Definition: Skimming Pricing Strategy

Answer 8

The price for a new product is set very high initially and is typically reduced over time

Question 9

Definition: Penetration Pricing Strategy

Answer 9

Product is introduced at a low price

Question 10

Definition: Intermediate Pricing Strategy

Answer 10

Price is set between the two extremes and is used in the vast majority of initial pricing decisions

Question 11

Skimming Pricing Strategy is useful if (7)

Answer 11

1) Demand is likely to be price inelastic
2) There are different price-market segments, of which one will pay a higher price for it
3) It can be protected by a patent or copyright
4) Production or marketing costs are unknown
5) Production capacity is constrained
6) The firm wants to quickly recoup its investment or fund other projects
7) There is a realistic perceived value in it

Question 12

Penetration Pricing Strategy is useful if (6)

Answer 12

1) Elastic demand in target market segment
2) Neither unique nor protected by patent or copyright
3) Competitors are expected to quickly enter the market
4) There are no distinct and separate price-market segments
5) possibility of large savings in production and marketing costs if a large sales volume can be generated
6) The firm’s major objective is to obtain a large market share

Question 13

Pricing strategies can be termed as either (2)

Answer 13

1) Full-Cost Price Strategies

2) Variable-Cost Pricing strategies

Question 14

Definition: Full-Cost Price strategies

Answer 14

Consider both variable and fixed costs

Question 15

Definition: Variable-Cost Price Strategies

Answer 15

Consider only the direct variable costs associated with an offering. This is also known as contribution pricing and is used when a firm operates under capacity and fixed costs are a great proportion of total costs

Question 16

Types of Full-Cost Price Strategies (3)

Answer 16

1) Mark-up Pricing
2) Break-Even Pricing
3) Rate-of-Return Pricing

Question 17

Equation: Unit Selling Mark-up Price

Answer 17

Total Unit Cost/(1 - Desired Market-up)

Question 18

Equation: Mark-up percentage of the cost

Answer 18

(Unit selling price - Per Unit Cost) / Per Unit Cost

Question 19

Equation: Mark-up percentage of the price

Answer 19

(Unit selling Price - Per Unit Cost)/ Unit Selling Price

Question 20

Equation: Return on Investment (ROI)

Answer 20

[(Price * Quantity) - (Unit Cost * Quantity)]/Investment

Question 21

Variable-Cost Price Strategies Assumptions (3)

Answer 21

1) Short-term, the relevant costs are variable, not total
2) Variable unit cost represents the minimum selling price
3) Any price above this minimum contributes to fixed costs and profit

Question 22

Effects of Variable-Cost Price Strategies on demand (2)

Answer 22

1) Stimulates Demand - as variable cost prices are lower than full-cost prices
2) Shifts Demand from one time period to another

Question 23

Definition: Competitive Interaction

Answer 23

The sequential action and reaction fo rival companies in setting and changing prices for their products and assessing likely outcomes, such as sales, unit volume and profit for each company and an entire market.

Question 24

Definition: Price War

Answer 24

Involves successive price cutting by competitors to increase or maintain their unit sales or market share. If competitors match the lower price, market share, sales and profit gains could be lost. Usually the overall price reductions benefit none of the competitors

Question 25

Characteristics increasing/decreasing the risk of Price Wars (7)

Answer 25

1) Product Type (Undifferentiated/Differentiated)
2) Market growth Rate (Stable or Decreasing/Increasing)
3) Price visibility to competitors (High/Low)
4) Buyer price sensitivity (High/Low)
5) Overall industry cost trend (Declining/Stable)
6) Industry capacity utilization (Low/High)
7) Number of Competitors (Many/Few)

Question 26

Characteristics of Pricing in E-Commerce (8)

Answer 26

1) Price transparency
2) Informed consumers
3) Rising international competition
4) Reverse auctions
5) Rise of new digital models
6) Lower costs
7) High price elasticity
8) Frequent price changes

Question 27

Online Buyer Benefits (7)

Answer 27

1) Low prices
2) Shopping convenience
3) Easy to Compare
4) Free shipping
5) Time saving
6) Easy to buy
7) Range of products