1. Brand equity, 2. product strategy and 3. Pricing

Question 1

What are the steps of brand management process?

Answer 1

Strategic brand management combines the design and implementation of marketing activities and programs to build, measure, and manage brands to maximize their value. It has four main steps:
1 • Identifying and establishing brand positioning
2 • Planning and implementing brand marketing
3 • Measuring and interpreting brand performance
4 • Growing and sustaining brand value

Question 2

What is the definition of a “brand”?

Answer 2

The American Marketing Association defines a brand as “a name, term, sign, symbol, or design, or a combination
of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them
from those of competitors.”

A brand is thus a product or service whose dimensions differentiate it in some way
from other products or services designed to satisfy the same need. These differences may be functional, rational,
or tangible—related to product performance of the brand. They may also be more symbolic, emotional, or intangible—
related to what the brand represents or means in a more abstract sense.

Question 3

What is the role of a brand for consumers?

Answer 3

A brand is a promise between the firm and the consumer. It is a means to set consumers’ expectations and reduce their risk. In return for customer loyalty, the firm promises to reliably deliver a predictably positive experience and set of desirable benefits with its products and services.

Brands can also take on personal meaning to consumers and become an important part of their identity.
They can express who consumers are or who they would like to be. For some consumers, brands can even take on
human-like characteristics.

Question 4

What is the role of a brand for firms?

Answer 4

1. Simplify product handling, by organizing inventory and accounting records
2. Legal protection
3. Predictability and security for demand
4. Barrier of entry for competitors

Question 5

What is branding?

Answer 5

Branding is the process of endowing products and services with the power of a brand. It’s all about creating
differences between products. Marketers need to teach consumers “who” the product is—by giving it a name and
other brand elements to identify it—as well as what the product does and why consumers should care. Branding
creates mental structures that help consumers organize their knowledge about products and services in a way that
clarifies their decision making and, in the process, provides value to the firm.

Question 6

What is BRAND EQUITY?

Answer 6

Brand equity is the added value endowed to products and services with consumers. It may be reflected in the way
consumers think, feel, and act with respect to the brand, as well as in the prices, market share, and profitability it
commands.

Question 7

What is customer-based brand equity?

Answer 7

Customer-based brand equity is thus the differential effect brand knowledge has on consumer response to the
marketing of that brand.26 A brand has positive customer-based brand equity when consumers react more favorably
to a product and the way it is marketed when the brand is identified than when it is not identified. A brand has
negative customer-based brand equity if consumers react less favorably to marketing activity for the brand under

Question 8

Which are the three ingredientes of customer-based brand equity?

Answer 8

the same circumstances. There are three key ingredients of customer-based brand equity.

1. Brand equity arises from differences in consumer response. If no differences occur, the brand-name product is essentially a commodity, and competition will probably be based on price.
2. Differences in response are a result of consumers’ brand knowledge, all the thoughts, feelings, images, experiences, and beliefs associated with the brand. Brands must create strong, favorable, and unique brand associations with customers, as have Toyota (reliability), Hallmark (caring), and Amazon.com (convenience and wide
   selection).
3. Brand equity is reflected in perceptions, preferences, and behavior related to all aspects of the marketing of a
   brand.

Question 9

What are advantages of strong brands?

Answer 9

Improved perceptions of product performance , Greater trade cooperation and support
, Greater loyalty Increased marketing communications effectiveness
, Less vulnerability to competitive marketing actions . Possible licensing opportunities
, Less vulnerability to marketing crises Additional brand extension opportunities. Larger margins, Improved employee recruiting and retention
More inelastic consumer response to price increases Greater financial market returns
More elastic consumer response to price decreases

Question 10

What is a brand promise?

Answer 10

A brand promise is the marketer’s vision of what the brand must be and do for consumers.

Question 11

Which are brand equity models?

Answer 11

1. Brand asset valuator - Young and Rubicam
   - Energized differentiation
   - Relevance
   - Esteem = quality and loyalty
   - Knowledge
2. Brandz - Millward Brown and WPP
   - Power: a prediction of the brand’s volume share
   - Premium: a brand’s ability to command a price premium relative to the category average
   - Potential: the probability that a brand will grow value share
3. Brand Resonance Pyramid
   - The brand resonance model also views brand building as an ascending series of steps, from bottom to top: (1) ensuring customers identify the brand and associate it with a specific product class or need; (2) firmly establishing the brand meaning in customers’ minds by strategically linking a host of tangible and intangible brand associations; (3) eliciting the proper customer responses in terms of brand-related
   judgment and feelings; and (4) converting customers’ brand responses to intense, active loyalty.

Question 12

Which are the elements of the brand pyramid?

Answer 12

• Brand salience is how often and how easily customers think of the brand under various purchase or consumption
situations—the depth and breadth of brand awareness.
• Brand performance is how well the product or service meets customers’ functional needs.
• Brand imagery describes the extrinsic properties of the product or service, including the ways in which the
brand attempts to meet customers’ psychological or social needs.
• Brand judgments focus on customers’ own personal opinions and evaluations.
• Brand feelings are customers’ emotional responses and reactions with respect to the brand.
• Brand resonance describes the relationship customers have with the brand and the extent to which they feel
they’re “in sync” with it.

Question 13

How to build brand equity?

Answer 13

brand equity drivers:
1. The initial choices for the brand elements or identities making up the brand (brand names, URLs, logos,
symbols, characters, spokespeople, slogans, jingles, packages, and signage)—Microsoft chose the
name Bing for its new search engine because it felt it unambiguously conveyed search and the “aha” moment
of finding what you are looking for. It is also short, appealing, memorable, active, and effective
multiculturally.36
2. The product and service and all accompanying marketing activities and supporting marketing programs—
General Mills and its long-time CMO Mark Addicks are employing a number of new marketing
activities to sell cereals, cake mixes, and yogurt. The company is exploring how to best use smart phones
with consumers via QR codes, apps, and augmented reality, developing new packaging strategies in the
process.37
3. Other associations indirectly transferred to the brand by linking it to some other entity (a person, place, or
thing)—The brand name of New Zealand vodka 42BELOW refers to both a latitude that runs through New
Zealand and the percentage of the drink’s alcohol content. The packaging and other visual cues are designed
to leverage the perceived purity of the country to communicate the positioning for the brand.

Question 14

Which are the criteria for the choice of Brand Elements?

Answer 14

There are six criteria for choosing brand elements. The first
three—memorable, meaningful, and likable—are brand building. The latter three—transferable, adaptable, and
protectable—are defensive and help leverage and preserve brand equity against challenges.
1. Memorable—How easily do consumers recall and recognize the brand element, and when—at both purchase
and consumption? Short names such as Tide, Crest, and Puffs are memorable brand elements.
2. Meaningful—Is the brand element credible? Does it suggest the corresponding category and a product ingredient
or the type of person who might use the brand? Consider the inherent meaning in names such as
DieHard auto batteries, Mop & Glo floor wax, and Lean Cuisine low-calorie frozen entrées.
3. Likable—How aesthetically appealing is the brand element? A recent trend is for playful names that also offer
a readily available URL, especially for online brands like Flickr, Instagram, Pinterest, Tumblr, Dropbox, and
others.
4. Transferable—Can the brand element introduce new products in the same or different categories? Does it add
to brand equity across geographic boundaries and market segments? Although initially an online bookseller,
Amazon.com was smart enough not to call itself “Books ‘R’ Us.” The Amazon is famous as the world’s biggest
river, and the name suggests the staggeringly diverse range of products the company now sells.
5. Adaptable—How adaptable and updatable is the brand element? Logos can easily be updated. The past 100
years have seen the Shell logo updated 10 times.
6. Protectable—How legally protectable is the brand element? How competitively protectable? When names are
in danger of becoming synonymous with product categories—as happened to Kleenex, Kitty Litter, Jell-O,
Scotch Tape, Xerox, and Fiberglass—their makers should retain their trademark rights and not allow the
brand to become generic.

Question 15

What is a brand contact?

Answer 15

Brands are not built by advertising alone. Customers come to know a brand through a range of contacts and
touch points: personal observation and use, word of mouth, interactions with company personnel, online or telephone
experiences, and payment transactions.

A brand contact is any information-bearing experience, whether
positive or negative, a customer or prospect has with the brand, its product category, or its market.4

Question 16

What is internal branding?

Answer 16

Internal branding
consists of activities and processes that help inform and
inspire employees about brands.

Question 17

What is brand bonding?

Answer 17

Brand bonding occurs when customers experience
the company as delivering on its brand promise. All the
customers’ contacts with company employees and communications
must be positive.53 The brand promise will
not be delivered unless everyone in the company lives the
brand. Disney is so successful at internal branding that it
holds seminars on the “Disney Style” for employees from
other companies.

Question 18

What are some internal branding principles?

Answer 18

Some important principles for internal
branding are:55
1. Choose the right moment. Turning points are
ideal opportunities to capture employees’ attention
and imagination. After it ran an internal branding
campaign to accompany its external repositioning,
the “Beyond Petroleum” ad campaign, BP found
most employees were positive about the new brand
and thought the company was going in the right
direction.
2. Link internal and external marketing. Internal
and external messages must match. Ford’s newbranding push to “Go Further” targets car buyers as well as Ford employees. The company believes that making
Ford’s internal branding efforts consistent with its external branding can “create profound synergies that
will benefit the company in significant ways.” Internally, Ford CMO Jim Farley is emphasizing three areas to
help Ford employees “go further”: “people serving people,” “ingenuity,” and “attainable.”56
3. Bring the brand alive for employees. Internal communications should be informative and energizing.
Starbucks created a major facility and exhibit to physically immerse managers and employees in the brand
experience.
To help its staff better understand how the brand positioning and promise affected their daily
work, a major services company invested more than 100,000 hours in deep manager and employee training,
with role-playing scenarios, exercises, and interactive tools.57
4. Keep it simple. Don’t overwhelm employees with too many details. Focus on the key brand pillars, ideally
in the form of a brand mantra. Walmart uses three very simple brand pillars: “Quality Products; Unbeatable
Prices; Easy Shopping.”

Question 19

How to measure brand equity?

Answer 19

How do we measure brand equity? An indirect approach assesses potential sources of brand equity by identifying
and tracking consumer brand knowledge structures.59 A direct approach assesses the actual impact of brand
knowledge on consumer response to different aspects of the marketing. “Marketing Insight: The Brand Value
Chain” shows how to link the two approaches.

Question 20

What are the three multipliers that affect the value from each stage?

Answer 20

The model also assumes that three multipliers increase or decreasethe value that can flow from one stage to another.
1• The program multiplier determines the marketing program’s ability
to affect the customer mind-set and is a function of the quality of
the program investment.
2• The customer multiplier determines the extent to which value created in the minds and hearts of customers affects market performance.
This result depends on competitive superiority (how effective the
quantity and quality of the marketing investment of other competing
brands are), channel and other intermediary support (how much
brand reinforcement and selling effort various marketing partners are
putting forth), and customer size and profile (how many and what
types of customers, profitable or not, are attracted to the brand).
3• The market multiplier determines the extent to which the value
shown by the market performance of a brand is manifested in
shareholder value. It depends, in part, on the actions of financial
analysts and investors.

Question 21

How is predisposition measured according to Millward Brown?

Answer 21

Millward Brown asserts that this brand predisposition is measured
by three brand equity metrics: power, premium and potential.
• People are predisposed to choose the brand over others. This will
drive brand volume, so power predicts volume share based entirely
on perceptions, absent of activation factors.
• People are predisposed to pay more for the brand. This will allow
the brand to charge more, so premium predicts the price index
your brand can command.
• Potential indicates the likelihood of value share growth for the
brand in the next 12 months, based on people’s predisposition to
stick to the brand or try it in the future.

Question 22

What is brand Valuation?

Answer 22

brand valuation, which is the job of estimating the total financial value of the brand.

Question 23

How does Interbrand valuation model work?

Answer 23

Top brand-management firm Interbrand has developed a model to formally estimate the dollar value of a brand. It defines brand value as
“the net present value of the future earnings that can be attributed to
the brand alone”. The firm believes marketing and financial analyses are
equally important in determining the value of a brand. Its process follows
five steps (see Figure 11.7 for a schematic overview):
1. Market Segmentation—The first step is to divide the market(s) in which the brand is sold into mutually exclusive segments that help determine variations among the brand’s different customer groups.
2. Financial Analysis—Interbrand assesses purchase price, volume, and frequency to help calculate accurate forecasts of future brand sales and revenues. Once it has established Brand Revenues, it deducts all associated operating costs to derive earnings
before interest and tax (EBIT). It also deducts the appropriate taxes and a charge for the capital employed to operate the underlying business, leaving Economic Earnings, that is, the earnings
attributed to the branded business.
3. Role of Branding—Interbrand next attributes a proportion of Economic Earnings to the brand in each market segment by first identifying the various drivers of demand and then determining the degree to which the brand directly influences each. The Role of
Branding assessment is based on market research, client workshops,
and interviews and represents the percentage of Economic Earnings the brand generates. Multiplying the Role of Branding by Economic Earnings yields Brand Earnings.
4. Brand Strength—Interbrand then assesses the brand’s strength profile to determine the likelihood that the brand will realize forecasted Brand Earnings. This step relies on competitive benchmarking and a structured evaluation of the brand’s clarity, commitment, protection, responsiveness, authenticity, relevance, differentiation, consistency, presence, and understanding. For each segment, Interbrand applies industry and brand equity metrics to determine
a risk premium for the brand. The company’s analysts derive the overall Brand Discount Rate by adding a brand-risk premium.

Question 24

SUMMARY CHAPTER ->

Answer 24

1. A brand is a name, term, sign, symbol, design, or some
   combination of these elements, intended to identify the
   goods and services of one seller or group of sellers and
   to differentiate them from those of competitors. The
   different components of a brand—brand names, logos,
   symbols, package designs, and so on—are called
   brand elements.
2. Brands are valuable intangible assets that offer a number
   of benefits to customers and firms and need to be
   managed carefully. The key to branding is that consumers
   perceive differences among brands in a product category.
3. Brand equity should be defined in terms of marketing
   effects uniquely attributable to a brand. That is, different
   outcomes result when a product or service is marketed
   under its brand than when it is not.
4. Building brand equity depends on three main factors:
   (1) The initial choices for the brand elements or identities
   making up the brand; (2) the way the brand is integrated
   into the supporting marketing program; and (3) the associations
   indirectly transferred to the brand by links tosome other entity (the company, country of origin, channel
   of distribution, or another brand).
5. Brand audits measure “where the brand has been,” and
   tracking studies measure “where the brand is now” and
   whether marketing programs are having the intended
   effects.
6. A branding strategy identifies which brand elements a
   firm chooses to apply across the various products it sells.
   In a brand extension, a firm uses an established brand
   name to introduce a new product. Potential extensions
   must be judged by how effectively they leverage existing
   brand equity to a new product, as well as how effectively
   they contribute to the equity of the parent brand in turn.
7. Brands may expand coverage, provide protection,
   extend
   an image, or fulfill a variety of other roles for
   the firm. Each brand-name product must have a well-defined
   positioning to maximize coverage, minimize
   overlap, and thus optimize the portfolio.
8. Customer equity is a concept that is complementary to
   brand equity and reflects the sum of lifetime values of all
   customers for a brand.

Question 25

How does Marketing planning begin? - Which are the 3 factors that define “Attractiveness of the market offering” ?

Answer 25

Marketing planning begins with formulating an
offering to meet target customers’ needs or wants.

The customer will judge the offering on three basic elements:

1. product features and quality,
2. service mix and quality, and
3. price

All three elements—products, services, and pricing—must be
meshed into a competitively attractive market offering.

Question 26

How to define a “product”?

Answer 26

Many people think a product is tangible, but

• technically a product is anything that can be offered to a market to satisfy a want or need, including physical goods, services, experiences, events, persons, places, properties, organizations, information, and ideas.

Question 27

How is the “customer-value” hierachy defined?

Answer 27

1 • The fundamental level is the core benefit: the service or benefit the customer is really buying. A hotel
guest is buying rest and sleep. The purchaser of a drill is buying holes. Marketers must see themselves
as benefit providers.
2 • At the second level, the marketer must turn the core benefit into a basic product. Thus a hotel room
includes
a bed, bathroom, towels, desk, dresser, and closet.
3 • At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally expect when they purchase this product. Hotel guests minimally expect a clean bed, fresh towels, working lamps, and a relative degree of quiet.
4 • At the fourth level, the marketer prepares an augmented product that exceeds customer expectations. In developed countries, brand positioning and competition take place at this level. In developing and emerging markets such as India and Brazil, however, competition takes place mostly at
the expected product level.
5 • At the fifth level stands the potential product, which encompasses all the possible augmentations and
transformations the product or offering might undergo in the future. Here companies search for new
ways to satisfy customers and distinguish their offering.

Competition arises at Augmented lvl, however augmented benefits turn into expected ones

Question 28

On which 3 groups are products categorized, according to durability and tangibility?

Answer 28

1. Non-durable goods: Tangible, consumed in one or few uses, proper strategy is to make the avialable in many locations, small margin, and advertise heavily to foster brand preference
2. Durable goods: Tangible, survive many uses -> personal selling, services, warranties, higher margin
3. Services: intangible, inseparable, variable, and perishable products that normally require more quality control, supplier credibility, and adaptability.

Question 29

How are Consumer-goods classified?

Answer 29

1. Convinience: frequently, immediately, and with minimal effort.; Impulse goods -> without planning like candy, newspaper, magazine; Emergency goods -> when a need is urgent—umbrellas during a rainstorm, place them where consumers are likely to experience an urge
2. Shopping: suitability, quality, price, and style.
3. Specialty
4. Unsought

Question 30

How are Industrial-goods classified?

Answer 30

1. materials and parts
   - Raw materials -> farm products, natural products
   - Manufactured materials and parts -> component materials, component parts
2. capital items: long-lasting goods that facilitate developing or managing the finished product
   - Installations
   - Equipments
3. Supplies: short-term goods and services that facilitate developing or managing the
   finished product - “MRO goods”
   - Maintenance and repair
   - Operating supplies
4. business services.
   - Maintenance and repair
   - Advisory

Question 31

What are some “means of differentiation” for PRODUCTS?

Answer 31

Means for differentiation for PRODUCTS include

1. form
2. features
3. performance quality
4. conformance quality
5. durability
6. reliability,
7. repairability
8. style
9. Customization

Question 32

Which are the main SERVICE Differentiators?

Answer 32

service differentiators are

1. ordering ease
2. delivery
3. installation
4. customer training
5. customer consulting,
6. maintenance and repair
7. returns.
   - Controlable
   - Uncontrollable

Question 33

What is DESIGN?

Answer 33

Design is the totality of features that affect the way a product looks, feels, and functions to a consumer.
It offers functional and aesthetic benefits and appeals to both our rational and emotional sides.

In a visually oriented culture, transmitting brand meaning and positioning through design is critical. “In a
crowded marketplace,

Design is especially important with long-lasting durable goods such as automobiles.

Design can shift consumer perceptions to make brand experiences more rewarding.

Question 34

Which are some guidelines for LUXURY MARKETING?

Answer 34

1. Maintaining a premium image for luxury brands is crucial; controlling that image is thus a priority.
2. Luxury branding typically includes the creation of many intangible brand associations and an aspirational image.
3. All aspects of the marketing program for luxury brands must be aligned to ensure high-quality products and
   services
   and pleasurable purchase and consumption experiences.
4. Besides brand names, other brand elements—logos, symbols, packaging, signage—can be important drivers of
   brand equity for luxury products.
5. Secondary associations from linked personalities, events, countries, and other entities can boost luxury-brand
   equity
   as well.
6. Luxury brands must carefully control distribution via a selective channel strategy.
7. Luxury brands must employ a premium pricing strategy, with strong quality cues and few discounts and
   markdowns.
8. Brand architecture for luxury brands must be managed carefully.
9. Competition for luxury brands must be defined broadly because it often comes from other categories.
10. Luxury brands must legally protect all trademarks and aggressively combat counterfeits.

Question 35

How is the “Product Hierarchy” structured?

Answer 35

1. Need family—The core need that underlies the existence of a product family. Example: security.
2. Product family—All the product classes that can satisfy a core need with reasonable effectiveness. Example:
   savings and income.
3. Product class—A group of products within the product family recognized as having a certain functional
   coherence,
   also known as a product category. Example: financial instruments.
4. Product line—A group of products within a product class that are closely related because they perform a
   similar function, are sold to the same customer groups, are marketed through the same outlets or channels,
   or fall within given price ranges. A product line may consist of different brands, a single family brand, or an
   individual brand that has been line extended. Example: life insurance.
5. Product type—A group of items within a product line that share one of several possible forms of the product.
   Example: term life insurance.
6. Item (also called stock-keeping unit or product variant)—A distinct unit within a brand or product line
   distinguishable by size, price, appearance, or some other attribute. Example: Prudential renewable term life
   insurance.

Question 36

What is a Product System?

Answer 36

A product system is a group of diverse but related items that function in a compatible manner.49 For example,
the extensive iPod product system includes headphones and headsets, cables and docks, armbands, cases, power
and car accessories, and speakers.

Question 37

What is a product mix?

Answer 37

A product mix (also called a product assortment) is the set of all products and
items a particular seller offers for sale.

The width of a product mix refers to how many different product lines the company carries.

The length of a product mix refers to the total number of items in the mix. We can also talk about the average length of a line. We obtain this by dividing the total length (here 20) by the number of lines , for an average product line length of 4.

Question 38

What is the depth of the product mix?

Answer 38

The depth of a product mix refers to how many variants are offered of each product in the line. If Tide came in
two scents (Clean Breeze and Regular), two formulations (liquid and powder), and with two additives (with or without bleach), it would have a depth of eight because there are eight distinct variants

Question 39

What is the “consistency” of the product mix?

Answer 39

The consistency of the product mix describes how closely related the various product lines are in end use,
production requirements, distribution channels, or some other way. P&G’s product lines are consistent in that they are consumer goods that go through the same distribution channels. The lines are less consistent in the functions they perform for buyers.

Question 40

What is “Line-stretching” ?

Answer 40

Line Stretching Every company’s product line covers a certain part of the total possible range. For example,
Mercedes automobiles are located in the upper price range of the automobile market. Line stretching occurs when
a company lengthens its product line beyond its current range, whether down-market, up-market, or both ways.

Question 41

Why would a company “down-stretch” ?

Answer 41

Down-Market Stretch A company positioned in the middle market may want to introduce a lower-priced line
for any of three reasons:
1. The company may notice strong growth opportunities. Mass retailers such as Walmart, Target, and others
attract
a growing number of shoppers who want value-priced goods.
2. The company may wish to tie up lower-end competitors who might otherwise try to move up-market. If the
company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end
of the market.
3. The company may find the middle market stagnating or declining.

Marketers face a number of naming choices in deciding to move a brand down-market:
1. Use the parent brand name on all its offerings. Sony has used its name on products in a variety of price tiers.
2. Introduce lower-priced offerings using a sub-brand name, such as P&G’s Charmin Basic and Bounty Basic.
3. Introduce the lower-priced offerings under a different name, such as the Gap’s Old Navy brand. This strategy
is expensive to implement and means brand equity will have to be built from scratch, but the equity of the parent
brand name is protected.

Question 42

What is an “Up- Stretch” ?

Answer 42

Up-Market StretchCompanies may wish to enter the high end of the market to achieve more growth, realize
higher margins, or simply position themselves as full-line manufacturers. Many markets have spawned surprising
upscale segments: Starbucks in coffee, Häagen-Dazs in ice cream, and Evian in bottled water.

Question 43

What is a Two-way stretch?

Answer 43

Purina Dog Food has stretched up and down to create a product line differentiated by benefits to dogs, breadth of
varieties, ingredients, and price:
• Pro Plan ($38.99/18 lb. bag)—helps dogs live long and healthy lives with high-quality ingredients (real meat,
fish, and poultry)
• Purina ONE ($22.99/16.5 lb. bag)—meets dogs’ changing and unique nutritional needs and provides superpremium
nutrition for good health
• Purina Dog Chow ($12.24/18.5 lb. bag)—provides dogs with complete nutrition to build, replenish, and repair
at each life stage
• Alpo by Purina ($8.69/17.6 lb. bag)—offers beef, liver, and cheese flavor combinations and three meaty
varieties

Question 44

What is Line Filling?

Answer 44

A firm can also lengthen its product line by adding more items within the present range. Consider BMW.

Line filling is overdone if it results in cannibalization and customer confusion. The company needs to differentiate
each item in the consumer’s mind with a just-noticeable difference.

Question 45

Which are the situations that call for “ Product MIX pricing “?

Answer 45

We can distinguish six situations calling for product-mix pricing:
1. product line pricing,
2. optional-feature pricing
3. captive-product pricing: Manufacturers
of razors often price them low and set high markups on razor blades.
4. two-part pricing
5. by-product pricing:
Any income earned on the by-products
will make it easier for the company to charge a lower price on its main product if competition forces it to do so.
6. product-bundling pricing: In mixed bundling, the seller offers goods both individually and in bundles, normally charging less for the bundle than if the items were purchased separately

Question 46

What is COBRANDING?

Answer 46

Co-Branding Marketers often combine their products with products from other companies in various
ways. In co-branding—also called dual branding or brand bundling—two or more well-known brands are
combined into a joint product or marketed together in some fashion

Question 47

What are the different types of COBRANDING?

Answer 47

One form of co-branding is
1. same-company co-branding, as when General Mills advertises Trix cereal and
Yoplait yogurt.
2. joint-venture co-branding, such as General Electric and Hitachi lightbulbs in Japan or the Citi Platinum Select AAdvantage Visa Signature credit card in which three different parties are involved.
3. multiple-sponsor co-branding, such as Taligent, a one-time technological alliance of Apple, IBM, and
Motorola.
4. retail co-branding in which two retail establishments use the same location to optimize
space and profits, such as jointly owned Pizza Hut, KFC, and Taco Bell restaurants.

Question 48

What are the requirements for successful ingredient branding?

Answer 48

1. Consumers must believe the ingredient matters to the performance and success of the end product. Ideally,
   this intrinsic value is easily seen or experienced.
2. Consumers must be convinced that not all ingredient brands are the same and that the ingredient is superior.
3. A distinctive symbol or logo must clearly signal that the host product contains the ingredient. Ideally, this
   symbol or logo functions like a “seal” and is simple and versatile, credibly communicating quality and
   confidence.
4. A coordinated “pull” and “push” program must help consumers understand the advantages of the branded
   ingredient. Channel members must offer full support such as consumer advertising and promotions and—
   sometimes in collaboration with manufacturers—retail merchandising and promotion programs.

Question 49

What is packaging?

Answer 49

Packaging includes all the activities of designing and producing the container for a product. Packages might
have up to three layers. Cool Water by Davidoff For Men cologne comes in a bottle (primary package) inside a cardboard box (secondary package), shipped in a corrugated box (shipping package) containing six dozen bottles in cardboard boxes.
Packaging is important because it is the buyer’s first encounter with the product

Question 50

Which factors contribute to the use of packaging as a mkt. tool?

Answer 50

Several factors contribute to the growing use of packaging as a marketing tool:

• Self-service. In an average supermarket, which may stock 15,000 items, the typical shopper passes some 300 products per minute. Given that 50 percent to 70 percent of all purchases are made in the store, the effective package must perform many sales tasks: attract attention, describe the product’s features, create consumer confidence, and make a favorable overall impression.

• Consumer affluence. Rising affluence means consumers are willing to pay a little more for the convenience, appearance, dependability, and prestige of better packages.

• Company and brand image. Packages contribute to instant recognition of the company or brand. In the
store, they can create a billboard effect, as Garnier Fructis does with its bright green packaging in the hair
care aisle.

• Innovation opportunity. Unique or innovative packaging can bring big benefits to consumers and profits to producers. Companies are always looking for a way to make their products more convenient and easier to use—often charging a premium when they do so. The SC Johnson Smart Twist Cleaning System has a handheld sprayer and carousel that rotates between concentrated versions of three different cleaning products;
Kleenex hand towels use a dispenser that fits upside down in a bathroom towel rack; and Kiwi Express Shine
shoe polish has a dispenser and applicator to shine shoes without the need to spread newspaper, wear a glove, or use a brush

Question 51

Which objectives should packaging achieve?

Answer 51

Formally, packaging must achieve a number of objectives:

1. Identify the brand.
2. Convey descriptive and persuasive information.
3. Facilitate product transportation and protection.
4. Assist at-home storage.
5. Aid product consumption.

Question 52

Which type of tests should be done prior to making decisions about packaging?

Answer 52

Engineering tests ensure that the package stands up
under normal conditions; visual tests, that the script is legible and the colors harmonious; dealer tests, that dealers
find the packages attractive and easy to handle; and consumer tests, that buyers will respond favorably.

Question 53

What are the functions of labels?

Answer 53

A label performs several functions.

First, it identifies the product or brand—for instance, the name Sunkist stamped on oranges.

It might also grade the product; canned peaches are grade-labeled A, B, and C. The label might describe the product: who made it, where and when, what it contains, how it is to be used, and how to useit safely.

Finally, the label might promote the product through attractive graphics. Advanced technology allows
360-degree shrink-wrapped labels to surround containers with bright graphics and accommodate more product
information, replacing glued-on paper labels.

Question 54

What is price / pricing?

Answer 54

Price is the one element of the marketing mix that produces revenue; the other elements
produce costs. Price also communicates the company’s intended value positioning of its product or brand.
A well-designed and marketed product can still command a price premium and reap big profits. But new
economic
realities have caused many consumers to reevaluate what they are willing to pay for products and
services, and companies have had to carefully review their pricing strategies as a result.

Question 55

What are the forces that influence pricing in the new digital world?

Answer 55

Buyers can:
• Get instant price comparisons from thousands of vendors.
• Check prices at the point of purchase. Customers can use smart phones to make price comparisons in stores
before deciding whether to purchase, pressure the retailer to match or better the price, or buy elsewhere.
• Name their price and have it met.
• Get products free. Open source, the free software movement that started with Linux, will erode margins for just about any company creating software. The biggest challenge confronting Microsoft, Oracle, IBM, and virtually every other major software producer is: How do you compete with programs that can be had for free? “Marketing Insight: Giving It All Away” describes how firms have been successful with essentially free offerings.
Sellers can:
• Monitor customer behavior and tailor offers to individuals. GE Lighting, which gets 55,000 pricing requests
a year from its B-to-B customers, has Web programs that evaluate 300 factors going into a pricing quote, such
as past sales data and discounts, so it can reduce processing time from up to 30 days to six hours.
• Give certain customers access to special prices. Other business marketers are already using extranets to get a precise handle on inventory, costs, and demand at any given moment in order to adjust prices instantly.

Both buyers and sellers can:
• Negotiate prices in online auctions and exchanges or even in person. Want to sell hundreds of excess and
slightly worn widgets? Post a sale on eBay. Want to purchase vintage baseball cards at a bargain price? Go to www.baseball-cards.com.

Question 56

What are alternatives to normal pricing?

Answer 56

1. Bartering
   Bartering, one of the oldest ways of acquiring goods, is making a comeback through transactions
   estimated to total $12 billion annually in the United States. Trade exchange companies like Florida Barter and Web sites like www.swap.com connect people and businesses seeking win-win solutions
2. Renting
   The sector of the new sharing economy that is really exploding is rentals

Question 57

How do companies usually approach the pricing process?|

Answer 57

In small companies, the boss often sets prices. In large companies, division and product line managers do. Even here, top management sets general pricing objectives and policies and often approves lower management’s proposals.

Where pricing is a key competitive factor (aerospace, railroads, oil companies), companies often establish a
pricing department to set or assist others in setting appropriate prices. This department reports to the marketing department, finance department, or top management. Others who influence pricing include sales managers, production managers, finance managers, and accountants. In B-to-B settings, research suggests that pricing performance improves when pricing authority is spread horizontally across the sales, marketing, and finance units and when there is a balance in centralizing and delegating that authority between individual salespeople and teams and central management

Question 58

What are price reference points?

Answer 58

Possible Consumer Reference Prices
• “Fair Price” (what consumers feel the product should cost)
• Typical Price
• Last Price Paid
• Upper-Bound Price (reservation price or the maximum most consumers would pay)
• Lower-Bound Price (lower threshold price or the minimum most consumers would pay)
• Historical Competitor Prices
• Expected Future Price
• Usual Discounted Price

Question 59

How do price endings affect perception?

Answer 59

-Customers perceive an item priced at $299 to be in the $200 rather than the $300 range; they tend to process prices “left to right” rather than by rounding

• Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company
  wants a high-price image, it should probably avoid the odd-ending tactic
• Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve
  from memory
• Pricing cues such as sale signs and prices that end in 9 are more influential when consumers’ price knowledge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores

Question 60

Which are the 6 steps in setting a pricing policy?

Answer 60

1. Selecting the Pricing Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price

Question 61

Which are types of pricing objectives?

Answer 61

1. Survival
   Companies pursue survival as their major objective if they are plagued with overcapacity, intense
   competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the
   company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction.
2. Maximum Current Profit
   Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors’ reactions, and legal restraints on price.
3. Maximum Market Share
   Some companies want to maximize their market share. They believe a higher sales volume will lead to lower unit costs and higher long-run profit, so they set the lowest price, assuming the market is price sensitive. Texas Instruments famously practiced this market-penetration pricing for years. The company would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell.

The following conditions favor adopting a market-penetration pricing strategy:
(1) The market is highly price
sensitive and a low price stimulates market growth;
(2) production and distribution costs fall with accumulated production experience; and
(3) a low price discourages actual and potential competition.

4. Maximum Market Skimming
   Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony has been a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time. When Sony introduced the world’s first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue from the various segments of the market, the pricethe price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 42-inch Sony LED HDTV cost only $579 20 years later in 2013.

Market skimming makes sense under the following conditions:
(1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing a small volume are high enough to cancel the advantage of charging
what the traffic will bear;
(3) the high initial price does not attract more competitors to the market; and (4) the high price communicates the image of a superior product.

Product-Quality Leadership A company might aim to be the product-quality leader in the market.33
Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived
quality, taste, and status with a price just high enough not to be out of consumers’ reach.

Question 62

What are the determinants of price sensitivity?

Answer 62

Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when

(1) there are few or no substitutes or competitors;
(2) they do not readily notice the higher price;
(3) they are slow to change their buying habits;
(4) they think the higher prices are justified; and
(5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.

Question 63

Which are factors that reduce price-sensitivity?

Answer 63

Factors That Reduce Price Sensitivity
• The product is more distinctive.
• Buyers are less aware of substitutes.
• Buyers cannot easily compare the quality of substitutes.
• The expenditure is a smaller part of the buyer’s total income.
• The expenditure is small compared to the total cost of the end product.
• Part of the cost is borne by another party.
• The product is used in conjunction with assets previously bought.
• The product is assumed to have more quality, prestige, or exclusiveness.
• Buyers cannot store the product.

Question 64

How to estimate demand curves?

Answer 64

Estimating Demand Curves Most companies attempt to measure their demand curves using several
different methods.

• Surveys can explore how many units consumers would buy at different proposed prices. Although consumers might understate their purchase intentions at higher prices to discourage the company from pricing high, they
also tend to actually exaggerate their willingness to pay for new products or services.36

• Price experiments can vary the prices of different products in a store or of the same product in similar territories to see how the change affects sales. Online, an e-commerce site could test the impact of a 5 percent price increase by quoting a higher price to every 40th visitor to compare the purchase response. However, it must do this carefully and not alienate customers or be seen as reducing competition in any way (thus violating the
Sherman Antitrust Act).

• Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. The data
can be longitudinal (over time) or cross-sectional (from different locations at the same time). Building the
appropriate model and fitting the data with the proper statistical techniques call for considerable skill, but
sophisticated price optimization software and advances in database management have improved marketers’ abilities to optimize pricing.

Question 65

What were the findings of the 40-year period study done about price elasticity?

Answer 65

elasticity yielded interesting findings:
• The average price elasticity across all products, -> a 1 percent decrease in prices led to a 2.62 percent increase in sales.
• Price elasticity magnitudes were higher for durable goods than for other goods and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages.
• Inflation led to substantially higher price elasticities, especially in the short run.
• Promotional price elasticities were higher than actual price elasticities in the short run (though the reverse
was true in the long run).
• Price elasticities were higher at the individual item or SKU level than at the overall brand level.

Question 66

Decline in average cost is a result of ?

Answer 66

This decline in the average cost with accumulated production experience is called the experience curve or learning curve.

Question 67

Which are the 7 pricing methods?

Answer 67

1. markup pricing:
   - add a standard markup to the product’s cost.
   - Markups are generally higher on seasonal items (to cover the risk of not selling), specialty items, slower-moving items, items with high storage and handling costs, and demand-inelastic items, such as prescription drugs.
2. target-return pricing
3. perceived-value pricing:
   The company can try to determine the value of its offering in several ways: managerial judgments within the company, value of similar products, focus groups, surveys, experimentation, analysis of historical data, and conjoint analysis.
4. value pricing:
   Value pricing is thus not a matter of simply setting lower prices; it is a matter of
   reengineering the company’s operations to become a low-cost producer without sacrificing quality to attract a large number of value-conscious customers
5. EDLP, Every Day Low Pricing vs. High-Low Pricing, The most important reason retailers adopt EDLP is that constant sales and promotions are costly and have
   eroded consumer confidence in everyday shelf prices. Some consumers also have less time and patience for past traditions like watching for supermarket specials and clipping coupons.
6. going-rate pricing:
   the firm bases its price largely on competitors’ prices.
   In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, all firms normally charge the same price. Smaller firms “follow the leader,” changing their prices when the market leader’s prices change rather than when their own demand or costs change.
7. auction-type pricing.
   - English auctions (ascending bids) have one seller and many buyers. On sites such as eBay and Amazon.com,
   the seller puts up an item and bidders raise their offer prices until the top price is reached. The highest bidder
   gets the item. English auctions are used today for selling antiques, cattle, real estate, and used equipment and vehicles. Kodak and Nortel sold hundreds of patents for wireless and digital imaging via auctions, raising hundreds of millions of dollars.61

• Dutch auctions (descending bids) feature one seller and many buyers or one buyer and many sellers. In the
first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. Ariba—acquired by SAP in 2012—runs business-to-business auctions to help companies acquire low-priced items as varied as steel, fats, oils, name badges, pickles, plastic bottles, solvents, cardboard, and even legal and janitorial work.62

• Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S.
and other governments often use this method to procure supplies or to grant licenses. A supplier will not bid below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls is the bid’s expected profit

Question 68

Why is mark-up pricing still popular?

Answer 68

Still, markup pricing remains popular. First, sellers can determine costs much more easily than they can estimate demand. By tying the price to cost, sellers simplify the pricing task. Second, when all firms in the industry use this pricing method, prices tend to be similar and price competition is minimized. Third, many people feel costplus pricing is fairer to both buyers and sellers. Sellers do not take advantage of buyers when the latter’s demand becomes acute, and sellers earn a fair return on investment.

Question 69

What are the different Auction types?

Answer 69

English auctions (ascending bids) have one seller and many buyers. On sites such as eBay and Amazon.com,
the seller puts up an item and bidders raise their offer prices until the top price is reached. The highest bidder
gets the item. English auctions are used today for selling antiques, cattle, real estate, and used equipment and vehicles. Kodak and Nortel sold hundreds of patents for wireless and digital imaging via auctions, raising hundreds of millions of dollars.61

• Dutch auctions (descending bids) feature one seller and many buyers or one buyer and many sellers. In the
first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. Ariba—acquired by SAP in 2012—runs business-to-business auctions to help companies acquire low-priced items as varied as steel, fats, oils, name badges, pickles, plastic bottles, solvents, cardboard, and even legal and janitorial work.62

• Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other bids. The U.S.
and other governments often use this method to procure supplies or to grant licenses. A supplier will not bid below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls is the bid’s expected profit

Question 70

What is the impact on prices, taking into account other marketing

Answer 70

• Brands with average relative quality but high relative advertising budgets could charge premium prices.
Consumers were willing to pay higher prices for known rather than for unknown products.

• Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low quality and low advertising charged the lowest prices.

• For market leaders, the positive relationship between high prices and high advertising held most strongly in
the later stages of the product life cycle.

Question 71

What are some illegal pricing practices?

Answer 71

U.S. legislation states that sellers must set prices without talking to competitors: Price-fixing is illegal.

it is illegal for a company to set artificially high “regular” prices, then announce a “sale” at prices close to previous everyday prices.

Question 72

What are the different modes of counter-trade?

Answer 72

• Barter. The buyer and seller directly exchange goods, with no money and no third party involved.
• Compensation deal. The seller receives some percentage of the payment in cash and the rest in products.
A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee.
• Buyback arrangement. The seller sells a plant, equipment, or technology to a company in another country
and agrees to accept as partial payment products manufactured with the supplied equipment. A U.S. chemical
company built a plant for an Indian company and accepted partial payment in cash and the remainder in
chemicals manufactured at the plant.
• Offset. The seller receives full payment in cash for a sale overseas but agrees to spend a substantial amount of the
money in that country within a stated time period. In the Gorbachev era, PepsiCo sold its cola syrup to the government
of the Soviet Union for rubles and agreed to buy Russian vodka at a certain rate for sale in the United States

Question 73

Which are the types of Price Discounts and Allowances?

Answer 73

1. Discount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,”
   which means payment is due within 30 days and the buyer can deduct 2 percent by paying within 10 days.
2. Quantity Discount: A price reduction to those who buy large volumes. A typical example is “$10 per unit for fewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller. They can be offered on each order placed or on the number of units ordered over a given period.
3. Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channel
   members if they perform certain functions, such as selling, storing, and record keeping. Manufacturers must offer the same functional discounts within each channel.
4. Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels, motels, and airlines offer seasonal discounts in slow selling periods.
5. Allowance: An extra payment designed to gain reseller participation in special programs. Trade-in
   allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs.

Question 74

What is a downside from using too many discounts?

Answer 74

Word can get around fast that the company’s list price is “soft,” and discounting becomes the norm, undermining the perceived value of the offerings. Some product categories self-destruct by always being on sale.

Question 75

How to arrive at the “Real” price ?

Answer 75

Upper management should conduct a net price analysis to arrive at the “real price” of the offering. The real price is affected not only by discounts but by other expenses that reduce the realized price (see “Promotional Pricing” below). Suppose the company’s list price is $3,000. The average discount is $300. The company’s promotional spending averages $450 (15 percent of the list price). Retailers are given co-op advertising money of $150 to back the product. The company’s net price is $2,100, not $3,000.

Question 76

What are the different types of promotional pricing?

Answer 76

• Loss-leader pricing. Supermarkets and department stores often drop the price on well-known brands to
stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items. Manufacturers of loss-leader brands typically object because this practice can dilute the brand image and bring complaints from retailers who charge the list price. Manufacturers have tried to keep intermediaries from using loss-leader pricing by lobbying for retail-price-maintenance laws, but these laws have been revoked.

• Special event pricing. Sellers will establish special prices in certain seasons to draw in more customers. Every August, there are back-to-school sales.

• Special customer pricing. Sellers will offer special prices exclusively to certain customers. Members of Road Runner Sports’ Run America Club get “exclusive” online offers with price discounts twice those given to
regular customers.

• Cash rebates. Auto companies and other consumer-goods companies offer cash rebates to encourage
purchase of the manufacturers’ products within a specified time period. Rebates can help clear inventories without cutting the stated list price.

• Low-interest financing. Instead of cutting its price, the company can offer low-interest financing. Automakers
have used no-interest financing to try to attract more customers.

• Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over longer
periods and thus lower the monthly payments. Consumers often worry less about the cost (the interest rate) of a loan and more about whether they can afford the monthly payment.

• Warranties and service contracts. Companies can promote sales by adding a free or low-cost warranty or
service contract.

• Psychological discounting. This strategy sets an artificially high price and then offers the product at
substantial savings; for example, “Was $359, now $299.” Discounts from normal prices are a legitimate form of promotional pricing; the Federal Trade Commission and Better Business Bureau fight illegal discount tactics.

Question 77

What is “price discrimination” ?

Answer 77

Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.

In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand.

In second-degree price discrimination, the seller charges less to buyers of larger volumes.

Question 78

What are the cases for 3 degree price discrimination?

Answer 78

1. Customer-segment pricing.
   Different customer groups pay different prices for the same product or service. For example, museums often charge a lower admission fee to students and senior citizens.
2. Product-form pricing. Different versions of the product are priced differently, but not in proportion to their costs. Evian prices a 2-liter bottle of its mineral water as low as $1 but 5 ounces of the same water in a moisturizer spray for as much as $12.
3. Image pricing. Some companies price the same product at two different levels based on image differences. A perfume manufacturer can put a scent in one bottle, give it a name and image, and price it at $10 an ounce. The same scent in another bottle with a different name and image can sell for $30 an ounce.
4. Channel pricing. Coca-Cola carries a different price depending on whether the consumer purchases it from a fine restaurant, a fast-food restaurant, or a vending machine.
5. Location pricing. The same product is priced differently at different locations even though the cost of offering it at each location is the same. A theater varies its seat prices according to audience preferences for different locations.
6. Time pricing. Prices vary by season, day, or hour. Restaurants charge less to “early bird” customers, and some hotels charge less on weekends. Retail prices for roses increase by as much as 200 percent in the lead-up to Valentine’s Day.

Question 79

How does a yield mgmt. service work?

Answer 79

The airline and hospitality industries use yield management systems and yield pricing, by which they offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires.

Question 80

What are th 5 pre-requisites for price discrimination to work?

Answer 80

1. First, the market must be segmentable and the segments must show different intensities of demand.
2. Second, members in the lower-price segment must not be able to resell the product to the higher-price segment.
3. Third, competitors must not be able to undersell the firm in the higher-price segment.
4. Fourth, the cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination.
5. Fifth, the practice must not breed customer resentment and ill will.
6. Sixth, of course, the particular form of price discrimination must not be illegal

Question 81

Which factors can motivate a company to initiate price-cutting?

Answer 81

1. One is excess plant capacity

2. Dominate the market through lower costs

Question 82

What are the traps of price-cutting?

Answer 82

1 • Low-quality trap. Consumers assume quality is low.
2 • Fragile-market-share trap. A low price buys market share but not market loyalty. The same customers will
shift to any lower-priced firm that comes along.
3 • Shallow-pockets trap. Higher-priced competitors match the lower prices but have longer staying power
because of deeper cash reserves.
4 • Price-war trap. Competitors respond by lowering their prices even more, triggering a price war

Customers may assume the item is about to be
replaced by a new model, the item is faulty and is not selling well, the firm is in financial trouble, the price will
come down even further, or the quality has been reduced

Question 83

What are reasons for price increases?

Answer 83

1. Cost inflation. Rising costs unmatched by productivity gains squeeze profit margins and lead companies to regular rounds of price increases.
   called anticipatory pricing.
2. Overdemand.

Question 84

In how many ways can prices be increased?

Answer 84

• Delayed quotation pricing. The company does not set a final price until the product is finished or delivered.
This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment.

• Escalator clauses. The company requires the customer to pay today’s price plus all or part of any inflation increase that takes place before delivery. Escalator clauses base price increases on some specified price index.
They are found in contracts for major industrial projects, such as aircraft construction and bridge building.

• Unbundling. The company maintains its price but removes or prices separately one or more elements that were formerly part of the offer, such as delivery or installation. Car companies sometimes add higher-end
audio entertainment systems or GPS navigation systems to their vehicles as separately priced extras.

• Reduction of discounts. The company instructs its sales force not to offer its normal cash and quantity discounts.

Question 85

Which are “low-visibility” price increases?

Answer 85

Eliminating discounts, increasing minimum order sizes, and curtailing production of lowmargin
products are examples, and contracts or bids for long-term projects should contain escalator clauses based
on such factors as increases in recognized national price indexes.

Question 86

How can competitors react to price decreases?

Answer 86

1. If the competitor has a market share objective, it is likely to match price differences or changes.
2. If it has a profit-maximization objective, it may react by increasing its advertising budget or improving product quality.

Question 87

Which factors must be considered before responding to a price-change in the market?

Answer 87

The company must consider the product’s stage in the life cycle, its importance in the company’s portfolio, the competitor’s intentions and resources, the market’s price and quality sensitivity, the behavior of costs with volume, and the company’s alternative opportunities.