Chapter 11

Question 1

advertising allowance

Answer 1

Tactic of offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts.

Question 2

bait and switch

Answer 2

A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced item (the switch) by disparaging the low priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item.

Question 3

break-even point

Answer 3

The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero.

Question 4

cash discount

Answer 4

Tactic of offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period.

Question 5

competitive parity

Answer 5

A firm’s strategy of setting prices that are similar to those of major competitors.

Question 6

competitor-based pricing method

Answer 6

An approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings.

Question 7

competitor orientation

Answer 7

A company objective based on the premise that the firm should measure itself primarily against its competition.

Question 8

complementary products

Answer 8

Products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other.

Question 9

contribution per unit

Answer 9

Equals the price less the variable cost per unit; variable used to determine the break-even point in units.

Question 10

cost-based pricing method

Answer 10

Determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace.

Question 11

cost of ownership method

Answer 11

A value-based method for setting prices that determines the total cost of owning the product over its useful life.

Question 12

coupon

Answer 12

Provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount.

Question 13

cross-price elasticity

Answer 13

The percentage change in demand for Product A that occurs in response to a percentage change in price of Product B.

Question 14

cumulative quantity discount

Answer 14

Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions.

Question 15

customer orientation

Answer 15

Pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations.

Question 16

demand curve

Answer 16

Shows how many units of a product or service consumers will demand during a specific period at different prices.

Question 17

elastic

Answer 17

Refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded.

Question 18

everyday low pricing (EDLP)

Answer 18

A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer.

Question 19

experience curve effect

Answer 19

Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price.

Question 20

fixed costs

Answer 20

Those costs that remain essentially at the same level, regardless of any changes in the volume of production.

Question 21

geographic pricing

Answer 21

The setting of different prices depending on a geographical division of the delivery areas.

Question 22

grey market

Answer 22

Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.

Question 23

high/low pricing

Answer 23

A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.

Question 24

horizontal price fixing

Answer 24

Occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers.

Question 25

improvement value

Answer 25

Represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products.

Question 26

income effect

Answer 26

Refers to the change in the quantity of a product demanded by consumers because of a change in their income.

Question 27

inelastic

Answer 27

Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.

Question 28

leader pricing

Answer 28

Consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost.

Question 29

listing allowances

Answer 29

Fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products.

Question 30

loss leader pricing

Answer 30

Loss leader pricing takes the tactic of leader pricing one step further by lowering the price below the store’s cost.

Question 31

manufacturer’s suggested retail price (MSRP)

Answer 31

Manufacturers encourage retailers to sell their merchandise at a specific price.

Question 32

markdowns

Answer 32

Reductions retailers take on the initial selling price of the product or service.

Question 33

market penetration pricing

Answer 33

A pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly.

Question 34

maximizing profits strategy

Answer 34

A mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized.

Question 35

monopolistic competition

Answer 35

Occurs when many firms sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.

Question 36

monopoly

Answer 36

Occurs when only one firm provides the product or service in a particular industry.

Question 37

noncumulative quantity discount

Answer 37

Pricing tactic that offers a discount based on only the amount purchased in a single order.

Question 38

oligopoly

Answer 38

Occurs when only a few firms dominate a market.

Question 39

predatory pricing

Answer 39

A firm’s practice of setting a very low price for one or more of its products with the intent of driving its competition out of business; illegal under the Competition Act.

Question 40

prestige products or services

Answer 40

Those that consumers purchase for status rather than functionality.

Question 41

price bundling

Answer 41

Consumer pricing tactic of selling more than one product for a single, lower price than the items would cost sold separately; can be used to sell slow-moving items, to encourage customers to stock up so they won’t purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle.

Question 42

price discrimination

Answer 42

The practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal.

Question 43

price elasticity of demand

Answer 43

Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price.

Question 44

price fixing

Answer 44

The practice of colluding with other firms to control prices.

Question 45

price lining

Answer 45

Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences in quality.

Question 46

price skimming

Answer 46

A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment.

Question 47

price war

Answer 47

Occurs when two or more firms compete primarily by lowering their prices.

Question 48

pricing tactics

Answer 48

Short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats (e.g., lowering price temporarily to meet a competitor’s price reduction) or broadly accepted methods of calculating a final price for the customer that is short-term in nature.

Question 49

profit orientation

Answer 49

A company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing.

Question 50

pure competition

Answer 50

Occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand.

Question 51

quantity discount

Answer 51

Pricing tactic of offering a reduced price according to the amount purchased; the more the buyer purchases, the higher the discount and, of course, the greater the value.

Question 52

rebate

Answer 52

A consumer discount in which a portion of the purchase price is returned to the buyer in cash; the manufacturer, not the retailer, issues the refund.

Question 53

sales orientation

Answer 53

A company objective based on the belief that increasing sales will help the firm more than will increasing profits.

Question 54

seasonal discount

Answer 54

Pricing tactic of offering an additional reduction as an incentive to retailers to order merchandise in advance of the normal buying season.

Question 55

size discount

Answer 55

The most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit (e.g., per gram).

Question 56

substitute products

Answer 56

Products for which changes in demand are negatively related—that is, a percentage increase in the quantity demanded for Product A results in a percentage decrease in the quantity demanded for Product B.

Question 57

substitution effect

Answer 57

Refers to consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.

Question 58

target profit pricing

Answer 58

A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit.

Question 59

target return pricing

Answer 59

A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

Question 60

total cost

Answer 60

The sum of the variable and fixed costs.

Question 61

uniform delivered pricing

Answer 61

The shipper charges one rate, no matter where the buyer is located.

Question 62

value-based pricing method

Answer 62

Focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product.

Question 63

variable costs

Answer 63

Those costs, primarily labour and materials, that vary with production volume.

Question 64

vertical price fixing

Answer 64

Occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) collude to control the prices passed on to consumers.