Chapter 11: Pricing Strategy

Question 1

Bundle Pricing

Answer 1

A form of psychological pricing that involves selling products together at a single price in order to suggest a good value.

Question 2

Cost-Plus Pricing

Answer 2

A cost-oriented pricing approach that involves totaling up the costs of producing a product or completing a project and then adding on a percentage or fixed profit amount. This approach is used when costs are difficult to estimate in advance such as military weapon development.

Question 3

Deceptive Pricing

Answer 3

Illegal under the Federal Trade Commission Act, an approach that involves price deals that mislead the consumer. For example, putting a fake price on a product much higher than the product sells for in the market, crossing it out, and then offering the product at the market price and claiming a price reduction could easily mislead consumers.

Question 4

Going-Rate Pricing

Answer 4

Pricing a product at the average charged in the industry.

Question 5

Markup Pricing

Answer 5

A cost-oriented pricing approach that involves adding a percentage to the invoice price in order to determine the final selling price. For example, if a retailer used a 50 percent markup on a product that was bought from a wholesaler for $1, the selling price to the consumer would be $1.50.

Question 6

Odd Pricing

Answer 6

Also called odd-even pricing, a form of psychological pricing in which the prices are set at one or a few cents or dollars below a round number in order to create the perception that the price is low, for example, 99 cents or $129 rather than $1 or $130.

Question 7

Penetration Pricing Policy

Answer 7

Approach to pricing in which the seller charges a relatively low price on a new product initially in order to grow a market, gain market share, and discourage competition from entering the market.

Question 8

Prestige Pricing

Answer 8

A form of psychological pricing that involves charging a high price to create a signal that the product is exceptionally fine.

Question 9

Predatory Pricing

Answer 9

Practice that involves charging a very low price for a product with the intent of driving competitors out of business. It is illegal under the Sherman Act and Federal Trade Commission Act.

Question 10

Price Discrimination

Answer 10

The practice of charging different prices to different buyers for goods of like grade and quality which is illegal under the Robinson-Patman Act if it lessens or is deemed injurious to competition.

Question 11

Price Elasticity

Answer 11

A measure of consumers’ price sensitivity which is estimated by dividing relative changes in the quantity sold by relative changes in price. If demand is elastic, a slight lowering of price will result in a relatively large increase in quantity demanded.

Question 12

Price Fixing

Answer 12

An unfair business practice outlawed by the Sherman Antitrust Act and the Federal trade Commission Act that involves competitors in a market colluding to set the final price of a product.

Question 13

Promotional Allowance

Answer 13

Price reduction offered to channel members in exchange for performing various promotional activities such as featuring the product in store advertising or on in-store displays.

Question 14

Quantity Discounts

Answer 14

Discounts offered for purchasing a large number of units.

Question 15

Rate-of Return Pricing

Answer 15

Cost-oriented approach to pricing that involves adding a desired rate of return on investment to total costs. Generally, a breakeven analysis is performed for expected production and sales levels and a rate of return is added on.

Question 16

Sealed-Bid Pricing

Answer 16

Bidding process in which each seller submits a sealed bid and attempts to price below competition in order to get the contract. Many large construction and military projects are bid this way.

Question 17

Skimming Pricing Policy

Answer 17

Approach to pricing in which the seller charges a relatively high price on a new product initially in order to recover costs and make profits rapidly and then lowers the price at a later date to make sales to more price-sensitive buyers.

Question 18

Slotting Allowances

Answer 18

Payments to retailers to get them to stock items on their shelves, a common tactic for getting new products into stores.

Question 19

Value Pricing

Answer 19

Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings. For existing products, this can be accomplished by offering more product or service while maintaining or decreasing the dollar price.