Chapter 13: Setting the Right Price

Question 1

Price

Answer 1

That which is given up in an exchange to acquire a good or service.

Question 2

Revenue

Answer 2

The price per unit charged to customers multiplied by the number of units sold. Price x quantity.

Question 3

Costs

Answer 3

The combined financial value of all inputs that go into the production of a company’s products, both directly and indirectly.

Question 4

Profit

Answer 4

Revenues minus expenses.

Question 5

Return on investment (ROI)

Answer 5

Net profits divided by the investment.

Question 6

Market share

Answer 6

A company’s product sales as a percentage of total sales for that industry.

Question 7

Status quo pricing

Answer 7

A pricing objective that maintains existing prices or meets the competition’s prices.

Question 8

Four steps in setting the right price on a product

Answer 8

1) Establish pricing objectives 2) estimate demand, costs, and profits 3) choose a price strategy to help determine a base price 4) fine-tune the base price with pricing tactics.

Question 9

Different Pricing Objectives

Answer 9

Profit-oriented pricing objectives (pursuing profit maximization or satisfactory profits or target ROI); sales-oriented pricing objectives (pursuing market share or sales maximization); status quo pricing (pursuing the status quo price).

Question 10

Price sensitivity

Answer 10

Consumer’s varying levels of desire to buy a given product at different price levels.

Question 11

Price elasticity of demand

Answer 11

A measurement of change in consumer demand for a product relative to the changes in its price.

Question 12

Break-even analysis

Answer 12

The calculation of number of units sold, or total revenue required, a firm must meet to cover its costs, beyond which profit will occur. Formula: Fixed costs / (Variable price per unit / Variable cost per unit)

Question 13

Price strategy

Answer 13

A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle. Price strategies are price skimming, penetration pricing, or status quo pricing.

Question 14

Price skimming

Answer 14

A high introductory price, often coupled with heavy promotion to skim the cream off the top and people are willing to pay more for a perceived above-average product.

Question 15

Penetration pricing

Answer 15

A relatively low price for a product initially as a way to reach the mass market.

Question 16

Experience curves

Answer 16

Curves that show costs declining at a predictable rate s experience with a product increases.

Question 17

Base price

Answer 17

The general price level at which the company expects to sell the good or service.

Question 18

Quantity discount

Answer 18

A unit price reduction offered to buyers buying either in multiple units or at more than a specified dollar amount.

Question 19

Cumulative quantity discount

Answer 19

A deduction from list price that applies to the buyer’s total purchases made during a specific period. (Spend more than $600 in this time period and get a discount).

Question 20

Noncumulative quantity discount

Answer 20

A deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period. (Buy three or more of a product for a discount).

Question 21

Cash discount

Answer 21

A price reduction offered to a consumer, an industrial user, or a marketing intermediary in return for prompt payment of a bill.

Question 22

Functional discount (trade discount)

Answer 22

A discount to wholesalers and retailers for performing channel functions.

Question 23

Seasonal discounts

Answer 23

A price reduction for buying merchandise out of season.

Question 24

Value-based pricing

Answer 24

Setting the price at a level that seems to the customer to be a good price compared with the prices of other options.

Question 25

FOB (free on board) origin pricing

Answer 25

The buyer absorbs the freight costs from the shipping point (“free on board”).

Question 26

Uniform delivered pricing

Answer 26

The seller pays the actual freight charges and bills every purchaser an identical, flat freight charge.

Question 27

Zone pricing

Answer 27

A modification of uniform delivered pricing that divides the total market into segments or zones and charges a flat freight rate to all customers in a given zone.

Question 28

Freight absorption pricing

Answer 28

The seller pays all or part of the actual freight charges and does not pass them on to the buyer.

Question 29

Basing-point pricing

Answer 29

Charging freight from a given (basing) point, regardless of the city from which the goods are shipped. Mostly illegal now.

Question 30

Single-price tactic

Answer 30

Offering all goods and services at the same price (or perhaps two or three prices).

Question 31

Flexible pricing (variable pricing)

Answer 31

Different customers pay different prices for essentially the same merchandise bought in equal quantities.

Question 32

Professional services pricing

Answer 32

Used by people with experience, training, and often certification, fees are typically charged at an hourly rate, but may be based on the solution of a problem or performance of an act.

Question 33

Price lining

Answer 33

Offering a product line with several items at specific price points.

Question 34

Loss-leader pricing

Answer 34

A product is sold near or even below cost in the hope that shoppers will buy other items once they are in the store.

Question 35

Odd-even pricing (psychological pricing)

Answer 35

Odd-numbered prices connote bargains, and even-numbers prices imply quality.

Question 36

Price bundling

Answer 36

Marketing two or more products in a single package for a special price.

Question 37

Unbundling

Answer 37

Reducing the bundle of services that comes with the basic product.

Question 38

Two-part pricing

Answer 38

Charging two separate amounts to consume a single good or service.

Question 39

Bait pricing

Answer 39

A price tactic that tries to get consumers into a store through false or misleading price advertising and then uses high-pressure selling to persuade consumers to buy more expensive merchandise instead.

Question 40

Deceptive pricing

Answer 40

Promoting a price or price saving that is not actually available.

Question 41

Price fixing

Answer 41

An agreement between two or more firms on the price they will charge for a product.

Question 42

Predatory pricing

Answer 42

The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.

Question 43

Resale price maintenance

Answer 43

Attempts by a producer to control a store’s retail price for the product.