Chapter 7

Question 1

Competition-based pricing

Answer 1

Advantage

• fast and cheap
• reaching specific sales goals

Disadvantage

• Product bundles of companies often not comparable
• Competition based prices often contain estimation errors
• customers WTP is often neglected, therefore revenue is given away

Question 2

Cost-based Pricing

Answer 2

Advantage

• Fast and cheap
• Securing specific margin goals
• pricing is based on reliable cost-data

Disadvantage

• A detailed knowledge of cost structures is necessary
• Price premium is often random
• Customers WTP is often neglected , therefore revenue is given away

Question 3

customer based pricing

Answer 3

Advantage :

• Prices reflect customers WTP for product
• Optimal scooping out of potential yields

Disadvantage

• Measuring WTP is generally complicated
• Competition prices and costs are not taken into account

Question 4

Break Even Analysis

Answer 4

advantage

• Practicable instrument for yes no decisions
• Delivers useful hints about reaching the break-even point
• Particularly to be used as a security-calculus

Disadvantage

• subjective assessment of manager, which combinations of price and break-even-volume is easiest to reach
• Requires knowledge of demand function
• value of information is determined by the quality of sales volume estimates
• low precision

Question 5

Maximizing contribution margins

Answer 5

Advantage

• Logically adequate method of optimizing prices
• easy implementation
• highly practicable
• approach is superior to cost-plus-calculation

Disadvantage

• implies knowledge of demand reaction to price position, without offering a solution for their determination
• also knowledge of competitors’reactions and their impact on sales volume is implied
• informational content is determined by the quality of sales volume estimation

Question 6

decision Tree methods

Answer 6

advantages

• easy implementation
• enables accounting of insecurities about reachable sales volumes and price politic reactions of competitors
• Delivers clear to do procedures for choosing a decision criterion

disadvantages

• No information about demand sensitivity
• No information about possible reactions of competitors
• value of information is driven by the quality of the sales and probability estimates
• subjective price decision : choice of decision criterion depends on risk appetitie of manager

Question 7

decision support systems

Answer 7

Disadvantages

• potentially too simple
• methodological skills necessary
• Adjustment of model to the specific problem
• high risk of wrong decisions due to lack of methodical skills and understanding of relationship

Advantages

• is able to represent real buying decisions properly
• extensive market simulation, which attempts to model the complexity of real buying decisions
• often based on conjoint measurement- such data supports complex pricing decisions well
• reaching optimal goals due to integration of several sources of information

Question 8

marginal analytic models

Answer 8

advantages

• enable an analytically exact determination of optimal price regarding sales and profit goals
• The ideal process of price setting creates awarenses of basic cause-effect relations
• all possible prices are taken in account

disadvantage

• demand and cost functions are often based on simplified assumptions far away from reality
• requires sound empirical foundations especially for the demand function
• parametric assumptions

Question 9

target costing

Answer 9

advantage

• market orientation of pricing decision
• target cost splitting enable early testing of existing technologies and performance aspects for efficiency and marketability

disadvantage

• knowledge of an optimal, market-related price is assumed
• additional use of market- orientied tools is needed to determine price
• use of process is limited to early cost configuration of production.service
• possible price and cost dynamics may require updating the calculations