Final Exam

Question 1

What are the 3 C’s of pricing?

Answer 1

Cost Based Pricing

Cost Based Methods: Margin
Unit Margin $ = Selling Price – Cost per Unit
Margin % = unit margin/selling price
Markup % = (selling price – cost per unit)/cost per unit

Cost plus pricing

Break even pricing 

Target Profit Pricing

Markup pricing

Competition Based Methods
Going rate pricing

  Price premium: a strategy that involves tactically pricing your company's 
   product higher than your immediate competition. 

  Computed using actual prices in the market place 

   Price Premium %= (Brand A Price ($) – Benchmark Price ($))/Benchmark 
   Price ($)

Customer Based Methods

 Perceived value pricing: value which customers are willing to pay for a 
 particular product or service based on their perception about the product.

Question 2

What is Penetration vs. Skimming?

Answer 2

Consider skimming when:

  Customers are not price sensitive 

  Economies of scale may not be available 

  Company lacks resources to grow quickly 

 Marketing resources or production capacity 

Consider penetration when:

 Reverse of skimming conditions and: 

 Competition may enter soon 

 Product may catch on quickly with large market.

Question 3

What is Fixed cost allocation?

Answer 3

taking a fixed cost (e.g., factory lease) and spreading it out over several product lines (e.g., based on square feet used).

 Utilities, factory lease, insurance, management, etc., may be allocated. 

  Allocation is somewhat subjective, and different methods of allocation may 
  lead to different “costs” per unit.

Question 4

What are channel margins?

Answer 4

the difference between the price paid by the buyer and the cost to the seller at the point in the distribution channel

Question 5

What is an intermediary and what are the benefits of intermediaries?

Answer 5

Intermediary: independent firms which assist in the flow of goods and services from producers to end-users; they include agents, wholesalers and retailers; marketing services agencies; physical distribution companies; and financial institutions. Also referred to as Middlemen.

Benefits of intermediaries:
Selling: contacting potential customers
Assorting: creating sets of products from several sources
Sorting: breaking bulk
Transporting: physically moving the product
Financing
Grading (especially meat & produce)

Marketing information and research

Question 6

What are economies of scale? What are the four main drivers?

Answer 6

Economies of scale exist when the cost per unit produced is lower (more economical) at high volumes of production (large scale) than it is at low volumes of production.

Four main drivers of economies of scale:

1) Procurement bargaining power, quantity discounts (Walmart)
2) Wider allocation of fixed costs, esp. advertising (GM vs. Chrysler)
3) Experience curve – The experience effect: The cost per unit decreases by 10% to 30% each time production volume doubles.
- Specialization of labor
- Operator skills improve
- Operators innovate
- Management reengineers processes

4) Change in production technologies

Typically involve increasing fixed cost and decreasing variable cost

Question 7

What is the oligopolists dilemma?

Answer 7

The main problem that these firms face is that each firm has an incentive to cheat; if all firms in the oligopoly agree to jointly restrict supply and keep prices high, then each firm stands to capture substantial business from the others by breaking the agreement undercutting the others. Such competition can be waged through prices, or through simply the individual company expanding its own output brought to market.

Question 8

What are giffen goods?

Answer 8

A Giffen good is a low income, non-luxury product for which demand increases as the price increases and vice versa. (i.e., bread, water, wheat)

Question 9

What is the price elasticity of demand?

Answer 9

Change in Quantity / Change in Price

Usually negative, except for giffen goods
Price elasticity changes with price when demand is linear
High elasticity >= high price sensitivity

Question 10

What are some considerations in price tailoring / discrimination?

Answer 10

Do different segments have different elasticities?

Are segments separable?

Will price tailoring have an attractive ROI?
Is the discrimination tolerable?
Different product or service features
Time of day, day of week, season, advance purchase
Quantity of purchase
Geography (international – text books?)
Demographics: Age (children, students, seniors), gender, profession (teacher, soldier)

Question 11

Pros & cons of Licensing, Leasing, Pay-per-use, Subscription pricing:

Answer 11

Outright sale or purchase?
License may reduce risks and limit rights

Pay-per-use:
Good when usage varies across customers

Subscriptions:
May encourage increased usage over pay-per-use

Leasing:
Limits risk, helps with buyers cash flow

Question 12

Compute unit margin

Answer 12

Selling price - cost per unit

Question 13

Compute margin %

Answer 13

Unit margin / selling price

Question 14

Markup %

Answer 14

selling price - cost

unit margin / cost per unit

Question 15

Price premium %

Answer 15

(price - benchmark price) / benchmark price

Question 16

What is the Sherman Anti-Trust Act:

Answer 16

prohibits companies from combining to create a monopoly if the resulting entity might inhibit free trade

Question 17

What is Price Fixing:

Answer 17

when competitors agree to set prices to act like a monopoly (prosecuted under Sherman Anti-Trust Act)

Question 18

What is the Robinson-Patman Act:

Answer 18

Price Discrimination is illegal if it threatens competition (usually apply to B2B level NOT B2C)

Question 19

The FTC (Federal Trade Commission) is authorized to act against deceptive marketing practices, including:

Answer 19

• Promoting a “sale price” that is really the everyday price
• Regular price may be determined by how long the price was offered (more than half the time) or how many units were sold.
• Check policies at the state level.
• Individuals may also sue companies for damages.

Question 20

What is a deductive hypothesis?

Answer 20

developing a hypothesis (or hypotheses) based on existing theory, and then designing a research strategy to test the hypothesis

Question 21

The four questions used to identify critical issues:

Answer 21

How is the process currently performed?
How much does the current method cost?
What is wrong with the present method?
What value would the improvements have?

Question 22

Conjoint Analysis:

Answer 22

Conjoint analysis is the optimal market research approach for measuring the value that consumers place on features of a product or service. This commonly used approach combines real-life scenarios and statistical techniques with the modeling of actual market decisions.

Question 23

What are the four primary ways of setting ad budgets?

Answer 23

1) Percentage of sales
- E.g., Ad budget is 4% of last year’s gross sales.
- More if you have high margins, less if less.
- Caution: Sales will cause advertising.
2) Competitive parity
- Match competitors or match relative to share of market.
3) All you can afford
- Use whatever’s left after paying the last bill!
- Objective and task (considered best by many)
- Figure out what needs to be done; identify costs for each task.

Question 24

How do iconic rote learning and mere exposure contribute to response hierarchies?

Answer 24

Iconic Rote Learning = Through repetition, people learn images, words, jingles, etc. (no reinforcement required).

Mere Exposure = The more a person is exposed to a neutral stimulus, the higher the probability that the person will like the stimulus.

Question 25

Differentiate between beliefs, affective responses, and behavioral responses:

Answer 25

1) Beliefs: Cognitive components of attitude.
- Awareness
- Unaided (without a cue)

Top of mind: % of customers naming a brand first in its category

Aided (with a cue)

Consider distracters: Ask about fictitious brands

Ad awareness can be aided or unaided; ad awareness asks about the ad, not the brand

Knowledge

Like “in depth awareness”

Affective responses: Feelings, emotions, evaluations, liking (subjective responses)

Liking of image

Likert scales often used (agree/disagree)

Affect = evaluation, valuing, liking (subjective)

Behavioral responses: What consumers do.

May include behavioral intentions

Behavioral intentions:

Purchase intention – how likely would you be to buy .. ?

Switching intention – would you be willing to switch..?

Behavior:

Usage – have you ever used/purchased..?

Frequency – how often do you…?