Module 2 - Setting the Price

Question 1

A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price.

Answer 1

Setting the Price

Question 2

Pricing Policy (6 Steps)

Answer 2

Step 1: Selecting the Pricing Objective
Step 2: Determining Demand
Step 3 - Estimating Costs
Step 4: Analysing Competitors’ Costs, Prices, and Offers
Step 5: Choosing your Pricing Method
Step 6: Determining the Final Price

Question 3

The company first decides where it wants to position its market offering. The clearer a
firm’s objectives, the easier it is to set price.

Answer 3

Step 1: Selecting the Pricing Objective

Question 4

Five Major Objectives:

Answer 4

1. Survival
2. Maximum Current Profit
3. Maximum Market Share
4. Maximum Market Skimming
5. Product-Quality Leadership

Question 5

Companies pursue survival as their major objective if they are plagued with
overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business.

Answer 5

Survival

Question 6

Many companies try to set a price that will maximize current profits. They estimate the
demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment.

Answer 6

Maximum Current Profit

Question 7

Some companies want to maximize their market share. They believe a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive.

Answer 7

Maximum Market Share

Question 8

The following conditions favor adopting a market-penetration pricing strategy:

Answer 8

(1) the market is highly price sensitive and a low price stimulates market growth;
(2) production and distribution.

Question 9

It makes sense under the following conditions:
(1) A sufficient number of buyers have a high current demand;
(2) the unit costs of producing a small volume are high enough to cancel the advantage of
charging what the traffic will bear;
(3) the high initial price does not attract more competitors to the market;
(4) the high price communicates the image of a superior product. Companies unveiling a
new technology favor setting high prices to maximize market skimming.

Sony is a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time.

Answer 9

Maximum Market Skimming

Question 10

A company might aim to be the product-quality leader in the market. Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.

Answer 10

Product-Quality Leadership

Question 11

It is the degree to which demand changes when the cost of a product or service changes. It is commonly measured using the price elasticity of demand, which states that some consumers won’t pay more if a lower-priced option is available.

Answer 11

Price Sensitivity

Question 12

Factors Leading to Less Price Sensitivity

Answer 12

1. The product is more distinctive
2. Buyers are less aware of substitutes
3. Buyers cannot easily compare the quality of substitute
4. The expenditure is a smaller part of the buyer’s total income
5. The expenditure is small compared to the total cost of end product
6. Part of the cost is borne by another party
7. The product s used in conjunction with assets previously bought
8. The product is assumed to have more quality, prestige or exclusiveness
9. Buyers cannot store the product

Question 13

Most companies attempt to measure their demand curves using several different methods.

Answer 13

Estimating Demand Curves

Question 14

Measuring Demand Curves Using Several Different Methods:

Answer 14

Surveys
Statistical Analysis
Consumer Preference and Income Data
Competitor Pricing and Market Conditions

Question 15

Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t always the net result.

Answer 15

Step 3 - Estimating Costs – ensuring profits

Question 16

Type of Cost and Level of Production:

Answer 16

Fixed Costs
Variable Costs
Average Costs

Question 17

Also known as overhead, are costs that do not vary with production level or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on regardless of output.

Answer 17

Fixed Costs

Question 18

It vary directly with the level of production.

Answer 18

Variable Costs

Question 19

It is the cost per unit at that level of production; it equals total costs divided by production.

Answer 19

Average Costs

Question 20

• Cost is typically the expense incurred for making a product or service that is sold by a company.
• Price is the amount a customer is willing to pay for a product or service.
• The cost of producing a product has a direct impact on both the price of the product and the profit earned from its sale.

Answer 20

Cost vs. Price

Question 21

The appropriate price of a product or service is based on supply and demand. The two opposing forces are always trying to achieve equilibrium, whereby the quantity of goods or services provided matches the market demand and its ability to acquire the goods or service. The concept allows for price adjustments as market conditions change.

Answer 21

Price

Question 22

Every company has to track its competitors carefully. That especially goes for pricing, costs, and promotional offers. Companies need to know just how much their competitors’ prices can fluctuate in comparison to their own. They also need to be ready to adjust to those fluctuation.

Answer 22

Step 4: Analyzing Competitors’ Costs, Prices, and Offers

Question 23

Analyzing Competitors’ Costs, Prices, and Offers:

Answer 23

Price Lists
Retail and Wholesale Prices
Promotions and Discounts

Question 24

Companies select a pricing method that includes one or more of these three considerations.

Answer 24

Step 5: Choosing your Pricing Method

Question 25

Six Price-Setting Methods:

Answer 25

Mark-Up Pricing
Target-Return Pricing
Perceived-Value Pricing
Value Pricing
Going-Rate Pricing
Auction-Type Pricing

Question 26

Generally higher on seasonal items (to cover the risk of not selling), specialty items, slower-moving items, items with high storage and handling costs, and demand-inelastic items, such as prescription drugs.

Answer 26

Mark-Up Pricing

Question 27

The firm determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on investment, often use this method.

Answer 27

Target-Return Pricing

Question 28

It is a customer’s own perception of a product or service’s merit or desirability to them, especially in comparison to a competitor’s product.

Answer 28

Perceived Value Pricing

Question 29

It is customer-focused, meaning companies base their pricing on how much the customer believes a product is worth.

Answer 29

Value-Based Pricing

Question 30

Smaller firms “follow the leader,” changing their prices when the market leader’s prices change rather than when their own demand or costs change. Some may charge a small premium or discount, but they preserve the difference.

Answer 30

Going-Rate Pricing

Question 31

It is growing more popular, especially with scores of electronic marketplaces selling everything from pigs to used cars as firms dispose of excess inventories or used goods.

Answer 31

Auction-Type Pricing

Question 32

3 Major Types of Auctions

Answer 32

English Auctions
Dutch Auctions
Sealed-Bid Auctions

Question 33

They have one seller and many buyers. On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise the offer price until the top price is reached. The highest bidder gets the item. They are used today for selling antiques, cattle, real estate, and used equipment and vehicles.

Answer 33

English Auctions

Question 34

It feature one seller and many buyers, or one buyer and many sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price.

Answer 34

Dutch Auctions

Question 35

Let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. government often uses this method to procure supplies. A supplier will not bid below its cost but cannot bid too high for fear of losing the job. The net effect of these two pulls is the bid’s expected profit.

Answer 35

Sealed-Bid Auctions

Question 36

Step 6: Determining the Final Price

Answer 36

Step 6: Determining the Final Price

Question 37

The final price must take into account the brand’s quality and advertising relative to the competition.
• Brands with average relative quality but high relative advertising budgets could charge premium prices. Consumers were willing to pay higher prices for known rather than for unknown products.
• Brands with high relative quality and high relative advertising obtained the highest prices. Conversely, brands with low quality and low advertising charged the lowest prices.
• For market leaders, the positive relationship between high prices and high advertising held most strongly in the later stages of the product life cycle. These findings suggest that price is not necessarily as important as quality and other benefit.

Answer 37

Impact of Other Marketing Activities

Question 38

The price must be consistent with company pricing policies. Yet companies are not averse to establishing pricing penalties under certain circumstances.

Answer 38

Company Pricing Policies

Question 39

Buyers may resist accepting a seller’s proposal because of a high perceived level of risk. The seller has the option of offering to absorb part or all the risk if it does not deliver the full promised value. Some recent risk-sharing applications include big computer hardware purchases and health plans for big unions.

Answer 39

Gain-and-Risk Sharing Pricing

Question 40

How will distributors and dealers feel about the contemplated price?
If they don’t make enough profit, they may choose not to bring the product to market.

Answer 40

Impact of Price on Other Parties