Pricing

Question 1

A small change in price of a product within the price indifference band causes a substantial change in the
demand of that product. True or False?

Answer 1

False, a price indifference band is a price range in which price changes have little or no effect.

Question 2

The key to effectively using perceived-value pricing is to deliver value that is on par with your competitors. True or False?

Answer 2

False. The key of using perceived-value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers.

Question 3

Offset is a form of countertrade where sellers receive full payment in cash and agree to spend a substantial amount of the money in the country where they are trading within a stated time period. True or False?

Answer 3

That’s true.

Question 4

Trade-in allowances reward dealers for participating in advertising and sales support programs.

Answer 4

False. Trade-in allowances are granted for turning in an old item when buying new ones.

Question 5

Psychological discounting involves setting an artificially high price and then offering the product at substantial savings. True or False?

Answer 5

That’s true.

Question 6

Loss leader pricing dilutes a companyʹs brand image. True or False?

Answer 6

That’s true.

Question 7

What is loss leader pricing?

Answer 7

Loss leader pricing is a technique where supermarkets and department stores drop prices drop the price of a well-known brand to stimulate demand.

Question 8

Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases. True or False?

Answer 8

That’s true.

Question 9

Shrinking the amount of product instead of raising the price is a good way to counteract consumer resistances to price increases. True or False?

Answer 9

That’s true.

Question 10

Which of the following is the first step in setting a pricing policy?
A) selecting a pricing method
B) selecting the pricing objective
C) determining demand
D) estimating cost
E) analyzing competitorsʹ costs, prices, and offers

Answer 10

Answer: B

Question 11

What are the steps in pricing a company should follow?

Answer 11

1. Selecting the price objective
2. Determining the demand
3. Estimating Costs
4. Analysing competitors costs, prices and offers
5. Selecting the pricing methode
6. Selecting the final price

Question 12

When consumers examine products, they often compare an observed price to an internal price they remember. This is known as a(n) ________ price.

A) m arkup
B) reference
C) market-skimming
D) accumulated
E) target

Answer 12

Answer B)

When consumers examine products, they often compare an observed price to an internal price they remember. This is known as a reference price.

Question 13

A company decided to conduct a market survey for its new MP3 player which it had priced at $150. However, in the survey, 95 % of the participants said that the maximum they would pay for the MP3 player is $100. This is an example of which of the following possible consumer reference prices?

A) historical competitor price
B) expected future price
C) usual discounted price
D) upper-bound price
E) last price paid

Answer 13

Answer: D

Question 14

What are possible customer reference prices?

Answer 14

• fair price (what the product should cost)
• typical price
• last price paid
• upper-bound price (reservation price or what most customers would pay
• lower-bound price (lower threshold price, or the least what cnsumers would pay)
• competitor price
• expected future price
• usual discounted price

Question 15

A company has developed the prototype of a mobile phone which it plans to launch in the next few months. The phone comes equipped with the most advanced technological features. As part of its test marketing efforts, it allows customers to examine and use the prototype and also gathers feedback regarding product features and price. The results of this test marketing effort show that customers are willing to pay at least $500, considering the phoneʹs various features. As such, the company has found out about the customersʹ ________.

A) last paid price
B) expected future price
C) lower-bound price
D) upper-bound price
E) typical price

Answer 15

The company has found out about the customersʹ lower- bound price (the least consumers would pay).

Question 16

A company that is looking to maximize its market share would do well to follow ________ pricing.

A) markup
B) market-penetration
C) market-skimming
D) survival
E) target-return

Answer 16

A company that is looking to maximize its market share would do well to follow market-penetration pricing and sets the lowest price, assuming the market is price sensitive.

Question 17

A market-penetration pricing strategy is most suitable when _______.

A) a low price slows down market growth
B) production and distribution costs fall with accumulated production experience
C) a high price dissuades potential competitors from entering the market
D) the market is characterized by inelastic demand
E) a low price encourages actual competition

Answer 17

Answer: B

A market-penetration pricing strategy is most suitable when:

1. the market is highly price sensitive and a low price stimulates market grow
2. production and distribution costs fall with accumulated production experience
3. and, a low price discourages actual and potential competition

Question 18

When Apple introduced its iPhone, it was priced at $599. This allowed Apple to earn the maximum amount of revenue from the various segments of the market. Two months after the introduction, the price has come down to $399. What kind of a pricing did Apple adopt?

A) loss-leader pricing
B) market-penetration pricing
C) market-skimming pricing
D) target-return pricing
E) value pricing

Answer 18

Answer: C

Apple had adoped market skimming pricing, in which prices start high and slowly drop over time.

Question 19

The first step in estimating demand is to ________.

A) analyze competitorsʹ cost
B) select a pricing method
C) understand what affects price sensitivity
D) calculate fixed costs
E) decipher the experience curve

Answer 19

Answer: C

The first step in estiating demand is to understand what affects price sensitivity.

Question 20

Which factors leading to less price sensivity?

Answer 20

• The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of substitutes
• The expenditure is a smaller part of the buyers total income
• The expenditure is small compared to the total cost of the end product
• Part of the cost is borne by another party
• The product is used in conjunction with assets bought previously
• The product is assumed to have more quality, prestige or exclusiveness
• Buyers cannot store the product

Question 21

Consumers are less price sensitive when ________.

A) price is only a small part of the total cost spent on the product over its lifetime
B) they perceive the higher prices to be unjustified
C) they change their buying habits regularly
D) there are many substitutes and competitors in the market
E) they are buying high-cost items

Answer 21

Answer: A

Question 22

Which of the following is true regarding price elasticity?

A) The higher the elasticity, the less is the volume growth resulting from a 1 percent price reduction.
B) Within the price indifference band, price changes have little or no effect on demand.
C) If demand is elastic, sellers will consider increasing the price.
D) Price elasticity does not depend on magnitude and direction of the contemplated price change.
E) When demand is inelastic, sellers should lower prices in order to increase total revenue.

Answer 22

Answer: B

Question 23

What does price elasticity mean?

Answer 23

If demand hardly changes with a small change in price, the demand is inelastic. If demand changes considerably, demand is elastic.

The higher the elasticity, the greater the volume growth resulting from 1% price reduction.

Price elasticity depends on the magnitude and direction of the contemplated price change.

Question 24

Mattʹs retail store offers all its products at $2 lower than its competitors throughout the year. The store never runs any promotional campaigns or offers any additional special discounts. Mattʹs retail store is following a(n) ________.

A) auction-type pricing policy
B) target-plus pricing policy
C) everyday low pricing policy
D) high-low pricing policy
E) going-rate pricing policy

Answer 24

Answer: C

Mattʹs retail store is following an everyday low pricing policy, which is an important type of value pricicing. The advantage of this strategy is that the constant low prices eliminate the week-to-week price uncertainty and the high-low pricing of promotion oriented competitors.

Question 25

Everyday low pricing (EDLP) is most suitable if ________.

A) consumers are willing to perform activities such as clip coupons to avail of discounts
B) consumers tend to associate price with quality
C) customers are insensitive to changes in price
D) the cost of conducting frequent sales and promotions is high
E) consumers have sufficient time to find the best prices

Answer 25

Answer: D

The most important reason to adopt EDLP is that constant sales and promotion are costly and have eroded consumers confidence in the credibility of everyday shelf prices.

Consumers also have less time and patience for time consuming traditions such as watching for supermarkt specials and clipping coupons.

Question 26

A Japanese firm is ready to sell its recent technological innovation to the U.S. government. But it has asked for 80 % in cash and the rest in mica (a mineral). The Japanese firm is looking to enter into a(n) ________ with the U.S. government.

A) functional discount
B) compensation deal
C) buyback arrangement
D) offset agreement
E) barter deal

Answer 26

Answer: B

The Japanese firm is looking for a compensation deal, where a seller receives some percentage of the payment in cash and the rest in products.

Question 27

Armac Ltd., is a sluice-box manufacturer based in China. A sluice-box is used for gold prospecting. Armac is interested in selling a few of its machines to an American mining company, but it wants 95 percent of the
machinesʹ price in gold and the rest in ores recovered by using the machines. This is an example of a ________.

A) buyback arrangement
B) functional discount
C) barter deal
D) compensation deal
E) sealed bid

Answer 27

Answer: A

This is an example of a buyback arrangement, where a seller receives a percentage of the payment in cash and the remainder in products manufactured with the machine.

Question 28

When supermarkets and department stores drop the price on well-known brands to stimulate store traffic,
they are said to be following ________.

A) value pricing
B) loss-leader pricing
C) special event pricing
D) high-low pricing
E) everyday low pricing

Answer 28

When supermarkets and department stores drop the price on well-known brands to stimulate store traffic,
they are said to be following loss-leader pricing.

Question 29

The price of tickets to the opera vary depending on where the person would like to be seated–in the gallery
or in the stalls. This is an example of ________.

A) channel pricing
B) time pricing
C) image pricing
D) product-form pricing
E) location pricing

Answer 29

This is an example of location pricing, where the same product is priced differently at different locations even though the cost of offering it at each location is the same.

Question 30

For price discrimination to work ________.

A) the market must be segmentable and the segments must show similar intensities of demand
B) members in the lower-price segment must be able to resell the product to the higher-price segment
C) competitors must be able to undersell the firm in the higher-price segment
D) the practice must not breed customer resentment and ill will
E) the extra revenue derived from price discrimination must not exceed the cost of segmenting and policing the market

Answer 30

Answer: D

For price discrimination to work the practice must not breed customer resentment and ill will. Additional conditions that must be given are:

• The market must be segmentable and the segments must show DIFFERENT intensities of demand
• Members in the lower-price segment must NOT be able to resell the product to the higher-price segment
• Competitors must NOT be able to undersell the firm in the higher-price segment
• The cost of segmentation must not exceed the extra revenue derived from price discrimination

Question 31

When a company requires the customers to pay todayʹs price and all or part of any inflation increase that takes place before delivery, it is known as ________.

A) special-customer pricing
B) an escalator clause
C) delayed quotation pricing
D) unbundling
E) time pricing

Answer 31

Answer: B

The company requires the customer to pay todays price and all or part of any inflation increase that takes place before delivery.

Question 32

How does the Internet help sellers discriminate between buyers and vice-versa?

Answer 32

The Internet helps buyers to:

• Get instant price comparisons from thousands of vendors
• Name their price and have it met
• Get products free

The Internet helps sellers to:

• Monitor customer behavior and tailor offers to individuals
• Give certain customer access to special prices

The Internet helps both buyers and sellers to negotiate prices in online auctions and exchanges or even
in person.

Question 33

What are the different forms of countertrade?

Answer 33

• Barter: The buyer and seller directly exchange goods, with no money and no third party involved.
• Compensation deal: The seller receives some percentage of the payment in cash and the rest in products.
• Buyback arrangement: The seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment.
• **Offset: **The seller receives full payment in cash but agrees to spend a substantial amount of the money in that country within a stated time period.

Question 34

What are the different types of price discounts and allowances?

Answer 34

The different types of price discounts and allowances are:

• Discount: A price reduction given to buyers who pay their bills promptly.
• Quantity discount: A price reduction offered to those who buy in large volumes.
• Functional discount: This is offered by a manufacturer to trade-channel members if they perform certain functions like selling, storing, and record keeping.
• Seasonal discount: This is a price reduction given to those who buy merchandise or services out of season.

Allowances ( extra payment designed to gain reseller articipation in special programs):

1. Trade-in allowances - These are granted for turning in an old item when buying a new one.
2. Promotional allowances - These reward dealers for participating in advertising and sales support programs.

Question 35

What pricing methods do you know?

Answer 35

• Cost-driven pricing
• Competition-based pricing
• Customer-Driven Pricing

Question 36

What is the goal of strategic pricing?

Answer 36

Goal:

• to find the combination of margin and market share, that maximizes the long term profitability.

Question 37

What is the purpose of strategic pricing?

Answer 37

Purpose of Strategic Pricing

• to price more profitably by capturing more value, not necessarily be making more sales.
• to take care how the “Willingness to Pay” (WTP) can be increased by changing customers’ product perceptions or their price expectations

Question 38

What are the characteristics of strategic pricing?

Answer 38

Characteristics:

• Proactive
• Profit-driven
• Value-based

Question 39

What is the objective of tactical (operational) pricing?

Answer 39

Objective:

• Operational Price setting is to find out the WTP of a specific, given Marketing-Mix

Question 40

What is Willingness-to-Pay?

Answer 40

Willingness-to-Pay (WTP):

• Willingness to pay refers to the maximum price that the customer is prepared to pay for a service
• In opposite to the operational price setting the strategic Pricing is trying to develop the WTP.

Question 41

What are the 8 Steps to a better pricing?

Answer 41

1. Assess value customers place on our product
2. Consider variation in perceived product value
3. Assess customer price sensitivity.
4. Identify an optimal pricing structure.
5. Consider competitors‘ reactions.
6. Monitor prices realized at the transaction level
7. Assess customers‘ emotional response.
8. Analyze revenue versus cost to serve.
9. Communicate value

Question 42

What is value-based pricing?

Answer 42

«Value based pricing is pricing a product the way it is perceived by customers in the marketplace»

Question 43

What are the 5 Steps of value-oriented Pricing?

Answer 43

1. Conceptualize (entwerfen) customer value
2. Understand the Key value drivers for customers
3. Calculate customer value
4. Communicate Value to Customers
5. Develop Ways to Capture Customer Value

Question 44

What is the reason for segmented pricing?

Answer 44

The reason is that a one-size fits all approach to pricing reduces profitability and intensifies customer pricing pressure:

„In the future, what you pay will be determined by where you live and who you are“

Question 45

What are Price Fences, and which do you know?

Answer 45

Price Fences are a means to charge different customer different prices.

Types include:

• Buyer identification fences
• Purchase location fences (incl. Channel)
• Time purchase fences
• Purchase quantity fences
  
  • Volume discount
  • Order discount

Question 46

What are the 6 steps of value based segmentation?

Answer 46

• Determine basic segmentation criteria
• Identify discriminating value drivers
• Determine operational constraints and advantages with regard to those value drivers
• Create primary and secondary segments
• Create detailed segment descriptions
• Develop metrics and fence

Question 47

What are Price Metrics, and which common categories do you know?

Answer 47

Price metrics are the units to which the price is applied. They define the terms of exchange – what exactly the buyer will receive per units of price paid.

Common Categories:

• per use
• per times spent consuming
• per person who consumes
• per amount of benefit received

Question 48

What are the Benefits Of Policy Driven Pricing?

Answer 48

• Provides greater consistency across customer base
• Increases perceptions of price integrity
• Mitigates cost associated with ad-hoc discounting
• Creates more efficient selling process
• creates more profit in the long term, although in the short term you may lose some business

Question 49

What are the four elements of Price Perception?

Answer 49

Question 50

What do you know about the reference price?

Answer 50

• Customers place the current price of a service in relation to a reference price.
• The reference price is the stored price perception
• Internal reference price: is the price that is stored in the memory of the customer due to past purchasing experience or expectations.
• External reference price: customers derive the external reference price from outside – for example from price lists or price advertisements.
• Customers can certainly compare the internal reference price of a service with the external reference price of another service.