Quiz

Question 1

What are the three basic competitive stances?

Answer 1

A competitive stance is a company’s posture or set of response tendencies.

1) Cooperative – will match the price change
2) Aggressive – will maintain the price or make a smaller change
3) Dismissive – will maintain the price

Question 2

How to determine the stance of your competitors?

Answer 2

Must collect relevant information to anticipate their reaction to your price change.

Possible historical indicators:

• Past responses towards your company
• Past responses towards other companies
• Past behaviors of key executives

Question 3

What is price signaling?

Answer 3

Price signaling: when publicly available pricing information is intentionally managed to have an effect on competitors.

Price signaling techniques:

• News releases
• Press conferences
• Other forms of publicity

Explicit private communication is illegal.

Question 4

How can we apply game-theory to manage price competition?

Answer 4

Pricing behaviors themselves can communicate information.
Game theory involves examining possible patterns of behaviors in order to help predict and manage price competition.
A payoff matrix is a useful tool to simplify this process – two competitors, two prices, four possible price situations.

Question 5

Which type of items have the highest price awareness?

Answer 5

Big-ticket items
Items whose prices are relatively stable over time
Items in product categories where there is little inter-brand variation
Items where the customer had opportunities to think about its price

Question 6

What is price origin beliefs?

Answer 6

Beliefs concerning the factors that cause a price to be high or low that can be used as rules of thumb for making price-level inferences

These beliefs:
> Could be more detailed or less detailed
> May or may not be accurate

Examples of beliefs:

• Items that show higher-quality materials will have higher prices.
• Items that have more useful features will have higher prices.
• Prices of items whose production is more labor-intensive are likely to be higher.
• Larger packages of a product will have lower per-ounce prices than smaller packages.

Question 7

What is internal reference price?

Answer 7

A price or price range that is constructed in the customer’s mind and is used as a basis for evaluating an encountered price
All three sources of price-level knowledge can contribute to the IRP – how specific the IRP is depends on the price-level knowledge used to create it:
Much knowledge = specific price
Less knowledge = price range

Question 8

How to increase price-level awareness?

Answer 8

Simplify the price structure

Use media advertising

Question 9

How to decrease price-level awareness?

Answer 9

Complicate prices

• Difficult price format
• Partitioned price

Complicate the product with branded variants.

Question 10

What is price meaning knowledge?

Answer 10

The knowledge of what the price may communicate about the product, the seller and/or the offer.

Question 11

What is price meaning knowledge?

Answer 11

A pricing strategy that minimizes the use of both round-number and just-below pricing, such as $3.17, $8.44 or $176.54
Suggests to consumers that the retailer is engaged in a careful price-setting process
Encourages acceptance of the seller’s price in a negotiation
Is more common among low numbers

Question 12

Why are emotions important for pricing?

Answer 12

Price-related feelings:
Have a strong effect on the buyer’s response to a price
Are usually negative since a price involves giving up something of value
Can be conceptualized by the pain of paying – how much it hurts to pay

Question 13

What has framing to do with pricing?

Answer 13

Since the buyer’s feelings are related to perceived gains and losses, the seller should consider how to manage the buyer’s perceptions.

Framing: the management of the factors that influence the set of gains and losses that comprise the buyer’s perception of price; methods relate to price format

Question 14

What is the Weber-Fechner Law?

Answer 14

There are “diminishing returns” for the mental effects of a stimulus – each additional unit of external stimulation will add less to the mental effect of the stimulus than its predecessor.
Applied to pricing: each additional dollar will add less to the pain of paying than its predecessor

Question 15

What is loss aversion?

Answer 15

Loss aversion: the tendency of a loss to hurt more than an equal-sized gain feels good

Example: A salary increase of $2,000 will feel good. A salary decrease of $2,000 would hurt more than the increase felt good.

Question 16

Can you explain the Perceptions of Price as a single loss?

Answer 16

Occurs when the price is equal to, or in the range of, the customer’s IRP; is the simplest perception
The size of a price change in percent terms will be an important factor in determining the buyer’s pain of paying.
Purchase aggregate: a set of related purchases that consumers consider as one purchase

Question 17

Can you explain the Perceptions of Price as two losses?

Answer 17

Occurs when a product’s price exceeds a consumer’s IRP
The first loss is the expected price.
The second loss is the perceived surcharge.
A price perceived as two losses will be more negatively evaluated than that price perceived as one loss.

The seller can avoid negative evaluations of a price that is perceived as two losses by:
Monitoring the IRPs of consumers
Downsizing the product or the number of items in the product’s package
Downsizing relies on the disinclination to adjust IRPs when a package size decreases.

Question 18

Can you explain the Perceptions of Price as a loss and a gain

Answer 18

Occurs when a product’s price is less than a consumer’s IRP
The loss is the expected price.
The gain, or perceived discount, would be experienced when the customer notices that the price is lower than his or her IRP.
Is more positively evaluated than a price perceived as a single loss

Question 19

Can you explain the Perceptions of Price as a Gain Forgone?

Answer 19

Occurs when a price is not perceived as a loss at all due to income received at about the same time
Perceiving a price as a gain forgone results in a more favorable evaluation of price than perceiving it as a single loss.
Seller’s can create this link at times of monetary gain, i.e. tax refund time.

Question 20

What are the implications of prospect-theory for the seller?

Answer 20

A price perception of a loss and gain should be encouraged - the key is to manage the customer’s IRP.
When price awareness is low and a price has been decreased, the seller can create this awareness by advertising an external reference point.

Question 21

What are the applications of the external reference price?

Answer 21

It is most likely to be effective when what is being claimed is a discount of moderate size – around 20-40 percent.
Discount claims without an external reference price will be interpreted as a 10-15 percent discount.
Claims of lower or higher amounts are not advisable.

Question 22

How does customers fairness judgement influence their price perception?

Answer 22

The degree to which a consumer judges a price as fair will influence his/her pain of paying that price:

Most painful when it is judged as unfair
Less painful when it is judged fair
Least painful when it is judged as “more than fair”

Question 23

When is a Price Increase Considered Fair?

Answer 23

When an item’s price exceeds the IRP and the consumer experiences a perceived surcharge, the feeling about the surcharge will depend on whether:

The price is one of long standing
The consumer is new to the market
The seller’s costs are perceived to have increased

Question 24

Which factors can enhance the value of a gain?

Answer 24

The value of a gain can be affected by:

The size of the gain
Dangling
Perceived responsibility

Question 25

What is dangling?

Answer 25

Retail advertising works to draw the consumer’s attention to the offered discounts.

Dangling: the practice of putting a discount or other offer in the consumer’s mind in a way that is vivid and immediate.
These vivid images causes the reference point to shift so that passing up the discount involves incurring a loss.

Question 26

What is perceived responsibility?

Answer 26

Perceived discounts can take on an emotional potency beyond the amount of money involved.

One reason: customers feel responsible for having obtained the discount
Feelings of personal responsibility are important when customers perceive prices as involving gains.