Chapter 14: Developing Pricing Strategies and Programs

Chapter 14: Developing Pricing Strategies and Programs

Essay
101.

Explain why and how the Internet is partially reversing the fixed price concept of
retailing?
Suggested Answer: Computer technology is making it easier for sellers to use
software that monitors customers movements over the Web and allows them to
customize offers and prices. New software applications are also allowing buyers
too compare prices instantaneously through online robotic shoppers or
shopbots.
Page: 432

102.

Level of difficulty: Easy

Prior research has shown that although consumers may have fairly good
knowledge of the range of prices involved, surprisingly few can recall specific
prices of products accurately. When examining products, consumers often employ
reference prices. List the possible prices consumers use as their reference.
Suggested Answer: These reference prices include fair price, (what the product
should cost); typical price; last price paid; upper-bound price (reservation price or
what most consumers would pay); lower-bound price (lower threshold price or the
least consumers would pay); competitor price; expected future price; and usual
discounted price.
Page: 435
Level of difficulty: Hard

103.

In setting the price for their products or services, firms must stop and pause to
reflect on the many factors affecting its pricing policy. List these six factors and
briefly the subsequent components of each one of them.
Suggested Answer: The six-step procedure includes: Step 1: selecting the price
objectivethere are five objectives available here: survival, maximum current
profit, maximum market share, maximum market skimming, or product-quality
leadership. Step 2: determining demandprice sensitivity, estimating demand
curves, and price elasticity. Step 3: estimating costsfixed and variable costs,
accumulated production, activity-based cost accounting, and target costing. Step
4: analyzing competitors costs, prices, and offersreviewing the market and
noting competition. Step 5: selecting a pricing methoduse markup or margin,
perceived-value pricing, value pricing, EDLP, high-low, going-rate pricing, and
auction-type pricing. Step 6: selecting the final priceimpact on other marketing

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activities, company pricing policies, gain-and-risk sharing pricing, and impact of

price on other parties.
Pages: 437450
Level of difficulty: Hard
104.

If the company has determined that the price for its product is less elastic, then
one or more of the following conditions must exist. List these conditions for a
product to have an inelastic demand.
Suggested Answer: Demand is likely to be less elastic under the following
conditions: (1) there are few or no substitutes or competitors; (2) buyers do not
really notice the higher price; (3) buyers are slow to change their buying habits;
and (4) buyers think the higher prices are justified.
Page: 440
Level of difficulty: Hard

105.

According to George E. Cressman Jr. at Strategic Pricing Group, marketers

nurture three major marketing myths about pricing strategy. List these and
briefly explain each
Suggested Answer: (1) Pricing our products to cover full costs will make us
profitablemarketers often do not realize the value they actually do provide. (2)
pricing our products to grow market share will make us profitablemarket share
is determined by value delivery at a competitive advantage. (3) pricing our
products to meet customer demand will make us profitablecutting prices to
keep customers or beat competition offers encourages customs to demand further
price concessions.
Page: 441
Level of difficulty: Hard

106.

An increasing number of companies are basing their prices on the customers

perceived value. Explain the concept of perceived value and what is the key
to pricing in this manner.
Suggested Answer: Perceived value is made up of several elements, such as the
buyers image of the product performance, the channel deliverables, the warranty
quality, customer support, and softer attributes such as the suppliers reputation,
trustworthiness, and esteem. Each potential customer places different weights on
these different elements, with the result that some will be price buyers, others
value buyers, and others loyal buyers. Companies will need different strategies for
each of these three groups.
The key to perceived value pricing is to deliver more value than the competitor
and to demonstrate this to prospective buyers. The company can determine the
value of its offering in several ways: managerial judgments, value of similar
products, focus groups, survey, experimentation, analysis of historical data, and
conjoint analysis.

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Pages: 445446
107.

Level of difficulty: Hard

Explain why value pricing is not just a matter of simply setting lower prices?
Suggested Answer: Value pricing is not just a matter of simply setting lower
prices, it is a matter of reengineering the companys operations to become a lowcost producer without sacrificing quality, and lowering prices significantly to
attract a large number of value-conscious consumers.
Page: 447
Level of difficulty: Easy

108. In a classic study, Farris and Reibstein examined the relationships among relative
price, relative quality, and relative advertising for 227 consumer businesses. List
and briefly explain their findings.
Suggested Answer: (1) Brands with average relative quality but high relative
advertising budgets were able to charge premium prices. Consumers apparently
were willing to pay higher prices for known products than for unknown products.
(2) Brands with high relative quality and high relative advertising obtained the
highest prices. Conversely, brands with low quality and low advertising charge the
lowest prices. (3) The positive relationship between high prices and high
advertising held most strongly in the later stages of the product life cycle for
market leaders.
Page: 448
Level of difficulty: Hard
109. For price discrimination to work, certain conditions must exist. Please list and
briefly explain these conditions.
Suggested Answer: First, the market must be segmentable and the segments must
show different intensities of demand. Second, members in the lower-price
segment must not be able to resell the product to the higher-price segment. Third,
competitors must not be able to undersell the firm in the higher-price segment.
Fourth, the cost of segmenting and policing the market must not exceed the extra
revenue derived from price discrimination. Fifth, the practice must not breed
customer resentment and ill will. Sixth, the particular form of price discrimination
must not be illegal.
Page: 444
Level of difficulty: Hard
110. In responding to a competitors price cut, a firm in a nonhomogeneous market has
more latitude and should consider what four issues before responding?
Suggested Answer: A nonhomogeneous market needs to consider the following
issues: (1) Why did the competitor change the price? To steal the market, to

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utilize excess capacity, to meet changing cost conditions, or to lead an industrywide price change? (2) Does the competitor plan to make the price change
temporary or permanent? (3) What will happen to the companys market share
and profits if it does not respond? (4) What are the competitors and other firms
responses likely to be to each possible reaction?
Page: 460
Level of difficulty: Medium

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Chapter 14: Developing Pricing Strategies and Programs

Short Answer
131.

When is price discrimination legal?

Suggested Answer: Price discrimination is legal if the seller can prove that its
costs are different when selling different volumes or different qualities of the
same product to different retailers.
Page: 453
Level of difficulty: Hard

132.

When a company initiates a price cut in an attempt to dominate the market

through lower costs (such as the $1.00 special lunch menus at key fast food
restaurants) the company must ensure that it does not fall into certain low cost
traps. List these three traps.
Suggested Answer: There is the low-quality trap, the fragile-market-share
trap, and the shallow-pockets trap.
Page: 455
Level of difficulty: Hard

133.

Movie matinees are priced lower than the evening shows; afternoon ball games
are sometimes priced cheaper than the evening games, television advertising costs
less when run after midnight. These are examples of what type of price
discrimination?
Suggested Answer: These are examples of time pricing discrimination.
Pages: 453454
Level of difficulty: Easy

134.

The final price of the product must take into account the brands quality and
advertising relative to the competition. In the classic study conducted by Farris
and Reibstein, which examined the relationships among relative price, relative
quality, and relative advertising for 227 consumer businesses found certain
findings. Please list the conclusions of these findings.
Suggested Answer: The findings suggested that price is not as important as
quality and other benefits in the market offering
Page: 448
Level of difficulty: Hard

135. IKEA and Southwest Airlines are among the best practitioners of value pricing
win loyal customers by charging a fairly low-price for a high-quality offering.
Why is value pricing not a matter of simply lowering prices?
Suggested Answer: Value pricing is a matter of reengineering the companys
operations to become a low-cost producer without sacrificing quality, and
lowering prices significantly to attract a large number of value-conscious
customers.
Pages 446447
Level of difficulty: Medium

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136.

Your local retailer has instituted an EDLP pricing program for his stores. What
would one of the reasons be for the retailer to adopt an EDLP pricing policy?
Suggested Answer: Constant sales and promotions are costly and have eroded
consumer confidence in the credibility of everyday shelf prices.
Page: 447
Level of difficulty: Easy

137.

As a newly hired marketing associate, you have been given the responsibility to
reduce the costs of your product by utilizing a process called target costing.
Explain how you would go about implementing a target costing program.
Suggested Answer: Market research is used to establish a new products desired
functions and the price at which the product will sell, given its appeal and
competitors prices. Deducting the desired profit margin from this price levels the
target cost that must be achieved. Each cost elementdesign, engineering,
manufacturing, and sales must be examined to reduce costs to the target cost
range.
Page: 443
Level of difficulty: Hard

138.

How would you explain the concept of price elasticity to a co-worker?

Suggested Answer: Price elasticity is the responsiveness or demand of the
products sales in relationship to price. Price elasticity depends on the magnitude
and direction of the contemplated price change. It may be negligible with a small
price change and substantial with a large price change. It may differ for a price cut
versus a price increase, and there may be a price indifference band within which
price changes have little or no effect.
Pages: 440441
Level of difficulty: Medium

139. The importance of pricing for profitability was demonstrated in a 1992 study by
McKinsey & Company. Summarize their findings.
Suggested Answer: McKinsey concluded that a 1 percent improvement in price
created an improvement in operating profits of 11.1 percent.
Page: 434
Level of difficulty: Medium
140. Executives complain that pricing is a big headache. Many companies determine
their costs then add the industrys traditional margin. Your firm decides to use
price as a strategic tool in the marketing mix. What is it that your firm needs to
do to be able to use price as a strategic tool?
Suggested Answer: You must customize prices and offerings based on segment
value and costs. This requires a thorough understanding of consumer pricing
psychology and a systematic approach to setting, adapting, and changing prices.
Page: 433- 434
Level of difficulty: Hard

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Chapter 14: Developing Pricing Strategies and Programs

141. In the description of the newest product by your firm, is the phrase we want this
brand to be priced like a Starbucks, and other premium products. What pricing
strategy will your company employ to deliver on this objective?
Suggested Answer: Your strategy should be pricing the product as the productquality leader in the market. Perhaps an affordable luxury.
Page: 438
Level of difficulty: Medium
142. When the salesperson at the local luxury car dealer pitches a customer on the
dealers free maintenance for 36 months or 36,000 miles whichever comes first,
the salesperson is trying to overcome the cars initial high cost by using what
method?
Suggested Answer: The salesperson is trying to convince the customer that if
offers the lowest total cost of ownership (TCO).
Page: 439
Level of difficulty: Easy
143. How would you (citing George Cressmans advise) counter-argue this pricing
strategy myth: pricing our products to grow market share will make us
profitable?
Suggested Answer: Cressman reminds marketers that share is determined by
value delivery at competitive advantage, not just price cuts.
Page: 441
Level of difficulty: Hard
144.

In deciding on the price for your products introduction, you must consider what
is best described as the three Cs. Define and explain what is meant by this
statement?
Suggested Answer: The three Cs mean the customers demand schedule, the
cost function, and the competitors prices. Costs set a floor to the price. Customer
demand sets the ceiling and competitors prices and the price of substitutes
provide an orientation point.
Page: 444
Level of difficulty: Medium

145.

As a small firm in a commodity industry, you are often faced with a pricing policy
that can best be described as going-rate pricing. Explain how this pricing policy
works.
Suggested Answer: With going-rate, pricing the firm bases its price largely on
competitors prices. The firm might charge the same, more, or less than major
competitors.
Page: 447
Level of difficulty: Medium

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146.

Explain the type of auction found on eBay.

Suggested Answer: This is an English auction in which the seller puts up an item
and bidders raise the offer price until the top price is reachedascending bid
auction.
Page: 448
Level of difficulty: Medium

147.

As the marketing manager for your product, you have been forced to take a price
increase due to cost pressures from your suppliers. After adjusting for customer
and consumer demand fluctuations and elasticity, you feel that you have
accounted for all possible reactions. Your boss, however, feels differently and says
that your recommendations are not complete. What other factors, besides
consumer/customers, are affected by price changes?
Suggested Answer: Other parties that must be accounted for include distributors
and wholesalers, dealers, the sales force, government agencies, and your
competitors reactions.
Page: 450
Level of difficulty: Medium

148.

Your company has recently sold its resin producing plant in India to a local
concern. As part of the sales price, your company agrees to accept as partial
payment the production of the resin at an agreed upon price for six years. This is
an example of what type of countertrade?
Suggested Answer: This is an example of a buyback arrangement.
Page: 451
Level of difficulty: Medium

149.

In attempt to rein in the continued discounting by the sales force, you

implement a net price analysis program to arrive at the real price of your
products. Describe the steps necessary to implement such a program.
Suggested Answer: A net price analysis should adjust for discounts and
promotional allowances/pricing such as loss-leader pricing, special-events
pricing, cash rebates, low-interest financing, longer payment terms, warranties
and service contracts, and psychological discounting employed by the sales force.
Pages: 452543
Level of difficulty: Medium

150. As the marketing manager for a brand leader in your industry, you noticed that a
competitor has just reduced his prices by 15 percent on his number one selling
product. In a memo to your boss, you must outline how (or if you wish to)
respond to this latest threat. In creating your letter, you outline five possible
response alternatives that are available to you. These five responses are?
Suggested Answer: You can maintain price; maintain price and add value to the
brand; reduce price to match competitor (or go even below his price); increase

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price and improve quality; and finally you can launch a low-price fighter/flanker
brand/line.
Page: 460
Level of difficulty: Medium

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