Chp 11: pricing concepts + strategies

Question 1

define price

Answer 1

the overall sacrifice a consumer is willing to make to acquire a specific product or service

Question 2

what does price sacrifice include

Answer 2

includes money paid to seller to acquire item, value of time necessary to acquire product, travel costs, taxes, shipping costs

Question 3

5 points to price

Answer 3

1) Consumers judge benefits a product delivers against price and make purchase decision based on this overall judgement of value
2) Successful pricing - match product with consumer’s value perceptions
3) Firm can price products too high and too low (too low price can signal low quality, poor performance or other negative attributes). Too low price can cause retailers and manufacturers to lose money and negatively impact perceived positioning of product, even if it brings in new consumers
4) Consumers want high value, which may come with relatively high or low price depending on bundle of benefits product/service delivers
5) Price affects revenue

Question 4

explain 5Cs

Answer 4

Successful pricing strategies built through 5 critical components

Question 5

list 5Cs

Answer 5

1) company objectives
2) customers
3) costs
4) competition
5) channel members

Question 6

C: company objectives explain

Answer 6

Each firm embraces an objective that fits with where mgmt thinks firm needs to go to be successful. Specific objectives reflects how firm intends to grow (by increasing profits, sales, decreasing competition, building customer satisfaction)

Question 7

C: company objectives: 4 orientations

Answer 7

1) profit orientation
2) sales orientation
3) competitor orientation
4) customer orientation

Question 8

define profit orientation

Answer 8

company objective that can be implemented by focusing on target profit pricing, maximizing profits or target return pricing

Question 9

define target profit pricing

Answer 9

pricing strategy implemented by firms where they have a particular profit goal as their overriding concern, uses price to stimulate a certain level of sales at a certain profit per unit

Question 10

define maximizing profits strategy

Answer 10

mathematical model that captures all factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized

Question 11

define target return pricing

Answer 11

pricing strategy implemented by firms less concerned with absolute level of profits and more interested in rate at which their profits are generated relative to their investments, designed to produce a specific return on investment, usually expressed as % of sales

Question 12

define sales orientation

Answer 12

company objective based on belief that increasing sales will help firm more than increasing profits

Question 13

C: company objectives: 2 points to sales orientation

Answer 13

1) Can also set market share objective and set prices to have high market share. Can gain market share by offering high quality product at fair price
2) Implicitly for sales to increase, consumers must see greater value

Question 14

define competitor orientation

Answer 14

company objective based on premise that firm should measure itself primarily against its competition

Question 15

define competitive parity

Answer 15

firm’s strategy of setting prices similar to those of major competitors

Question 16

C: company objectives: 2 points to competitor orientation

Answer 16

1) competitive parity
2) Value only implicitly considered, competitors may be using value as pricing strategy so copying strategy may provide value

Question 17

define customer orientation

Answer 17

pricing orientation that explicitly invokes concept of customer value and setting price to match consumer expectations

Question 18

C: company objectives: 2 points to customer orientation

Answer 18

1) Can make it easy for customers to pay, no haggle price structure to make purchase process simpler and easier thereby lowering overall price and increasing value
2) Can offer very high prices, state of the art products in full anticipation of limited sales to enhance firm’s rep and image and increase company’s value in mind of consumers

Question 19

C: customers: what is this about

Answer 19

About understanding consumer’s reactions to different prices

Question 20

C: customers: 2 things to consider

Answer 20

1) demand curves and pricing

2) price elasticity of demand

Question 21

C: customers: define demand curve

Answer 21

shows how many units of a product/service consumers will demand during specific period at different prices

Question 22

C: customers: define prestige products/services

Answer 22

those that consumers purchase for status > functionality

Question 23

C: customers 3 points to demand curves

Answer 23

1) As price increases, demand decreases (downward sloping, can be linear or curved)
2) X - quantity demanded
3) Y - price

Question 24

C: customers: explain prestige goods for demand curve

Answer 24

For these products, high price leads to greater status associated with it and greater exclusivity so high price leads to greater quantity sold up to certain point (demand curve upward sloping)

Question 25

C: customers: explain price elasticity of necessary items

Answer 25

Consumers less sensitive to price increases for necessary items because they have to purchase these products even if price rises

Question 26

C: customers: why do we look at price elasticity of demand

Answer 26

Marketers need to know how consumers will respond to price increase/decrease so they can determine if it makes sense to raise/lower price

Question 27

define price elasticity of demand

Answer 27

measures how changes in price affects quantity of product demanded

Question 28

formula for price elasticity of demand

Answer 28

% change in quantity demanded / % change in price

Question 29

C: customers:price elasticity of demand: market is elastic

Answer 29

Market is price sensitive (elastic) when price elasticity < -1 (1% decrease in price -> more than 1% increase in Qd)

Question 30

C: customers: define elastic

Answer 30

refers to market for product that s price sensitive, relatively small changes in price will generate fairly large changes in quantity demanded

Question 31

C: customers: price elasticity of demand: explain market is inelastic

Answer 31

Market is price insensitive (inelastic) when price elasticity > -1 (1% decrease in price -> less than 1% increase in quantity sold), used when firms want to raise prices

Question 32

C: customers define inelastic

Answer 32

refers to market for product that is price insensitive, relatively small changes in price will not generate large changes in Quantity demanded

Question 33

C: customers: explain price elasticity for price increases and decreases

Answer 33

Consumes more sensitive to price increases than decreases & price elasticity of demand changes along demand curve

Question 34

C: customers: 3 factors affecting price elasticity of demand

Answer 34

1) income effect
2) substitution effect
3) price elasticity

Question 35

C: customers: define income effect

Answer 35

refers to change in quantity of a product demanded by consumers because of a change in their income

Question 36

C: customers: 1 point to income effect

Answer 36

as income rises, demand shifts from lower priced products to higher priced alternatives. As income falls, demand shifts from less expensive alternatives or purchase less

Question 37

C: customers: define substitution effect

Answer 37

refers to consumers ability to substitutes other products for the focal brand, thus increasing price elasticity of demand for focal brand

Question 38

C: customers: 2 points to substitution effect

Answer 38

1) Greater availability of substitute products, higher price elasticity of demand
2) Brand loyal consumers won’t be affected by this and will have low price elasticity of demand. Make brand less substitutable and make it unique

Question 39

C: customers define cross price elasticity

Answer 39

% change in demand for product A that occurs in response to % change in price of product B

Question 40

C: customers: define complementary products

Answer 40

products whose demand curves are positively related, such that they rise or fall together, a % increase in demand for one results in % increase in demand for another

Question 41

C: customers: define substitute products

Answer 41

products for which changes in demand are negatively related - % increase in quantity demanded for product A results in % decrease in quantity demanded for product B

Question 42

C: costs: what should prices not be based on

Answer 42

Prices should not be based on costs because consumers make purchase decisions on perceived value

Question 43

C: costs: 2 costs

Answer 43

1) variable cost
2) total cost
3) fixed cost

Question 44

C: cost define variable cost

Answer 44

costs, primarily labour and materials, that vary with production volume

Question 45

C: cost: define fixed cost

Answer 45

costs remain essentially at the same level, regardless of any changes in volume of production

Question 46

C: cost: define total cost

Answer 46

sum of variable + fixed cost

Question 47

C: cost define break even point

Answer 47

point at which number of units sold generates just enough revenue to equal total costs, profits are 0

Question 48

C: cost: define contribution per unit

Answer 48

price - variable cost per unit, variable used to determine break even point in units

Question 49

C: cost: formula for break even point in units

Answer 49

Fixed costs / contribution / unit

Question 50

C: cost 2 points to break even analysis

Answer 50

1) Analyze relationship among cost, price, revenue and profit over different levels of production and sales
2) Break even analysis can help managers assess pricing strategies, conditions in which different prices may make product profitable

Question 51

C: cost 3 disadvantages of break even analysis

Answer 51

1) normally not a single price so use avg;
2) price often gets reduced as quantity increases because costs decrease so multiple analyses needed;
3) cannot indicate how much units will sell at given price

Question 52

C: competition: 4 types

Answer 52

1) monopoly
2) oligopoly
3) monopolistic competition
4) pure competition

Question 53

C: competition 2 points to monopoly

Answer 53

1) One firm control market

2) Less price competition & fewer firms

Question 54

C: competition: 5 points to oligopoly

Answer 54

1) Handful of firms control market
2) More price competition & fewer firms
3) Firms typically change prices in reaction to competition to avoid upsetting stable competitive environment

Question 55

C: competition: define price war

Answer 55

occurs when 2+ firms compete primarily by lowering prices

Question 56

C: competition: why do firms do price war

Answer 56

1) if new entrants want to gain market share, and established firms drop prices to preserve market share
2) avoiding appearance of being insensitive to consumers
3) overreacting to price decrease by competitors

Question 57

C: competition: 3 points to monopolistic competition

Answer 57

1) Many firms selling differentiated products at different prices
2) Less price competition & many firms
3) Products may be viewed as substitutes but not perfect substitutes

Question 58

C: competition: what may be done instead of price war in oligopoly

Answer 58

Better service, higher quality, brand loyalty may be used as strategies instead, consumers do not buy solely on basis of price

Question 59

C: competition: 5 points to pure competition

Answer 59

1) Many firms selling commodities for same price
2) More price competition & many firms
3) Consumers perceive products as substitutable
4) Price usually set according to laws of supply + demand
5) Lowering prices may create price war + erode profits, can instead de-commoditized products by differentiating them

Question 60

C: channel members: what does it include

Answer 60

Includes manufacturers, wholesalers, retailers

Question 61

C: channel members: define grey market

Answer 61

employs irregular but not necessarily illegal methods, generally it legally circumvents authorized channels of distribution to sell goods at lower prices than those intended by manufacturer

Question 62

C: channel members: 1 point

Answer 62

Need to balance your needs with what the manufacturer wants. If manufacturer wants high prices to convey better image, and retail wants lower prices, there will be conflict

Question 63

C: channel members: 2 points to grey market

Answer 63

1) To prevent grey market, can put disclaimer warning consumers that warranty is void unless item is purchased from authorized dealer
2) Grey market may occur when retailer has too much product in stock and sells product at lower price to non authorized dealers

Question 64

how to choose pricing strategy

Answer 64

specific to product and target market

Question 65

3 pricing methods

Answer 65

1) cost based method
2) competitor based method
3) value based method

Question 66

define cost based pricing method

Answer 66

determines final price to charge by starting with cost, without recognizing role that consumers or competitors prices play in marketplace

Question 67

1 point to cost based pricing method

Answer 67

Assumes costs do not vary much for levels of production

Question 68

define competitor based pricing method

Answer 68

approach that attempts to reflect how firm wants consumers to interpret its products relative to competitors offerings

Question 69

2 points to competitor based pricing method

Answer 69

1) Setting prices at same level or close to competitor’s price signals to consumers that product is similar
2) Higher prices signals greater features, better quality or some other valued benefit

Question 70

define value based pricing method

Answer 70

focus on overall value of product offering as perceived by consumers, who determine value by comparing benefits they expect the product to deliver with sacrifice to acquire product

Question 71

2 types of value based pricing methods

Answer 71

1) improvement value method

2) cost of ownership method

Question 72

define improvement value pricing method

Answer 72

represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products

Question 73

define cost of ownership pricing method

Answer 73

determines total cost of owning product over its useful life

Question 74

1 point to cost of ownership pricing method

Answer 74

Consumers may be willing to pay more for product because over its lifetime, it will cost less than cheaper alternative

Question 75

3 pricing strategies

Answer 75

1) everyday low pricing
2) high/low pricing
3) new product pricing

Question 76

define everyday low pricing strategy

Answer 76

strategy companies use to emphasize continuity of their retail prices at level somewhere between regular, non sale price and deep discount sale prices their competitors may offer

Question 77

2 points to everyday low pricing strategy

Answer 77

1) EDLP adds value by reducing search costs - consumers spend less time comparing prices at different stores
2) Some consumers perceive stores that use EDLP carry lower quality goods, whereas high/low pricing stores tend to carry better quality items. But again consumers decision comes down to value.

Question 78

define high/low pricing strategy

Answer 78

relies on promotion of sales, during which prices are temporarily reduced to encourage purchases

Question 79

explain high/low pricing strategy

Answer 79

Some consumers may relish challenge of getting lowest price or so be price sensitive they are willing to spend time and effort to seek lowest price

Question 80

explain new product pricing strategy

Answer 80

When product is already on market, its approximate value has already been established

Question 81

3 examples of new product pricing

Answer 81

1) price skimming
2) market penetration pricing
3) consumers use of reference pricing

Question 82

define price skimming

Answer 82

strategy of selling new product/service at high price that innovators + early adopters are willing to pay to obtain it, after high-price market becomes saturated and sales slow, firm lowers price to capture (or skim) the next most price sensitive segment

Question 83

2 things to ensure price skimming is effective

Answer 83

1) For this to work, product must be perceived as breaking new ground in some way, offering new benefits unavailable in alternative products
2) competitors can’t be able to enter market easily, otherwise price competition will force lower prices

Question 84

2 reasons to use price skimming

Answer 84

1) May use with high price early to signal high quality, or to limit demand to build production capacities, or to earn back high R&D investment, or to test consumer’s price sensitivity
2) Can prevent competition through patent protections, inability to copy (too complex, raw materials hard to get) or high costs of entry

Question 85

drawback and point to price skimming

Answer 85

1) Drawback: high unit costs associated with producing small volumes and may causes discontent for consumers who feel cheated when prices drop too quickly
2) Profits flow from margin

Question 86

define market penetration pricing

Answer 86

setting initial price low for intro of new product/service with objective of building sales, market share, profits quickly

Question 87

define experience curve effect

Answer 87

drop in unit cost as accumulated volume sold increases; as sales continue to grow, costs continue to drop allowing even further reductions in price

Question 88

3 points to market penetration pricing

Answer 88

1) Profits flow from volume
2) Strategy discourages competition from entering market because profit margin is low and if costs to produce product drop because of accumulated volume, competitors that enter will face higher unit costs until volume catches up with early entrants
3) experience curve effect

Question 89

drawback to market penetration pricing

Answer 89

Drawback: firm needs to have capacity to satisfy rapid rise in demand, low price does not signal high quality, avoid if some segments of market are willing to pay more for product otherwise firm is leaving money on table

Question 90

define reference price

Answer 90

price against which buyers compare actual selling price of product and that facilitates their evaluation process

Question 91

2 points to consumers use of reference pricing

Answer 91

1) When consumers view sale price and compare with reference price, perceptions of value of deal increases
2) Consumers also rely on reference prices stored in memory (based on what they last paid or what they expect to pay for a slice of pizza for example), and what comparative products sell for

Question 92

define pricing strategy

Answer 92

long term approach in setting prices broadly in integrative effort based on 5 Cs of pricing

Question 93

define pricing tactics

Answer 93

short term methods used to focus on 5Cs, can be responses to competitive threats (like lowering price temporarily to meet competitor’s price reduction) or broadly accepted methods of calculating final price for customer that is short term in nature

Question 94

3 pricing tactics

Answer 94

1) consumer pricing tactics
2) consumer price reductions
3) business to business pricing tactics

Question 95

when is consumer pricing tactics used

Answer 95

when firms sell products directly to consumers

Question 96

3 types of consumer pricing tactics

Answer 96

1) price lining
2) price bundling
3) leader pricing

Question 97

define price lining

Answer 97

establishing price floor and price ceiling for entire line of similar products and then setting a few other price points in between to represent distinct differences in quality

Question 98

1 point to price lining

Answer 98

Having options at different price points means firm can satisfy range of tastes and budgets

Question 99

define price bundling

Answer 99

pricing of more than one product for single, lower price than items would cost sold separately

Question 100

1 point to price bundling

Answer 100

Can be used to sell slow moving items, to encourage consumers to stock up so they won’t purchase competing brands, to encourage trial of new product, or provide incentive to purchase less desirable product to obtain more desirable one in same bundle

Question 101

define leader pricing

Answer 101

building store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above store’s cost

Question 102

1 point to leader pricing

Answer 102

When consumer goes in store to get deal, consumer will likely also pick up other items they need (these items are priced at high profit margins so purchase covers lower markup on deal product)

Question 103

explain consumer price reductions

Answer 103

Final price consumer pays has often been adjusted from original price

Question 104

3 types of consumer price reductions

Answer 104

1) markdowns
2) quantity discounts for consumers
3) coupons and rebates

Question 105

3 points to markdowns

Answer 105

1) Reductions retailers take on initial selling price of product
2) Integral component of high/low strategy
3) Markdowns enable retailers to get rid of slow moving/obsolete goods, sell seasonal items after season, match competitor’s prices on goods, promote goods and increase sales (once consumer in store they buy more goods)

Question 106

define size discount

Answer 106

most common implementation of quantity discount at consumer level. The larger the quantity bought, the less the cost of unit

Question 107

2 points to quantity discounts for consumers

Answer 107

1) size discount

2) By buying large quantities consumers less likely to switch brands and consume more of product

Question 108

define coupon

Answer 108

provides stated discount to consumers on final selling price of specific item, retailer handles discount

Question 109

define rebates

Answer 109

consumer discount in which portion of purchase price is returned to buyer in cash. The manufacturer issues refund

Question 110

1 point to coupons

Answer 110

Goal of coupons: prompt consumer to try product, reward loyal consumers, encourage repurchase. By saving consumer money, firm adds value to products

Question 111

1 point to rebates

Answer 111

Hassle factor for rebates is higher, they must mail in documentation, and wait for cheque. But rebates provide greater control than coupons and valuable customer info

Question 112

5 types of business to business pricing tactics

Answer 112

1) seasonal discounts
2) cash discounts
3) allowances
4) quantity discounts
5) uniform delivered vs geographic pricing

Question 113

define seasonal discounts

Answer 113

additional reduction offered as incentive to retailers to order goods in advance of normal buying season

Question 114

1 point to seasonal discounts

Answer 114

Dealers weigh extra cost of carrying inventory for longer period of time and benefits of larger profit

Question 115

define cash discounts

Answer 115

additional reduction reduces invoice cost if buyer pays invoice prior to end of discount period

Question 116

1 point to cash discounts

Answer 116

By encouraging early pmt, B2B sellers benefit from time value of money. They can invest money or avoid borrowing money + paying interest on it

Question 117

define allowances

Answer 117

ads or listing allowances (additional price reductions) offered in return for specific behaviours

Question 118

define listing allowance

Answer 118

fee paid to retailers to get new products into stores or to gain more or better shelf space

Question 119

2 points to allowances

Answer 119

1) Advertising allowances offered to retailers if they agree to features manufacturer’s product in their ads and promotional efforts
2) Large listing allowances could be considered bribery and put small manufacturers that can’t afford allowances at competitive disadvantage

Question 120

define quantity discounts

Answer 120

providing reduced price according to amount purchased

Question 121

define cumulative quantity discount

Answer 121

discount based on amount purchased over specified period and usually involves several transactions

Question 122

define noncumulative quantity discount

Answer 122

discount based on amount purchased in single order

Question 123

3 points to quantity discounts

Answer 123

1) The more the buyer purchases, the higher the discount and the greater the value
2) cumulative quantity discount - Encourages resellers to maintain current supplier because cost to switch is discount
3) noncumulative quantity discount - Provides incentive to purchase more goods immediately

Question 124

define uniform delivered

Answer 124

shipper charges one rate, no matter where buyer is located

Question 125

define geographic pricing

Answer 125

different prices charged depending on geographical delivery area

Question 126

1 point to uniform delivered

Answer 126

Makes things simple for buyer and seller

Question 127

1 point to geographic pricing

Answer 127

Can be advantageous for shipper because reflects actual shipping charges more closely than uniform delivered

Question 128

how to prices fluctuate

Answer 128

Prices tend to fluctuate naturally and respond to varying market conditions

Question 129

what do firms often engage in

Answer 129

Firms often engage in pricing practices that can unfairly reduce competition or harm consumers through fraud + deception

Question 130

laws for pricing

Answer 130

Laws for this can be poorly enforced and difficult to prove

Question 131

4 types of legal + ethical issues of pricing

Answer 131

1) deceptive or illegal price ads
2) predatory pricing
3) price discrimination
4) price fixing

Question 132

3 points to deceptive or illegal price ads

Answer 132

1) It is always illegal and unethical to lie is ads, a certain amount of puffery is allowed
2) Price ads should never deceive consumers to point of causing harm
3) example: advertising regular price and sale price but regular price is fake

Question 133

3 types of deceptive or illegal price ads

Answer 133

1) deceptive reference price
2) loss leader pricing
3) bait and switch

Question 134

2 points to deceptive reference price

Answer 134

1) If reference point has been inflated or fake, ads are deceptive and may cause harm to consumer
2) Competition bureau determines regular price by using 1 of 2 tests

Question 135

2 tests by competitive bureau to determine if we have deceptive reference price

Answer 135

1) volume test - substantial quantity of products were sold at price noted or higher
2) time test - necessitates products being sold at regular price for substantial period of time

Question 136

define loss leader pricing

Answer 136

takes tactic of leader pricing one step further by lowering price below store’s cost

Question 137

1 point to loss leader pricing

Answer 137

Example: buy one get one free

Question 138

define bait and switch

Answer 138

deceptive practice of luring customers in store with very low advertised price on an item (bait) only to aggressively pressure them into purchasing a high priced item (switch) by disparaging the low priced item, comparing it unfavourably with higher priced model, or professing an inadequate supply of lower priced item

Question 139

1 point to bait and switch

Answer 139

Laws for this are difficult to enforce because salespeople are always trying to get customers to trade up without deliberately baiting them, key to proving this centers on intent of seller, which is difficult to prove

Question 140

define predatory pricing

Answer 140

practice of setting very low price for 1+ of its products with intent of driving its competition out of business

Question 141

2 points to predatory pricing

Answer 141

1) Illegal under competition act - constraints free trade and unfair competition
2) Need to demonstrate intent - that firm intended to drive out competition or prevent competitors from entering, and must prove firm charged prices lower than its avg cost

Question 142

define price discrimination

Answer 142

practice of selling same product to different resellers or to ultimate consumer at different prices

Question 143

4 points to price discrimination

Answer 143

1) Not all forms are illegal under competition act
2) Usually large firms will receive lower prices
3) Quantity discounts must be available to all customers and not be structured so that they favour certain buyers over others
4) Competition act requires firms to demonstrate price discounts don’t restrict competition

Question 144

define price fixing

Answer 144

colluding with other firms to control prices

Question 145

2 types of price fixing

Answer 145

1) horizontal price fixing

2) vertical price fixing

Question 146

define horizontal price fixing

Answer 146

occurs when competitors that produce + sell competing products collude or work together to control prices, effectively taking price out of decision process for consumers

Question 147

1 point to horizontal price fixing

Answer 147

This is illegal and reduces competition

Question 148

define vertical price fixing

Answer 148

occurs when parties at different levels of same marketing channel collude to control prices passed to consumers

Question 149

define manufacturer’s suggested retail price

Answer 149

manufacturers encourage retailers to sell their merchandise at specific price

Question 150

2 points to vertical price fixing

Answer 150

1) MSRPS used by manufacturer to reduce retail price competition among retailers, simulate retailers to provide complementary services and support manufacturer merchandise
2) Manufacturers enforce MSRP by withholding benefit like cooperative ads or reducing to deliver goods to non complying retailers