armstrong mai12 tif 09

Marketing: An Introduction, 12e (Armstrong/Kotler)

Chapter 9 Pricing: Understanding and Capturing Customer Value

1) ________ refers to the amount of money charged for a product or service.

A) Payroll

B) Profit

C) Price

D) Cost

E) Salary

Answer: C

Difficulty: Easy

Chapter LO: 1

Course LO: Discuss strategies for setting and adjusting prices

2) ________ is the only element in the marketing mix that produces revenue.

A) Price

B) Place

C) Promotion

D) Product

E) Profit

Answer: A

Difficulty: Easy

Chapter LO: 1


3) Which of the following sets the upper limit for a product's pricing?

A) profits

B) product costs

C) consumer perceptions of value

D) elements of the product mix

E) competition

Answer: C

Difficulty: Easy

Chapter LO: 1


4) Which of the following sets the lower limit for a product's pricing?

A) product costs

B) profits

C) competition

D) elements of the product mix

E) consumer perceptions of value

Answer: A

Difficulty: Easy

Chapter LO: 1


5) ________ uses buyers' perceptions of what a product is worth as the key to pricing.

A) Customer value-based pricing

B) Target return pricing

C) Cost-plus pricing

D) Psychological pricing

E) Competition-based pricing

Answer: A

Difficulty: Easy

Chapter LO: 1


6) Value-based pricing is the reverse process of ________ pricing.

A) good-value

B) target costing

C) cost-based

D) value-added

E) competition-based

Answer: C

Difficulty: Moderate

Chapter LO: 1


7) A value-based pricing strategy most likely begins with ________.

A) assessing customer needs

B) designing a stylish product

C) evaluating the product's costs

D) promoting the product's benefits

E) setting a price based on perceived value

Answer: A


Chapter LO: 1


8) ________ pricing involves charging a constant low price with few or no temporary price discounts.

A) High-low

B) Target return

C) Cost-plus

D) Everyday low

E) Market-skimming

Answer: D


Chapter LO: 1


9) Providing extra amenities to differentiate and support high-priced products is referred to as ________ pricing.

A) high-low

B) value-added

C) target return

D) everyday low

E) cost-plus

Answer: B


Chapter LO: 1


10) ________ pricing involves setting prices based on the expenses involved in producing, distributing, and selling a product plus a fair rate of return for a company's effort and risk.

A) Competition-based

B) Value-added

C) Cost-based

D) Good-value

E) Demand-based

Answer: C


Chapter LO: 1


11) Rent, electricity, and executive salaries that do not vary with production level are referred to as ________ costs.

A) fixed

B) variable

C) break-even

D) target

E) promotional

Answer: A


Chapter LO: 1


12) ________ costs are also known as overhead.

A) Fixed

B) Variable

C) Target

D) Capital

E) Payroll

Answer: A

Difficulty: Easy

Chapter LO: 2


13) Costs that change directly with the level of production are referred to as ________ costs.

A) fixed

B) variable

C) target

D) capital

E) payroll

Answer: B

Difficulty: Easy

Chapter LO: 1


14) ________ costs refer to the sum of the fixed and variable costs for any given level of production.

A) Target

B) Marginal

C) Value-based

D) Total

E) Break-even

Answer: D

Difficulty: Easy

Chapter LO: 1


15) A company designs what it considers to be a good product, calculates the expenses of making the product, and sets a price that adds a standard markup to the cost of the product. This approach to pricing is called ________ pricing.

A) value-added

B) good-value

C) cost-plus

D) competitor-based

E) break-even

Answer: C


Chapter LO: 1


16) ________ pricing is when a firm tries to determine the price at which it will break even or make the profit it is seeking.

A) Competition-based

B) Target return

C) Cost-plus

D) Good-value

E) Value-added

Answer: B

Difficulty: Easy

Chapter LO: 1


17) The Fashion Store, a new startup, sets product prices so that revenues will equal manufacturing and marketing costs. The pricing strategy used by the company is referred to as ________ pricing.

A) good-value

B) value-added

C) cost-plus

D) competition-based

E) target return

Answer: E

Difficulty: Difficult

Chapter LO: 1


AACSB: Analytic thinking

18) Which of the following statements about break-even analysis is most likely true?

A) It determines how customer-perceived value changes with value-added pricing.

B) It is a tool used to calculate fixed costs.

C) It is used to determine the maximum price that can be set on a product.

D) It is a tool marketers use to examine the relationship between supply and demand.

E) It fails to consider customer value and the relationship between price and demand.

Answer: E


Chapter LO: 1


19) Which of the following is an external factor that affects pricing decisions?

A) the marketing mix

B) competition

C) top management

D) marketing objectives

E) marketing strategy

Answer: B


Chapter LO: 2


20) Radox, a luxury watch brand, identifies a market segment that is willing to pay premium prices for its watches, and Radox managers select an ideal selling price. Managers then determine the costs to create watches that meet the ideal selling price. The company's pricing approach is referred to as ________.

A) mass production

B) cost-plus pricing

C) target costing

D) value-added pricing

E) target return pricing

Answer: C


Chapter LO: 2



21) In ________, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities.

A) pure competition

B) monopolistic competition

C) oligopolistic competition

D) a pure monopoly

E) a pure monopsony

Answer: A


Chapter LO: 2


22) There are more than 20 stores on a street in Sao Paulo that specialize in selling the same quality and brand of wheat products. An individual seller cannot charge more than the going market price without the risk of losing business to the other stores. What type of market does this example represent?

A) pure competition



D) a pure monopoly

E) a black market

Answer: A


Chapter LO: 2



23) Under ________, the market consists of many buyers and sellers trading over a range of prices rather than a single market price.

A) pure competition



D) a pure monopoly

E) a pure monopsony

Answer: B


Chapter LO: 2


24) Under ________, the market consists of a few large sellers who are highly sensitive to each other's pricing and marketing strategies.

A) pure competition



D) a pure monopoly

E) pure monopsony

Answer: C


Chapter LO: 2


25) The relationship between the price charged for a product and the resulting demand level can be shown in a ________.

A) demand curve

B) supply curve

C) elastic demand slope

D) break-even chart

E) inelastic demand slope

Answer: A

Difficulty: Easy

Chapter LO: 2


26) When demand hardly changes with a small change in the price of a product, then the demand for the product is best described as ________.

A) elastic

B) flexible

C) inelastic

D) variable

E) cyclical

Answer: C

Difficulty: Easy

Chapter LO: 2


27) Which of the following is an economic factor that affects the pricing decisions of a company?

A) market-penetration practices

B) top management decisions

C) promotional activities

D) reseller policies

E) interest rates

Answer: E

Difficulty: Easy

Chapter LO: 2


28) A firm uses ________ when it charges a high, premium price for a new product with the intention of reducing the price in the future.

A) market-skimming pricing

B) target costing

C) deceptive pricing

D) market-penetration pricing

E) predatory pricing

Answer: A

Difficulty: Easy

Chapter LO: 3


29) The strategy of setting a low initial price to attract a large number of buyers quickly and win a large market share is referred to as ________.


B) market-penetration pricing

C) value-added pricing

D) target costing

E) deceptive pricing

Answer: B

Difficulty: Easy

Chapter LO: 3


30) Which of the following conditions is most likely essential for implementing a successful market-skimming pricing strategy for a product?

A) The product's quality and image support its high price.

B) Lower-priced alternatives can enter the market easily.

C) Low prices promote more market growth than high prices.

D) The product's price matches its manufacturing costs.

E) A low-price position of the product is maintained.

Answer: A

Difficulty: Easy

Chapter LO: 3


31) Which of the following conditions is most likely essential for implementing a successful market-penetration pricing strategy for a product?

A) The product's quality supports its high price.

B) Alternative products can enter the market easily.

C) The market for the product is highly price sensitive.

D) Prices increase incrementally as sales volume increases.

E) Production costs rise with an increase in marketing efforts.

Answer: C

Difficulty: Easy

Chapter LO: 3


32) Qriosity Inc. released a new antivirus program at half-price to attract buyers. This is most likely an example of ________.


B) market-penetration pricing

C) optional-product pricing

D) by-product pricing

E) allowance pricing

Answer: B


Chapter LO: 3



33) NerdHerd Electronics sells three different sizes of televisions at three different prices. In this case, the company's pricing strategy is referred to as ________ pricing.

A) product line

B) optional-product

C) by-product

D) product bundle

E) captive-product

Answer: A


Chapter LO: 4



34) Selling accessory products along with the main product is referred to as ________ pricing.

A) product bundle

B) optional-product

C) market-penetration

D) by-product

E) product line

Answer: B

Difficulty: Easy

Chapter LO: 4


35) Setting a price for products that must be used along with a main product is known as ________ pricing.

A) by-product

B) market-penetration

C) product line

D) product bundle

E) captive-product

Answer: E


Chapter LO: 4


36) How do firms that use captive-product pricing make up for the low prices of their main products?

A) They reduce the cost of the captive products.

B) They provide the captive products as freebies.

C) They set high markups on the captive products.

D) They increase the price of the main products.

E) They offer the captive products and main products together at a reasonable price.

Answer: C


Chapter LO: 4


37) Netcorp, an Internet service provider, charges its users a fixed rental fee for its basic package, which has a download limit. If a user exceeds this download limit, an additional fee is charged for every download. In this case, the firm's pricing strategy is referred to as ________ pricing.

A) by-product

B) two-part

C) optional-product

D) segmented

E) promotional

Answer: B


Chapter LO: 4



38) Combining several products and offering the collection at a reduced price is referred to as ________ pricing.

A) by-product

B) product bundle

C) captive-product

D) optional-product

E) product line

Answer: B


Chapter LO: 4


39) Which group is most likely offered functional discounts by manufacturers?

A) trade-channel members that perform sales tasks

B) consumers who buy products in large quantities

C) buyers who pay their bills before the due date

D) buyers who purchase merchandise out of season

E) retailers that participate in advertising programs

Answer: A


Chapter LO: 5


40) Glow, a gift card store, offers a price reduction to customers who buy Christmas cards the week after Christmas. In this case, the store offers a ________.

A) functional discount

B) seasonal discount

C) promotional allowance

D) trade-in allowance

E) quantity discount

Answer: B


Chapter LO: 5



41) Vac "N" Sew, a consumer electronics outlet, offers a price reduction of $100 when customers bring in a used vacuum cleaner and exchange it for a new vacuum cleaner or sewing machine. This is an example of a ________.

A) functional discount

B) cash discount

C) seasonal discount

D) trade-in allowance

E) by-product allowance

Answer: D


Chapter LO: 5



42) When Luxury Motors gives price reductions to its new car dealers to reward them for participating in advertising and sales support programs, the firm is granting ________.

A) cash discounts

B) seasonal discounts

C) quantity discounts

D) promotional allowances

E) trade-in allowances

Answer: D


Chapter LO: 5



43) Metro Museum has different admission prices for students, adults, and seniors. All three groups are entitled to the same services. This form of pricing is called ________ pricing.

A) time-based

B) location-based

C) customer-segment

D) by-product

E) product form

Answer: C


Chapter LO: 5



44) Busch Stadium in St. Louis charges different prices for seats in different areas of the ball park, even though each seat costs the same for the owners of the stadium. What is this form of pricing called?

A) location-based pricing

B) market-skimming pricing

C) product-form pricing

D) time-based pricing

E) market-penetration pricing

Answer: A


Chapter LO: 5



45) When a firm varies the price of a product by the season, month, day, or even hour, without changing product features, it is using ________ pricing.

A) product form

B) market-penetration

C) market-skimming

D) time-based

E) value-added

Answer: D

Difficulty: Easy

Chapter LO: 5


46) Pricing a product based on consumers' reference prices is referred to as ________ pricing.

A) geographical

B) psychological

C) allowance

D) by-product

E) captive-product

Answer: B

Difficulty: Easy

Chapter LO: 5


47) Consumers rely less on price to judge the quality of a product when they ________.

A) lack information about the product

B) are unable to research the product

C) have prior experience with the product

D) are unable to judge the quality of the product

E) rely on cues from sellers to differentiate a high or low price

Answer: C


Chapter LO: 5


48) ________ prices are carried in buyers' minds and used when looking at a given product.

A) Captive-product

B) Reference

C) Promotional

D) Geographical

E) Dynamic

Answer: B

Difficulty: Easy

Chapter LO: 5


49) What type of pricing is being used when a company temporarily prices its products below the list price to create buying excitement and urgency?

A) segmented pricing

B) psychological pricing

C) geographical pricing

D) promotional pricing

E) dynamic pricing

Answer: D

Difficulty: Easy

Chapter LO: 5


50) When a manufacturer offers a ________, a customer buys a product from a manufacturer's dealer within a specified time period, and the manufacturer sends the customer a check.

A) cash rebate

B) quantity discount

C) promotional allowance

D) flash sale

E) functional discount

Answer: A

Difficulty: Easy

Chapter LO: 5


51) Which of the following pricing strategies charges the same price plus freight to all customers, regardless of their location?

A) basing-point pricing

B) freight-absorption pricing

C) FOB-origin pricing

D) zone pricing

E) uniform-delivered pricing

Answer: E


Chapter LO: 5


52) Which of the following pricing strategies is the opposite of FOB-origin pricing?

A) basing-point pricing

B) dynamic pricing

C) uniform-delivered pricing

D) freight-absorption pricing

E) zone pricing

Answer: C


Chapter LO: 5


53) Wilkinson & Company sells plumbing supplies across the United States. Wilkinson uses Chicago as its central location for determining freight costs regardless of the city from which products are actually shipped. For example, a Dallas customer pays the freight cost from Chicago to Dallas even if the goods are shipped from Dallas. Wilkinson most likely uses ________ pricing.

A) basing-point

B) FOB-origin

C) freight-absorption

D) zone

E) reference

Answer: A


Chapter LO: 5



54) Computer Works is a computer accessories manufacturer based in Brazil. All customers in South America pay the same freight charge, $20, when they order products from the company. All customers in North America pay a freight charge of $50. The company's pricing strategy is referred to as ________ pricing.

A) basing-point

B) FOB-origin

C) freight-absorption

D) zone

E) uniform-delivered

Answer: D


Chapter LO: 5



55) Chef Brown's Health Food Store sells nutritional, energy-producing foods. Product prices are adjusted frequently to meet the needs of individual customers and situations. For example, long-time customers receive discounts. This strategy is most likely an example of ________ pricing.

A) zone

B) competition-based

C) dynamic

D) basing-point

E) penetration

Answer: C


Chapter LO: 5



56) Which of the following would most likely trigger a price increase?

A) cost inflation

B) reduced demand

C) cheaper alternatives

D) reduced expenses

E) overproduction

Answer: A


Chapter LO: 6


57) The Sherman Act, Clayton Act, and Robinson-Patman Act are all federal laws that were initially adopted to curb the formation of ________.

A) monopolies

B) oligopolies

C) competitive markets

D) international markets

E) limited partnerships

Answer: A


Chapter LO: 6


AACSB: Ethical understanding and reasoning

58) ________ pricing refers to selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business.

A) Oligopolistic

B) Captive

C) Dynamic

D) Zone

E) Predatory

Answer: E

Difficulty: Easy

Chapter LO: 6



59) Penny Bank, a discount store, is highly competitive. When entering a new market, Penny Bank often cuts prices so deeply that it sells below costs, effectively pushing smaller retail stores with less purchasing power out of the market. In this case, Penny Bank is using ________.

A) market skimming

B) psychological pricing

C) predatory pricing

D) deceptive pricing

E) cost-plus pricing

Answer: C


Chapter LO: 6



60) ________ pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers.

A) Predatory

B) Psychological

C) Deceptive

D) Cost-plus

E) Allowance

Answer: C


Chapter LO: 6



61) A small percentage improvement in price can generate a large percentage increase in profitability.

Answer: TRUE

Difficulty: Easy

Chapter LO: 1


62) Everyday low pricing is a cost-based pricing strategy.

Answer: FALSE

Difficulty: Easy

Chapter LO: 1


63) Cost-based pricing relies on consumers' perceptions of value to drive pricing.

Answer: FALSE

Difficulty: Easy

Chapter LO: 1


64) The simplest pricing method is break-even pricing, which involves adding a standard markup to the cost of a product.

Answer: FALSE

Difficulty: Easy

Chapter LO: 1


65) A break-even chart shows the total cost and total revenue expected at various sales volume levels of a product.

Answer: TRUE


Chapter LO: 1


66) Target return pricing is a variation of break-even pricing.

Answer: TRUE


Chapter LO: 1


67) Target costing starts with an ideal selling price based on customer value considerations and then aims at costs that will ensure that the price is met.

Answer: TRUE


Chapter LO: 2


68) In small companies, prices are typically set by the sales or marketing departments.

Answer: FALSE


Chapter LO: 2


69) Under oligopolistic competition, the market consists of only a few large sellers.

Answer: TRUE

Difficulty: Easy

Chapter LO: 2


70) The demand curve shows the number of units the market will buy in a given time period at similar prices.

Answer: FALSE


Chapter LO: 2


71) If demand hardly changes with a small change in price, the demand is said to be elastic.

Answer: FALSE

Difficulty: Easy

Chapter LO: 2


72) If demand is elastic rather than inelastic, sellers typically consider increasing their prices.

Answer: FALSE

Difficulty: Easy

Chapter LO: 2


73) Pricing strategies usually remain the same as a product passes through its life cycle.

Answer: FALSE


Chapter LO: 2


74) Market skimming makes sense when a product's quality and image support its higher price, and enough buyers want the product at that price.

Answer: TRUE


Chapter LO: 3


75) When using product line pricing, a firm sets one price for all products in the line based on average manufacturing costs.

Answer: FALSE


Chapter LO: 4


76) Andy Candy Stores prices its candy displays at ten different price levels, ranging from $2.00 per pound to $4.95 per pound. This is an illustration of price steps.

Answer: TRUE


Chapter LO: 4



77) When World Movers, a house mover, sells boxes and pads that must be used in moving a household's furniture, the company is practicing dynamic pricing.

Answer: FALSE


Chapter LO: 4



78) When a manufacturer seeks a market for by-products and accepts a price that covers more than the cost of storing and delivering those by-products, the manufacturer is able to reduce the main product's price to make it more competitive.

Answer: TRUE


Chapter LO: 4


79) When using product bundle pricing, sellers combine several products and offer the bundle at an increased price for increased profit.

Answer: FALSE


Chapter LO: 4


80) Used too frequently, promotional pricing can have a negative effect of decreasing a brand's value in the eyes of customers.

Answer: TRUE


Chapter LO: 5


81) Freight-absorption pricing is used for market skimming and holding on to monopolistic markets.

Answer: FALSE


Chapter LO: 5


82) The price that a company should charge in a specific country depends on the nature of the wholesaling and retailing system in that country.

Answer: TRUE


Chapter LO: 5


83) The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade.

Answer: TRUE


Chapter LO: 6



84) Federal legislation on price-fixing states that sellers must set prices after talking to customers and competitors.

Answer: FALSE


Chapter LO: 6



85) Price discrimination is allowed if a seller can prove that its costs are different when selling to different retailers.

Answer: TRUE

Difficulty: Easy

Chapter LO: 6



86) What is customer value-based pricing? Describe the two types of value-based pricing.

Answer: Customer value-based pricing uses buyers' perceptions of value as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with all other marketing mix variables before the marketing program is set. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set to match perceived value. It is important to remember that "good value" is not the same as "low price." The two types of value-based pricing are good-value pricing and value-added pricing. More and more, marketers have adopted the strategy of good-value pricingoffering the right combination of quality and good service at a fair price. In many cases, this has involved introducing less-expensive versions of established, brand name products. Many companies also adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support their higher prices.


Chapter LO: 1



87) What are the two different types of costs a company incurs? Explain with examples.

Answer: A company's costs take two forms: fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales level. For example, a company must pay each month's bills for rent, heat, interest, and executive salaries regardless of the company's level of output. Variable costs vary directly with the level of production. Each PC produced by HP involves a cost of computer chips, wires, plastic, packaging, and other inputs. Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies with the number of units produced. Total costs are the sum of the fixed and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production.


Chapter LO: 1


88) Explain competition-based pricing.

Answer: Competition-based pricing involves setting prices based on competitors' strategies, costs, prices, and market offerings. Consumers will base their judgments of a product's value on the prices that competitors charge for similar products. In assessing competitors' pricing strategies, a company should consider several factors. First, it must find how the company's market offering compares with competitors' offerings in terms of customer value. If consumers perceive that the company's product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify a higher price. Next, the company should determine the strength of its current competitors and their current pricing strategies. If the company faces a host of smaller competitors charging high prices relative to the value they deliver, it might charge lower prices to drive weaker competitors from the market. If the market is dominated by larger, lower-price competitors, the company may decide to target unserved market niches with value-added products and services at higher prices. Finally, no matter what price the company chargeshigh, low, or in betweenit must try to give customers superior value for that price.


Chapter LO: 1



89) With reference to the different types of markets, compare pure competition with monopolistic competition.

Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Under monopolistic competition, the market consists of many buyers and sellers trading over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers.


Chapter LO: 2


90) With reference to pricing in different types of markets, compare oligopolistic competition with a pure monopoly.

Answer: Under oligopolistic competition, the market consists of only a few large sellers. As there are few sellers, each seller is alert and responsive to competitors' pricing strategies and marketing moves. In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing is handled differently in each case.


Chapter LO: 2


91) What is a demand curve? Why is it useful to marketers?

Answer: Each price a company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is illustrated in a demand curve. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely relatedthat is, the higher the price, the lower the demand. Understanding a demand curve is crucial to good pricing decisions. In a monopoly, the demand curve shows the total market demand resulting from different prices. If a company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices.


Chapter LO: 2


92) Explain the concept of price elasticity.

Answer: Price elasticity refers to how responsive demand will be to a change in price. If demand hardly changes with a small change in price, the demand is inelastic. If demand changes greatly, the demand is elastic. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue. At the same time, most firms want to avoid pricing that turns their products into commodities.


Chapter LO: 2


93) What external factors affect the pricing decisions made by organizations?

Answer: External factors that affect pricing decisions include the nature of market and demand, competitor's strategies, and competitor's prices. Economic conditions can also have a strong impact on the firm's pricing strategies. Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product's price and value, and the company's costs of producing and selling a product. Beyond the market and the economy, a company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment, such as resellers' reactions to prices. The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company's short-term sales, market share, and profit goals may need to be tempered by broader societal considerations.


Chapter LO: 2



94) Distinguish between market-skimming pricing and market-penetration pricing.

Answer: Many companies that invent new products set high initial prices to skim revenues layer by layer from the market. This is known as market-skimming pricing. For this strategy to work, the product's quality and image must support its higher price, and enough buyers must want the product at that price. The costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Competitors should not be able to enter the market easily and undercut the high price. Market-penetration pricing is used to penetrate the market quickly to attract a large number of buyers in a short period and win a large market share by setting a low initial price. For this strategy to work, the market must be highly price sensitive so that a low price produces more market growth. Production and distribution costs must fall as sales volume increases. Also, the low price must help keep out competition and be maintained over time.


Chapter LO: 3



95) Explain product line pricing.

Answer: In product line pricing, management must decide on the price steps to set between the various products in a line. The price steps should take into account cost differences between products in a line. More important, they should account for differences in customer perceptions of the value of different features.


Chapter LO: 4


96) Which pricing mix strategy should be used in relation to saleable scrap materials? How does this strategy function?

Answer: Producing products and services often generates by-products. If the by-products have no value and if getting rid of them is costly, this will affect the pricing of the main product. When using by-product pricing, a manufacturer can seek a market for scraps or by-products and accept any price that covers more than the cost of disposing of or storing and delivering the by-products. By-product pricing allows the seller to reduce the main product's price to make it more competitive.


Chapter LO: 4



97) What is segmented pricing? Briefly describe the different types of segmented pricing.

Answer: In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms. Under customer-segment pricing, different customers pay different prices for the same product or service. Under product-form pricing, different versions of the product are priced differently but not according to differences in their costs. Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. Finally, using time-based pricing, a firm varies its price by the season, the month, the day, and even the hour.


Chapter LO: 5


98) Explain how companies that market their products internationally decide what prices to charge in different countries.

Answer: Companies that market their products internationally must decide what prices to charge in different countries. In some cases, a company can set a uniform worldwide price. However, most companies adjust their prices to reflect local market conditions and cost considerations. A firm must consider economic conditions, competitive situations, laws and regulations, and development of the wholesale and retail system. Consumer perceptions and preferences also may vary from country to country, calling for different prices. The company may have different marketing objectives in various world markets. Costs play an important role in setting international prices. In some cases, price escalation may result from differences in selling strategies or market conditions. In most instances, however, it is simply a result of the higher costs of selling in another countrythe additional costs of operations, product modifications, shipping and insurance, import tariffs and taxes, exchange-rate fluctuations, and physical distribution.


Chapter LO: 5



99) Identify a few situations in which price cuts or price increases might be necessary.

Answer: Several situations may lead a firm to consider cutting its price. Price cuts may be necessary when there is excess capacity. Another is falling demand in the face of strong price competition or a weakened economy. In such cases, a firm may aggressively cut prices to boost sales and market share. A company may also cut prices in a drive to dominate the market through lower costs. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand. When a company cannot supply all that its customers need, it may raise its prices, ration products to customers, or both.


Chapter LO: 6



100) What is the difference between price-fixing and predatory pricing? How do governments discourage firms from engaging in such practices?

Answer: Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per sethat is, the government does not accept any excuses for price-fixing. As such, companies found guilty of these practices can receive heavy fines. Recently, governments at the state and national levels have been aggressively enforcing price-fixing regulations in industries ranging from gasoline, insurance, and concrete to credit cards, CDs, and computer chips. Price-fixing is also prohibited in many international markets.

Sellers are also prohibited from using predatory pricingselling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This protects small sellers from larger ones that might sell items below cost temporarily or in a specific locale to drive them out of business.


Chapter LO: 6



2Copyright 2015 Pearson Education, Inc.

armstrong mai12 tif 09

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