Eastern Michigan University

MKT 510A

Chapter 12-Developing Pricing Strategies and Programs

true /false Questions

1)Price is the only element of the marketing mix to produce revenue.  

 

2. Price is one of the least flexible elements in the marketing mix.  

 

3. If a firm chooses the objective of current profit maximization, it essentially is ignoring the effect of other elements of the marketing mix.  

 

4. When a consumer compares a product’s price with a posted “regular retail price,” the customer is employing a reference price.  

 

5. Market skimming pricing makes sense when a company is plagued with overcapacity, intense competition, or changing consumer wants.  

 

6. Consumers are likely to be more price sensitive when the cost is being borne by another party, and when the product cannot be stored.  

 

7. One way of estimating the demand curve for your product is simply ask consumers how many units they would buy at different proposed prices.  

 

8. A decline in average production costs as the firm accumulates more experience is called the learning curve.  

 

9. Fixed costs are costs that do not vary with production or sales revenue.  

 

10. The CEO’s salary is an example of a variable cost.  

 

11. When a manufacturer varies its cost as a function of its differentiated marketing offers, the manufacturer needs to use activity-based accounting.

 

12. Target costing focuses on trying to engineer costs before a new product has been introduced.  

 

13. Target costing requires determining the price consumers will pay before producing the good or service.  

 

14. The three Cs in pricing are: customers’ demand schedule, cost function, and competitors’ prices.  

 

15. A company that sells bottled water at a premium price is using a markup pricing strategy.  

 

16. Going-rate pricing is especially popular if costs are difficult to measure or

competitive response is certain.  

 

17. In going-rate pricing, the firm bases its price largely on competitors’ prices.  

 

18. Retailers that employ everyday low pricing do not run price promotions.

 

19. A shoe store that carries pumps at $32, $52, and $82, and no other prices, is engaged in product-line pricing.  

 

20. When Toyota offers a Corolla model that includes air, automatic transmission, a CD player, and custom paint at a price below what the individual options would be priced at, it is an example of product-bundle pricing.  

 

Multiple Choice Questions

 

21. When customers buy on the basis of a reference price or because the price conveys a particular quality image to them, they are being influenced by                                                       .

1. value pricing
2. the psychology of pricing
3. the going-rates of competitors
4. value augmented by perception
5. an aggregated marketing plan for pricing

 

 

22. Scotty is in the process of opening Suburban Legends SK8S to sell boards, wheels, trucks, clothing, videos, and skateboarding related collectibles. The first thing Scotty should do when setting the store’s prices is to                                                                                                        .

1. determine demand
2. estimate costs
3. determine her target market
4. select a pricing method
5. select a pricing objective

 

23. A                              pricing objective is suitable for a company that has overcapacity, intense competition, and changing customer needs.

1. maximum current profit
2. survival
3. maximum current revenue

4. maximum sales growth
5. partial cost recovery

 

 

24. When introduced in the late 1970s, personal computers had large initial demand. People were interested in buying them to make writing and editing easier. The earliest simple PCs were initially priced at around $2,500. The manufacturers of the first PCs were probably using a pricing strategy.

1. cost-oriented
2. market-skimming
3. value-oriented
4. market-penetration
5. product-quality leadership

 

 

25. In 1991, Taco Bell began offering a 59-79-99 cents pricing strategy for its Mexican- themed fast food. It did this by eliminating kitchens and having workers assemble food rather than cook it. Its costs fell as it became more efficient, and the 59-79-99 pricing allowed to Taco Bell to take market share from leaders McDonalds and Burger King. Taco Bell was using a  pricing strategy.

1. market-skimming
2. product quality leadership
3. maximum current revenue
4. market-penetration
5. maximum sales growth

 

 

 

26. Which of the following is an example of a fixed cost?

1. A salesperson’s commission.
2. The portion of your cell phone bill that does not include charges for additional minutes.
3. Delivery costs of a 3-ton refrigeration unit to Guangzhou, Guangdong Province, and another one to Xiamen, Fujian Province.
4. Cost of the hiring process to employ a new vice-president of legal.
5. Extra employees brought in to handle the holiday rush.

 

27. Which of the following is an example of a fixed cost?

1. The CEO’s bonus.
2. Occasional charitable expenses donated by the firm.
3. Mall rent based on percentage of sales.
4. Monthly $2,000 payment on loan to buy earthmoving equipment.
5. Employees’ regular salaries as dictated by the union contract.

 

 

28. Every time Nike doubles the total number of shoes it has sold, its marketing cost structure falls by a predictable percentage. This is an example of the                                                                      .

1. leverage effect
2. activity-based pricing concept
3. experience curve

4. elasticity consumer exhibit for shoe prices
5. target costing principle

 

 

29. When a manufacturer varies its cost as a function of its differentiated marketing offers, the manufacturer needs to use                                                     accounting.

1. standard cost
2. value-added
3. LIFO
4. FIFO
5. activity-based cost

 

 

 

30. Which of the following is NOT  for marketers considering pricing strategies?

1. Costs set a “floor” on the price a company can set.
2. Competitors’ prices serve as an orienting point for setting prices.
3. Customers’ assessment of unique product features serves as an orienting point for setting prices.
4. A too-low price can result in no demand.
5. The price of substitutes serves as an orienting point for setting prices.

 

 

31. Jane Yellowhair makes small woolen handbags out of Pendleton blankets, and has fixed costs of $30,000. She expects to sell 6,000 bags for $17.50. This price will give her a 20 percent markup. Calculate the variable costs.

a. $5.00

b. $6.00

c. $8.50

d. $9.00

e. $10.00

 

 

 

32. If an entrepreneur commits to her venture capitalists a goal of earning a 30 percent return on equity, it would most likely use a                                                                       pricing approach to setting price.

1. markup
2. psychological
3. target-return
4. going-rate
5. perceived-value

 

33. Burlingvale Coats produces winter wear for Target. Their recently designed parkas for the northern stores cost about $30 to produce, and Burlingvale wishes to earn a 15 percent return on an investment of $5 million. If 75,000 parkas will be sold to Target, the appropriate price per item is   .

a. $30.00

b. $37.50

c. $35.00

d. $40.00

e. $45.00

 

34. Nixon Watch Co. will incur fixed costs of $500,000 and unit variable costs of $20 on its new perpetual calendar quartz models. Nixon plans to set the wholesale price of the model at $50. To break even, Nixon must sell                                                                                                             units.

a. 9,876

b. 16,667

c. 18,333

d. 20,000

e. 25,000

 

35. SunCrest Gardening Supply Company wants to sell a polystyrene window planter for

$30. Its variable costs for each planter are $12. To break even, SunCrest needs to sell 500 planters. Calculate SunCrest’s fixed costs.

a. $1,667

b. $3,600

c. $6,000

d. $9,000

e. $15,000

 

 

36. A company that sells bottled water at a premium price is using a                                      pricing strategy.

1. markup
2. target-return
3. perceived-value
4. going-rate
5. demographic

 

 

37. When a wireless company advertises a low list price that includes free roaming, free weekends, and free long distance as additions to the regular 400 monthly minutes for $35,

it is using a                                pricing strategy.

1. markup
2. psychological
3. target-return
4. perceived-value
5. value

 

 

38. In                              pricing, the firm bases its price largely on competitors’ prices.

1. value
2. target-return
3. going-rate
4. perceived-value
5. geographical

 

39. A suburban Chinese inn sells a bowl of chicken soup priced at roughly the same price as those at KungFu fast food restaurant chain downtown. This information indicates that the Chinese inn uses               pricing.

1. value
2. target-return
3. going-rate
4. perceived-value
5. geographical

 

40. On eBay, the prices are set by the potential buyers who view the details of the offer and make bids declaring how much they are willing to pay. When the time runs out, the highest bidder wins the auction and gets the right to purchase the product at the agreed- upon price. This is an example of a(n)        auction.

1. sealed-bid
2. Portuguese
3. Dutch
4. English
5. descending-bid

 

 

41. The form of countertrade that involves the direct exchange of goods, with no money and no third party involved is called a(n)                                                           .

1. barter agreement
2. offset
3. compensation deal
4. buyback arrangement
5. sellback arrangement

 

42. Daimler Chrysler gives technical advice on motor manufacturing to a Chinese firm, and in exchange the firm provides DaimlerChrysler with natural rubber for gaskets and seals. This is an example of a(n)        .

1. barter agreement
2. offset
3. compensation deal
4. buyback arrangement
5. sellback arrangement

 

43. In which of the following forms of countertrade would the seller receive full payment if the seller agrees to spend a substantial amount of that money in that country within a stated time period?

1. Barter agreement.
2. Offset.
3. Compensation deal.
4. Buyback arrangement.
5. Sellback arrangement.

 

44. If a chipmaker gives personal computer makers a 2.5 percent discount for paying for their orders within seven days instead of the standard 30 days, the chipmaker is providing them with a .

1. functional discount
2. quantity discount
3. promotional price
4. cash discount
5. trade allowance

 

 

45. Every August, there is an International Beer Festival in the city of Qingdao. During the festival, local retailers offer                                                                    pricing to entice people who come for the festival to come into their stores and buy their merchandise.

1. special-event
2. seasonal discount
3. promotional allowance
4. psychological discount
5. functional discount

 

46. Professors and other professional members of the Association for Consumer Policy pay a different membership renewal rate than student members. The Association for Consumer Policy uses        pricing.

1. time
2. customer-segment
3. service-form
4. unfair
5. image

 

47. Lang Lang plays a venue in Xian, Shangxi Province. The floor seats cost¥2008, the seats on the edges but close run ¥1280, and the seats in the balconies are priced at

¥480. This is an example of                                    pricing.

1. psychological
2. image
3. value-added
4. perceived-value
5. location

 

48. While shopping at Parisian Department Store, you notice all of the neckties are priced at $18.50, $25.00, or $45.00. Parisian is using                                                            pricing.

1. product-line
2. price-quality
3. optional-feature

4. captive-product
5. customer-segment

 

49. O*Net, an Internet service provider (ISP), charges a membership fee and then a per hour usage charge for access to the Internet. This is an example of which type of product- mix pricing strategy?

1. Captive-pricing.
2. Product-line pricing.
3. Byproduct pricing.
4. Customer-segment pricing.
5. Two-part pricing.

 

50. You can buy inexpensive printers from Hewlett Packard with many different features, but when you go to buy the toner cartridge refills, the price is often much higher than you expected. This example describes        pricing.

1. product-line
2. price-quality
3. optional-feature
4. captive-product
5. customer-segment

 

51. When renewing her subscription to China Daily, Meimei was given the opportunity to purchase a subscription to China Business Weekly, to get a China Daily travel umbrella, and to purchase a membership in a discount gymnastic club all for one low price. The magazine publisher has engaged in   pricing.

1. product-bundling
2. product-line
3. by-product
4. captive-product
5. two-part

 

 

 Essay Questions

52. Diamond Machine Technology makes a tool for sharpening the blades of pruning sheers and glass clippers. The company has invested $250,000 in developing this sharpener. This tool, which is about the size of a piece of chewing gum, costs $3 to make.

Fixed costs for the sharpener is $10,000. The company expects to sell 100,000 sharpeners this year. Diamond Machine’s markup on sales is 30 percent, and it wants to earn a 20 percent ROI. Calculate both its markup price and its target-return price as well as its breakeven volume at both prices. Which price should Diamond Manufacturing use?

 

 

 

53. Goldstar, a Korean manufacturer, has decided to make and market small (125cc– 250cc) motorcycles in China. Explain in detail the six-step procedure Goldstar should use setting the prices for their products.

 

 

54. Mattel wishes to sell Barbie dolls in an area of the world where local currency cannot be converted and local distributors are forbidden to hold any outside currencies. Explain the four ways in which this challenge might be taken care of by Mattel using countertrade methods.

 

 

55. A Chinese condiment manufacturer wants to market its product internationally, but its marketing director is concerned about countertrading. What you can tell her about countertrading? Which forms should she expect to have to deal with if she plans on selling her products to Eastern Europe?

 

 

56. Provide an explanation and examples of the ways in which a firm might use discriminatory pricing. When does price discrimination work?

 

 

Mini-Cases Mini-Case 12-1

Fugazi is a punk band from Washington, D.C. The leader, Ian, insists that the band not focus on the commercial aspects of making music, so the band typically charges less than

$10 for a live show, they sell no T-shirts or other Fugazi gear, and they will only play in all-ages venues. To increase creative and financial control, Ian and other members of the band package and sell their self-produced CDs that they sell for $10 online.

 

57. Refer to Mini-Case 12-1. Every time Fugazi tours, they are able to pick up more ideas about how to minimize the costs of going on tour, in order to make a fair and increasing

return for their efforts. This is an example of                                 .

1. total costs falling
2. activity-based accounting
3. target costing
4. the learning curve
5. consideration of customers’ demand schedules

 

58. Refer to Mini-Case 12-1. When it comes to pricing their music, Fugazi uses the

                            method.

1. value
2. going-rate
3. markup
4. skimming
5. target-return

 

59. Refer to Mini-Case 12-1. The underlying objective or philosophy used by Fugazi in setting their prices is probably                                                         .

1. survival—in this case, keeping the band “alive”
2. maximum current profit—using the strict definition in the book
3. maximum market share—in this case, getting as many people to listen to the band as possible
4. market skimming—using the strict definition in the book
5. product-quality leadership—the logic being that offering the best music possible will cost more than providing average-quality music