Deck 10: Pricing: Understanding and Capturing Customer Value

Question 1

List some important characteristics of price.

Answer 1

Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly.

Question 2

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

A) Price
B) Product
C) Place
D) Fixed costs
E) Variable costs

Answer 2

A

Question 3

Define price. Discuss its importance.

Answer 3

In the narrowest sense, price is the amount of money charged for a product or a service. More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a product or service. Historically, price has been the major factor affecting buyer choice. In recent decades, however, nonprice factors have gained increasing importance. Even so, price remains one of the most important elements that determines a firm's market share and profitability.
Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. At the same time, pricing is the number one problem facing many marketing executives, and many companies do not handle pricing well. Some managers view pricing as a big headache, preferring instead to focus on other marketing mix elements. However, smart managers treat pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm's bottom line. A small percentage improvement in price can generate a large percentage increase in profitability. More important, as part of a company's overall value proposition, price plays a key role in creating customer value and building customer relationships.

Question 4

Price is the most inflexible of the marketing mix elements.

Question 5

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

A) Value
B) Cost
C) Price
D) Wage
E) Salary

Question 6

The perceived value of different product offers can be reasonably assessed by ________.

A) conducting a SWOT analysis
B) preparing demand curves
C) conducting surveys and experiments
D) collecting data about competitors' offers
E) setting a benchmark for product quality

Question 7

What sets the ceiling for product prices?

A) product manufacturing costs
B) sellers' perceptions of the product's value
C) customer perceptions of the product's value
D) variable costs
E) break-even volume

Question 8

A restaurant wants to use value-based pricing. It knows the costs of the ingredients in the food. It must also factor in ________ in determining customer satisfaction and value.

A) wages of employees
B) costs of utilities of the restaurant
C) atmosphere and décor of the restaurant
D) travel distance for customers
E) percentage of bar patrons versus dining patrons

Question 9

What is usually the first step in cost-based pricing?

A) testing the product concept with potential customers
B) determining the marketing mix strategy
C) setting a price that covers costs plus a target profit
D) designing a good product
E) adding up the costs of making the product

Question 10

________ pricing uses buyers' perceptions of value as the key to pricing.

A) Customer value-based
B) Cost-based
C) Time-based
D) Markup
E) Target return

Question 11

Factors a company considers in setting its price include all of the following EXCEPT ________.

A) competitors' strategies and prices
B) product costs
C) overall marketing strategy and mix
D) value of the product on the pre-owned market
E) nature of the market and demand

Question 12

Which of the following processes does value-based pricing reverse?

A) high-low pricing
B) everyday low pricing
C) cost-based pricing
D) good-value pricing
E) value-added pricing

Question 13

Prices have a direct impact on a firm's bottom line.

Question 14

Why is price considered one of the most flexible elements of the marketing mix?

Question 15

Which of the following is true with regard to price?

A) Historically, price has had the least perceptible impact on buyer choice.
B) Price is the least flexible element in the marketing mix.
C) Unlike product features and channel commitments, prices cannot be changed quickly.
D) Price is the sum of all the values that customers give up to gain the benefits of having a product.
E) Prices only have an indirect impact on a firm's bottom line.

Question 16

A pharmaceutical company in Utah recently released a new and expensive anti-ulcer drug in the market. The company justifies the high price of the drug by claiming that it is highly effective for treating all kinds of ulcers. The company also claims that the new drug will help bring down the need for invasive surgeries, an additional benefit for patients. Which of the following pricing strategies is the pharmaceutical company most likely using in this instance?

A) target pricing
B) markup pricing
C) cost-based pricing
D) value-based pricing
E) break-even pricing

Question 17

Effective ________ pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

A) competition-oriented
B) cost-based
C) time-based
D) customer-oriented
E) marketer-oriented

Question 18

Price is important to managers ________.

A) because prices cannot be changed quickly, so must be correctly determined
B) because a small percentage improvement in price can generate a large percentage increase in profitability
C) but other marketing mix elements create customer value and build relationships
D) but product features can be changed more quickly
E) but has little impact on a firm's market share

Question 19

What sets the floor for product prices?

A) consumer perceptions of the product's value
B) product costs
C) competitors' strategies
D) advertising budgets
E) market competition

Question 20

Which of the following is true of value-based pricing?

A) The targeted value and price drive decisions about what costs can be incurred and the resulting product design.
B) Value-based pricing is mostly product driven.
C) Value-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for its effort and risk.
D) The marketer usually designs a product and marketing program and then sets the price.
E) A company using value-based pricing designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit.

Question 21

Department stores such as Kohl's and JCPenney's practice high-low pricing by ________.

A) charging a constant, everyday low price
B) providing few or no temporary price discounts
C) increasing prices temporarily on select products
D) having frequent sale days for store credit-card holders
E) underpricing most consumer items

Question 22

Companies that adopt value-added pricing ________.

A) consider value-added features as a fitting substitute for aggressive cost cutting
B) set incredibly low prices to meet competition
C) attach value-added features and services to differentiate their offers and support their higher prices
D) overprice their products without any apparent justification
E) underprice their products and lower quality to boost demand in the short-run

Question 23

Which of the following involves introducing less-expensive versions of established, brand name products?

A) markup pricing
B) good-value pricing
C) time-based pricing
D) cost-based pricing
E) target profit pricing

Question 24

In an effort to differentiate its offerings from its competitors, Pegasus Computers decided to add an extra USB port in all its laptops besides providing a free pair of Delphi power bass headphones with every Pegasus laptop. Although the additional features increased the price of the laptops by $500, Pegasus was confident that the strategy would help boost demand for its laptops substantially. This is an example of ________.

A) good-value pricing
B) markup pricing
C) break-even pricing
D) value-added pricing
E) cost-based pricing

Question 25

Bon Vivant offers an assortment of exclusive French wines at incredibly low prices. These prices are neither limited-time offers nor special discounts, but represent the daily prices of products sold by Bon Vivant. This reflects Bon Vivant's ________ pricing strategy.

A) everyday low
B) markup
C) penetration
D) break-even
E) cost-based

Question 26

Overhead costs ________ as the number of units produced increases.

A) decrease
B) increase steadily
C) fluctuate
D) remain the same
E) increase rapidly

Question 27

Azure Air, an airline company, offers attractive prices to customers with tighter budgets. A no-frills airline, it charges for all other additional services, such as baggage handling and in-flight refreshments. Which of the following best describes Azure Air's pricing method?

A) target profit pricing
B) good-value pricing
C) cost-based pricing
D) break-even pricing
E) penetration pricing

Question 28

A company must pay each month's bills for rent, heat, interest, and executive salaries regardless of the company's level of output. This exemplifies its ________ costs.

A) overhead
B) variable
C) target
D) total
E) unit

Question 29

Companies with lower costs ________.

A) specialize in selling products with value-added features
B) usually market products with inferior quality, thereby justifying the low selling price
C) can set lower prices that result in smaller margins but greater sales and profits
D) tend to overprice products owing to their monopolistic advantage
E) usually set higher prices that result in higher margins

Question 30

Which of the following is most likely a fixed cost?

A) sales representative commissions
B) product distribution costs
C) manufacturing input costs
D) temporary worker salaries
E) facility rental payments

Question 31

Companies with higher costs ________.

A) can drive out competitors through their pricing strategy
B) intentionally pay higher costs so that they can add value through higher quality and claim higher prices and margins
C) can set lower prices that result in increased sales though with lower margins
D) specialize in selling products without value-added features
E) are more financially successful

Question 32

Retailers such as Costco and Walmart charge a constant, daily low price with few or no temporary price discounts. This is an example of ________ pricing.

A) competition-based
B) everyday low
C) cost-plus
D) break-even
E) penetration

Question 33

________ pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.

A) High-low
B) Everyday low
C) Cost-plus
D) Break-even
E) Penetration

Question 34

________ involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.

A) Value-based pricing
B) Competition-based pricing
C) Cost-based pricing
D) Penetration pricing
E) Break-even pricing

Question 35

Which of the following is true with regard to value-added pricing?

A) Companies that practice value-added pricing typically match the competition by cutting prices.
B) Companies practicing value-added pricing differentiate their offers by attaching value-added features to offerings that, in turn, justify higher prices.
C) The intrinsic value of products sold by companies practicing value-added pricing is far less than their actual selling price.
D) Companies practicing value-added pricing primarily rely on cost differentiation.
E) Value-added pricing is the most suitable pricing strategy in pure monopolies.

Question 36

Fixed costs ________.

A) are costs that do not vary with production or sales level
B) vary directly with the level of production
C) decrease with accumulated production experience
D) are the sum of the overhead and variable costs for any given level of production
E) represent the annual costs of inputs incurred by a company

Question 37

The Great Recession of 2008 to 2009 triggered a shift in consumer attitudes toward ________.

A) variety and price
B) perceptions of value
C) locations of stores
D) price and quality
E) economic data

Question 38

When McDonald's and other fast food restaurants offer "value menu" items at surprisingly low prices, they are most likely using ________ pricing.

A) break-even
B) target profit
C) good-value
D) cost-plus
E) target return

Question 39

________ pricing refers to offering just the right combination of quality and gratifying service at a fair price.

A) Markup
B) Good-value
C) Cost-plus
D) Target profit
E) Break-even

Question 40

Underpriced products ________.

A) produce less revenue than they would if they were priced at the level of perceived value
B) sell poorly in the global marketplace
C) produce more revenue than they would if they were priced at the level of perceived value
D) mostly offer higher value than those with a high markup price
E) are characterized by rapidly declining demand

Question 41

The total production costs at Kellner Machine Works are $87,000 out of which $45,000 represent fixed costs. Which of the following is representative of the variable costs incurred by the company?

A) $35,000
B) $42,000
C) $45,000
D) $87,000
E) $132,000

Question 42

The simplest pricing method is ________ pricing.

A) value-based
B) fixed cost
C) cost-plus
D) target return
E) competition-based

Question 43

With accumulated production experience and a higher volume of production, companies not only become more efficient but also ________.

A) gain economies of scale
B) incur higher overhead costs
C) create derived demand in the market
D) spend more per unit of produced output
E) tend to routinely spend less on inputs

Question 44

A downward-sloping experience curve is indicative of ________.

A) the negative customer perception about a company's products
B) the falling demand for a company's products
C) the falling unit production cost of a company
D) the low quality of a company's products
E) slow and inadequate organizational learning

Question 45

As production workers become better organized and more familiar with equipment, the average cost per unit tends to decrease with the ________.

A) increase in the diseconomies of scale
B) accumulated production experience
C) decrease in the economies of scale
D) increase in derived demand
E) increase in primary demand

Question 46

Cost-plus pricing ________.

A) is a complex pricing method
B) involves pricing that accurately reflects production costs
C) involves adding a standard markup for profit
D) aims at breaking even on the costs of making and marketing a product
E) is a value-based pricing method

Question 47

As production moves up, the average cost per unit decreases because ________.

A) variable costs decrease
B) of increasing diseconomies of scale
C) fixed costs are spread over more units
D) overhead costs decrease
E) revenue increases

Question 48

The experience curve reveals that ________.

A) repetition in production has no visible impact on production costs
B) repetition in production enhances efficiency
C) the average cost of production remains the same with accumulated production experience
D) repetition in production adds to the costs and thereby increases the prices of outputs
E) the average cost of production increases with accumulated production experience

Question 49

Experience-curve pricing assumes that ________.

A) competitors are weak and not willing to match price cuts
B) competitors are strong and invincible
C) aggressive pricing adversely affects product image
D) volume-based production slows down organizational learning
E) lower-cost technologies are almost always inferior

Question 50

Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This exemplifies ________.

A) target pricing
B) cost-plus pricing
C) value-based pricing
D) break-even pricing
E) penetration pricing

Question 51

Which of the following is most likely a risk associated with experience-curve pricing?

A) High-volume production facilities are unable to meet demand.
B) New technology often leads to productivity problems.
C) Demand for the product fluctuates unpredictably.
D) Consumers tend to prefer new brands over established ones.
E) Aggressive pricing often gives a product a cheap image.

Question 52

The learning curve is representative of the ________.

A) per unit cost of output in the long run
B) drop in the average per-unit production cost that comes with accumulated production experience
C) number of units the market will buy in a given time period, at different prices that might be charged
D) total market demand resulting from different prices
E) per unit cost of output in the short run

Question 53

To take advantage of a downward-sloping experience curve, a company must do all of the following EXCEPT ________.

A) increase the product's price
B) be able to sell the higher volume of product
C) price its product lower
D) increase its production output
E) decrease its costs through experience gained

Question 54

Herbie Inc., a firm manufacturing sandwich makers, has fixed costs of $250,000, variable costs of $20 per unit of output, and expected unit sales of 50,000 units. What is the unit cost of a sandwich maker manufactured by Herbie?

A) $15
B) $25
C) $30
D) $50
E) $75

Question 55

The fixed cost in manufacturing a single LED monitor is $40 and the variable cost is $12. If the company expects to manufacture 5,000 monitors, the total costs would be ________.

A) $60,000
B) $200,000
C) $260,000
D) $420,000
E) $500,000

Question 56

A manufacturing plant is designed to produce 2000 flat-screen TVs per day. But demand is higher than that. If the company tries to increase its production to 2500 TVs per day, the average costs will ________ because ________.

A) decrease; the plant becomes more efficient
B) stay the same; the plant becomes more efficient
C) decrease; the plant becomes inefficient
D) increase; the plant becomes more efficient
E) increase; the plant becomes inefficient

Question 57

A cell phone manufacturing firm produced 1,000 cell phones a day but believed that it could reasonably step up production to 2,000 cell phones a day. Consequently, it built a larger plant and installed efficient machinery and work arrangements to realize the projected output. Which of the following can most likely be inferred from this information?

A) The unit cost of producing 2,000 cell phones per day would be twice that of the unit cost of producing 1,000 units per day.
B) A production plant with the capacity of producing 5,000 cell phones a day would be most efficient.
C) The unit cost of producing 2,000 cell phones per day would be lower than the unit cost of producing 1,000 units per day.
D) A 2,000-capacity production plant would be less efficient because of increasing diseconomies of scale.
E) The fixed costs of the firm are more likely to increase with the increase in output.

Question 58

In 2011, the fixed costs of a company were $500,000, and its variable costs equaled $150,000. In 2010, the company made an annual profit of $200,000. It has been predicted that, despite a steady growth, the company's variable costs will likely equal $300,000 by 2013. The total costs of the company in 2011 were ________.

A) $350,000
B) $450,000
C) $650,000
D) $800,000
E) $950,000

Question 59

The long-run average cost (LRAC) curve indicates the ________.

A) per unit cost of output in the long run
B) projected total production costs of competitors
C) variable costs incurred by a firm over time
D) fixed costs incurred by a firm over the long term
E) number of units the market will buy in a given time period, at different prices that might be charged

Question 60

Costs that change with the level of production are referred to as ________.

A) fixed costs
B) variable costs
C) target costs
D) total costs
E) overhead costs

Question 61

Samsung Mobile plans to launch a new phone with a unit cost of $270 and wants to earn a 10 percent markup on its sales. Samsung's markup price is ________.

A) $275
B) $280
C) $295
D) $300
E) $335

Question 62

Target return pricing uses the concept of a(n) ________, which shows the total cost and total revenue expected at different sales volume levels.

A) BCG matrix
B) break-even chart
C) SWOT analysis
D) demand curve
E) experience curve

Question 63

Product costs set the ceiling for prices.

Question 64

A manufacturer has fixed costs of $100,000, a variable cost of $10 per unit of output, and break-even volume of 50,000 units. What should the manufacturer's unit cost be in order to break even?

A) $10
B) $12
C) $14
D) $16
E) $20

Question 65

Customer perceptions of the product's value set the floor for prices.

Question 66

Which of the following involves setting prices based on a rival firm's strategies, costs, prices, and market offerings?

A) target return pricing
B) good-value pricing
C) competitor value-added pricing
D) market-based pricing
E) competition-based pricing

Question 67

Which of the following statements about break-even analysis is true?

A) It is used to determine how much production experience a company must have in order to achieve desired efficiencies.
B) It is a technique used to calculate fixed costs.
C) It determines the amount of retained earnings a company will have during a given accounting period.
D) It is a technique marketers use to determine the relationship between supply and demand.
E) It is calculated by using variable costs, the unit price, and fixed costs.

Question 68

Target return pricing is a variation of which of the following cost-oriented pricing approaches?

A) cost-plus pricing
B) break-even pricing
C) markup pricing
D) value-based pricing
E) fixed cost pricing

Question 69

Which of the following is a cost-based approach to pricing?

A) value-based pricing
B) high-low pricing
C) target return pricing
D) good value pricing
E) EDLP

Question 70

Why is markup pricing most likely popular?

A) Sellers are more certain about demand than about costs.
B) Markup pricing tends to maximize market competition.
C) Markup pricing affords buyers greater bargaining power.
D) Sellers do not need to make frequent adjustments as demand changes.
E) Markup pricing is designed to set prices to break even on the costs of making and marketing a product.

Question 71

When performing a break-even analysis, the manufacturer should consider all of the following EXCEPT ________.

A) probable demand
B) likely profits
C) competitors' pricing
D) estimated break-even volumes
E) different prices

Question 72

Refer to the scenario below to answer the following question(s).
Alden Manufacturing produces small kitchen appliances-blenders, hand mixers, and electric skillets-under the brand name First Generation. Alden attempts to target newlyweds and first-time home buyers with this brand.
Considering that most young households have limited financial resources, Alden attempts to engage in target costing. "In doing this," says Milt Alden, the co-founder of Alden Electronics, "we have better control over keeping price right in line with customers."
Alden manufactures a three-speed blender, its top seller, along with a five-speed blender. The hand mixers are manufactured in two variants-a small handheld mixer with two rotating beaters and another that comes with an optional stand and an attached mixing bowl. Alden's temperature-controlled skillets are manufactured in a single style with three color options.
"Our product offerings are narrower," Milt Alden added, "but our line workers know each product like the back of their hands. This allows us to produce superior products while holding our prices low.
Which of these is NOT a way in which pricing can accomplish company objectives?

A) set prices to attract new customers and retain existing customers
B) raise prices to create excitement for a brand
C) set prices low to hinder competition from entering the market
D) price one product to help sales of other products in the company's line
E) set price to keep the loyalty of resellers

Question 73

As a manufacturer increases the price, ________.

A) efficiency drops
B) the break-even volume drops
C) competition is minimized
D) the total costs increase
E) the profit margin shrinks

Question 74

Mansfield Pharmaceuticals markets Zipro, an antibiotic. The firm has fixed costs of $1,000,000 and variable costs of $2 per bottle of 50 tablets priced at $10 per bottle. What is the break-even volume?

A) 25,000
B) 55,000
C) 100,000
D) 115,000
E) 125,000

Question 75

Companies can legitimately charge a higher price if ________.

A) consumers perceive that the company's product offers greater value
B) the demand for products manufactured by a firm is highly elastic
C) the cost of advertising is minimal
D) derived demand remains constant
E) consumers de-emphasize quality

Question 76

John assured his venture capitalists an earning of 25-percent return on equity when he began his IT startup. In order to achieve this result, he will most likely use which of the following pricing approaches?

A) value-based pricing
B) markup pricing
C) EDLP
D) customer-based pricing
E) target return pricing

Question 77

Refer to the scenario below to answer the following question(s).
Alden Manufacturing produces small kitchen appliances-blenders, hand mixers, and electric skillets-under the brand name First Generation. Alden attempts to target newlyweds and first-time home buyers with this brand.
Considering that most young households have limited financial resources, Alden attempts to engage in target costing. "In doing this," says Milt Alden, the co-founder of Alden Electronics, "we have better control over keeping price right in line with customers."
Alden manufactures a three-speed blender, its top seller, along with a five-speed blender. The hand mixers are manufactured in two variants-a small handheld mixer with two rotating beaters and another that comes with an optional stand and an attached mixing bowl. Alden's temperature-controlled skillets are manufactured in a single style with three color options.
"Our product offerings are narrower," Milt Alden added, "but our line workers know each product like the back of their hands. This allows us to produce superior products while holding our prices low.
Milt Alden says that his line workers "know each product like the back of their hands," and that this knowledge helps the company keep its prices low. This indicates that Alden Manufacturing most likely benefits from the ________.

A) cost-plus pricing
B) value-added pricing
C) experience curve
D) inelastic demand in the market
E) derived demand in the market

Question 78

The break-even volume is the point at which ________.

A) the total revenue and total cost curves intersect
B) demand equals supply
C) the production of one more unit will not lead to increase in demand
D) the company can pay off all its long-term debt
E) a firm exceeds the sales forecast

Question 79

Why is markup pricing most likely impractical?

A) Calculating costs is complicated due to fluctuations.
B) By tying the price to cost, sellers oversimplify pricing.
C) When all firms in the industry use this pricing method, prices tend to be similar.
D) The method ignores demand and competitor prices.
E) With a standard markup, consumers know when they are being overcharged.

Question 80

A company faces fixed costs of $100,000 and variable costs of $8 per unit. It plans to directly sell its product in the market for $12. How many units must it produce and sell to break even?

A) 20,000
B) 25,000
C) 30,000
D) 35,000
E) 40,000