Market-Based Management Chapter 8: Value-Based Pricing and Pricing Strategies

Market-based pricing is not possible without extensive customer and competitor intelligence.

True

Price elasticity is almost always a negative number due to the inverse relationship between price and volume.

True

When a price is inelastic, a price increase improves all aspects of performance.

True

________ pricing allows buyers of a product to select the performance configurations that best fit their needs and price budgets. A) Customerization value B) Life-cycle value C) Performance-based D) Perceived-value E) Value-in-use

A) Customerization value

Which of the following is true of value-based pricing? A) In value-based pricing, price is developed around a product's relative strengths to give customers greater benefits than competing products offer. B) Value-based pricing takes customer needs into account, but fails to consider customers' price sensitivity. C) Value-based pricing does not consider what customers require from a product in terms of performance and price. D) The cost of making a product and the desired profit margin are the two primary determinants in setting a value-based price. E) Value-based pricing is based on features of the product, but fails to consider the prices of similar products in the market.

A) In value-based pricing, price is developed around a product's relative strengths to give customers greater benefits than competing products offer.

________ is the ratio of the percentage change in volume to the percentage change in price. Correct Answer A) Price elasticity B) Market demand C) Market share needed D) Average selling price E) Volume sold

A) Price elasticity

When the management team noted the increased interest in bikes as a mode of commuting, bicycle manufacturer Sensta introduced utility bikes aimed at the urban commuter. In which of the following cases is the company following a multiple-segment pricing strategy? A) Sensta manufactures a basic model priced at $500, a bike with more features, priced at $1,500 and a deluxe model priced at $3,000. B) Sensta entered the market with a bike priced at $2,500, and later, as more competitors entered the market, reduced the price to $1,000. C) When Sensta entered the market, there were already competitors in the $1,000-$2,000 price range. Sensta introduced three bike models in the $500-$700 price range in order to capture market share, and later raised the prices of its products. D) With several competitors with similar product features in the utility bike market, Sensta concentrated on the sturdiness of its bikes, and raised the price of the basic model from $500 to $1,000. E) As the market for bikes in a particular city became saturated, Sensta raised the prices of its bikes hoping to gain maximum profit before exiting the market.

A) Sensta manufactures a basic model priced at $500, a bike with more features, priced at $1,500 and a deluxe model priced at $3,000.

Which of the following is true of skim pricing? A) Skim pricing is viable when a business has a sustainable differentiation advantage in a quality-sensitive market with few competitors. B) Skim pricing is most effective when product differentiation is diminishing, potential customers are price sensitive, and many competitors or substitutes exist. C) In skim pricing, a company tries to keep its costs as low as possible and to offer a low price that no competitor can beat. D) Skim pricing is most profitably used in the decline stage of the product life-cycle. E) Skim pricing is most useful to a business when there are many competitors in the market offering equivalent products.

A) Skim pricing is viable when a business has a sustainable differentiation advantage in a quality-sensitive market with few competitors.

Juliet repairs, buys, and sells old video games to a growing customer base of collectors and fans. She finds that as the products get scarcer, she can charge higher prices for her services and products. This is an example of ________. Correct Answer A) harvest pricing B) plus-one pricing C) reduce-focus pricing D) low-cost-leader pricing E) skim pricing

A) harvest pricing

Reduce-focus pricing is most likely to occur in the ________ stage of the product life cycle. A) mature B) decline C) early D) extinction E) growth

A) mature

Which of the following is true of price elasticity? A) Price elasticities between zero and -1 are considered elastic, as the percentage change in volume is less than the percentage change in price. B) Price elasticity is almost always a negative number due to the inverse relationship between price and volume. C) When the price elasticity equals 0, we have unitary elasticity where the percentage change in volume is equal to the percentage change in price. D) Price elasticities between -1 and -10 are inelastic because the percentage change in volume is greater than the percentage change in price. E) Prestige products that can see an increase in demand when their prices are increased have negative price elasticity.

B) Price elasticity is almost always a negative number due to the inverse relationship between price and volume.

________ pricing involves raising prices incrementally to the point where the best combination of volume and margin is achieved during the mature stage of the product life-cycle. A) Low-cost-leader B) Reduce-focus C) Skim D) Harvest E) Penetration

B) Reduce-focus

For which of the following products or services is the seller most likely to use life-cycle value pricing? A) shampoo B) a car C) lottery tickets D) a meal at a restaurant E) a hotel reservation

B) a car

The break-even volume for a company is ________. A) fixed plus variable expenses minus sales B) fixed expenses divided by margin per unit C) company sales divided by industry sales D) operating income minus fixed expenses E) operating income plus fixed expenses divided by margin per unit

B) fixed expenses divided by margin per unit

A ________ market-based pricing strategy product position is one in which a business can equal competitors on all areas of product and service quality but can find one area of meaningful performance in which it is clearly superior. A) reduce-focus B) plus-one C) harvest D) multi-segment E) penetration

B) plus-one

Which of the following is most likely to occur when price is inelastic? A) A price decrease increases unit margin. B) A price decrease increases gross profit. C) A price decrease hurts sales. D) A price decrease reduces unit volume. E) A price increase reduces gross profit.

C) A price decrease hurts sales.

________ programs allow a business to test price-performance preferences and to evaluate its product's value on the basis of the business's competitive position. A) Discourse analysis B) SWOT analysis C) Conjoint analysis D) TURF analysis E) Harvest technique

C) Conjoint analysis

Which of the following is true of penetration pricing? A) Penetration pricing is best used when there are no competitors in the market and entry is difficult. B) Penetration pricing is most effective when potential customers are quality-sensitive rather than price-sensitive. C) Penetration pricing is a mass-market strategy rather than a niche strategy. D) Penetration pricing is used in a market where product differentiation is high. E) Penetration pricing is a variation of a premium pricing strategy.

C) Penetration pricing is a mass-market strategy rather than a niche strategy.

In which of the following situations would a firm most likely pursue a low-cost leader strategy? A) There are no competitors in the market and the firm is the market leader. B) The market is quality-sensitive rather than price-sensitive. C) The firm can minimize its operational expenses in order to sell higher volumes of products. D) The company's product is a niche product and appeals to only a few customers. E) The nature of its products does not allow the firm to maintain a volume advantage in the market.

C) The firm can minimize its operational expenses in order to sell higher volumes of products.

The break-even market share for a company is ________. A) break-even volume divided by fixed expenses B) market share divided by break-even volume C) break-even volume divided by market demand D) fixed expenses divided by break-even volume E) market demand divided by break-even volume

C) break-even volume divided by market demand

A business with a competitive price and a large value advantage is most likely to ________. A) choose not to compete in this segment of the market B) lower its price to create a comparable value on the basis of positioning C) charge more for its product and still offer a good value D) lower its price, as its price is high relative to the value it offers E) improve performance on the basis of customer price-performance preferences to create customer value

C) charge more for its product and still offer a good value

In ________ pricing, the price is set on the basis of the value that customers realize when they compare the price and benefits of the company's product with those of a key competitor's product. A) value-in-use B) life-cycle value C) perceived-value D) customerization E) cost-based

C) perceived-value

In order for a company to use single-segment pricing, it is necessary that ________. A) the company set the lowest product price among similar products B) there be no other competitor in the market C) the total cost of ownership of the company's product be less than that of competing products D) the company set a higher price than competitors for its product E) the company first use a price skimming strategy when entering the market

C) the total cost of ownership of the company's product be less than that of competing products

In ________, the price of a product is set to provide customers with an attractive savings after considering the life-cycle costs of acquiring, owning, using, maintaining, and disposing of a product. A) performance-based pricing B) customerization value pricing C) value-in-use pricing D) perceived-value pricing E) cost-based pricing

C) value-in-use pricing

Which of the following is true of single-segment pricing strategy? A) The company does not base the price of a product on the savings that customers realize over the life of the product. B) A single-segment pricing strategy is most likely to be employed during the decline stage of the product life-cycle. C) A single-segment pricing strategy is a cost-based pricing strategy rather than a value-based one. D) The main goal of single-segment pricing is to lower the cost to potential customers in order to attract their purchase volume. E) A single-segment pricing strategy overlooks both competitor's offerings and price sensitivity.

D) The main goal of single-segment pricing is to lower the cost to potential customers in order to attract their purchase volume.

Which of the following is true of the value-in-use pricing method? A) Price is set on the basis of the value that customers realize when they compare the price and benefits of the company's product with those of a key competitor's product. B) Price is set by unbundling a product's features, placing a price on each, and then allowing customers to select the features they want at a price that they are willing to pay. C) The cost of making a product and the desired profit margin are the two primary determinants in setting a value-in-use price. D) The product price is set to provide customers with an attractive savings after considering the life-cycle costs of the product. E) It considers neither what the buyer would be willing to pay for product performance nor the cost of other similar products in the market.

D) The product price is set to provide customers with an attractive savings after considering the life-cycle costs of the product.

Which of the following types of pricing considers neither what the buyer would be willing to pay for product performance nor the pricing of competitive products in the market? A) value-in-use pricing B) perceived-value pricing C) customerization-based pricing D) cost-based pricing E) performance-based pricing

D) cost-based pricing

Which of the following is a favorable condition for implementing penetration pricing? A) high sustainable advantage B) quality-sensitive customers C) less competitors D) easy competitor entry E) less substitutes

D) easy competitor entry

To calculate break-even volume, operating income in the formula is ________. A) equal to variable costs B) multiplied by 100 C) equal to industry operating income D) equal to zero E) equal to fixed costs

D) equal to zero

Which of the following is the primary objective of penetration pricing? A) to increase price in order to reduce volumes B) to increase product differentiation C) to gain higher margins by reducing market share D) to build sales volume in a market E) to increase profit by increasing prices

D) to build sales volume in a market

Which of the following is true of product line pricing? A) Products that have a negative cross-price elasticity are substitutes. B) Products that have a positive cross-price elasticity are complementary products. C) It is not necessary to know the degree to which a product has cross-price elasticity with other products. D) As a business adds more products to its product line, it decreases the risk of cannibalizing existing product sales. E) Adding more products to a business's product line enhances sales growth.

E) Adding more products to a business's product line enhances sales growth.

GTB Electronics enters a new market and needs to set its pricing strategy for the market. Which of the following is a favorable condition for implementing skim pricing? A) There is little differentiation between competing products in the market. B) There are many substitute products available, with a wide range of prices and features. C) GTB's product position is about the same as competitors' positions in every area of product and service quality. D) The market has many well-established competitors. E) Entry into that particular market is difficult.

E) Entry into that particular market is difficult.

Which of the following statements is true of pricing decisions? A) The business with the lowest price will always offer customers the best economic value. B) It is possible to implement market-based pricing with low levels of customer and competitor intelligence. C) Cost-based pricing takes into account what the customer would be willing to pay for a certain level of product performance. D) Competitors' product-price positioning and company product-price positioning are the two primary determinants in setting a cost-based price. E) Market-based pricing starts with a good understanding of customer needs and the benefits that a product offers relative to competitors' products.

E) Market-based pricing starts with a good understanding of customer needs and the benefits that a product offers relative to competitors' products.

A price elasticity of -2 means that a price reduction of one percent will result in ________. A) a decrease in volume by 20% B) a decrease in volume by 2% C) an increase in market share by 20% D) a decrease in market share by 2% E) an increase in volume by 2%

E) an increase in volume by 2%

Harvest pricing is usually used in the ________ stage of the product life cycle. A) growth B) mature C) conception D) introduction E) decline

E) decline

Which of the following is most likely to be considered when using a cost-based pricing strategy? A) competitors' product-price positioning B) customer performance needs C) company product-price positioning D) price sensitivity in the market E) desired profit margin

E) desired profit margin

When sales figures for one of the products of Silkskin Cosmetics, a moisturizer, began to fall with low margins and declining volumes, the company decided to raise the price of the moisturizer. As volumes fell further, the company continued to raise prices, thus increasing margins, until it reached a price at which customers refused to buy the product. This pricing strategy is known as ________ pricing. A) skim B) penetration C) plus-one D) low-cost leader E) harvest

E) harvest

A low-cost leader in a market is by definition the volume leader.

False

A plus-one market-based pricing strategy means a business sets its price 1% higher than the competitors' price.

False

As a business adds more products to its product line, it decreases the risk of cannibalizing existing product sales.

False

Market-based pricing does not consider what the customer would be willing to pay for product performance, but depends on the costs of manufacturing the product.

False

Products that complement a certain product will not be affected whenever that product's price changes.

False

To use single-segment pricing, a company bases the price of a product on the costs of manufacturing and marketing the product, not on the attractive savings the customers realize over the life of the product.

False

When a business's product has no considerable and sustainable differential advantage in a quality-sensitive market, with many competitors, many substitutes and easy competitor entry, conditions are favorable for a skim pricing strategy.

False

A company that sells its product for a higher price than its competitor can offer a higher economic value to customers.

True

A reduce-focus pricing strategy calls for price increases with the intent of reducing volumes and market share in exchange for higher margins.

True

Life-cycle costs of ownership include acquisition cost, ownership cost, usage cost, repair/maintenance cost and disposal cost/value.

True

The number of performance aspects that can be evaluated in a price-performance trade-off analysis is limited.

True

When the total contribution produced by a pricing strategy is lower, overall profits will also be lower because fixed costs are deducted from the total contribution.

True