BA 370 CH.14
If the fixed costs of manufacturing a new cell phone are $10,000, the sales price is $60, and variable cost per unit is $20, the break-even point is
-250 UNITS 60-20=40 10,000/40=250
Predatory pricing
-Is ILLEGAL in the United States under both the Sherman Antitrust Act and the Federal Trade Commission Act -Predatory pricing occurs when a firm sets a very low price for one or more of its products with the intent of driving its competition out of business
Historically, prices were
-Prices rarely changed except in response to radical shifts in market conditions -Historically, managers have treated price as an afterthought to their marketing strategy, setting prices according to what competitors were charging or, worse yet, adding up their costs and tacking on a desired profit to set the sales price
_____ shows the relationship between income and demand
A DEMAND CURVE -A demand curve shows how many units of a product or service consumers will demand during a specific period of time at different prices
In developing marketing strategies, why is price often the most challenging of the four Ps to manage?
Because it is the LEAST understood element of the MARKETING MIX -Marketers should view pricing decisions as a strategic opportunity to create value rather than as an afterthought to the rest of the marketing mix
_____ products are products whose demands are positively related and as such, they rise or fall together
COMPLEMENTARY -Complementary products are things that are used together and as such, their demands are positively related; in other words, a percentage increase in the quantity demanded for Product A results in a percentage increase in the quantity demanded for Product B
Imelda's is an upscale women's clothing store. Prices are based on customers' beliefs about the value of the clothing. The store focuses on a limited target market and provides excellent customer service. Imelda's is using a ________ pricing strategy
CUSTOMER-ORIENTED -A firm uses customer orientation when it sets its pricing strategy based on how it can add value to its products or services
Traditional demand curve economic theory is used by marketers to understand ________ in the five Cs of pricing
CUSTOMERS -A demand curve shows how many units of a product or service consumers will demand during a specific period of time at different prices. Demand curves evaluate how price changes affect customers' purchase decisions, and in effect they measure customers' different value perceptions
In general, prices should not be based on costs because
CUSTOMERS MAKE THEIR PURCHASE BASED ON PERCEIVED VALUE
If the price for a product increases, the demand for the complementary product will
DECREASE -total cost of using the two products together has increased
Managers of Wendy's fast-food restaurants keep track of prices at competitors such as McDonald's, Burger King, and Arby's, knowing that a decrease in the prices at these other fast-food restaurants will
DECREASE demand for Wendy's products -The other fast-food restaurants are potential substitutes for Wendy's. If prices of substitutes go down, it makes the food at Wendy's seem like less of a value and demand will go down
Marketers spend millions of dollars annually trying to create or reinforce brand loyalty. Brand loyalty changes the demand curve for the firm's products by
DECREASING the price ELASTICITY of demand -Brand-loyal customers are less sensitive to price increases. Getting consumers to believe that a particular brand is unique, different, or extraordinary in some way makes other brands seem less substitutable, which in turn increases brand loyalty and decreases the price elasticity of demand
What situation is occurring if a 1 percent decrease in price results in more than a 1 percent increase in quantity demand?
DEMAND IS PRICE ELASTIC -If a 1 percent price decrease results in, say, a 1.1 percent increase in demand, price elasticity is equal to 1.1 ÷ −1 = −1.1. Price elasticity of less than −1.0 reflects elastic demand
The break-even point is estimated by
DIVIDING FIXED COSTS BY CONTRIBUTION PER UNIT
Break-even analysis is useful because it allows managers to
ESTIMATE the quantity they will need to SELL at a given price to break-even -A useful technique that enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales is called break-even analysis. Although it cannot actually help managers set prices, it does help them assess their pricing strategies because it clarifies the conditions in which different prices may make a product or service profitable. It becomes an even more powerful tool when performed on a range of possible prices for comparative purposes
When a firm has a particular profit goal as its overriding concern, it will use target return pricing to meet the profit objective
FALSE -Target return pricing is used when firms want to produce a specific return on their investment; target profit pricing is implemented when a firm has a particular profit goal as its overriding objective
At the break-even point, profits are maximized
FALSE -costs = revenue
Costs related to supply and costs related to demand are the two primary cost categories
FALSE -variable & fixed
The demand curve for prestige products generally slopes downward due to higher prices
FALSE -when customers value the prestige of a product more than the price differential, a higher price may lead to a greater quantity sold
Which of the following is the most logical example of complementary products?
HOT DOGS & HOT DOG BUNS
The price elasticity of demand for a specific brand of deodorant is −.9. The market for this product is considered
INELASTIC -The market for a product is generally viewed as price insensitive, or inelastic, when its price elasticity is greater than 1
One of the limitations associated with break-even analysis is that
IT ASSUMES THERE IS ONLY ONE PRICE -Break-even analysis assumes that all products are sold at a single price (or an average price)
A strategy of setting prices based on how customers develop their perceptions of value can often be the most effective pricing strategy, especially if the strategy
Is supported by CONSISTENT advertising and distribution strategies -The question describes a customer orientation in pricing, which can be effective since it is based on value, as long as other aspects of the marketing mix support the strategy
In a market with ________ there are many firms providing differentiated products
MONOPOLISTIC COMPETITION
The commercial airline industry is considered what type of market?
OLIGOPOLISTIC COMPETITION -When a market is characterized by oligopolistic competition, only a few firms dominate. Examples of oligopolistic markets include the soft drink market and commercial airline travel
Rita knew that her established customers liked her product much better than her competitor's. She was planning to expand into new markets, and she was considering pricing. She was leaning toward charging a higher price than competitors to help demonstrate that hers was a high-quality product. Rita was considering
PREMIUM PRICING -the firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom price does not matter
There is an old saying "If you have to ask the price of a yacht, you cannot afford it." Products like yachts are most likely to be associated with
PRESTIGE PRICING -Prestige products or services are for consumers who purchase for their status rather than for their functionality. The higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it
French luxury goods manufacturer and retailer Hermès is known for making expensive leather goods. But paying $300,168 for a handbag at auction, which is over the standard retail price of $280,000, is extraordinary, and not for the casual shopper. The handbag is considered a
PRESTIGE PRODUCT
________ is the cash expenditure plus taxes that consumers have to pay for a good or service.
PRICE -Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service
Samar customizes Harley-Davidson motorcycles. No two cycles are alike. He notices that very few customers even ask the price of his motorcycles before they decide to purchase them. Demand for his motorcycles is probably
PRICE INELASTIC -Since Samar's customers don't seem to care about the price (price insensitive), we would not expect to see demand change much as price changes. This describes a situation where demand is price inelastic
Juliannna wants her firm's gourmet snacks to be the leading brand in the U.S. market. When adopting a pricing strategy designed to gain market share, she should remember that
RARELY is the lowest-price offering the dominant brand in a market
The contribution per unit is
REVENUE - VARIABLE COST
Health clubs often use a low introductory offer price to get people to join their club. These low prices represent a ________ pricing strategy
SALES ORIENTATION -The health clubs are attempting to get more members and are sacrificing profits in the short term in favor of greater sales. This is a sales orientation strategy. A new health club might focus on unit sales, dollar sales, or market share and therefore be willing to set a lower membership fee and accept less profit at first to focus on and generate more unit sales
Which of the following is most likely to be characterized by pure competition in the United States?
SOYBEANS -With pure competition, a large number of sellers offer standardized products or commodities that consumers perceive as substitutable, such as grains, gold, meat, spices, or minerals
Byron gave the manager of his convenience store a set of binoculars so she could see the gasoline prices charged by the other convenience store at that intersection. Byron told the manager to always match the gasoline prices of the other store. Byron is using a ________ pricing strategy
STATUS-QUO -A status-quo pricing strategy is a type of competitor-oriented strategy in which the firm changes prices only when competitors change theirs
When the price for Blu-ray players dropped, the demand for DVD players went down, so DVD players and Blu-ray players are
SUBSTITUTE PRODUCTS -the change in their demand are negatively related
There are many options available to consumers when it comes to breakfast cereals. So, if Kellogg's significantly increases the price of Rice Krispies, consumers are more apt to buy alternate cereals instead. This illustrates which concept?
SUBSTITUTION EFFECT -The greater the availability of substitute products, the higher the price elasticity of demand for any given product will be. In this example, there are many close substitutes in the breakfast cereal category. If the price of Rice Krispies significantly increases, many consumers will turn to competing brands
A ________ strategy involves accurately measuring all the factors needed to predict sales and profits at various price levels, so that the price level that produces the highest return can be chosen
TARGET RETURN -The maximizing profits strategy relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized
According to a typical demand curve, the higher the price,
THE LOWER THE QUANTITY CONSUMERS WILL BUY -A typical demand curve shows that as price increases, quantity demanded for a product or service will decrease
_______ are included in the full price of a product or service
TRAVEL COSTS -Taxes, shipping, travel costs, and the value of the consumer's time are all elements of the full price of a product
American Airlines just reduced its fares for summer flights by $100. Delta Airlines changes its pricing structure and reduces its flights by $100 as well. Delta is employing status-quo pricing
TRUE
Rarely is the lowest-price product offering the dominant brand in a given market
TRUE
Pricing strategies should be aligned with a firm's overall goals and objectives
TRUE -Every firm has different goals and company objectives. Ideally, these goals should spill down to the pricing strategy, such that the pricing of a company's products and services should support and allow the firm to reach its overall goals
Price is the only part of the marketing mix that does not generate costs
TRUE -Product, place, and promotion all generate costs; price generates revenue
The key to successful pricing is to match the product with the consumer's perception of value
TRUE -Successful pricing considers consumers' perceived value, since to ignore this might result in a price that is too high or too low. Marketers should view pricing decisions as a strategic opportunity to create value rather than as an afterthought to the rest of the marketing mix
When the price of milk goes up, demand does not fall significantly, because people still need to buy milk. However, if the price of T-bone steaks rises beyond a certain point, people will buy fewer of them because they can turn to the many substitutes for this cut of meat. This refers to price elasticity of demand
TRUE -The price elasticity of demand measures how changes in a price affect the quantity of the product demanded. Specifically, it is the ratio of the percentage change in quantity demanded to the percentage change in price
In U.S. markets, there are many substitute products for Lucky Charms cereal, suggesting the price elasticity of demand for Fruit Loops is high
TRUE -substitution effect = high price elasticity
A customer orientation toward pricing implicitly invokes the concept of
VALUE -A customer orientation in pricing focuses on perceived value to set prices
Consider a bakery like Entenmann's: The majority of the ________ costs are the cost of the ingredients, primarily flour
VARIABLE -Variable costs are those costs, primarily labor and materials, that vary with production volume. As a firm produces more or less of a good or service, the total variable costs increase or decrease at the same time
