Marketing Chapter 9

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were ​$3 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 55 percent and cost of goods sold represents the only variable​ cost, by what percentage must costs decrease to maintain the gross margin percentage of 55 percent if​ A&F lowers prices by 10 ​percent? Set the initial price equal to​ $1.00. Then the new price is $ _______

$ 0.90 reduced prices = (1-(0.15*1)) = $0.90

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were $7 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 50 percent and cost of goods sold represents the only variable​ cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if​ A&F lowers prices by 15 percent? The current gross profit is ______ billion?

$3.50 billion - 50% of $7 billion = $3.50 billion

Your first task is to provide the product strategy team with a recommendation for the price of the side table. The side table design is simple, and there are many competitors with similar offerings. The product strategy team has indicated that in pricing this product, demand must be taken into account. Conner Ash from research has provided you with the demand curve for the side table. At a price of $100, 1,500 tables could be sold. At a price of $125, 1,000 could be sold. What price point do you recommend to the product strategy team?

- $100

The card-holder keychain is a much lower cost to produce than the satchel, overnight bag, or laptop bag. This allows the keychain to be offered at a lower price point. Which of the following pricing strategies would be best for the card-holder keychain?

Bundling: Offer the card-holder keychain for no additional cost if the consumer buys the satchel, overnight bag, and laptop all together.

Which of the following best describes the highest price that a customer is willing to pay for a​ fast-food chain's​ products?

Customer perception

Sadie's Restaurant has listened to its customers over the years and is now able to offer the right combination of quality and good service at a fair price. Which pricing strategy is​ Sadie's using?

Good-value pricing

When, if​ ever, is price discrimination​ allowed?

If the seller can prove that its costs are different when selling to different​ retailers, then it is legal.

In which type of competition do​ fast-food restaurants​ operate?

Monopolistic competition

__________ shows the number of units the market will buy in a given time period, at different prices that might be charged.

a demand curve

When companies treat customers fairly and make certain they understand pricing and pricing terms, this leads to ________

building strong and lasting customer relationships

A car buyer can choose a base model at one​ price, or one with a premium sound and navigation system at a higher price. This is an example of​ _______ pricing.

optional-product

A company's pricing strategy is affected by internal factors such as ________

overall marketing strategy, objectives, marketing mix, and other organizational considerations

Which of the following best describes Burger​ King's pricing strategy regarding its chicken nuggets during​ McDonald's Monopoly​ promotion?

​Competition-based pricing

Quantity: Quantity, or sales units volume, is the label for the x-axis in the break-even chart.

B

Your next task is to recommend to the marketing team the pricing strategy for the overnight bag. The priority in the overnight bag decision is for the company's online store. Again, you seek more information from your marketing research team. They tell you that they learned from focus groups that the Carry Tu overnight bag is viewed very similarly to the Grazzi overnight bag. In fact, consumers felt that price could be the deciding factor in selecting Carry Tu over Grazzi.

Dynamic pricing: Give your company the flexibility to quickly change the price when Grazzi does.

Total Revenue: The total revenue line typically starts at the chart origin and has a steeper slope than the total cost curve.

E

Internal factors that affect pricing include​ _________________.

The​ company's overall marketing​ strategy, objectives, and marketing mix

​________________________ is one major objective associated with a​ market-penetration pricing strategy.

Winning large market share

Roshika has been invited to a fancy dinner party and wants to bring a good bottle of wine as a gift for the host. Since she does not know much about​ wine, she will likely use the price of the wines as​ ________.

an indicator of quality

Companies have to think carefully when considering price changes. They must consider which of the following?

buyer and competitor reactions

Gillette charges a fairly low price for its razors​ (relative to​ costs) and a high price for razor blades. It is using a strategy of​ ___________ pricing.

captive-product

__________ is setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console.

captive-product pricing

Fixed costs are __________

costs that do not vary with production or sales level

__________ is the first step in cost-based pricing.

designing a good product

Continually adjusting prices to meet the characteristics and needs of individual customers and situations is known as​ _______________________.

dynamic pricing

__________ is/are costs that do not vary with production or sales level.

fixed costs

__________ is offering just the right combination of quality and good service at a fair price.

good-value pricing

Which of the following pricing strategies would a company use to attract a large number of buyers quickly and win a large market share?

market penetration pricing

A company sets a high price on a new product it introduces to maximize revenue from various market segments. Which new product pricing strategy is the company using?

market skimming pricing

__________ is setting a low price for a new product in order to attract a large number of buyers and a large market share.

market-penetration pricing

__________ is the second step in value-based pricing.

setting a target price to match the customer's perceived value

Cost-based pricing is __________.

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

__________ is based on a buyer's perceptions of value rather than on the seller's cost.

customer value-based pricing

Which of the following is true regarding the​ price-demand relationship?

If demand is​ elastic, sellers will consider lowering their prices.

Fixed Cost: Fixed costs are represented by a horizontal line on the break-even chart. Fixed costs do not change with changes in quantity.

C

Practice your price-setting prowess. Complete the equations below for markup pricing and break-even pricing. Drag each of the variables at the top into the correct spot in the equation.

Markup Pricing = Unit Cost/( 1 - Desired Return on Sales ) Break-Even Pricing = (Fixed Costs / Volumne) + Variable Costs

When sellers set prices in conjunction or collaboration with one​ another, this illegal practice is known as​ _______________.

price-fixing

A key element of​ Smashburger's pricing strategy is determining price steps between its​ quarter-pound, one-third​ pound, and​ half-pound hamburgers. The practice of setting prices for different products offered by a company within a single category is known as​ __________.

product line pricing

Dollars: Dollars are the label for the y-axis in the break-even chart.

A

The new product pricing strategy of ______ means the initial price is set high.

Market Skimming Pricing

Of the following, which is core element of our free market economy?

price competition

New, premium movie theaters offer features such as online reserved​ seating, high-backed leather executive chairs with armrests and​ footrests, the latest in digital​ sound, super-wide​ screens, and other amenities for which they charge a higher price. This is an example of which type of​ pricing?

Value-added pricing

Price Discrimination

Zinia Home Goods manufactures small furnishings that are sold in two different department stores. Zinia offers that exact to same vase to both department stores, but sells the vase for $10 more at one of the department stores. There is no difference in the vase offered and no difference in the two department stores.

When a college or university charges more for​ out-of-state students than​ in-state students, it is practicing​ ______________________.

location-based pricing

Smashburger is seeking to attract customers who eat out at casual dining​ restaurants, like P.F.​ Chang's and​ Applebee's. The average ticket price for customers at these restaurants is​ $13. For these​ customers, $13 is a​ __________ in considering the relative value of​ Smashburger's offerings.

reference price

Dollars: Dollars are the labeDollars: Dollars are the label for the y-axis in the break-even chart.l for the y-axis in the break-even chart.

A

Practice your price-setting prowess. Complete the equations below for markup pricing and break-even pricing. Drag each of the variables at the top into the correct spot in the equation. When you have moved all of the variables for both equations, click Submit. Markup Pricing = Break-Even Pricing =

Markup Pricing = Unit Cost/( 1 - Desired Return on Sales ) Break-Even Pricing = (Fixed Costs / Volume) + Variable Costs

The​ Robinson-Patman Act seeks to ensure that sellers offer the same price terms to customers at a given level of trade to prevent​ ______________________.

price discrimination

How do companies apply pricing strategies to accommodate differences in customer segments and situations?

they apply a variety of price adjustment strategies

__________ is/are the sum of the fixed and variable costs for any given level of production.

total costs

Predatory Pricing

Bob's Boxes sells cardboard boxes to consumer packaged goods manufactures. Bob's competition, a start-up company called Carl's Cardboards, has been stealing market share from Bob's Boxes. Bob decides to lower his prices below cost to push Carl's Cardboards out of business.

Which of the following refers to setting prices based on​ buyers' perception of value rather than on the​ seller's cost?

Customer​ value-based pricing

Total Cost: The total cost line combines both the fixed costs and the variable costs (which do vary with change in quantity). The total costs line intercept is at the level of fixed costs and typically sweeps from lower left to upper right.

D

Break-Even Point: The break-even point is where total revenue equals total costs.

F

After three years on the market, the Carry Tu line has established itself in the market, and all four product items are experiencing steady market growth. The competitor, Grazzi, has seen slow market growth. In response, Grazzi decides to cut prices by 10%. The Grazzi satchel, overnight bag, laptop bag, and card-holder keychain are now cheaper than the corresponding Carry Tu bags. What is your pricing strategy recommendation to your marketing team in response to Grazzi's price decrease?

Keep prices the same, but promote the perceived value of Carry Tu bags: Communicate the value of Carry Tu over Grazzi.

Deceptive Pricing

Kitchens and More is an appliance retailer. In an ad in the local newspaper, Kitchens and More offers a brand name refrigerator for $100. A consumer who sees the ad visits Kitchens and More and asks to see the refrigerator on sale. A sales associate explains to the consumer that Kitchens and More only stocked one of the $100 refrigerators, and it had been sold within five minutes of the store opening that day. He suggest the consumer browse the other refrigerators Kitchens and More sells.

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

cost-based pricing

Price ceilings are set by customer perception. Which of the following sets the floor for the price that a company charges?

costs

Marketers use three major pricing strategies: _________________

customer value based pricing, cost based pricing, and competition based pricing

A​ fast-food restaurant determines the cost of producing its chicken nuggets then adds a percentage to that cost to determine the price charged to consumers. This indicates that the restaurant is utilizing which of the following pricing​ strategies?

​Cost-plus pricing

A company has set a low price on a new product it introduced. It wants to maximize its market share and attract a large number of buyers quickly. Which new product pricing strategy should the company​ use?

market-penetration pricing

Fir-Niche's new product development team is developing an ornate writing desk. Before the prototype is produced, you have been asked to engage in target costing to recommend the target cost of materials per unit. This is part of an effort to make the writing desk of the best quality materials that the target market will be willing to pay, while still allowing Fir-Niche to make a profit. Conner emails you a report that contains the following information to help you make your decision. What cost of material per unit (variable cost) do you recommend for the ornate writing desk? Fixed costs $250,000 Projected units sold in 1 yr 1,000 Avg. price target market will pay $550

- $200 per unit

__________ is the third step in value-based pricing.

Determining costs that can be incurred

The illegal practice of​ ______________________ is selling below cost with the intention of punishing a competitor or gaining higher​ long-run profits by putting competitors out of business.

predatory pricing

__________ is/are costs that vary directly with the level of production.

variable costs

Now the product strategy team needs to decide what to do about the price of the leather armchair given the rise in costs. The team still wants the price to reflect a markup. The total cost per chair is now $450. Conner conducts a new round of focus groups with the target market and finds the acceptable price range for the armchair has shifted slightly to $525-$550. Remember, you originally recommended a markup of 25%. Given the new information, do you recommend increasing the markup, keeping the markup the same, or reducing the markup?

- Decrease the markup

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were $7 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 50 percent and cost of goods sold represents the only variable​ cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if​ A&F lowers prices by 15 percent? The increase in sales equals ​$ _____ billion

$ 1.499 billion 8.499 bil - 7 bill = 1.499 billion

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were $7 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 50 percent and cost of goods sold represents the only variable​ cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if​ A&F lowers prices by 15 percent? Set the initial price equal to​ $1.00. Then the new price is _____

$0.85 - assuming the original price of one piece is = $1.00 - reduced prices = (1-(0.15*1)) = $0.85

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were $7 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 50 percent and cost of goods sold represents the only variable​ cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if​ A&F lowers prices by 15 percent? The new sales level needed to maintain the original gross profit margin in terms of absolute dollars is $ _____ billion

$8.499 billion $3.5 bil / 0.41176 = $8.499 billion

Your next task is to provide a pricing recommendation for the bookshelf system. The product comes with five equal-length finished walnut shelves and the hardware to hang the shelves. When assembled, the shelves look like they are floating on the wall. The product strategy team suggests taking into consideration the break-even point in determining the bookshelf system's price. You ask Conner about expectations around this product. He says, "The bookshelf system is a popular item. I expect around 2,500 units to be sold this year." Production informs you that the variable costs are $50/unit. Fixed costs are $150,000. What price point do you recommend for the bookshelf system?

- $130

Fir-Niche's new product development team is developing an ornate writing desk. Before the prototype is produced, you have been asked to engage in target costing to recommend the target cost of materials per unit. This is part of an effort to make the writing desk of the best quality materials that the target market will be willing to pay, while still allowing Fir-Niche to make a profit. Conner emails you a report that contains the following information to help you make your decision. What cost of material per unit (variable cost) do you recommend for the ornate writing desk?

- $200 per unit

Your next task is to provide the product strategy team with a recommendation for the price of the leather chair. The leather chair is a unique offering because it comes in bold leather colors. Conner Ash from research tells you that, after his group did a market analysis, they found that there is little competition for this item. A series of focus groups with samples from the target market have indicated that an acceptable price range for the leather chair is $500 to $525. The product strategy team has indicated that markup pricing would be a good fit for this product item. If the total cost of producing the chair is $400 per chair, what markup will you recommend to the product strategy team?

- 30% markup

Several months have gone by. Production informs you that costs for the materials to produce the armchair have risen sharply. The product strategy team advises you that they will continue to use the high-quality materials, even if it means Fir-Niche will have to raise the price to cover the increasing costs. Before moving forward, the product strategy team wants to get an idea of how sales will fluctuate if the price for the leather chair increases. In your opinion, is the demand for the leather chair elastic or inelastic?

- Elastic: As the price goes up or down, the demand will also fluctuate.

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were ​$3 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 55 percent and cost of goods sold represents the only variable​ cost, by what percentage must costs decrease to maintain the gross margin percentage of 55 percent if​ A&F lowers prices by 10 ​percent? The percentage change in cost is ___%

-9 %

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were ​$3 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 55 percent and cost of goods sold represents the only variable​ cost, by what percentage must costs decrease to maintain the gross margin percentage of 55 percent if​ A&F lowers prices by 10 ​percent? The new cost per unit needed to maintain the original gross margin percentage is ​$____

0.41

Abercrombie​ & Fitch, once the favorite of loyal​ teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales declines.​ A&F's total sales were $7 billion last​ year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price reductions are often effective in increasing​ sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming​ A&F's gross profit margin is 50 percent and cost of goods sold represents the only variable​ cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if​ A&F lowers prices by 15 percent? The new gross margin percentage in decimal form equals _____

0.4118 (100 - 50 = 50), new profit will be 85 - 50 = $35 35/85 = 0.41176 (round up)

With regard to supply and​ demand, which of the following best represents the intentions of the​ fast-food company's slash on​ prices?

Demand will increase for its products

__________ is the fourth step in value-based pricing.

Designing products to deliver the desired value at a target price

If the company has selected its target market and positioning​ carefully, then its marketing mix​ strategy, including​ price, will be fairly straightforward. Of the​ following, which is NOT one of the common pricing​ objectives?

Grabbing international market share

The first product item that you must recommend a pricing strategy for is the satchel. The satchel will be the first of the Carry Tu bags to hit the market. Which of the following market-entry pricing strategies do you recommend?

Market skimming pricing strategy: Setting the price very high initially

A variation of​ break-even pricing is​ ____________________, which uses the concept of a​ break-even chart that shows the total cost and total revenue expected at different sales volume levels.

Target return pricing

Of the​ following, which is true about​ pricing?

Price competition is a core element of our​ free-market economy.

For the laptop bag pricing strategy, your marketing team suggests focusing on Karen Kliff's upscale design of the bag. The laptop bag's design is sophisticated and unique because the laptop slides in and out of the side of the bag, unlike most other bags where the laptop slides in and out of the top. The materials, while also eco-friendly, are the highest quality.

Psychological pricing: Setting a higher price to communicate a psychological advantage to the product

Price Fixing

Stu's Salon and Hal's Haircuts are the only two barber shops in Smallville. Both shops are always busy. Stu'd and Hal's grandsons play soccer together. At once soccer match, Stu and Hal talk with each other about their shops. The next day, both Stu's Salon and Hal's Haircuts institute a 10% increase in prices for services.

Your first task is to decide the best market segment to target for Carry Tu's line of bags. Choose the best segment for Carry Tu bags.

Target eco-conscious millennial women.

__________ is setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.

market-skimming pricing

Of the following, which is NOT one of the product mix pricing situations?

penetration pricing

When Apple introduced its iPhone​ X, it priced the new product at nearly​ $1,000, considerably higher than competing smart phones. Apple was pursuing a​ ___________________ new product pricing​ strategy.

premium pricing

__________ is the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.

price

__________ is a measure of the sensitivity of demand to changes in price.

price elasticity

Smashburger is investigating adding a​ half-pound burger to the menu at a lower price point. It has performed​ market-pricing experiments, with the new burger listed at either​ $4.29 or​ $3.99. The company has found little change in sales at the lower price. Based upon this​ finding, one could say that demand for the new burger is​ ___________.

price inelastic

Bath​ & Body Works uses​ _____________ pricing when the company offers​ "three-fer" deals on its products​ (such as​ soaps, lotions, and​ moisturizers).

product bundle

Many of​ Smashburger's competitors combine a​ burger, fries, and a drink offered at a reduced​ "combo" price. This practice is known as​ __________.

product bundle pricing

When Microsoft or Apple sells software as a package, it is engaging in what type of pricing?

product bundle pricing

The Ford Mustang is offered in several different models. Ford uses​ __________ pricing to determine the price steps between the different models.

product line

__________ is setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors' prices.

product line pricing

When a retailer temporarily prices a few select items below cost to create excitement and pull consumers into the​ store, it is practicing​ ___________________ pricing.

promotional

With ________, the price is used to say something about the product.

psychological pricing

Which of the following reverses the usual process of first designing a new​ product, determining its​ cost, and then​ asking, "Can we sell it for​ that?"

target costing

__________ is/are pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

target costing

Price is __________.

the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service

Marketers must consider external considerations in establishing pricing. Which of the following represents those external considerations?

the nature of the market and demand and other environmental factors

According to the​ video, by offering an a la carte​ menu, premium​ ingredients, and gourmet side​ dishes, Smashburger is able to extract a price premium from its loyal customers. This type of pricing approach is referred to as​ __________ pricing.

value-added

__________ is attaching features and services to differentiate a company's offers and charging higher prices.

value-added pricing

UPS uses​ _________________, which charges different prices for shipping depending on an​ item's destination. The more distant the city where the package is being​ shipped, the higher the price UPS charges.

zone pricing