Pricing Strategy
The total production costs at Kellner Machine Works are $87,000 out of which $45,000 represent fixed costs. What amount is representative of the variable costs incurred by the company?
$42,000
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 _______
$650
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 ________.
52 x 5000 = 260,000
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
A) produce less revenue than they would if they were priced at the level of perceived value
Why is price important to managers?
Because a small percentage improvement in price can generate a large percentage increase in profitability.
Why is price considered one of the most flexible elements of the marketing mix?
Because unlike product features and channel commitments, prices can be changed quickly.
Which pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.
Cost-based pricing
What kind of pricing uses the buyer's perceptions of value as the key to pricing?
Customer value-based
A manufacturing plant is designed to produce 2000 flat-screen TVs per day. But the 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
E) increase; the plant becomes inefficient
Customer perceptions of the product's value set the floor for prices. TRUE OR FALSE?
FALSE
Department stores that practice everyday low pricing typically provide frequent sale days, early-bird savings, and bonus earnings for store credit-card holders. TRUE OR FALSE?
FALSE
In a pure monopoly, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. TRUE OR FALSE?
FALSE
Product costs set the ceiling for prices. TRUE OR FALSE?
FALSE
The more elastic the demand, the more it pays for the seller to raise the price. TRUE OR FALSE?
FALSE
To take advantage of a downward-sloping experience curve, a company must increase the product's price. TRUE OR FALSE.
FALSE
Value-based pricing uses the sellers' perception of value as the key to pricing. TRUE OR FALSE?
FALSE
Cost-based pricing involves setting prices based on consumer perception of value. TRUE OR FALSE?
FALSE.
Price is the most inflexible of the marketing mix elements. True or False?
False
What type of pricing refers to offering just the right combination of quality and gratifying service at a fair price.
Good-value
Who typically sets prices in large and small companies?
In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product managers.
Do overhead costs change as the number of units produced increases?
No, they remain the same.
What is the is the only element in the marketing mix that produces revenue.
Price
Why is markup pricing most likely popular?
Sellers do not need to make frequent adjustments as demand changes.
Cost-based pricing is often product driven. TRUE OR FALSE?
TRUE
Good-value pricing usually is used by premium brands, and rarely by less-expensive brands. TRUE OR FALSE?
TRUE
If demand is elastic rather than inelastic, sellers will consider lowering their prices. TRUE OR FALSE?
TRUE
Using value-based pricing, a marketer would not design a product and marketing program before setting the price. TRUE OR FALSE?
TRUE
Variable costs change directly with the level of production. TRUE OR FALSE?
TRUE
While lower prices may attract additional customers, it is possible for pricing strategies to result in the product becoming a commodity in the customers' eyes. TRUE OR FALSE.
TRUE
In customer value-based pricing, price is considered along with all other marketing mix variables before the marketing program is set. TRUE OR FALSE?
TRUE.
Overhead costs are costs that do not vary with production or sales level. TRUE OR FALSE?
TRUE.
Why is markup pricing most likely impractical?
The method ignores demand and competitor prices.
How do companies adopt value-added pricing?
They attach value-added features and services to differentiate their offers and support their higher prices
Companies practicing value-added pricing differentiate their offers by attaching value-added features to offerings that, in turn, justify higher prices. TRUE OR FALSE?
True
Price is the sum of all the values that customers give up to gain the benefits of having a product. True or False?
True
Prices have a direct impact on a firm's bottom line. True or False.
True
The targeted value and price drive decisions about what costs can be incurred and the resulting product design. True or False.
True
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?
Value-based pricing
competition-based pricing involves setting pricing based on what?
a rival firm's strategies, costs, prices, and market offerings
As production workers become better organized and more familiar with equipment, the average cost per unit tends to decrease with the ________.
accumulated production experience
Cost-plus pricing involves what?
adding a standard markup for profit
Target return pricing uses the concept of a(n) ________, which shows the total cost and total revenue expected at different sales volume levels.
break-even chart
Target return pricing is a variation of which of the following cost-oriented pricing approaches?
break-even pricing
Companies with lower costs can do what with their prices?
can set lower prices that result in smaller margins but greater sales and profits
Experience-curve pricing assumes that ________.
competitors are weak and not willing to match price cuts
What factors does a company consider when setting its price?
competitors' strategies and prices, product costs, overall marketing strategy and mix, and the nature of the market and demand
The perceived value of different product offers can be reasonably assessed by doing what?
conducting surveys and experiments
Companies can legitimately charge a higher price if what?
consumers perceive that the company's product offers greater value
Which processes does value-based pricing reverse?
cost-based pricing
Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This exemplifies what type of pricing?
cost-plus
The simplest pricing method is ________ pricing.
cost-plus
Other than price, the other elements in the marketing mix represent what?
costs
What are fixed costs?
costs that do not vary with production or sales level
What sets the ceiling for product prices?
customer perceptions of the product's value
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.
customer-oriented
What is usually the first step in cost-based pricing?
designing a good product
The learning curve is representative of the ________.
drop in the average per-unit production cost that comes with accumulated production experience
If demand changes greatly with price, is the demand elastic or inelastic.?
elastic
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 of what type?
everyday low
Retailers such as Costco and Walmart charge a constant, daily low price with few or no temporary price discounts. This is an example of what pricing?
everyday low
When performing a break-even analysis, the manufacturer should consider competitors' pricing. TRUE OR FALSE?
false
Facility rental payments is an example of what kind of costs?
fixed cost
With fixed costs, as production moves up, why does the average cost per unit decreases?
fixed costs are spread over more units
With accumulated production experience and a higher volume of production, companies not only become more efficient but also ________.
gain economies of scale
When McDonald's and other fast food restaurants offer "value menu" items at surprisingly low prices, they are most likely using what type of pricing?
good-value
Which type of pricing involves introducing less-expensive versions of established, brand name products.
good-value pricing
Department stores such as Kohl's and JCPenney's practice high-low pricing doing what?
having frequent sale days for store credit-card holders
What type of pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
high-low
As a manufacturer increases the price, what happens to the break- even volume?
it drops
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.
overhead
The long-run average cost (LRAC) curve indicates the ________.
per unit cost of output in the long run
The Great Recession of 2008 to 2009 triggered a shift in consumer attitudes toward
price and quality
What sets the floor for product prices?
product costs
Price
refers to the amount of money charged for a product or service.
The experience curve reveals that ________.
repetition in production enhances efficiency
Why do companies with higher costs intentionally pay higher costs?
so that they can add value through higher quality and claim higher prices and margins
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?
target return
A downward-sloping experience curve is indicative of ________.
the falling unit production cost of a company
A demand curve shows what?
the number of units the market will buy in a given time period at different prices that could be charged.
The break-even volume is the point at which ________.
the total revenue and total cost curves intersect
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 what type of pricing?
value-add
Costs that change with the level of production are referred to as
variable costs
Break-even analysis is calculated by using what 3 things?
variable costs, the unit price, and fixed costs.
What is a pure monopoly?
when there is only one firm in the market