Chapter 11 - Pricing Strategy

Chapter 11
Pricing Strategy

True / False Questions

1. (p. 354) The core issue in pricing is finding out what value requirements (benefits-costs the
buyer places on the product or brand.
TRUE

Difficulty: Moderate

!. (p. 354) Price elasticity is the percentage change in the quantity sold of a brand when the price
changes" divided by the percentage change in price.
TRUE

Difficulty: Easy

#. (p. 354) $or the buyer factors other than price li%e quality" uniqueness" availability"
convenience" service and warranty are never important.
FALSE

Difficulty: Moderate

&. (p. 354) The underlying logic of economic value modeling ('() is that *a dollar worth of
benefits minus price* is a more realistic view of value than using the price+benefit ratio.
TRUE

Difficulty: Challenging

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Chapter 11 - Pricing Strategy
,. (p. 356) Sales forecasts" when combined with cost estimates" give no indication the financial
impact of different price strategies.
FALSE

Difficulty: Moderate

-. (p. 367) . pricing policy considers only the list price and does not include consideration of
discounts" allowances" returns and other operating guidelines. The policy serves as the basis
for implementing and managing the pricing strategy.
FALSE

Difficulty: Moderate

/. (p. 367) Prices should be set according to customers0 perceptions of value.
TRUE

Difficulty: Moderate

1. (p. 36) Price may be used to appeal to different mar%et segments. Price elasticity differences
ma%e it feasible to appeal to different segments.
TRUE

Difficulty: Moderate

2. (p. 36) 3f producer prices to intermediaries are too high" inadequate margins may discourage
intermediaries from actively promoting the producer0s brand.
TRUE

Difficulty: Challenging

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Chapter 11 - Pricing Strategy
14. (p. 36!) Price becomes a more active element of strategy as products move through the life
cycle and competitive pressures build" costs decline and volume increases.
TRUE

Difficulty: Challenging


Multiple Choice Questions

11. (p. 34!) Pricing decisions need to be coordinated with decisions for all of the 55555
components. This pricing perspective mandates understanding how pricing is viewed and
understood by customers.
A. Positioning strategy
6. Product strategy
C. 7istribution strategy
7. 7esign strategy

Difficulty: Challenging

1!. (p. 34!) Pricing decisions require analysis of the 55555 including the mi8" branding strategy
and features to determine the effects of these factors on price strategy.
.. Positioning strategy
. Product strategy
C. 7istribution strategy
7. 7esign strategy

Difficulty: Challenging

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Chapter 11 - Pricing Strategy
1#. (p. 34!) Pricing in coordinated and managed channels reflects total channel considerations
therefore the 555555 needs to be considered in deciding pricing strategy.
.. Positioning strategy
6. Product strategy
C. 7istribution strategy
7. 7esign strategy

Difficulty: Challenging

1&. (p. 35") Price plays the role of 55555 when positioning the brand as a high-quality product or
pursuing head-on competition with another brand" as illustrated by 9ewlett-Pac%ard0s
aggressive competition with 7ell on personal computers in the consumer segment.
A. Signal to the buyer
6. 3nstrument of competition
C. 3mproving financial performance
7. 7esign strategy

Difficulty: Easy

1,. (p. 35#) Price plays the role of a(n 55555 when price offers a way to quic%ly attac%
competitors or" alternatively" to position a firm away from direct competition.
.. Signal to the buyer
. 3nstrument of competition
C. 3mprovement in financial performance
7. 7esign strategy

Difficulty: Easy

11-&
Chapter 11 - Pricing Strategy
1-. (p. 35#) Price plays a role in 55555 since both revenues and costs need to be ta%en into
account in selecting pricing strategies.
.. Signaling to the buyer
6. The instrument of competition
C. 3mproving financial performance
7. 7esign strategy

Difficulty: Easy

11-,
Chapter 11 - Pricing Strategy
1/. (p. 35#) The role of pricing often depends on how other components such as" advertising"
sales promotion and distribution in the 55555 are used.
.. Signal to the buyer
6. Competitive strategy
C. $inancial performance
!. )ar%eting program

Difficulty: Easy

11. (p. 35$) :ow prices may be used to gain sales and 55555.
A. ;ain mar%et share
6. .chieve financial performance
C. Create product positioning
7. Stimulate demand

Difficulty: Easy

12. (p. 35$) Prices are selected to 55555 such as profit contribution and cash flow.
.. ;ain mar%et share
. .chieve financial performance
C. Create product positioning
7. Stimulate demand

Difficulty: Easy

!4. (p. 35$) Prices may be used to enhance product image" promote the use of the product and
create awareness that help achieve the ob<ective to 55555.
.. ;ain mar%et share
6. .chieve financial performance
C. Create product positioning
7. Stimulate demand

Difficulty: Easy

11--
Chapter 11 - Pricing Strategy
!1. (p. 35$) Price is used to encourage buyers to try a new product or to purchase e8isting brands
during periods when sales slow down (e.g." recessions. This illustrates the pricing ob<ective
of 55555.
.. ;ain mar%et share
6. .chieve financial performance
C. Create product positioning
!. Stimulate demand

Difficulty: Easy

!!. (p. 35$) The ob<ective of a pricing action may be to 55555. )anagement may want to
discourage mar%et entry or price cutting.
A. 3nfluence competition
6. .chieve financial performance
C. Create product positioning
7. Stimulate demand

Difficulty: Easy

!#. (p. 364) . conspiracy among firms to set prices for a product is termed 55555 and is illegal
under the Sherman .ct.
A. Price fi8ing
6. Price discrimination
C. 7eceptive pricing
7. Predatory pricing

Difficulty: Easy

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Chapter 11 - Pricing Strategy
!&. (p. 364) The Clayton .ct as amended by the =obinson-Patman .ct prohibits 55555
discrimination > the practice of charging different prices to different buyers for goods of li%e
grade and quality
.. Price fi8ing
. Price discrimination
C. 7eceptive pricing
7. Predatory pricing

Difficulty: Easy

!,. (p. 364) Price deals that mislead consumers fall into the category of 55555 and is outlawed
by the $ederal Trade Commission. 6ait and switch is an e8ample of this practice.
.. Price fi8ing
6. Price discrimination
C. 7eceptive pricing
7. Predatory pricing

Difficulty: Easy

!-. (p. 364) Charging a very low price for a product with the intent of driving competitors out of
business is 55555.
.. Price fi8ing
6. Price discrimination
C. 7eceptive pricing
!. Predatory pricing

Difficulty: Easy

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Chapter 11 - Pricing Strategy
!/. (p. 365) 55555 pricing methods use the cost of producing and mar%eting the product as the
basis for determining price.
A. Cost-oriented
6. 7emand-oriented
C. Competition-oriented
7. Predatory

Difficulty: Easy

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Chapter 11 - Pricing Strategy
!1. (p. 365) 55555 pricing methods consider estimated mar%et response to alternative prices. The
most profitable combination of price and mar%et response level is selected.
.. Cost-oriented
. 7emand-oriented
C. Competition-oriented
7. Predatory

Difficulty: Easy

!2. (p. 365) 55555 pricing methods use other companies0 prices as a reference point in setting
prices.
.. Cost-oriented
6. 7emand-oriented
C. Competition-oriented
7. Predatory

Difficulty: Easy

#4. (p. 365) 6rea%-even pricing is a 55555 approach to determine prices. The initial computation
is? 6rea%-even (units @ Total fi8ed costs divided by Anit price B Anit variable cost. Chen
using this method" select a price and calculate the number of units that must be sold at that
price to cover all fi8ed and variable costs.
A. Cost-oriented
6. 7emand-oriented
C. Competition-oriented
7. Predatory

Difficulty: Moderate

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Chapter 11 - Pricing Strategy

Essay Questions

#1. (p. 34) Chy should A.S. manufacturers worry about China when they have weathered
decades of competition from Dapan" Eorea and 'uropeF '8plain three reasons.
SP''7? 'arlier rivals usually too% years to build up an .merican presence. Chinese
competition often arrives en masse and seiGes share rapidly with unbeatable prices" leaving
little time for the A.S. companies to ad<ust.
6='.7T9? Hther .sian nations shed labor-intensive wor% as they industrialiGed" but China
is gaining share in low-end wor% such as garments and simple assembly at the same time it0s
advancing into higher-value areas such as digital electronics.
CH)P'T3T3HI? Dapan and Eorea are limited players in many industries. 6ut in China"
doGens of manufacturers battle for share in the domestic mar%ets for appliances" cell phones"
cars and more" %eeping everyone lean.
.::3.IC'S? Anli%e Dapan or Eorea" China welcomes foreign investment in %ey industries.
$oreign ventures account for -4J of e8ports and a big share of local sales" so it0s tough to
complain that China is closed.
S3K'? China is both an e8port power and is itself becoming the world0s biggest mar%et for
cars" appliances" cell phones and more. That gives China unparalleled economies of scale.
.CC'SS? =etail giants such as Cal-)art that import directly help Chinese electronics ma%ers
build A.S. mar%et share without the need to spend as much on distribution and ads as Sony"
Sharp and Samsung did.
A.S.PH:3CL? Chen imbalances got out of hand in the M14s and M24s the A.S. threatened
sanctions to prod Dapan and China to address trade grievances. China0s entry into the CTH
limits A.S. ability to act unilaterally.

Difficulty: Challenging

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Chapter 11 - Pricing Strategy
#!. (p. 34) '8plain the strategic role of price in the mar%eting strategy and how some
companies misuse price.
Part of the reason that pricing is misused and poorly understood is the common practice of
ma%ing it the last mar%eting decision. Ce thin% that we must design products" communication
plans and a method of distribution before we have something to price. Ce then use pricing
tactically to capture whatever value we can. This practice should be avoided. Pricing plays an
important strategic role in mar%eting strategy. Strategic choices about mar%et targets"
positioning strategies and products and distribution strategies set guidelines for both price and
promotion strategies. Product quality and features" type of distribution channel" end-users
served and the functions performed by value chain members all help establish a feasible price
range. Chen an organiGation forms a new distribution networ%" selection of the channel and
intermediaries may be driven by price strategy.

Difficulty: Challenging

##. (p. 35") '8plain the strategic role of price in the distribution strategy.
The type of channel" distribution intensity and channel configuration also influence pricing
decisions. The functions performed and the motivations of intermediaries need to be
considered in setting prices. (alue-added resellers require price margins to pay for their
activities and provide incentives to obtain their cooperation. Pricing is equally important when
distribution is performed by the producer. Pricing in coordinated and managed channels
reflects total channel considerations more so than in conventional channels. 3ntensive
distribution is li%ely to call for more competitive pricing than selective or e8clusive
distribution. 3n multi-channel situations" pricing may pose a particular challenge. $or
e8ample" if the web site offers a lower price than conventional channels" how will members of
those channels reactF Pricing decisions must ta%e into account these issues.

Difficulty: Challenging

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Chapter 11 - Pricing Strategy
#&. (p. 354) '8plain role of the buyers0 perception of value in pricing.
The core issue in pricing is finding out what value requirements (benefits-costs the buyer
places on the product or brand. Pricing decision ma%ers need this information in order to
determine the pricing strategy. 6asing price only on cost may lead to pricing too high or too
low compared to the value perceived by the buyer. 6uyers see different values depending on
their use situation so mar%et segment analysis is essential.

Difficulty: Challenging

#,. (p. 36$) '8plain how the pricing strategy selected depends on whether price will perform an
active or passive role in the mar%eting program.
The pricing strategy selected depends on whether price will perform an active or passive role
in the mar%eting program. The use of price as an active (or passive factor refers to whether
price is highlighted in advertising" personal selling and other promotional efforts. )any firms
choose neutral pricing strategies (at or near the prices of %ey competitors" emphasiGing non-
pricing factors in their mar%eting strategies.
11
The neutral pricing strategy see%s to remove
price as the basis of choosing among competing brands.

Difficulty: Moderate

11-1#