Chapter 16 Developing Pricing Strategies and Programs

David Issa 27/12/2015
Marketing Management, 15e (Kotler)

Chapter 16 Developing Pricing Strategies and Programs
1) When consumers examine products, they often compare an observed price to an internal price
they remember. This is known as a(n) ________ price.
A) markup
B) reference
C) market-skimming
D) accumulated
E) target
Answer: B
Diff: 1
LO: 16.1: How do consumers process and evaluate prices?
AACSB: Reflective thinking
2) ________ price refers to what the consumers feel the product should cost.
A) Fair
B) Typical
C) Usual discounted
D) List
E) Maximum retail
Answer: A
Diff: 1
3) While shopping at the mall, Jane was asked by one of the sales representatives at the
cosmetics counter to try out a new lipstick that her company was test marketing. The company
representative asks her how much she would be willing to pay for the lipstick. After trying it out,
Jane is of the opinion that $5 is just the right price for it. What type of a reference price is Jane
using?
A) usual discounted price
B) fair price
C) maximum retail price
D) last price paid
E) historical competitor price
Answer: B
Diff: 2
AACSB: Analytical thinking; Application of knowledge
1
4) The reservation price, the maximum that most consumers will pay for a given product, is
known as the ________ price.
A) expected future
B) usual discounted
C) upper-bound
D) typical
E) historical competitor
Answer: C
Diff: 1
5) Which of the following is NOT one of the possible consumer reference prices?
A) typical price
B) actual future price
C) last price paid
D) expected future price
E) upper-bound price
Answer: B
Diff: 3
AACSB: Analytical thinking
6) A company decided to conduct a market survey for its new MP3 player that the company had
priced at $150. In the survey, 95 percent of participants said that the maximum they would pay
for the MP3 player is $100. This is an example of which of the following possible consumer
reference prices?
A) historical competitor price
B) expected future price
C) usual discounted price
D) upper-bound price
E) last price paid
Answer: D
Diff: 2
2
7) The minimum price that most consumers would pay for a given product is known as the
________ price.
A) everyday low
B) usual discounted
C) fair
D) typical
E) lower-bound
Answer: E
Diff: 1
8) A company has developed the prototype of a mobile phone that it plans to launch in the next
few months. The phone comes equipped with the most advanced technological features. As part
of its test marketing efforts, the company allows customers to examine and use the prototype and
also gathers feedback regarding product features and price. The results of this test marketing
effort show that customers are willing to pay at least $500, considering the phone's various
features. As such, the company has discovered customers' ________.
A) last paid price
B) expected future price
C) lower-bound price
D) upper-bound price
E) typical price
Answer: C
Diff: 2
9) Many consumers are willing to pay $100 for a perfume that contains $10 worth of scent
because the perfume is from a well-known brand. What kind of pricing is the company
depending on?
A) going-rate pricing
B) image pricing
C) market-skimming pricing
D) target pricing
E) markup pricing
Answer: B
Diff: 2
AACSB: Application of knowledge
3
10) Pricing cues such as sale signs and prices that end in 9 are more influential when ________.
A) customers have substantial knowledge about prices
B) customers purchase the particular item regularly
C) product quality is standardized
D) product designs vary over time
E) prices do not vary from time to time
Answer: D
Diff: 2
11) Price is one of the two elements of the marketing mix that produces revenue.
Answer: FALSE
Diff: 1
12) Traditionally, price was never a major determinant of buyer choice.

Answer: FALSE
Diff: 1
13) Today, consumers are price takers and accept prices at face value or as given.
Answer: FALSE
Diff: 1
14) Pricing cues such as sale signs and prices that end in 9 are more influential when consumers
are experienced in the category.
Answer: FALSE
Diff: 2
15) Customers usually have a lower price threshold below which prices signal inferior or
unacceptable quality, as well as an upper price threshold above which prices are prohibitive and
the product appears not worth the money.
Answer: TRUE
Diff: 1
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16) Although consumers may have fairly good knowledge of the range of prices involved, very
few can accurately recall specific prices of products.
Answer: TRUE
Diff: 1
17) When examining products, consumers compare an observed price to an internal reference
price they remember or an external frame of reference.
Answer: TRUE
Diff: 1
18) Many consumers use price as an indicator of quality and value.

Answer: TRUE
Diff: 1
19) What are the different possible consumer reference prices?

Answer: Although consumers have fairly good knowledge of price ranges, surprisingly few can
accurately recall specific prices. When examining prices, consumers often employ reference
prices, comparing an observed price to an internal reference price they remember or an external
frame of reference such as a posted "regular retail price."
These reference prices include:
• fair price — what consumers feels the product should cost
• typical price
• last price paid
• upper-bound price — reservation price or the maximum most consumers would pay
• lower-bound price — lower threshold price or the minimum most consumers would pay
• historical competitor price
• expected future price
• usual discounted price
Diff: 2
20) When Abe goes shopping, he comes across a T-shirt that is priced at $35. Although he wants
to buy it, judging from the material used, he feels that the T-shirt should only cost $20. What
reference price is Abe using here?
Answer: Abe perceives $20 to be the "fair price" for the product.
Diff: 2
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21) NV Inc. has launched a touch sensitive handset in the Indian market and priced the same at
INR 9500. Although many people are checking it out and showing interest about purchasing it,
the majority of them are holding themselves back because they feel that it is not worth INR 9500.
They compare the handset's feature with that of its other competitors offering the same features
and come to a conclusion that it is worth INR 8500 and nothing more than that. What kind of a
reference price are the consumers using?
Answer: The consumers are using the upper-bound price. Upper-bound price refers to the
reservation price or the maximum that most consumers would pay.
Diff: 2
22) When Yolanda went shopping, she paid a lot to buy a jacket that had a well-known
designer's tag attached to it. After a few days, she came across a jacket which was
undistinguishable from the one she had bought but was priced 5 times lesser than the earlier one.
She didn't give this a second thought because she was convinced that the designer label she had
bought was worth it. What can be deduced from this?
Answer: Yolanda was using the price as an indicator of quality. She was using image pricing.
This kind of pricing is especially effective with ego-sensitive products such as perfumes,
expensive cars, and designer clothing.
Diff: 2
23) Which of the following is the first step in setting a pricing policy?
A) selecting a pricing method
B) selecting the pricing objective
C) determining demand
D) estimating cost
E) analyzing competitors' costs, prices, and offers
Answer: B
Diff: 2
LO: 16.2: How should a company set prices initially for products or services?
24) After determining its pricing objectives, what is the next logical step a firm should take in
setting its pricing policy?
A) It should analyze its competitors' costs, prices, and offers.
B) It should select its pricing method.
C) It should select its final price.
D) It should determine the demand for its product.
E) It should estimate the cost of its product.
Answer: D
Diff: 2
25) A firm that is plagued with overcapacity, intense competition, or changing consumer desires
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would do better if it pursues ________ as its major objective.

A) market skimming
B) product-quality leadership
C) survival
D) profit maximization
E) market penetration
Answer: C
Diff: 2
26) After estimating the demand and costs associated with alternative prices, a company has
chosen to price its product in such a way that it gains the highest rate of return on its investment.
The company is looking to ________.
A) maximize market share
B) skim the market
C) become a product-quality leader
D) survive in the market
E) maximize current profit
Answer: E
Diff: 2
27) Companies who believe that higher sales volume leads to lower unit costs and higher long-
run profits are attempting to ________.
A) maximize their market share
B) skim the market
C) become a product-quality leader
D) merely survive in the market
E) maximize their current profits
Answer: A
Diff: 2
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28) A company that is looking to maximize its market share would do well to follow ________
pricing.
A) markup
B) market-penetration
C) market-skimming
D) survival
E) target-return
Answer: B
Diff: 2
29) A market-penetration pricing strategy is most suitable when ________.

A) a low price slows down market growth
B) production and distribution costs fall with accumulated production experience
C) a high price dissuades potential competitors from entering the market
D) the market is characterized by inelastic demand
E) a low price encourages actual competition
Answer: B
Diff: 2
30) When a company introduces a product at a high price and then gradually drops the price over
time, it is pursuing a ________ strategy.
A) market-penetration pricing
B) market-skimming pricing
C) value-pricing
D) switching cost
E) loss-leader pricing
Answer: B
Diff: 2
31) When Apple introduced its iPhone, it was priced at $599. This allowed Apple to earn the
maximum amount of revenue from the various segments of the market. Two months after the
introduction, the price had come down to $399. What kind of a pricing did Apple adopt?
A) loss-leader pricing
B) market-penetration pricing
C) market-skimming pricing
D) target-return pricing
E) value pricing
Answer: C
Diff: 2
8
32) Market skimming pricing makes sense under all the following conditions, EXCEPT if
________.
A) a sufficient number of buyers have a high current demand
B) the unit costs of producing a small volume are high enough to cancel the advantage of
charging what the traffic will bear
C) the high initial price does not attract more competitors to the market
D) consumers are likely to delay buying the product until its price drops
E) the high price communicates the image of a superior product
Answer: D
Diff: 2
33) Companies that aim to ________ strive to be affordable luxuries.

A) survive in the market
B) partially recover their costs
C) maximize their market share
D) pursue value pricing
E) be product-quality leaders
Answer: E
Diff: 2
34) Starbucks, Aveda, and BMW have been able to position themselves within their categories
by combining quality, luxury, and premium prices with an intensely loyal customer base. These
companies are employing a ________ strategy.
A) market-skimming
B) market-penetration
C) survival
D) market share maximization
E) product-quality leadership
Answer: E
Diff: 2
35) The first step in estimating demand is to ________.

A) analyze competitors' cost
B) select a pricing method
C) understand what affects price sensitivity
D) calculate fixed costs
E) decipher the experience curve
Answer: C
Diff: 2
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36) Consumers are less price sensitive ________.

A) to high cost items
B) when they frequently change their buying habits
C) when there are more substitutes
D) when there are more competitors
E) when they do not readily notice higher prices
Answer: E
Diff: 2
37) Consumers are less price sensitive when ________.

A) price is only a small part of the total cost spent on the product over its lifetime
B) they perceive the higher prices to be unjustified
C) they change their buying habits regularly
D) there are many substitutes and competitors in the market
E) they are buying high-cost items
Answer: A
Diff: 2
38) If demand hardly changes with a small change in price, the demand is said to be ________.
A) strained
B) marginal
C) inelastic
D) flexible
E) unit elastic
Answer: C
Diff: 2
39) If demand changes considerably, with a small change in price, the demand is said to be
________.
A) unit elastic
B) elastic
C) inelastic
D) marginal
E) strained
Answer: B
Diff: 2
10
40) If consumers were largely indifferent to a $0.05 increase in the price of a gallon of milk, the
price rise is said to fall within customers' ________.
A) price indifference band
B) experience curve
C) arm's-length price
D) learning curve
E) net price index
Answer: A
Diff: 3
41) JJ pays overhead each month, including his company's bills for rent, heat, interest, and
salaries, which are examples of ________ costs.
A) total
B) average
C) activity-based
D) variable
E) fixed
Answer: E
Diff: 2
42) Which of the following is true regarding price elasticity?

A) The higher the elasticity, the lesser is the volume growth resulting from a 1 percent price
reduction.
B) Within the price indifference band, price changes have little or no effect on demand.
C) If demand is elastic, sellers will consider increasing the price.
D) Price elasticity does not depend on magnitude and direction of the contemplated price change.
E) When demand is inelastic, sellers should lower prices in order to increase total revenue.
Answer: B
Diff: 2
43) Costs that do not vary with production levels or sales revenue are known as ________ costs.
A) overhead
B) variable
C) average
D) opportunity
E) total
Answer: A
Diff: 1
44) Costs that differ directly with the level of production are known as ________ costs.
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A) fixed
B) overhead
C) opportunity
D) target
E) variable
Answer: E
Diff: 1
45) When ConAgra foods decided to cut $250 million in costs to return to a $1 price point (after
sales dropped as a result of raising prices $0.25 to cover higher commodity costs), it was using
________.
A) target costing
B) experience-curve pricing
C) ceiling pricing
D) the learning curve
E) promotional price elasticities
Answer: A
Diff: 3
46) ________ cost is the cost per unit at that level of production; it equals total costs divided by
production.
A) Target
B) Average
C) Marginal
D) Opportunity
E) Fixed
Answer: B
Diff: 1
47) The decline in the average cost of production with accumulated production experience is
called the ________.
A) demand curve
B) supply chain
C) learning curve
D) value chain
E) indifference curve
Answer: C
Diff: 2
48) Experience-curve pricing ________.

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A) assumes competitors are weak followers

B) allows products to project a high quality image
C) is applicable only to manufacturing costs
D) focuses on reducing fixed costs
E) is generally risk-free
Answer: A
Diff: 2
49) Deducting the desired profit margin from the price at which a product will sell, given its
appeal and competitors' prices, is known as ________.
A) overhead costing
B) target costing
C) activity-based costing
D) benefit analysis
E) estimate costing
Answer: B
Diff: 2
50) Competitors are most likely to react to a price change when ________.
A) the firm has a weak value proposition
B) the firm enjoys a monopoly
C) there are few competing firms
D) the product is heterogeneous
E) buyers have limited information
Answer: C
Diff: 2
51) Which of the following is the most elementary pricing method?

A) value pricing
B) going-rate pricing
C) markup pricing
D) target-return pricing
E) perceived-value pricing
Answer: C
Diff: 2
13
52) Despite its weaknesses, markup pricing remains popular for which of the following reasons?
A) Sellers can determine demand much more easily than they can estimate costs.
B) By tying the price to cost, the pricing task becomes more sophisticated.
C) When all firms in the industry use markup pricing, price competition flourishes.
D) Sellers take advantage of buyers when the latter's demand becomes acute.
E) Many people feel that cost-plus pricing is fairer to both buyers and sellers.
Answer: E
Diff: 2
53) A manufacturer has invested $750,000 in a new product and wants to set a price to earn a 15
percent ROI. The cost per unit is $18 and the company expects to sell 50,000 units in the first
year. Calculate the company's target-return price for this product.
A) $18.10
B) $18.23
C) $20.25
D) $20.70
E) $25.50
Answer: C
Diff: 3
54) An umbrella manufacturing company's fixed costs are $275,000. The variable cost per unit is
$5 and each umbrella is sold at $10. How many units should the firm sell in order to break even?
A) 1,819
B) 5,500
C) 18,000
D) 27,500
E) 55,000
Answer: E
Diff: 3
14
55) ________ pricing takes into account a host of inputs, such as the buyer's image of the
product performance, the channel deliverables, the warranty quality, customer support, and
attributes such as the supplier's reputation, trustworthiness, and esteem.
A) Perceived-value
B) Value
C) Going-rate
D) Auction-type
E) Markup
Answer: A
Diff: 2
56) The key to perceived-value pricing is to ________.

A) reengineer the company's operations
B) deliver more unique value than competitors
C) adopt subtle marketing tactics compared to competitors
D) deliver more value but at a lower cost
E) invest heavily in advertising in order to convey superior value
Answer: B
Diff: 2
57) ________ pricing is a matter of reengineering the company's operations to become a low-
cost producer without sacrificing quality.
A) Value
B) Going-rate
C) Auction-type
D) Markup
E) Perceived-value
Answer: A
Diff: 1
58) A retailer who utilizes a(n) ________ policy charges a constant low price with little or no
price promotions and special sales.
A) everyday low pricing
B) high-low pricing
C) low cost
D) going-rate pricing
E) auction-type pricing
Answer: A
Diff: 1
15
59) Matt's retail store offers all products at $2 less than its competitors. The store never runs
promotional campaigns or offers special discounts. Matt's retail store is following a(n) ________
pricing policy.
A) auction-type
B) target-plus
C) everyday low
D) high-low
E) going-rate
Answer: C
Diff: 2
60) Everyday low pricing is most suitable if ________.

A) consumers are willing to perform activities such as clip coupons to avail of discounts
B) consumers tend to associate price with quality
C) customers are insensitive to changes in price
D) the cost of conducting frequent sales and promotions is high
E) consumers have sufficient time to find the best prices
Answer: D
Diff: 2
61) In ________ pricing, the firm bases its price largely on competitor's prices.
A) going-rate
B) auction-type
C) markup
D) target-return
E) perceived-value
Answer: A
Diff: 1
62) Which of the following auctions is characterized by one seller and many buyers?
A) Walrasian auctions
B) ascending bid auctions
C) closed auctions
D) sealed-bid auctions
E) reverse auctions
Answer: B
Diff: 2
63) In which of the following auctions does the auctioneer first announce a high price for a
product and then slowly decreases the price until a bidder accepts?
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A) a Dutch auction with one buyer and many sellers

B) an English auction with one seller and many buyers
C) an ascending bid auction
D) a sealed-bid auction
E) a Dutch auction with one seller and many buyers
Answer: E
Diff: 2
64) In a(n) ________, the buyer announces something he or she wants to buy, and potential
sellers compete to offer the lowest price.
A) Dutch auction with one buyer and many sellers
B) English auction with one buyer and many sellers
C) English auction with one seller and many buyers
D) sealed-bid auction
E) ascending auction
Answer: A
Diff: 2
65) ________ auctions let would-be suppliers submit only one bid; they cannot know the other
bids.
A) Descending bid
B) Sealed-bid
C) English
D) Dutch
E) Reverse
Answer: B
Diff: 1
66) Companies strive to maximize their current profits if they are plagued with overcapacity,
intense competition, or changing consumer wants.
Answer: FALSE
Diff: 2
17
67) In reality, it is very easy for firms to estimate their demand and cost functions.
Answer: FALSE
Diff: 2
68) When Sony introduced the first high-definition television to the Japanese market in 1990, it
was priced at $43,000, which is an example of partial-cost recovery pricing.
Answer: FALSE
Diff: 3
69) If firms wish to maximize their market share, they should opt for market-skimming pricing.
Answer: FALSE
Diff: 2
70) In the case of prestige goods, the demand curve sometimes slopes upward.
Answer: TRUE
Diff: 2
71) Companies prefer customers who are less price sensitive.

Answer: TRUE
Diff: 1
72) A marketer who has unit costs of $16 and wants to earn a 20 percent markup on sales would
charge a markup price of $20.
Answer: TRUE
Diff: 3
73) Caterpillar uses target-return pricing to set prices on its construction equipment, and justifies
a higher price by showing lower lifetime operating costs.
Answer: FALSE
Diff: 3
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74) Price elasticity depends upon the magnitude and direction of the contemplated price change.
Answer: TRUE
Diff: 1
75) When a product is more distinctive, it leads to less price sensitivity.

Answer: TRUE
Diff: 2
76) Total costs consist of the sum of the fixed and the variable costs for any given level of
production.
Answer: TRUE
Diff: 1
77) In target-return pricing, the firm adds a standard markup to the product's cost.
Answer: FALSE
Diff: 2
78) One of the weaknesses of using surveys to estimate the demand curve is that consumers
exaggerate their willingness to pay for new products and services.
Answer: TRUE
Diff: 2
79) Value pricing requires a company to reengineer its operations to become a low-cost
producer.
Answer: TRUE
Diff: 1
80) Price elasticity magnitudes are lower for durable goods than for other goods.
Answer: FALSE
Diff: 3
19
81) In high-low pricing, retailers charge low prices on an everyday basis with occasional price
increases.
Answer: FALSE
Diff: 1
82) The US government often uses Dutch auctions to procure supplies.

Answer: FALSE
Diff: 2
83) If a calculator company produces 100,000 hand calculators at a cost of $10, but the cost
drops to $9 when it produces 200,000 and $8 when it produces 400,000 hand calculators, the
decline in average cost with accumulated product experience is called the price elasticity of
demand.
Answer: FALSE
Diff: 3
84) Briefly describe the different types of pricing objectives.

Answer: When a company is preparing to sets its price, it first has to select its pricing objectives.
The five major objectives available to a company are:
1. Survival — Companies pursue survival as their major objective if they are plagued with
overcapacity, intense competition, or changing consumer wants. As long as prices cover variable
costs and some fixed costs, the company stays in business.
2. Maximum current profit — Companies who try to maximize their current profit, estimate the
demand and costs associated with alternative prices and choose the price that produces maximum
current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows
its demand and cost functions, but in reality, these are difficult to estimate.
3. Maximum market share — Companies that want to maximize their market share believe that
a higher sales volume will lead to lower unit costs and higher long-run profit. They set the lowest
price, assuming the market is price sensitive. This is a market-penetration pricing strategy.
4. Maximum market skimming — Companies unveiling a new technology favor setting high
prices to maximize market skimming. Companies that use this, introduce their products at a high
price and slowly drop the price over time.
5. Product-quality leadership — Companies that aim to be product quality leaders strive to be
affordable luxuries, i.e., they want their products and services to be characterized by high levels
of perceived quality, taste, and status with a price just high enough not to be out of the
consumer's reach.
Diff: 2
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85) What are the different price-setting methods? Briefly describe each of them.
Answer: The six major price-setting methods are:
1. Markup pricing — This is the most elementary pricing method wherein a standard markup is
added to the product's cost.
2. Target-return pricing — Here, the firm determines the price that yields its target rate of return
on investment.
3. Perceived-value pricing — Perceived value is made up of a host of inputs, such as the buyer's
image of the product performance, the channel deliverables, the warranty quality, customer
support, and softer attributes such as the supplier's reputation, trustworthiness, and esteem.
Companies must deliver the value promised by their value proposition, and the customer must
perceive this value.
4. Value pricing — Companies win loyal customers by charging a fairly low price for a high-
quality offering. Value price is just not a matter of lowering the prices but also it is a matter of
reengineering the company's operations to become a low-cost producer without sacrificing
quality, to attract a large number of value conscious customers.
5. Going-rate pricing — Here, the firm bases its price largely on competitors' prices.
6. Auction-type pricing — There are three major types of auctions and their separate pricing
procedures:
a. English auctions — These have one seller and many buyers. The highest bidder gets the
item.
b. Dutch auctions — This features one seller and many buyers, or one buyer and many
sellers. In the first kind, an auctioneer announces a high price for a product and then slowly
decreases the price until a bidder accepts. In the other, the buyer announces something he wants
to buy, and potential sellers compete to offer the lowest price.
c. Sealed-bid auction — This lets would-be suppliers submit only one bid. The suppliers
have no knowledge about the other bids.
Diff: 2
86) Agatha's Inc. is about to introduce a new product in the market, but is not sure as to how it
should price the product. The company is facing intense competition from five other companies.
In the past, it has also failed to keep up with the changing consumer wants. In such a situation,
what should be its main objective?
Answer: The main objective for Agatha's Inc. should be survival. As long as prices cover
variable costs and some fixed costs, the company will stay in business. But, it is worthwhile to
remember that survival is a short-run objective. In the long run, the company has to add value to
its product or face extinction.
Diff: 2
21
87) Bella's Inc. has estimated the demand and costs associated with alternative prices. It has
finally chosen to price its new offering in such a way that it will maximize the rate of return on
investment. What can be deduced about the company's objective?
Answer: It can be deduced that the company's main objective is to maximize its maximum
current profit.
Diff: 2
88) When Juan's company introduced its new product in the market, it introduced it at the lowest
possible price assuming that the demand for the product is going to be highly responsive to the
introduction price. It also believes that a higher sales volume will lead to lower unit costs and
higher long-run profit. What can be said about the company's objective?
Answer: The company's objective is to maximize its market share.
Diff: 2
89) When Sony introduced the world's first high-definition television to the Japanese market in
1990, it was priced at $43,000. This helped Sony to scoop the maximum amount of revenue from
the various segments of the market. The price dropped steadily through the years — a 28-inch
Sony HDTV cost just over $6,000 in 1993, but a 40-inch Sony HDTV cost only $450 in 2014.
What pricing strategy did Sony use here?
Answer: Sony used a market-skimming pricing strategy. This is a favorite for companies
unveiling a new technology. Companies using this introduce their product at a high price and
slowly drop the price over time.
Diff: 2
90) Daryl convinced his prospective client that Car A was the best for him. But, the client
insisted that the car cost him a good $10,000 more than Car B, the one which he was thinking of
buying. Daryl told him that the amount he would have to spend on the fuel, insurance, repairs,
and maintenance for Car B would be 5 times more than what he would have to spend on Car A.
Finally convinced, the client consented to buy Car A. What technique did Daryl use to convince
his customer?
Answer: Daryl convinced his customer that Car A offers him the lowest total cost of ownership.
Diff: 2
91) A company that pays its bills each month for its rent, heat, interest, and salaries regardless of
its output is said to be incurring what type of costs?
Answer: These are said to be a company's fixed costs.
Diff: 2
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92) Ellie's manager has asked her to come up with ways to reduce costs of their new product by
utilizing a process called "target costing." What should Ellie do?
Answer: Ellie will have to ask the marketing research department to establish the new product's
desired functions and the price at which the product will sell, given its appeal and competitors'
prices. Deducting the desired profit margin from this price leaves the target cost that must be
achieved. Her company will then have to examine each cost element like the design, engineering,
manufacturing, and sales and bring down costs so that the final cost projections are in the target
range.
Diff: 2
93) What should a company do if its competitor's product contains features that are not available
in its own product?
Answer: In such a situation, the company should subtract the value of those features from the
price of its product.
Diff: 2
94) A toaster manufacturer who has invested $1 million in the business wants to set a price to
earn a 20 percent return on investment, specifically $200,000. What pricing method should it
choose?
Answer: The toaster manufacture should go for a target-return pricing. While using this pricing
method, companies determine the price that yields its target rate of return on investment.
Diff: 2
95) On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise the offer
price until the top price is reached. What kind of auctions are these?
Answer: eBay and Amazon.com are perfect examples of English auctions. Such auctions have
one seller and many buyers and the highest bidder gets the item.
Diff: 2
96) In which of the following forms of countertrade do buyers and sellers directly exchange
goods, with no money and no third party is involved?
A) buyback arrangements
B) offsets
C) barter
D) sealed bids
E) compensation deals
Answer: C
Diff: 1
LO: 16.3: How should a company adapt prices to meet varying circumstances and
opportunities?
97) A Japanese firm is ready to sell its recent technological innovation to the US government.
23
But it has asked for 80 percent in cash and the rest in mica. The Japanese firm is looking to enter
into a(n) ________ with the US government.
A) functional discount
B) compensation deal
C) buyback arrangement
D) offset agreement
E) barter deal
Answer: B
Diff: 2
opportunities?
98) Armac Ltd. is a sluice-box manufacturer based in China. A sluice-box is used for gold
prospecting. Armac is interested in selling a few of its machines to an American mining
company, but it wants 95 percent of the machines' price in gold and the rest in ores recovered by
using the machines. This is an example of a ________.
A) buyback arrangement
B) functional discount
C) barter deal
D) compensation deal
E) sealed bid
Answer: A
Diff: 2
opportunities?
99) ROC Engineering, a Chinese shipbuilding company, agrees to build a fleet of submarines for
the Sri Lankan navy, for which it will be paid in the local Sri Lankan currency. As per the
agreement, ROC must also spend a substantial amount of the money it generates through this
deal within the country. In accordance with the contract, ROC buys Sri Lankan tea at a reduced
rate. This is an example of which of the following forms of countertrade?
A) descending bid
B) offset
C) barter
D) compensation deal
E) buyback arrangement
Answer: B
Diff: 2
opportunities?
24
100) ________ are offered by a manufacturer to trade-channel members if they will perform
certain functions, such as selling, storing, and recordkeeping.
A) Consumer promotions
B) Quantity discounts
C) Functional discounts
D) Seasonal discounts
E) Trade-in allowances
Answer: C
Diff: 2
opportunities?
101) When hotels, motels, and airlines offer discounts in slow selling periods, they are said to be
offering ________.
A) trade discounts
B) quantity discounts
C) functional discounts
D) seasonal discounts
E) trade-in allowances
Answer: D
Diff: 2
opportunities?
102) A(n) ________ is an extra payment designed to gain reseller participation in special
programs.
A) seasonal discount
B) allowance
C) discount
D) quantity discount
E) functional discount
Answer: B
Diff: 2
opportunities?
25
103) ________ reward dealers for participating in advertising and sales support programs.
A) Functional discounts
B) Trade discounts
C) Promotional allowances
D) Rebates
E) Quantity discounts
Answer: C
Diff: 2
opportunities?
104) When supermarkets and department stores drop the price on well-known brands to
stimulate store traffic, they are said to be following ________ pricing.
A) value
B) loss-leader
C) special event
D) high-low
E) everyday low
Answer: B
Diff: 2
opportunities?
105) In ________, the seller charges a separate price to each customer depending on the intensity
of his or her demand.
A) second-degree price discrimination
B) third-degree price discrimination
C) psychological discounting
D) special-customer pricing
E) first-degree price discrimination
Answer: E
Diff: 2
opportunities?
26
106) In second-degree price discrimination, the seller charges ________.

A) less to buyers of larger volumes
B) different prices depending on the season, day, or hour
C) a separate price to each customer depending on the intensity of his or her demand
D) different prices for different versions of the same product
E) different prices for the same product depending on the channel through which it is sold
Answer: A
Diff: 2
opportunities?
107) In ________, the seller charges different amounts to different classes of buyers.
A) perceived value pricing
B) third-degree price discrimination
C) first-degree price discrimination
D) second-degree price discrimination
E) psychological discounting
Answer: B
Diff: 2
opportunities?
108) When museums charge a lower admission fee to students and senior citizens, this form of
price discrimination is known as ________ pricing.
A) location
B) channel
C) customer-segment
D) special-customer
E) loss-leader
Answer: C
Diff: 2
opportunities?
27
109) Madame Tussaud's wax museum is a popular tourist attraction in London. The museum
charges higher entry rates for tourists compared to locals. This form of price discrimination is
known as ________ pricing.
A) customer-segment
B) image
C) location
D) special customer
E) special event
Answer: A
Diff: 2
opportunities?
110) When Coca-Cola carries a different price depending on whether the consumer purchases it
in a fine restaurant, a fast-food restaurant, or a vending machine, then this form of price
discrimination is known as ________ pricing.
A) product-form
B) loss-leader
C) special event
D) channel
E) location
Answer: D
Diff: 2
opportunities?
111) The prices of tickets to the opera vary depending on where the person would like to be
seated — in the gallery or in the stalls. This is an example of ________ pricing.
A) channel
B) time
C) image
D) product-form
E) location
Answer: E
Diff: 2
opportunities?
28
112) When hotels drop their rates on the weekends, this form of price discrimination is known as
________ pricing.
A) channel
B) image
C) product-form
D) time
E) location
Answer: D
Diff: 2
opportunities?
113) The airline and hospitality industries use ________, by which they offer discounted but
limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory
just before it expires.
A) special-customer pricing
B) yield pricing
C) cash rebates
D) location pricing
E) customer-segment pricing
Answer: B
Diff: 2
opportunities?
114) ________ refers to selling below cost with the intention of destroying competition.
A) Bid rigging
B) Loss-leader pricing
C) Predatory pricing
D) Price discrimination
E) Price penetration
Answer: C
Diff: 1
opportunities?
29
115) For price discrimination to work ________.

A) the market must be segmentable and the segments must show similar intensities of demand
B) members in the lower-price segment must be able to resell the product to the higher-price
segment
C) competitors must be able to undersell the firm in the higher-price segment
D) the practice must not breed customer resentment and ill will
E) the extra revenue derived from price discrimination must not exceed the cost of segmenting
and policing the market
Answer: D
Diff: 2
opportunities?
116) When a movie theater charges a lower ticket fee for children and senior citizens, it is
engaging in ________ pricing.
A) product-form
B) image
C) customer-segment
D) location
E) time
Answer: C
Diff: 2
opportunities?
117) In a compensation deal, the seller sells a plant, equipment, or technology to another country
and agrees to accept as partial payment products manufactured with the supplied equipment.
Answer: FALSE
Diff: 1
opportunities?
118) Psychological discounting involves setting an artificially high price and then offering the
product at substantial savings.
Answer: TRUE
Diff: 1
opportunities?
30
119) Loss leader pricing dilutes a company's brand image.

Answer: TRUE
Diff: 2
opportunities?
120) In first-degree price discrimination, the seller charges less to buyers who purchase in larger
volumes.
Answer: FALSE
Diff: 2
opportunities?
121) When firms charge different prices to different customer groups for the same product or
service, it is a case of second-degree price discrimination.
Answer: FALSE
Diff: 2
opportunities?
122) The airline industries implement yield pricing by offering discounted but limited early
purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it
expires.
Answer: TRUE
Diff: 2
opportunities?
123) Price discrimination in all forms is illegal in the United States.

Answer: FALSE
Diff: 2
opportunities?
124) When PepsiCo sold its cola syrup to Russia for rubles and agreed to buy Russian vodka at a
certain rate for sale in the United States, it was engaged in the form of countertrade known as an
offset.
Answer: TRUE
Diff: 2
opportunities?
31
125) What are the different forms of countertrade?

Answer: Countertrade can take the following forms:
• Barter — The buyer and seller directly exchange goods, with no money and no third party
involved.
• Compensation deal — The seller receives some percentage of the payment in cash and the
rest in products.
• Buyback arrangement — The seller sells a plant, equipment, or technology to another
country and agrees to accept as partial payment products manufactured with the supplied
equipment.
• Offset — The seller receives full payment in cash but agrees to spend a substantial amount of
the money in that country within a stated time period.
Diff: 2
opportunities?
126) What are the different types of price discounts and allowances?
Answer: The different types of price discounts and allowances are:
• Discount — This is a price reduction given to buyers who pay their bills promptly.
• Quantity discount — This is a price reduction offered to those who buy in large volumes.
• Functional discount — This is offered by a manufacturer to trade-channel members if they
perform certain functions like selling, storing, and recordkeeping.
• Seasonal discount — This is a price reduction given to those who buy merchandise or
services out of season.
• Allowance — This is an extra payment designed to gain reseller participation in special
programs. There are of two types:
• Trade-in allowances — These are granted for turning in an old item when buying a new one.
• Promotional allowances — These reward dealers for participating in advertising and sales
support programs.
Diff: 2
opportunities?
32
127) What are the different types of promotional pricing?

Answer: Companies can use any of the following pricing techniques to stimulate early purchase:
• Loss-leader pricing — Supermarkets and department stores often drop the price on well-
known brands to stimulate additional store traffic. This pays if the revenue on the additional sales
compensates for the lower margins on the loss-leader items.
• Special event pricing — Sellers can establish special prices in certain seasons to draw in
more customers.
• Special customer pricing — Sellers can offer special prices exclusively to certain customers.
• Cash rebates — Auto companies and other consumer-goods companies offer cash rebates to
encourage purchase of the manufacturers' products within a specified time period. Rebates can
help clear inventories without cutting the stated list price.
• Low-interest financing — Instead of cutting its price, the company can offer customers low-
interest financing.
• Longer payment terms — Sellers stretch loans over longer periods and thus lower the
monthly payments. Consumers often worry less about the interest rate of a loan, and more about
whether they can afford the monthly payment.
• Warranties and service contracts — Companies can promote sales by adding a free or low-
cost warranty or service contract.
• Psychological discounting — This strategy sets an artificially high price and then offers the
product at substantial savings.
Diff: 2
opportunities?
128) What is third-degree price discrimination?

Answer: In third-degree price discrimination, the seller charges different amounts to different
classes of buyers, as in the following cases:
• Customer-segment pricing — Different customer groups pay different prices for the same
product or service. For example, museums often charge a lower admission fee to students and
senior citizens.
• Product-form pricing — Different versions of the product are priced differently, but not
proportionately to their costs.
• Image pricing — Some companies price the same product at two different levels based on
image differences. A perfume manufacturer can put the perfume in one bottle, give it a name and
image, and price it at $10 an ounce. The same perfume in another bottle with a different name
and image and price can sell for $30 an ounce.
• Channel pricing — Coca-Cola carries a different price depending on whether the consumer
purchases it in a fine restaurant, a fast-food restaurant, or a vending machine.
• Location pricing — The same product is priced differently at different locations even though
the cost of offering it at each location is the same. A theater varies its seat prices according to
audience preferences for different locations.
• Time pricing — Prices are varied by season, day, or hour. Public utilities vary energy rates to
commercial users by time of day and weekend versus weekday.
Diff: 2
opportunities?
129) A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in
33
coffee. This is an example of what kind of a countertrade?

Answer: This is an example of a compensation deal. In such deals, the seller receives some
percentage of the payment in cash and the rest in products.
Diff: 2
opportunities?
130) Fred's company has recently sold its resin-producing plant to a business in India. As part of
the sales price, his company agrees to accept as partial payment the production of the resin at an
agreed upon price for six years. This is an example of what type of countertrade?
Answer: This is an example of a buyback arrangement. In such arrangements, the seller sells a
plant, equipment, or technology to another country and agrees to accept as partial payment
products manufactured with the supplied equipment.
Diff: 2
opportunities?
131) PepsiCo sold its cola syrup to Russia and agreed to buy Russian vodka at a certain rate for
sale in the United States for the next five years. What kind of a countertrade did both the parties
indulge in?
Answer: Both the parties indulged in an offset. In such countertrade, the seller receives full
payment in cash but agrees to spend a substantial amount of the money in that country within a
stated time period.
Diff: 2
opportunities?
132) When Indu's company printed the ad for their perfume in the newspapers, the caption read,
"WAS $100, NOW $75." What kind of a promotional pricing did her company use?
Answer: Indu's company used psychological discounting. This strategy sets an artificially high
price and then offers the product at substantial savings.
Diff: 2
opportunities?
133) Movie matinees are priced lower than the evening shows at local theaters; television
advertising costs less when run after midnight. These are examples of what type of price
discrimination?
Answer: These are examples of time pricing or price discrimination based on time.
Diff: 2
opportunities?
134) When the airline industry offers discounted but limited early purchases, higher-priced late
34
purchases, and the lowest rates on unsold inventory just before it expires, what kind of a pricing
technique are they said to be using?
Answer: The airline industry is using yield pricing.
Diff: 2
opportunities?
135) A low price buys market share but not market loyalty. The same customers will shift to any
lower-priced product that may come along. This is called the ________ trap.
A) low-price
B) relative-market-share
C) shallow-pockets
D) target-market-share
E) fragile-market-share
Answer: E
Diff: 2
LO: 16.4: When and how should a company initiate a price change?
136) When higher-priced competitors match lower prices of their competitors but have longer
staying power because of deeper cash reserves, it leads to a(n) ________ trap.
A) low-quality
B) fragile-market-share
C) price war
D) escalator
E) shallow-pockets
Answer: E
Diff: 2
137) A company does not set a final price until the product is finished or delivered. This is
known as ________.
A) delayed quotation pricing
B) an escalator clause
C) special-event pricing
D) time pricing
E) the shallow-pockets trap
Answer: A
Diff: 2
35
138) Companies sometimes initiate price cuts in an attempt to dominate the market through
lower costs.
Answer: TRUE
Diff: 1
139) In a price-war trap, higher-priced competitors match the firm's lower prices but have longer
staying power because of deeper cash reserves.
Answer: FALSE
Diff: 2
140) Escalator clauses are found in contracts for major industrial projects, such as aircraft
construction and bridge building.
Answer: TRUE
Diff: 2
141) Generally, consumers prefer small price increases on a regular basis to sudden, sharp
increases.
Answer: TRUE
Diff: 1
142) Shrinking the amount of product instead of raising the price is a good way to counteract
consumer resistance to price increases.
Answer: TRUE
Diff: 1
36
143) How can companies initiate price cuts and what are the traps that companies can fall into
because of this?
Answer: Several circumstances prompt a firm to cut its prices. One is excess plant capacity: The
firm needs additional business and cannot generate it through increased sales effort, product
improvement, or other measures. Companies sometimes initiate price cuts in a drive to dominate
the market through lower costs. Either the company starts with lower costs than its competitors,
or it initiates price cuts in the hope of gaining market share and lower costs. Cutting prices to
keep customers or beat competitors often encourages customers to demand price concessions.
Other than this, a price-cutting strategy can also lead to the following possible traps:
• Low-quality trap — Consumers assume quality is low.
• Fragile-market-share trap — A low price buys market share but not market loyalty. The same
customers will shift to any lower-priced firm that comes along.
• Shallow-pockets trap — Higher-priced competitors match the lower prices but have longer
staying power because of deeper cash reserves.
• Price-war trap — Competitors respond by lowering their prices even more, triggering a price
war.
Customers often question the motivation behind price changes. They may assume the item is
about to be replaced by a new model; the item is faulty and is not selling well; the firm is in
financial trouble; the price will come down even further; or the quality has been reduced. The
firm must monitor these attributions carefully while initiating a price cut.
Diff: 2
144) What are some ways to respond to overdemand?

Answer: When a company cannot supply all its customers, it can raise its prices, ration supplies,
or both. It can increase price in the following ways, each of which has a different impact on
buyers.
• Delayed quotation pricing. The company does not set a final price until the product is
finished or delivered. This pricing is prevalent in industries with long production lead times, such
as industrial construction and heavy equipment.
• Escalator clauses. The company requires the customer to pay today's price plus all or part of
any inflation increase that takes place before delivery. Escalator clauses base price increases on
some specified price index. They are found in contracts for major industrial projects, such as
aircraft construction and bridge building.
• Unbundling. The company maintains its price but removes or prices separately one or more
elements that were formerly part of the offer, such as delivery or installation. Car companies
sometimes add higher-end audio entertainment systems or GPS navigation systems to their
vehicles as separately priced extras.
• Reduction of discounts. The company instructs its sales force not to offer its normal cash and
quantity discounts.
Diff: 3
37
145) What techniques can a firm use to help consumers avoid sticker shock and a hostile reaction
when prices rise?
Answer: One is to maintain a sense of fairness, such as giving customers advance notice so they
can do forward buying or shop around. Sharp price increases also need to be explained in
understandable terms. Making low-visibility price moves first is also a good technique:
Eliminating discounts, increasing minimum order sizes, and curtailing production of low-margin
products are examples, and contracts or bids for long-term projects should contain escalator
clauses based on such factors as increases in recognized national price indexes.
Diff: 2
146) How can a firm anticipate a competitor's reactions to a price change?

Answer: One way is to assume the competitor reacts in the standard way to a price being set or
changed. Another is to assume the competitor treats each price difference or change as a fresh
challenge and reacts according to self-interest at the time. Now the company will need to
research the competitor's current financial situation, recent sales, customer loyalty, and corporate
objectives. If the competitor has a market share objective, it is likely to match price differences
or changes. If it has a profit-maximization objective, it may react by increasing its advertising
budget or improving product quality. The problem is complicated because the competitor can put
different interpretations on lowered prices or a price cut: that the company is trying to steal the
market, that it is doing poorly and trying to boost its sales, or that it wants the whole industry to
reduce prices to stimulate total demand.
Diff: 2
147) When a company requires customers to pay today's price and all or part of any inflation
increase that takes place before delivery, it is known as ________.
A) special-customer pricing
B) an escalator clause
C) delayed quotation pricing
D) unbundling
E) time pricing
Answer: B
Diff: 2
LO: 16.5: How should a company respond to a competitor's price change?
38
148) When a company maintains its price but removes or prices separately one or more elements
that were part of the former offer, such as free delivery or installation, it is known as ________.
A) escalating
B) differentiation
C) unbundling
D) reverse discounting
E) delayed quotation pricing
Answer: C
Diff: 2
149) In markets that are characterized by products that are highly homogeneous, how should a
firm react to a competitor's reduction in price?
A) shrink the amount of the product available
B) substitute expensive materials or ingredients
C) reduce product features
D) reduce product services
E) augment the product
Answer: E
Diff: 2
150) A company must consider the product's stage in the life cycle and its importance in the
company's portfolio before responding to a competitor's price cut.
Answer: TRUE
Diff: 1
151) A firm in a homogeneous market that has the ability to augment its product is more likely to
need to meet a competitive price reduction than one that does not have the ability to augment its
product.
Answer: FALSE
Diff: 2
39
152) What should a firm consider if it is in a nonhomogeneous market and a competitor lowers
its prices?
Answer: A firm should consider:
• Why did the competitor change the price? To steal the market, to utilize excess capacity, to
meet changing cost conditions, or to lead an industry-wide price change?
• Does the competitor plan to make the price change temporary or permanent?
• What will happen to the company's market share and profits if it does not respond? Are other
companies going to respond?
• What are the competitors' and other firms' likely responses to each possible reaction?
Diff: 2
153) What are three possible responses to low-cost competitors?

Answer: Three possible responses to low-cost competitors are:
1. further differentiate the product or service
2. introduce a low-cost venture
3. reinvent as a low-cost player
Diff: 2
40

Chapter 16 Developing Pricing Strategies and Programs

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Chapter 16 Developing Pricing Strategies and Programs

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Marketing Management, 15e (Kotler)

12) Traditionally, price was never a major determinant of buyer choice.

18) Many consumers use price as an indicator of quality and value.

19) What are the different possible consumer reference prices?

would do better if it pursues ________ as its major objective.

29) A market-penetration pricing strategy is most suitable when ________.

33) Companies that aim to ________ strive to be affordable luxuries.

35) The first step in estimating demand is to ________.

36) Consumers are less price sensitive ________.

37) Consumers are less price sensitive when ________.

42) Which of the following is true regarding price elasticity?

48) Experience-curve pricing ________.

A) assumes competitors are weak followers

51) Which of the following is the most elementary pricing method?

56) The key to perceived-value pricing is to ________.

60) Everyday low pricing is most suitable if ________.

A) a Dutch auction with one buyer and many sellers

71) Companies prefer customers who are less price sensitive.

75) When a product is more distinctive, it leads to less price sensitivity.

82) The US government often uses Dutch auctions to procure supplies.

84) Briefly describe the different types of pricing objectives.

106) In second-degree price discrimination, the seller charges ________.

115) For price discrimination to work ________.

119) Loss leader pricing dilutes a company's brand image.

123) Price discrimination in all forms is illegal in the United States.

125) What are the different forms of countertrade?

127) What are the different types of promotional pricing?

128) What is third-degree price discrimination?

coffee. This is an example of what kind of a countertrade?

144) What are some ways to respond to overdemand?

146) How can a firm anticipate a competitor's reactions to a price change?

153) What are three possible responses to low-cost competitors?

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