Chapter 10 - Managing Price and Customer Cost Perceptions
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Questions and Answers

What is an example of an adjustment that a manager might make to set a final price?

  • Markup pricing
  • Predatory pricing
  • Quantity discounts (correct)
  • Price-fixing

Which pricing practice involves charging different customers different prices for the same product?

  • Price-fixing
  • Rebates
  • Breakeven pricing
  • Price discrimination (correct)

What is the formula to calculate Total Revenue?

  • Expected Unit Sales × Unit Price (correct)
  • Unit Price - Total Variable Costs
  • Total Costs + Profit/Loss
  • Fixed Costs / Contribution Margin

Which term describes the situation where companies collaborate to set high prices instead of letting the market dictate the prices?

<p>Price-fixing (D)</p> Signup and view all the answers

What does the Markup formula specifically indicate?

<p>Unit Price minus Unit Variable Cost (C)</p> Signup and view all the answers

What pricing strategy involves setting an initially high price and gradually lowering it over time?

<p>Skimming Strategy (C)</p> Signup and view all the answers

Which pricing method is based on the company’s costs?

<p>Cost-Based Pricing (D)</p> Signup and view all the answers

What is the main objective of penetration pricing?

<p>To establish a large market share quickly (A)</p> Signup and view all the answers

What does price discrimination refer to?

<p>Charging different prices for the same product to different customers (D)</p> Signup and view all the answers

Which of the following terms describes a pricing strategy where retailers entice customers with low prices on select items?

<p>Loss-Leader Pricing (A)</p> Signup and view all the answers

Which pricing strategy aims to prevent competitors from gaining market share by setting prices low?

<p>Predatory Pricing (C)</p> Signup and view all the answers

What is the primary feature of ‘Every Day Low Prices’ (EDLP)?

<p>Prices do not change frequently and are consistently low. (B)</p> Signup and view all the answers

Which of the following best describes performance-based pricing?

<p>Setting prices based on meeting specific performance goals (B)</p> Signup and view all the answers

What characterizes static prices?

<p>They remain stable over time. (B)</p> Signup and view all the answers

What is the role of the Manufacturer’s Suggested Retail Price (MSRP)?

<p>To create a perceived comparison for consumers (A)</p> Signup and view all the answers

What does price most objectively assess regarding a product?

<p>The perceived value of the product (D)</p> Signup and view all the answers

Which of the following statements about reference prices is true?

<p>Reference prices significantly influence customer purchase decisions. (A)</p> Signup and view all the answers

What is a primary characteristic of variable costs?

<p>They fluctuate with the quantity of product sold. (A)</p> Signup and view all the answers

In which market types is price generally more influential on demand?

<p>Luxury products like jewelry (A)</p> Signup and view all the answers

A penetration pricing strategy aims to:

<p>Establish a large market share with low initial prices. (C)</p> Signup and view all the answers

What must a company ensure when using a skimming pricing strategy?

<p>There will be a period without competition after the product launch. (D)</p> Signup and view all the answers

Which pricing strategy requires constant monitoring of customer perceptions?

<p>Value-based pricing (B)</p> Signup and view all the answers

What is a potential disadvantage of cost-based pricing?

<p>It may not cover all costs accurately. (C)</p> Signup and view all the answers

What typically happens when competitors engage in a price war?

<p>Companies might lose money overall. (D)</p> Signup and view all the answers

How does price presentation affect customer perceptions?

<p>Customers tend to view $3.99 as significantly lower than $4.00. (D)</p> Signup and view all the answers

Why is understanding perceived costs crucial for marketers?

<p>To ensure prices are acceptable to customers. (A)</p> Signup and view all the answers

What factor influences pricing strategy during a product's life cycle?

<p>Stage in the product life cycle (C)</p> Signup and view all the answers

What impact do internal costs have on a company’s pricing decisions?

<p>They influence price but should not be the sole basis. (A)</p> Signup and view all the answers

When is price most sensitive to changes?

<p>In markets with discretionary purchases. (B)</p> Signup and view all the answers

What are fixed costs?

<p>Costs that do not change regardless of production volume. (C)</p> Signup and view all the answers

Which formula correctly calculates total costs?

<p>Total Costs = Fixed Costs + Total Variable Costs (B)</p> Signup and view all the answers

What does the contribution margin indicate?

<p>The difference between unit price and variable cost expressed as a ratio. (B)</p> Signup and view all the answers

What is a breakeven volume?

<p>The total number of units needed to sell to cover costs with no profit. (A)</p> Signup and view all the answers

Which pricing strategy involves initially setting a high price for a new product?

<p>Skimming pricing (A)</p> Signup and view all the answers

What is expected unit sales also referred to as?

<p>Demand forecast (C)</p> Signup and view all the answers

What do variable costs include?

<p>Costs that change in direct proportion to production levels. (C)</p> Signup and view all the answers

Which of the following reflects a marketing strategy's risk?

<p>Setting an initial low price to quickly gain market share. (D)</p> Signup and view all the answers

How is profit calculated?

<p>Profit = Total Revenue – Total Costs (B)</p> Signup and view all the answers

What is markup in pricing terms?

<p>The percentage increase from cost to selling price. (A)</p> Signup and view all the answers

What is the first step in the price-setting process?

<p>Set pricing objectives. (B)</p> Signup and view all the answers

Which factor influences price setting the most according to customer behavior?

<p>Customer expectations (D)</p> Signup and view all the answers

What is an example of a cost-based pricing approach?

<p>Setting prices based solely on production costs plus a markup. (A)</p> Signup and view all the answers

What happens when the price of an elastic good is raised?

<p>Demand usually drops significantly. (D)</p> Signup and view all the answers

What is the main purpose of prestige pricing?

<p>To enhance brand image (B)</p> Signup and view all the answers

Which pricing model adjusts its prices based on customer demand?

<p>Dynamic pricing (B)</p> Signup and view all the answers

Which pricing strategy charges a fixed fee for a predetermined period in exchange for services?

<p>Retainer-based pricing (D)</p> Signup and view all the answers

What do loss-leader pricing strategies primarily aim to accomplish?

<p>Attract customers to purchase additional higher-margin items (C)</p> Signup and view all the answers

Which pricing strategy is often associated with offering different pricing options based on usage or quantity purchased?

<p>Tiered pricing (A)</p> Signup and view all the answers

What is a common disadvantage of using prestige pricing?

<p>Difficulty in finding accurate price data (B)</p> Signup and view all the answers

What is the primary focus of value-based pricing?

<p>To reflect the perceived value to the customer (D)</p> Signup and view all the answers

What distinguishes microtransactions from traditional transactions?

<p>Involves smaller amounts for virtual goods (C)</p> Signup and view all the answers

Which of the following is NOT a common adjustment in price-setting?

<p>Changing product features (D)</p> Signup and view all the answers

What is the primary goal of setting pricing objectives?

<p>To define clear business intentions (A)</p> Signup and view all the answers

What is the primary characteristic of flat-rate pricing?

<p>Charges a fixed price, regardless of resource use (C)</p> Signup and view all the answers

Which type of pricing is likely to be implemented in a subscription model?

<p>Freemium pricing (D)</p> Signup and view all the answers

What is an essential aspect to estimate when setting prices?

<p>Market potential and customer demand (D)</p> Signup and view all the answers

Which pricing strategy aims to charge based on results achieved by the product or service?

<p>Performance-based pricing (B)</p> Signup and view all the answers

What happens to the price per unit as volume increases up to a certain point?

<p>It decreases until a threshold is reached, then increases. (C)</p> Signup and view all the answers

If you have fixed expenses of $558,000, what is the variable cost per unit if you sell 400 units?

<p>$2,350 (D)</p> Signup and view all the answers

What price did customers indicate was appropriate for the product?

<p>$4,999 (D)</p> Signup and view all the answers

What discount percentage was suggested to attract new customers?

<p>5% (D)</p> Signup and view all the answers

Which practice is illegal when one company sets prices extremely low to run competitors out of business?

<p>Predatory pricing (B)</p> Signup and view all the answers

What is the main objective of analyzing competitors’ prices and value propositions?

<p>To understand customer value perception. (B)</p> Signup and view all the answers

Which of the following is NOT a common adjustment made to base prices?

<p>Providing free shipping for large orders. (A)</p> Signup and view all the answers

What could be a result of a company engaging in price-fixing?

<p>Higher market prices overall. (D)</p> Signup and view all the answers

What is a possible consequence of using comparison prices improperly?

<p>Legal repercussions. (C)</p> Signup and view all the answers

What should be the first step in setting a price according to the outlined steps?

<p>Set pricing objectives. (C)</p> Signup and view all the answers

Which act prevents companies from engaging in price discrimination?

<p>Robinson-Patman Act. (B)</p> Signup and view all the answers

Why is the concept of 'price thresholds' important in setting prices?

<p>Customers have psychological spending limits. (D)</p> Signup and view all the answers

What could be an effective way to shift demand during slower sales periods?

<p>Price bundling. (D)</p> Signup and view all the answers

What type of pricing involves offering different services at the same price to different buyers?

<p>Price discrimination (D)</p> Signup and view all the answers

Flashcards

Reference Price

The price a customer expects to pay for a good or service.

Variable Costs

Costs that change based on the quantity of products sold.

Fixed Costs

Costs that remain the same regardless of sales volume.

Skimming Strategy

Setting a high initial price and gradually lowering it over time to maximize profits.

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Penetration Pricing

Launching a product at a low price to gain market share quickly.

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Cost-Based Pricing

Setting prices based on the company's costs.

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Value-Based Pricing

Setting prices based on what customers are willing to pay.

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Prestige Pricing

Setting a high price to enhance brand image and perceived value.

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Static Prices (Fixed Prices)

Prices that don't fluctuate much and remain relatively stable over time.

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Every Day Low Prices (EDLP)

A pricing strategy that guarantees consistent low prices without sales events or comparison shopping.

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Perceived Value

The customer's subjective assessment of a product's worth based on both monetary and nonmonetary factors.

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Price Presentation

The way a price is displayed, impacting customer perceptions.

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Price Sensitivity

The extent to which changes in price influence customer demand.

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Product Life Cycle

The stages a product goes through from introduction to decline, with corresponding price adjustments.

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Price War

A competitive scenario where companies repeatedly lower prices to gain market share, often leading to decreased profitability for all involved.

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Brand Loyalty

Customer preference for a specific brand, often independent of price.

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Comparison Shopping

Customers comparing prices and features of competing products before making a purchase.

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Elasticity

The sensitivity of demand to price changes.

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Static Pricing

Prices remain relatively stable over time, offering consistency and predictable shopping experiences.

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Dynamic Pricing

Prices fluctuate based on factors like demand and customer behavior.

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High-Low Pricing

Offering temporary low prices on select items to attract customers, followed by price increases when others are discounted.

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Loss-Leader Pricing

Discounting certain items significantly to attract customers, aiming for them to buy higher-margin products.

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Price Lining

Considering how the price of one product influences the perception and price of another.

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Microtransactions

A business model where users make small payments for virtual goods or services within a platform.

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Cost-Plus Pricing

Pricing a service by adding a markup to the cost of providing it.

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Hourly Pricing

Charging customers based on the number of hours spent completing a task or project.

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Flat-Rate Pricing

Charging a fixed price for a service, regardless of time or resources needed.

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Retainer-Based Pricing

Charging a fixed fee for a set period, in exchange for a range of services.

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Tiered Pricing

Offering different price options based on usage, quantity, or volume purchased.

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Freemium Pricing

Offering a basic service for free, with premium options available for a fee.

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Subscription Pricing

Charging a recurring fee for access to a service or product over a period.

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Predatory Pricing

Setting prices below cost to drive competitors out of business, often considered illegal to protect smaller companies.

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Price Discrimination

Charging different customers different prices for the same product or service. It's generally illegal unless certain conditions are met like quantity discounts.

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Total Costs

The combined cost of all company expenses, including fixed costs (like rent) plus variable costs (like materials that change with production).

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Unit Contribution

The profit generated from selling one unit of a product or service.

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Contribution Margin

The ratio of unit contribution to the selling price, showing the proportion of sales revenue that contributes to covering fixed costs and profit.

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Markup

The ratio of unit contribution to the variable cost per unit, indicating the percentage profit markup on each unit.

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Breakeven Volume

The number of units that need to be sold to exactly cover all fixed costs and variable costs, resulting in zero profit.

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Breakeven Sale (in Dollars)

The total sales revenue required to cover all fixed costs and variable costs, resulting in zero profit.

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Elastic Demand

When small changes in price significantly affect the quantity demanded.

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Inelastic Demand

When changes in price have little impact on the quantity demanded.

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Price-Setting Steps

The steps involved in determining a final price for a product or service.

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What are some factors that influence price setting?

Customer perceptions, company costs, market characteristics, and competition all play a role in determining the final price.

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What are the two main pricing strategies for new products?

Skimming and penetration pricing are common strategies for launching new products.

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Why is understanding the price-customer cost relationship important?

Both the seller's costs and the customer's perceived value must be considered to set a price that is acceptable to both parties.

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Profit

The difference between revenue (money earned) and costs (money spent). A positive profit means you make more money than you spend.

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Price Threshold

A psychological price point where customers are more likely to buy a product. It's often a round number just below a psychologically significant price.

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Value Proposition

The unique benefits a product or service offers to customers. It's what makes it desirable and different from competitors.

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Market Research

Gathering and analyzing information about customers, competitors, and the overall market. It helps understand consumer needs and market trends.

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Competitor Analysis

Examining your competitors' products, pricing, marketing strategies, and customer feedback. It's essential for understanding your competitive landscape.

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Bait and Switch

A deceptive marketing tactic where a company advertises a low price for a product, but then makes it unavailable and tries to sell a more expensive alternative.

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Comparison Prices

Reference prices used to show customers how a product's price compares to others. They can be used legally, but their use needs to be carefully considered.

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Quantity Discounts

Lower prices offered for larger orders, encouraging customers to buy more. This can increase sales and reduce production costs.

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Price Bundling

Offering multiple products or services together at a discounted price. This can increase sales by encouraging customers to buy more than they originally planned.

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Price Premiums

Charging a higher price for products or services perceived as superior or more valuable. This can be due to quality, brand reputation, or exclusive features.

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Study Notes

Price and Customer Cost Perceptions

  • Price is the monetary commitment from the customer, reflecting product value.
  • Customers consider both monetary and non-monetary costs when evaluating value.
  • Price represents relative value for both buyer and seller; acceptable price is crucial for exchange.
  • Price is linked to total perceived costs for the buyer, including monetary and nonmonetary aspects of purchase and use.
  • Seller's price must cover production costs plus other business-related expenses.

Influences on Price Setting

  • Customer Perception: Reference price (expected price) strongly influences value perceptions. Presentation of price (e.g., $3.99 vs. $4.00) can influence perception.
  • Internal Costs: Variable costs (change with quantity sold) and fixed costs (don't change) should be considered. Variable costs are linked directly to production/sales. Fixed costs, are independent of sales e.g., salaries, advertising, rent.
  • Market Characteristics: Price sensitivity varies by market. Certain markets (e.g., jewelry, vacations) are more price-sensitive than others. Stage of product life cycle affects pricing (e.g., higher prices during introduction).
  • Competition: Competitors' prices are a major factor, with the risk of price wars resulting when competitors react to price drops with further reductions that can harm all.

Pricing Strategies

  • New Products: Skimming strategy (initially high price, gradual drops) is suitable when the product is significantly better than existing options, there is little initial competition, and the product has significant value. Penetration strategy (low initial price) is effective when facing immediate competition, offers lower costs, and aims for mass-market appeal.
  • Existing Products: Cost-based pricing (sets price based on costs) is straightforward but doesn't factor in customer willingness to pay. Value-based pricing (sets price based on customer willingness to pay) aims for maximum profit but requires understanding customer value. Prestige pricing sets high prices to enhance brand image.
  • Static vs. Dynamic Pricing: Static prices (fixed prices) provide consistency and lessen price comparison shopping. Dynamic pricing adjusts price based on competition and demand. High-low pricing involves temporary low prices and subsequent price increases. Loss-leader pricing uses dramatically reduced prices on specific items to attract customers who are likely to make additional purchases. Price lining is considering how one product's price might influence others.
  • Microtransactions: A business model for purchasing virtual goods or services within a platform using micropayments.
  • Service Pricing: Hourly, flat-rate, retainer-based, tiered, freemium, subscription, and performance-based pricing models are common.

Price-Setting Steps

  • Step 1: Set Pricing Objectives (e.g., sales goals, profit goals, image-building).
  • Step 2: Estimate Demand and Revenue (assess market potential and your product's projected demand).
  • Step 3: Determine Cost, Volume, and Profit Relationships (analyse variable costs, fixed costs and their relationship to different levels of production/sales).
  • Step 4: Analyze Competitors' Prices, Offers, and Value Propositions (research competitors' pricing and value propositions).
  • Step 5: Set Initial Base Price (determine an initial price based on Steps 1-4, testing with customers).
  • Step 6: Adjust to Set Final Price (adjust the base price by factoring in market conditions, discounts, and other promotional offers).
  • Protecting Competitors: Laws like the Sherman Act and the Federal Trade Commission Act protect smaller companies from predatory pricing (setting extremely low prices to drive competitors out of business).
  • Protecting Customers: Robinson-Patman Act and similar legislation deter price discrimination (charging different customers different prices for the same product) and price-fixing/collusion(companies agree to control prices rather than set them based on market conditions). Bait-and-switch is illegal. Comparison prices must be accurate.

Pricing Calculations

  • Fixed Costs: Costs independent of production/sales
  • Variable Costs: Costs directly related to production/sales
  • Breakeven point: When total revenue equals total costs
  • Key calculation formulas exist for profit, unit contribution, contribution margin, markup, breakeven volume, and breakeven sale.

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Description

This quiz covers essential concepts in pricing strategies, including adjustments managers might make to set final prices and the implications of different pricing practices. Topics include total revenue calculation, markup formulas, and collaborative pricing practices. Enhance your understanding of the strategies used in pricing and revenue generation.

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