Setting the Right Price - DOC

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					Chapter 18—Setting the Right Price


TRUE/FALSE

  1. The first step in setting the right price for a new product is to estimate demand, costs, and profits.

      ANS: F
      The first step in setting the right price for a new product is to derive pricing goals from the firm's
      overall objectives.

      PTS: 1           REF: 271            OBJ: 18-1 TYPE: Def
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

  2. All pricing objectives have trade-offs that managers must weigh.

      ANS: T           PTS: 1              REF: 271            OBJ: 18-1 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  3. Once he compiles information on pricing objectives, market demand, quantity supplied, and the price
     elasticity of demand, the owner/operator of a home cleaning service will be ready to determine the
     optimal price for a new service offering.

      ANS: F
      He must also collect information or estimates about costs and total revenue at a variety of prices. Only
      then can he make reasonable estimates about profits and market share.

      PTS: 1           REF: 271-272        OBJ: 18-1 TYPE: App
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  4. Leading Brands, Inc. manufactures Trek Natural sports drink. The company would like to introduce a
     Trek Natural brand energy drink. Leading Brands would have a great amount of freedom in choosing a
     price for its new energy drink.

      ANS: F
      If a firm brings out a new item similar to a number of others already on the market, its pricing freedom
      will be restricted.

      PTS: 1           REF: 272            OBJ: 18-1 TYPE: App
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  5. It makes the most sense to use price skimming as a pricing policy when supply is greater than demand.

      ANS: F
      It makes the most sense to use price skimming as a pricing policy when demand is greater than supply.

      PTS: 1           REF: 272-273        OBJ: 18-1 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  6. Penetration pricing is sometimes referred to as a "market-plus" approach to pricing.

      ANS: F
      Price skimming is sometimes referred to as a "market-plus" approach to pricing.
     PTS: 1           REF: 273            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

 7. The Raver-Smythe Corporation (RSC) has introduced mylar-based artificial fingernails. It earns a low
    profit margin on the sale of each box of its new fingernails and is still able to meet its revenue
    objectives due to economies of scale. RSC is using a penetration pricing policy.

     ANS: T           PTS: 1              REF: 273                          OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

 8. One disadvantage of using a penetration pricing policy is that the high unit profit margins will attract
    potential competitors into production of similar products.

     ANS: F
     Penetration pricing has low profit margins on each unit sold. This is seen as an advantage because it
     discourages potential customers from entering the market.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

 9. Price fixing is clearly illegal in all instances.

     ANS: T           PTS: 1              REF: 274                          OBJ: 18-2 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

10. There are two limousine services that drive customers from communities in North Georgia to the
    Atlanta airport. Whenever one reduces its fare, its competitor reduces its fares by the same amount.
    This is an example of status quo pricing.

     ANS: T           PTS: 1              REF: 275            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

11. Price discrimination can sometimes be justified.

     ANS: T           PTS: 1              REF: 275                          OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

12. Manufacturers know the approximate price level they can expect when establishing a product price.
    This approximate price is called the base price.

     ANS: T           PTS: 1              REF: 275-276        OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

13. A winery that makes a huge profit on merlot wines may lower its price on pinot noir wines to cause
    damage to wineries that only produce pinot noir. This is an example of predatory pricing.

     ANS: T           PTS: 1              REF: 275            OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

14. A retailer of furniture for babies that is allowed to deduct 3 percent from its total bill if it pays by a
    specific date is receiving a cash discount.

     ANS: T                  PTS: 1                     REF: 276            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

15. Functional discounts are typically calculated as the wholesale price times the accumulated margin
    percentages.

     ANS: F
     Functional discounts are typically a percentage discount from the base price.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

16. Hudson Melendez owns a company that installs in-ground swimming pools. He gives large discounts
    to homeowners that have pools built in October or November. This is an example of a seasonal
    discount.

     ANS: T           PTS: 1              REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

17. Functional discounts, noncumulative quantity discounts, and promotional allowances are examples of
    rebates given to the trade customer.

     ANS: F
     Rebates involve a cash refund for the purchase of a product during a specific period.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

18. The basic assumption with price skimming is that the firm is customer driven, seeking to understand
    the attributes customers want in goods and services they buy and the value of that bundle of attributes
    to customers.

     ANS: F
     This is the basic assumption for value pricing.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

19. Evergreen Lighting, a manufacturer of decorative, energy-efficient lighting products, requires its
    buyers to pay for the cost of transportation from the manufacturing site to their place of businesses.
    Evergreen Lighting uses FOB origin pricing.

     ANS: T           PTS: 1              REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

20. A manufacturer using uniform delivered pricing is legally discriminating against buyers who are
    located close to the point of shipping because they pay the same amount as buyers located far from the
    point of shipping pay.

     ANS: T           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

21. A retail store implements a single-pricing tactic as a way to remove price comparisons from the
    buyer's decision-making process.
     ANS: T           PTS: 1              REF: 278            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

22. A catalog retailer offer three styles of khaki pants at three price levels. Customers can buy khaki pants
    for $26, $32, or $38 and at no other prices but these. The special pricing tactic used by the catalog
    retailer is best described as variable psychological pricing.

     ANS: F
     The catalog retailer is using price lining as a pricing tactic as well as psychological (odd-even) pricing.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

23. Charlene's cable system has offered her a deal for basic cable plus six premium channels for less than
    she is currently paying for basic cable. The cable system is using price lining to increase its overall
    profits.

     ANS: F
     The cable system is using price bundling.

     PTS: 1           REF: 280            OBJ: 18-4 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

24. One example of price bundling occurs when the ballet sells season tickets at a lower price than the
    total price of tickets for each show bought individually.

     ANS: T           PTS: 1              REF: 280                        OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

25. Rag fibers for paper and cotton seeds for cottonseed oil are two by-products of the cotton textile
    industry. Because these products are produced together, they are complementary products.

     ANS: F
     Complementary products are those that are consumed together, whereby the sale of one causes an
     increase in the sale of the other.

     PTS: 1           REF: 281            OBJ: 18-4 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

26. Escalator pricing and price shading are two examples of cost-oriented pricing tactics.

     ANS: F
     Escalator pricing is an example of cost-oriented pricing tactics; price shading is an example of a
     demand-oriented pricing tactic.

     PTS: 1           REF: 282            OBJ: 18-5 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

27. Many businesses find recessions to be an excellent time to build market share through the use
    of price shading.

     ANS: F
     Recessions are an excellent time to build market share through value-based pricing, bundling, and
     unbundling.
     PTS: 1           REF: 282            OBJ: 18-5 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy


MULTIPLE CHOICE

  1. The marketing manager of icruise.com (a Web site travel site targeted to consumers who want a luxury
     vacation) finds that the firm can gain market share and become the industry leader if it slashes prices
     by 50 percent during the month of December. However, the vice-president of finance is committed to
     reporting a 25 percent return on investment at all times. This conflict illustrates:
     a. a need to eliminate low-profit products
     b. a lack of corporate concentration on the marketing concept
     c. how pricing operates in a mature marketplace
     d. the need for trade-offs in pricing objectives
     e. how target markets can be ignored
     ANS: D
     Different individuals in an organization may have pricing objectives that are not mutually compatible
     and will involve trade-offs.

     PTS: 1           REF: 271            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer | TB&E Model
     Online/Computer

  2. After establishing pricing goals, managers should estimate total revenue at a variety of prices. Next,
     they should _____. Only after performing this task are they are ready to estimate how much profit and
     how much market share can be earned at each possible price.
     a. choose the ROI target
     b. determine corresponding costs for each price
     c. estimate industry supply
     d. implement pricing segmentation
     e. establish geographic pricing heuristics
     ANS: B           PTS: 1              REF: 272            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  3. A company's pricing strategy should do all of the following EXCEPT:
     a. give direction for price movements over the product life cycle
     b. define the initial price
     c. ignore the targeting and positioning strategy of the company
     d. set a competitive price
     e. interact with the other elements of the marketing mix
     ANS: C
     The pricing strategy needs to blend with the targeting and positioning strategy of the company.

     PTS: 1           REF: 272            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

  4. A 16-ounce bottle of Prairie Herb vinegar sells for $4.95, and a 16-ounce bottle of Heinz vinegar costs
     $1.05. Prairie Herb vinegar is new to the market, perceived to be of higher quality, and provides a
     unique flavor to foods even though it is used in the same way as Heinz vinegar. Prairie Herb vinegar is
     most likely using a _____ policy.
     a. penetration pricing
   b.   status quo pricing
   c.   price-skimming
   d.   bundling cost pricing
   e.   geodemographic pricing
   ANS: C
   Price skimming is common for products in the introductory stage of their product life cycle.

   PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
   TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

5. A shortage of blood for transfusions for injured animals has resulted in the introduction of a
   synthesized product called Oxyglobin, which can be used effectively as a blood replacement. The
   manufacturer of the product has put a high price on the product in order to recoup its research and
   development costs. The manufacturer of Oxyglobin is using a _____ policy.
   a. price-banding
   b. penetration pricing
   c. price-lining
   d. bundling costs
   e. price-skimming
   ANS: E
   Price skimming is a pricing policy whereby a firm charges a high introductory price.

   PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
   TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

6. The price-skimming strategy is sometimes called a "market-plus" approach to pricing because it
   denotes a high price relative to the prices of competing products. This strategy works best when:
   a. competition is abundant
   b. revenues are equal to expenses
   c. supply is greater than demand
   d. production capacity is large and flexible
   e. demand is greater than supply
   ANS: E
   Price skimming denotes a high price; therefore, the demand must be great.

   PTS: 1           REF: 273            OBJ: 18-1 TYPE: Comp
   TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

7. When the Mosquito Magnet was introduced, it was designed to rid the immediate area of mosquitoes
   and other annoying insects. The technology for the Mosquito Magnet had taken years to develop. It is
   a patented grill-like apparatus that emits carbon dioxide to attract bugs to a fan that draws them into
   the device where they die. What type of pricing policy would you recommend the company use to
   introduce this product to the market?
   a. status quo pricing
   b. penetration pricing
   c. price-skimming
   d. flexible pricing
   e. leader pricing
   ANS: C
   The price-skimming strategy will recoup the R&D costs quickly. Also, patents will limit or prohibit
   direct competition.
     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

 8. For which of the following situations would a price-skimming strategy be most appropriate?
    a. the addition of a new comic book series with an obviously gay hero
    b. the introduction of a new brand of bottled water
    c. the elimination of demand for low wattage light bulbs
    d. the introduction of a unique, roomy automobile model that has extremely low energy and
        fuel costs
    e. the introduction of a Barbie Olympic champion doll by Mattel and the International
        Olympic Committee
     ANS: D
     The automobile will justify a price-skimming strategy because the manufacturer will need to recoup
     R&D costs, and it will take several years for the competition to catch up.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

 9. The DCS Stainless Steel Gas Grill for outside cooking costs $3,995. The market for a grill that could
    easily replace a kitchen range is limited even though a lot of people have seen articles about this grill
    in cooking magazines and in the cooking section of newspapers. There is no potential competitor for
    this grill. The _____ strategy is probably best.
    a. price-skimming
    b. penetration pricing
    c. status quo
    d. cost bundling
    e. price-lining
     ANS: A
     Like products in the introductory stage of the product life cycle, this grill has no competition.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

10. The market for turkey products is large. If a major producer of turkeys were to introduce a boneless
    fresh turkey wrapped around savory dressing, most of the large market for this new product would be
    aware of its existence. The market is price sensitive, and there is some potential competition. The
    appropriate strategy would be:
    a. price skimming
    b. penetration pricing
    c. status quo
    d. cost bundling
    e. price lining
     ANS: B
     The market for the new product is price-sensitive.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product
11. Jones Soda Company and Big Sky Brands have introduced Jones Soda Carbonated Candy, a candy
    that delivers a blast of the most popular Jones Soda flavors along with an oddly enjoyable tongue-
    tingling sensation. A _____ strategy would most likely be used with this product to convince
    consumers to try it and not buy some other brand.
    a. price-lining
    b. price-fixing
    c. status quo pricing
    d. penetration pricing
    e. price-skimming
     ANS: D
     Consumers are price-sensitive in this market.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

12. When a firm introduces a new product at a relatively low price because it hopes to reach the mass
    market, it is following a _____ strategy. The low price is designed to capture a large share of a
    substantial market and produce lower production costs.
    a. penetration pricing
    b. price-insensitive demand
    c. price-skimming
    d. price elasticity
    e. cost bundling
     ANS: A           PTS: 1              REF: 273            OBJ: 18-1 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

13. Pharmacies are a new addition to Sam's Clubs. They could exert a greater influence on the marketplace
    for prescription drugs than their newness indicates. Sam's has a stated philosophy of marking up
    merchandise a maximum of 14 percent. When that philosophy is applied to prescription drugs,
    especially generics, warehouse club prices can be dramatically lower than those of conventional
    drugstores, supermarkets, or discount store pharmacies. Sam's is using a _____ strategy to convince
    consumers to use its pharmacies rather than its competitors.
    a. penetration pricing
    b. price-insensitive demand
    c. price-skimming
    d. price elasticity
    e. cost bundling
     ANS: A
     When a firm introduces a new product at a relatively low price because it hopes to reach the mass
     market, it is following a penetration pricing strategy. The low price is designed to capture a large share
     of a substantial market and produce lower production costs.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

14. A penetration strategy tends to be effective in a price-sensitive market. Thus, one of the purposes of
    penetration pricing is to:
    a. recoup product development costs quickly
    b. discourage competitors from entering the market
    c. produce a large margin of profit per unit
    d. develop exclusive distribution
    e. attract the price-insensitive buyer who demands the latest in technology
     ANS: B
     A low price will mean a low profit margin and will only be attractive if a large volume of business can
     be seized. The first company on the market that uses penetration pricing has a great advantage.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

15. Penetration pricing means charging a relatively low price for a product as a way to reach the mass
    market. The low price is designed to capture a large share of a substantial market. Thus, penetration
    pricing:
    a. tends to be more effective in a less price-sensitive market
    b. tempts competitors to enter the market
    c. provides a large profit per unit sold
    d. recoups product development costs quickly
    e. tends to lower production costs
     ANS: E
     The low price is designed to capture a large share of the market, resulting in lower production costs.
     Production costs are lowered because of economies of scale in production.

     PTS: 1           REF: 273-274        OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

16. The introductory price for the Nintendo Gamecube video game console was $100 lower than the list
    price of Xbox and Playstation 2, its only two competitors. Given this information, you can assume
    Nintendo used a(n) _____ policy for its Gamecube.
    a. penetration pricing
    b. flexible pricing
    c. competitive skimming
    d. cost bundling
    e. absorption pricing
     ANS: A           PTS: 1              REF: 273-274        OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

17. A penetration pricing strategy tends to be most effective:
    a. when demand is relatively inelastic
    b. under unitary conditions
    c. in price-sensitive markets
    d. when the company can only perform small production runs
    e. if unit costs are high
     ANS: C
     Penetration pricing is the logical choice given an elastic demand curve.

     PTS: 1           REF: 273            OBJ: 18-1 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

18. Leupold & Stevens, Inc., makes Leupold scopes for rifles and has introduced a new scope that has the
    quality and performance for which Leupold & Stevens is famous at a price much lower than it has ever
    sold a rifle scope before. The new scope offers several different magnifications and is the only scope
    in the $200 range that is made in the United States. (All similar scopes are priced much higher.) Which
    pricing strategy is Leupold & Stevens using to appeal to a larger market?
    a. price skimming
     b.   status quo pricing
     c.   penetration pricing
     d.   unbundling
     e.   cost sharing
     ANS: C           PTS: 1              REF: 273-274        OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

19. A firm charging a price identical to or very close to the competition's price is using a _____ strategy.
    a. differentiation pricing
    b. penetration pricing
    c. preemptive pricing
    d. status quo pricing
    e. leader pricing
     ANS: D           PTS: 1              REF: 274            OBJ: 18-1 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

20. Super-Sav supermarket employees regularly shop at other local supermarkets in order to make certain
    that Super-Sav is charging prices comparable to the other supermarkets. What type of pricing strategy
    is Super-Sav using?
    a. leader pricing
    b. preemptive pricing
    c. status quo pricing
    d. flexible pricing
    e. functional pricing
     ANS: C
     Status quo pricing is simply meeting the competition.

     PTS: 1           REF: 274            OBJ: 18-1 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

21. State laws that put a lower limit on wholesale and retail prices are called _____. In states that have
    these laws, selling below cost is illegal.
    a. unfair trade practice acts
    b. price-fixing laws
    c. predatory pricing acts
    d. price discrimination rulings
    e. channel controls
     ANS: A           PTS: 1              REF: 274            OBJ: 18-2 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

22. States developed unfair trade practice acts to
    a. enforce the Sherman Act that makes bait pricing illegal
    b. prevent oligopoly leaders from getting together and fixing prices at the highest the market
        will bear
    c. establish penalties for companies that break the Clayton Act by engaging in predatory
        pricing
    d. make sure that all pricing policies are equitable
    e. protect small, local firms from giant companies that operate efficiently on razor-thin profit
        margins
     ANS: E
     Unfair practice acts protect small businesses.

     PTS: 1           REF: 274            OBJ: 18-2 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

23. The U.S. Department of Justice has charged that Samsung, the world's largest DRAM (dynamic RAM)
    maker, Hynix Semiconductor, Inc., Infineon Technologies AG, and Micron Technology, Inc. all
    conspired to set prices of computer memory between 1999 and 2002. This means the companies:
    a. tried to sell computer memory at below costs
    b. charged customers different amounts for the same number of computer memory
    c. colluded on the price they would charge customers for the computer memory
    d. used uniform geographic pricing
    e. created an artificial demand for computer memory
     ANS: C
     Price fixing is an agreement between two or more firms on the price they will charge for a product.

     PTS: 1           REF: 274            OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

24. South Africa's Competition Commission accused South African Airways of conspiring with its partner,
    Germany's Lufthansa, to set prices on flights between Cape Town, Johannesburg, and Frankfurt. As a
    result, the two airlines were charged with:
    a. price discrimination
    b. price fixing
    c. bait pricing
    d. unfair trade practices
    e. channel control pricing tactics
     ANS: B
     Price fixing is an agreement between two or more firms on the price they will charge for a product.

     PTS: 1           REF: 274            OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

25. The Association of Specialty Surgical Practice has published a minimum fee schedule for services and
    distributed this schedule throughout the medical profession. Specialty Surgical is encouraging:
    a. price fixing
    b. bait pricing
    c. unfair trade practices
    d. service autonomy pricing
    e. predatory pricing
     ANS: A
     Publishing and circulating minimum fee schedules is an example of price fixing.

     PTS: 1           REF: 274            OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

26. K&G Restaurant Supplies sells paper products and commodity items like flour to for-profit businesses.
    It charges a substantially lower price to companies that operate multiple locations such as a restaurant
    chain. It charges a higher price to small or independent operations because they are less profitable
    customers. K&G Restaurant Supplies is engaging in:
    a. unfair trade practices
    b. price fixing
     c. price discrimination
     d. predatory pricing
     e. bait pricing
     ANS: C
     If a seller charges different prices to different customers for the same product, price discrimination is
     occurring.

     PTS: 1           REF: 274-275        OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

27. Many bars sell a glass of beer at a lower price during happy hour than during peak times. This is an
    example of:
    a. unfair trade practices
    b. price fixing
    c. price discrimination
    d. predatory pricing
    e. bait pricing
     ANS: C
     If a seller charges different prices to different customers for the same product, price discrimination is
     occurring.

     PTS: 1           REF: 274-275        OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

28. Imagine you have developed a device that can be used to tell whether uncooked meat has been
    irradiated. Several smaller retail chains have agreed to carry your product, but a large discount retailer
    has asked you to sell the device to it for a substantially lower price. The large discount retailer is
    asking you to practice:
    a. unfair trade practices
    b. predatory pricing
    c. channel control pricing
    d. price fixing
    e. price discrimination
     ANS: E           PTS: 1              REF: 274-275        OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

29. When Microsoft introduced its Windows NT network operating system, it gave buyers free Web-
    server software. At the same time, Netscape was trying to sell similar Web-server software for $4,999.
    Once Microsoft got a lion's share of the market, and Netscape's market share declined substantially,
    Microsoft began charging an above-market price for its Web-server software. Many people thought
    Microsoft was guilty of:
    a. predatory pricing
    b. unfair trade practices
    c. channel manipulation pricing
    d. price fixing
    e. price discrimination
     ANS: A
     Predatory pricing is the practice of charging a very low price for a product with the intent of driving
     competitors out of business or out of a market.

     PTS: 1                 REF: 275               OBJ: 18-2 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

30. After mangers understand both the legal and the marketing consequences of price strategies, they
    should set a _____ price, the general level at which a company expects to sell a good or service.
    a. functional
    b. zone
    c. demand
    d. leader
    e. base
     ANS: E           PTS: 1              REF: 275            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

31. Razer-Edge makes machines for sharpening the blades used by butchers to slice meat. When Razer-
    Edge priced its Primary Sharpener, its salespeople were told that it would be sold for $1,700, but that
    there would be room for discounts and flexibility. The $1,700 price is the _____ price for the Primary
    Sharpener.
    a. base
    b. zone
    c. demand
    d. channel leader
    e. functional
     ANS: A
     The $1,700 price is the general price level at which the company intends to sell the product, and this
     price is also known as the base price.

     PTS: 1           REF: 275            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

32. For 2006, the price of a single ticket in the infield box at an Atlanta Braves baseball game was $35
    although if you elected to buy a season pass for the same seat, the ticket price was reduced or
    discounted. This $35 is an example of a _____ price.
    a. base
    b. zone
    c. demand
    d. channel leader
    e. functional
     ANS: A
     The $35 price is the general price level at which the Atlanta Braves intend to sell the ticket, and this
     price is also known as the base price.

     PTS: 1           REF: 275            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

33. When a buyer pays a lower price for buying in multiple units or above a specified dollar amount, the
    buyer is receiving a:
    a. functional discount
    b. cash discount
    c. rebate
    d. promotional allowance
    e. quantity discount
     ANS: E                 PTS: 1                 REF: 276               OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

34. A _____ discount is a deduction from list prices that is aimed at encouraging customer loyalty.
    a. cumulative quantity
    b. noncumulative quantitative
    c. functional
    d. cash
    e. frequent buyer
     ANS: A
     Because quantity discounts are allowed to be achieved over time, customers become locked into
     buying from a single supplier to qualify for a discount. There is no such term as frequent buyer
     discount.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

35. For 2006, the price of a single ticket in the infield box at an Atlanta Braves baseball game was $35.
    The effective value of a season pass for the same seat was $2,735, but the buyer was only charged
    $2,241. Season ticket buyers were rewarded with:
    a. promotional allowances
    b. noncumulative quantity discounts
    c. frequent buyer discounts
    d. functional discounts
    e. cumulative quantity discounts
     ANS: B
     When a buyer pays a lower price for buying multiple units or above a specified dollar amount for a
     single order, the buyer is receiving a noncumulative quantity discount.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

36. Quantity discounts are most often used to:
    a. reward the buyer who pays in cash
    b. encourage large orders
    c. increase supply for a specific raw material
    d. reward a channel intermediary for performing some service
    e. shift the storage function backward to the supplier
     ANS: B
     Quantity discounts encourage wholesalers or retailers to buy in larger amounts.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

37. An Internet picture frame manufacturer offers retailers reduced prices on any combination of size or
    style frames purchased. The discount is shown as they shop and adjusted as the quantity of frames
    purchased increases. What common form of purchase discount is the frame manufacturer using?
    a. rebate
    b. cash discount
    c. quantity discount
    d. promotional allowance
    e. functional discount
     ANS: C
     Quantity discounts offer lower prices for buying in multiple units or above a specified dollar amount.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

38. Merchants frequently offer a _____, a discount off the base price to customers who pay immediately,
    or within a specified time period.
    a. functional discount
    b. quantity discount
    c. base discount
    d. cash discount
    e. promotional allowance
     ANS: D           PTS: 1              REF: 276                         OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

39. When a customer of Vegas Sign Company chooses to pay immediately on delivery rather than wait to
    be billed in 30 days, the buyer receives a 5 percent discount. This discount is an example of a:
    a. quantity discount
    b. cash discount
    c. rebate
    d. functional discount
    e. promotional allowance
     ANS: B
     A cash discount is offered to those who pay immediately or within a specified time frame.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

40. When a channel intermediary is compensated for the ordinary services and tasks performed within the
    channel of distribution, the compensation usually comes in the form of a discount from base price.
    This discount is called a:
    a. seasonal discount
    b. promotional allowance
    c. cumulative or noncumulative quantity discount
    d. functional (or trade) discount
    e. rebate or refund
     ANS: D           PTS: 1              REF: 276            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

41. When the salesperson from R.W. Hunt & Sons, a distributor of rifles and other items needed for
    hunting or target practice, calls on retail sporting goods stores, she is authorized to offer the retailers a
    15 percent discount from the list price in recognition of activities retailers perform for the distributor.
    These activities include unpacking, floor display setup, and a repair service. This 15 percent discount
    is called a:
    a. quantity discount
    b. promotional allowance
    c. trade discount
    d. seasonal discount
    e. channel allowance
     ANS: C
     A functional, or trade, discount is the customary discount from list price that is offered to
     intermediaries in recognition of functions that are performed in the selling of the product.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

42. A _____ is a price reduction that shifts the storage function forward to the purchaser and enables
    manufacturers to maintain steady production year-round.
    a. functional discount
    b. base allowance
    c. promotional allowance
    d. quantity discount
    e. seasonal discount
     ANS: E           PTS: 1              REF: 276                        OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

43. A June sale on Marshmallow Peeps candy, an Easter staple for many people, is an example of which
    of the following pricing tactics?
    a. quantity discount
    b. seasonal discount
    c. temporal discount
    d. promotional allowance
    e. functional discount
     ANS: B
     A seasonal discount is a price reduction for buying merchandise out of season.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

44. Hunter's Alley is a chain of stores targeted to people who are proud of their NRA membership. It has
    agreed to set up a special display of Swartklip ammunition near its rifle and shotgun aisles and also to
    run an advertisement in newspapers in communities where its stores are located. Swartklip has agreed
    to supply the display material free and to pay for half the cost of the advertisement. This is an example
    of a:
    a. bundled pricing tactic
    b. functional discount
    c. promotional allowance
    d. quantity discount
    e. direct allowance
     ANS: C
     A promotional allowance may be used to offer free goods or displays to a retailer in return for
     promotion of a manufacturer's products, or it may pay for some or all of the advertising costs.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer | TB&E Model
     Promotion

45. _____ are cash refunds given for the purchase of a product during a specific period.
    a. Rebates
    b. Loss leaders
    c. Reciprocal allowances
    d. Demand discounts
     e. Promotional allowances
     ANS: A           PTS: 1              REF: 276                       OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

46. In 2005, KitchenAid offered purchasers of any Kenmore brand major appliance a refund of $100 if
    they mailed Kenmore the receipt showing where and when they had purchased the appliance. Kenmore
    offered a:
    a. rebate
    b. reciprocal allowance
    c. cash discount
    d. functional discount
    e. trade promotion
     ANS: A
     Rebates are cash refunds.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

47. _____ occurs when a firm is customer-driven and seeks to understand the attributes customers want in
    the goods and services they buy and the value of those attributes to customers. Thus, the price of the
    product is set at a level that seems to the customer to be a good price compared with the prices of other
    options.
    a. Value-based pricing
    b. Noncumulative pricing
    c. CRM pricing
    d. Market concept pricing
    e. Price bundling
     ANS: A           PTS: 1              REF: 276-277        OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

48. One pharmaceutical manufacturer did not price a new antiulcer drug by adding up the costs of
    developing and manufacturing the medication and tacking on the amount of profit it wanted to make.
    Instead, the company justified a higher price than it might otherwise have been able to get from
    medical insurers by using studies that showed the new drug could help patients avoid expensive
    surgery and save the insurance companies money. The pharmaceutical company used:
    a. value-based pricing
    b. noncumulative pricing
    c. CRM pricing
    d. price bundling
    e. market concept pricing
     ANS: A
     Value-based pricing occurs when a firm is customer-driven and seeks to understand the attributes
     customers want in the goods and services they buy and the value of those attributes to customers.
     Thus, the price of the product is set at a level that seems to the customer to be a good price compared
     with the prices of other options.

     PTS: 1           REF: 276-277        OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

49. The basic assumption behind value-based pricing is that:
    a. the firm is sales-driven
     b. the firm is both customer-driven and competitor-driven
     c. increased profitability for wholesalers will increase the number of services they are willing
        to perform
     d. consumers are more concerned about price than quality
     e. additional long-term costs to manufacturers will increase
     ANS: B
     The basic assumption is the business is seeking to understand its customers. Because it is unlikely to
     be operating as a monopoly, it must also pay attention to what its competitors are doing.

     PTS: 1           REF: 276            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

50. A price tactic that requires the purchaser to absorb the freight costs from the shipping point is called
    _____. In this case, the farther buyers are from sellers, the more they pay because transportation costs
    generally increase with the distance merchandise is shipped.
    a. basing-point pricing
    b. zone pricing
    c. uniform delivered pricing
    d. freight absorption pricing
    e. FOB origin pricing
     ANS: E           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

51. The term FOB is an acronym for:
    a. free on board
    b. fee on buyer
    c. first on board
    d. freight on board
    e. freight origin buyer
     ANS: A           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

52. If an item purchased under FOB origin terms is damaged in transit, against whom can the purchaser
    file its damage claim?
    a. against the manufacturer
    b. against the common carrier
    c. against all of the supply chain members
    d. against the buyer
    e. no damage claim may be filed
     ANS: B
     Products shipped FOB origin become the purchaser's responsibility at the point of shipment. The
     purchaser cannot complain to the manufacturer and should file a claim against the carrier.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

53. Shipping fresh-cut flowers to international buyers can be risky because of price changes during the
    time required for shipment, expense incurred over long distances, and quality of product delivered. To
    minimize risks and costs, a seller would likely employ:
    a. freight absorption pricing
    b. uniform delivered pricing
     c. zone pricing
     d. basing-point pricing
     e. FOB origin pricing
     ANS: E
     Because title will pass to the purchaser at the time of shipment in FOB origin pricing, the risks and
     costs will also pass to the purchaser at that point.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

54. With _____, the seller pays the actual freight charges and bills every purchase with an identical, flat
    freight charge.
    a. uniform delivered pricing
    b. zone pricing
    c. FOB origin pricing
    d. freight absorption pricing
    e. basing-point pricing
     ANS: A           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

55. Uniform delivered pricing enables a firm to:
    a. charge each customer the actual cost of shipping its products
    b. stir up price competition between buyers
    c. maintain a nationally advertised price
    d. discriminate in favor of buyers that are geographically closer to the seller
    e. charge each customer its fair share of the cost of shipping
     ANS: C
     With uniform delivered pricing, all customers will pay the same price regardless of their location.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

56. An Alabama-based catalog retailer sells fireplace equipment such as screens and andirons. Its
    customers in New England are charged one shipping rate, and customers west of the Rocky Mountains
    are charged a different rate. Customers in the midwestern states are charged yet another rate. What
    kind of geographic pricing is the catalog retailer using?
    a. FOB origin pricing
    b. FOB factory
    c. zone pricing
    d. freight absorption pricing
    e. uniform delivered pricing
     ANS: C
     Zone pricing is a modification of uniform delivered pricing that divides the United States into
     segments or zones and a charges a flat rate to all customers in that zone.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

57. In a catalog targeted to people who like to bake, customers can buy a single yeast bread mix designed
    specifically to be baked in bread machines for $3.95 each or 12 different mixes for $37.50. This is an
    example of:
     a.   price bundling
     b.   CRM pricing
     c.   psychological pricing
     d.   penetration pricing
     e.   status quo pricing
     ANS: A
     The 12 items sold together are priced less expensively than if purchased separately.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

58. If your favorite mail-order catalog lists freight charges according to the dollar amount of merchandise
    purchased, you know that it is using _____ pricing.
    a. quantity discount
    b. freight absorption
    c. zone
    d. uniform delivered
    e. FOB origin
     ANS: D
     With uniform delivered pricing, all customers will pay the same price regardless of their location.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

59. Uniform delivered pricing:
    a. creates no geographic price discrimination
    b. is sometimes called "postage stamp pricing"
    c. is prevalent in the steel, cement, corn oil, and lead industries
    d. is common where freight costs are a large portion of total costs
    e. is calculated from regional base points
     ANS: B
     With uniform delivered pricing, all customers pay the same amount for freight regardless of location.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

60. If a company decides to divide its market area into segments or regions and charge a flat rate for
    freight to all customers in a given region, the company is using _____ pricing.
    a. zone
    b. uniform delivered
    c. freight absorption
    d. FOB origin
    e. basing-point
     ANS: A           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

61. Green Earth Marketing sells containers for temporary storage of recyclables nationally through its
    catalog. The company wants to simplify pricing and reduce its risk. Green Earth also desires some type
    of difference in price due to distance. As a result, the company should use _____ pricing.
    a. two-part
    b. uniform delivered
     c. freight absorption
     d. flexible
     e. zone
     ANS: E
     In zone pricing, the freight prices are set according to geographic areas.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

62. Quart jars of Dancing Pig Barbecue Sauce, produced in Nevada, are sold through the mail. The
    company uses two different shipping prices. All customers west of the Mississippi River pay $3.99
    shipping and handling costs per order, while all east of the Mississippi River pay $4.99. This is an
    example of _____ pricing.
    a. penetration
    b. skimming
    c. zone
    d. basing point
    e. freight absorption
     ANS: C
     Two zones have been established. Every customer in zone 1 pays the same price while every customer
     in zone 2 pays a higher price.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

63. If the seller pays all or part of the actual freight charges and does not pass them on to the buyer, the
    seller is using _____ pricing.
    a. freight absorption
    b. uniform delivered
    c. zone
    d. FOB origin
    e. basing-point
     ANS: A           PTS: 1              REF: 277            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

64. Landover Arms, Inc. currently markets its rifles designed for competitive shooting in the New England
    market. It would like to expand into the Midwest market, but the competition there is intense. Which
    geographic pricing tactic should the firearms manufacturer use?
    a. FOB origin pricing
    b. zone pricing
    c. freight absorption pricing
    d. basing-point pricing
    e. multiple unit pricing
     ANS: C
     In freight absorption pricing, the seller pays all or part of the freight costs and does not pass them on to
     the purchaser. This keeps the purchase price low.

     PTS: 1           REF: 277            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution
65. If a manufacturer designates a shipping point from which to calculate all freight charges and charges
    customers the freight costs from that point (even if the goods were shipped from another location), the
    manufacturer is using _____ pricing.
    a. freight absorption
    b. uniform delivered
    c. zone
    d. FOB origin
    e. basing-point
     ANS: E
     With a basing-point price, the seller designates a location as a basing point and charges all buyers the
     freight costs from that point.

     PTS: 1           REF: 277-278        OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

66. A national manufacturer of car parts has six warehouses and has a pricing policy of charging freight
    from the closest warehouse to the customer, regardless of where parts are shipped from. For instance,
    if the customer is in Vancouver, British Columbia, the closest warehouse to the customer is in Seattle,
    Washington. If the ordered car part actually comes from the Alabama warehouse, the customer still
    pays freight from Seattle. The manufacturer uses _____ pricing.
    a. FOB origin
    b. uniform delivered
    c. zone
    d. basing-point
    e. freight absorption
     ANS: D
     In basing-point pricing, customers pay freight from a set base point, regardless of the location from
     which the goods are shipped.

     PTS: 1           REF: 277-278        OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

67. Greenbacks was a chain of retail stores, located in Colorado, Arizona, Montana, New Mexico, Utah,
    and Wyoming, where all of the merchandise is priced at $1. Greenbacks used:
    a. a single-price tactic
    b. flexible pricing
    c. price lining
    d. price bundling
    e. leader pricing
     ANS: A
     The single-price tactic offers all goods and services at the same price.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

68. The tactic that allows different customers to pay different prices for essentially the same merchandise
    bought in equal quantities is called _____. This tactic is often found in the sale of shopping goods,
    specialty merchandise, and most industrial goods except supply items.
    a. zoning (or basing) pricing
    b. illegal price fixing
    c. price maintenance
    d. psychological (or odd-even) pricing
     e. flexible (or variable) pricing
     ANS: E           PTS: 1              REF: 278            OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

69. An advantage associated with a flexible pricing policy is that it:
    a. causes inconsistent profit margins
    b. enables a seller to close a sale with a price-conscious customer
    c. causes ill will among customers if they discover that other customers are paying lower
       prices
    d. enables salespeople to automatically lower the price to make a sale
    e. can spark a price war with competitors
     ANS: B
     Flexible pricing may allow a salesperson to negotiate with a price-sensitive customer, which is an
     advantage.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

70. For centuries, businesses used negotiations and bartering as a matter of routine. The Industrial Age
    saw the emergence of mass production and extended distribution chains, which made face-to-face
    negotiations with each customer impractical. Fixed prices became necessary to manage the enormous
    growth in both the volume and the variety of products, distributed over larger geographic regions. The
    advent of the Internet and electronic commerce has greatly affected the way businesses price their
    goods and services and has allowed for the use of more _____, a form of customized pricing.
    a. zoning (or basing) pricing
    b. illegal price fixing
    c. price maintenance
    d. psychological (or odd-even) pricing
    e. flexible (or variable) pricing
     ANS: E
     The tactic that allows different customers to pay different prices for essentially the same merchandise
     bought in equal quantities is called flexible (or variable) pricing. This tactic is often found in the sale
     of shopping goods, specialty merchandise, and most industrial goods except supply items.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer

71. Ahmad Jing operates a wedding consultant service. He will often provide essentially the same service
    to different customers at distinctly different prices depending on how he likes the customer and how
    much he thinks the customer needs his services. Jing uses:
    a. two-part pricing
    b. an illegal pricing policy
    c. flexible pricing
    d. bait and switch practices
    e. price maintenance
     ANS: C
     Flexible pricing is defined as selling essentially the same product to different customers for different
     prices.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Customer
72. Eustis Lee is a lawyer who only handles DUI cases. No matter how quickly, he resolves the case, he
    charges each customer $5,000. Lee justifies the fee because of his lengthy education and the years he
    has spent learning how the judicial system operates Which pricing policy is the lawyer using?
    a. professional services pricing
    b. potential (or base) pricing
    c. price maintenance
    d. psychological pricing
    e. flexible (or variable) pricing
     ANS: A
     Professional services pricing is used by people with lengthy experience, training, and often
     certification by a licensing board.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

73. Pauline LaMour works as a personal organizer. If she were hired to come to your home and organize
    your closets, she would charge $500--whether the job took her 15 minutes or the entire day. She feels
    her fee is justified because of her 20 years of experience. LaMour uses:
    a. professional services pricing
    b. potential (or base) pricing
    c. price maintenance
    d. psychological pricing
    e. flexible (or variable) pricing
     ANS: A
     Professional services pricing is used by people with lengthy experience, training, and often
     certification by a licensing board.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

74. Merck & Co., the manufacturer of the AIDS drug Crixidan, distributes exclusively to one distributor,
    Stadtlanders Pharmacy. The pharmacy has been criticized for charging too high a price for the drug
    and taking advantage of inelastic demand. Stadtlanders claims the charges are ethical because of high
    staffing costs and associated discounts with various health plans. This situation describes issues
    associated with:
    a. resale price maintenance
    b. price bundling
    c. flexible pricing
    d. professional services pricing
    e. uniform delivered pricing
     ANS: D
     Professional services pricing is often used with products and services that have an inelastic demand.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

75. Often a seller will establish a series of prices for a family of merchandise items. There may be several
    different models at specific price points but no prices in between. This policy is called:
    a. price lining
    b. price bracketing
    c. family pricing
     d. variable pricing
     e. price bundling
     ANS: A           PTS: 1              REF: 279                        OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

76. At the Greenville Florist, there are four different prices for funeral bouquets. The smallest bouquet
    sells for $30; there is also a $40 version and a $75 version. For those who want to express their grief
    through the purchase of a dramatic floral arrangement, the florist also offers a $150 value. The owner
    of the florist shop has chosen price lining because it will:
    a. enable the shop to carry a larger total inventory
    b. maintain all of the product line at the same stage in the product life cycle
    c. confuse customers and allow salespeople to sell more of the expensive models
    d. reach several different target market segments
    e. thwart competitors that are trying to sell similar products
     ANS: D
     Price lining allows a retailer to appeal to several different target markets. It is not an uncommon
     strategy and competitors probably use it. It should not affect inventory overall and will not confuse
     customers.

     PTS: 1           REF: 279            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

77. Single-price selling:
    a. removes price comparisons from the buyer's decision-making process
    b. does not benefit the retailer
    c. is most effective when used during an inflationary period
    d. encourages clerical errors
    e. is accurately described by none of these choices
     ANS: A
     Single-price selling allows retailers to enjoy the benefits of simplified pricing and minimal clerical
     errors. Inflation creates headaches as retailers must raise prices frequently in order to continue earning
     a profit.

     PTS: 1           REF: 278            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

78. Consumers sometimes prefer two-part pricing because:
    a. prices are often perceived as quality indicators
    b. consumers like to be in control of costs
    c. consumers are uncertain about the number and types of activities they might use at places
       like amusement parks
    d. consumers prefer a limited number of choices
    e. prices have little or no psychological influence on most consumers
     ANS: C
     Two-part pricing is a price tactic that charges two separate amounts to consume a single good or
     service.

     PTS: 1           REF: 281            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

79. Why is price lining is a valuable tactic for marketing managers?
     a. Price lining results in a greater inventory carrying charge.
     b. A company that uses price lining is able to carry a smaller total inventory and reduce
        confusion for its customers.
     c. A company that uses price lining has more price markdowns and greater markup.
     d. The price lining strategy allows the company to gain brand loyalty from its targeted
        segments.
     e. Price lining tends to confuse customers and requires them to listen closely to the
        salesperson’s pitch.
     ANS: B
     With price lines, a retailer can choose to carry a smaller inventory because it wants to offer products at
     certain price levels but not at every possible point of the price scale.

     PTS: 1           REF: 279            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

80. _____ is an attempt by the marketing manager to induce store patronage through selling a product near
    cost or even below cost.
    a. Odd-even pricing
    b. Leader pricing
    c. Price skimming
    d. Potential (or base) pricing
    e. Price lowballing
     ANS: B           PTS: 1              REF: 279                       OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

81. The owner of a neighborhood hardware store has decided to sell a set of three padlocks for $5. He
    hopes the below-cost price for the locks will attract current and new customers who will also buy
    regularly priced items. The owner is encouraging store patronage through:
    a. variable pricing
    b. psychological pricing
    c. price maintenance
    d. price lowballing
    e. leader pricing
     ANS: E
     Leader pricing involves selling a product near or even below cost to attract business.

     PTS: 1           REF: 279            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

82. Leader pricing is used to:
    a. attract customers to a store so they can be persuaded to buy a more expensive product
       instead
    b. bundle products together for sale
    c. attract customers to the store so they will buy other products in addition to the leader
       product
    d. price products at odd-numbered amounts to stimulate demand
    e. maintain a status quo pricing strategy
     ANS: C
     Leader pricing involves selling a product near or even below cost to attract business.

     PTS: 1                REF: 279               OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

83. The retail nursery is selling potting soil at a below-market price to lure customers into the store in
    hopes that while they are in the store to buy potting soil, they will also buy other gardening items that
    have a much higher markup. The retail nursery is utilizing:
    a. price lowballing
    b. price maintenance
    c. price lining
    d. leader pricing
    e. functional pricing
     ANS: D
     Leader pricing involves selling a product near or even below cost to attract business.

     PTS: 1           REF: 279            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

84. _____ tries to get customers into the store with misleading advertising and then uses high-pressure
    selling to persuade the consumer to buy something else more expensive.
    a. Functional pricing
    b. Bait pricing
    c. Sales-oriented pricing
    d. Production-oriented pricing
    e. Decoy pricing
     ANS: B           PTS: 1              REF: 279                       OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

85. Cashtown Used Cars aired a radio spot announcing, "Today only, previously owned cars are only
    $200!" Meghan just wanted some kind of in-town transportation. When she went to Cashtown, the
    salesperson said, "We have only one $200 car left, and it's not the kind of car I'd want my wife to
    drive. However, we do have some great deals on newer models." Meghan went home with an $8,000
    used car. Cashtown is probably practicing:
    a. decoy pricing
    b. deal pricing
    c. functional pricing
    d. bait pricing
    e. price pressuring
     ANS: D
     Bait pricing tries to get customers into the store with misleading advertising and then uses high-
     pressure selling to persuade the consumer to buy something else more expensive.

     PTS: 1           REF: 279            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

86. If a marketer decides to price goods at odd-numbered dollar amounts to denote bargains, and at even-
    numbered amounts to denote quality, he or she is using:
    a. two-part pricing
    b. price lining
    c. price bracketing
    d. decoy pricing
    e. psychological pricing
     ANS: E                 PTS: 1                REF: 280               OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

87. Which of the following phrases accurately describes psychological pricing?
    a. banned in most states
    b. designed to aid the economy-minded purchaser
    c. equally effective on all types of products
    d. also called odd-even pricing
    e. essentially the same as price shading
     ANS: D
     Psychological pricing has mixed results, depending on the type of product.

     PTS: 1           REF: 280            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

88. Marketing two or more products in a single package for a special price is known as:
    a. price bundling
    b. two-part pricing
    c. psychological pricing
    d. price lining
    e. family pricing
     ANS: A           PTS: 1              REF: 280                      OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

89. The Toronto Convention and Visitors Association offers tourists a promotion in which they can buy
    one night in a Toronto hotel, two tickets to a Blue Jays baseball game, two tickets to a theatrical
    production, and dinner for two at an upscale restaurant for a substantially lower price than if the
    components were purchased separately. The Toronto Convention and Visitors Association is using a
    pricing technique called:
    a. price lining
    b. two-part pricing
    c. psychological pricing
    d. price bundling
    e. bait pricing
     ANS: D
     Marketing two or more products in a single package for a special price is called price bundling.

     PTS: 1           REF: 280            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

90. The Grand Slam Ticket Pack of Major League Baseball’s Atlanta Braves provides four game tickets,
    four hotdogs, four Coca-Colas, four Braves bucket caps, one game program, and parking at prices as
    low as $59. This price is significantly lower than the items could be purchased individually and means
    the Braves are using:
    a. price lining
    b. two-part pricing
    c. price maintenance
    d. price bundling
    e. price bracketing
     ANS: D
     Marketing two or more products in a single package for a special price is called price bundling.
     PTS: 1           REF: 280            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

91. Tickets to the combined amusement park and water slide were $49 for the day. Then the company
    gave customers the option to purchase tickets for either the amusement park or the water slide for $18.
    To help keep costs in line, the park management also began charging its customers a small parking fee.
    Initially, the cost of parking was figured into the $49 price. The amusement park is using:
    a. price lining
    b. potential (or base) pricing
    c. unbundling
    d. professional services pricing
    e. price maintenance
     ANS: C
     Reducing the bundle of services that comes with the basic product is called unbundling.

     PTS: 1           REF: 280            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

92. Teresa and Debbie have decided to keep their new power boat in a "drystack" storage facility rather
    than in the water at a marina. The storage facility charges them a fee of $500 per year, plus $25 each
    time they call ahead and ask the facility to put their boat in the water for the day or weekend. The
    facility is using a pricing tactic known as:
    a. multiple unit pricing
    b. professional services pricing
    c. price lining
    d. price bundling
    e. two-part pricing
     ANS: E
     Two-part pricing involves two separate charges to consume a single product or service.

     PTS: 1           REF: 281            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

93. If you want to buy season tickets in the comfortable seating behind the batter at the Fullerton College
    Softball Complex, you can expect to make a qualifying payment that gives you the right to purchase
    the tickets. This payment is not deemed to be part of the ticket price. It is one of the costs that must be
    paid in order to buy a season ticket. Fullerton College is using:
    a. multiple unit pricing
    b. professional services pricing
    c. price lining
    d. price bundling
    e. two-part pricing
     ANS: D
     Two-part pricing involves two separate charges to consume a single good or service.

     PTS: 1           REF: 280            OBJ: 18-3 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing

94. _____ are extra fees paid by consumers for violating the terms of purchase agreements.
    a. Decoy fees
    b. Misuse discounts
    c. Punitive fees
     d. Consumer penalties
     e. Financial judgments
     ANS: D           PTS: 1              REF: 281                       OBJ: 18-3 TYPE: Def
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

95. Consumers are required to pay consumer fees because businesses allegedly:
    a. will sell more if the consumer is unaware of the actual costs
    b. suffer an irrevocable revenue loss
    c. are required by the federal government to charge this fee
    d. avoid additional transactional costs when purchase agreements are violated
    e. incur greater fixed costs as a result of the purchase agreement violation
     ANS: B
     There is no such federal law. Businesses allege they incur more transactional costs as a result of
     purchase agreements violations. Fixed costs do not change.

     PTS: 1           REF: 281            OBJ: 18-3 TYPE: Comp
     TOP: AACSB Reflective Thinking | TB&E Model Strategy

96. Post makes several varieties of cereals. In promoting this product line, Post offers a 50-cents-off
    coupon that can be used to purchase any of its cereals. Therefore, Post must consider _____ when
    pricing its cereals.
    a. joint costs
    b. differential costs
    c. bundling costs
    d. potential (or basing) costs
    e. factorial costs
     ANS: A
     Joint costs are costs that are shared in the manufacturing and marketing of several products in a
     product line.

     PTS: 1           REF: 281-282        OBJ: 18-4 TYPE: App
     TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

97. Alissa Dunn is the owner and operator of Dunn's Best Jams, which she sells at craft festivals. She only
    makes and sells three types of jams--pecan pie jam, chocolate pie jam, and lemon tart jam. The costs of
    leasing her professional kitchen for manufacturing, travel to craft shows, insurance, and so on are
    allocated on an equal basis to the three types of jam sold. In other words these costs are:
    a. derived costs
    b. elastic costs
    c. joint costs
    d. revenue impediments
    e. synergistic costs
     ANS: C
     Joint costs are costs that are shared in the manufacturing and marketing of several products in a
     product line.

     PTS: 1          REF: 281-282         OBJ: 18-4 TYPE: App
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Product

98. Which of the following factors can a manager IGNORE when deciding on prices for an entire product
    line?
      a.   Products in the line could be substitutes for one another.
      b.   Buyer considers the brand or the price first.
      c.   Products share joint costs.
      d.   Products will affect demand for the other products in the line.
      e.   Products in the line are complementary to one another.
      ANS: B
      The manager is trying to determine the relationships between the various products in the line and is
      looking at the products, not the buyer.

      PTS: 1           REF: 281-282        OBJ: 18-4 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

 99. Kule, Inc. produces three different lines of car racks for transporting large, bulky items.

                                                Bicycle              Luggage              Skis
      Sales                                    $140,000             $100,000          $160,000
      Less: cost of goods sold                  110,000              110,000           140,000
      Gross margin                               30,000              (10,000)           20,000

      Total company net annual profit = $40,000

      Included in the cost of goods sold is $12,000 of annual rent (a fixed cost) that is distributed equally
      among the three product lines. As a consultant to Kule, will you recommend that it drop the luggage
      rack line?
      a. No, dropping the line will actually decrease overall net profits.
      b. Yes, dropping the line will increase company net profits.
      c. No, dropping the line will result in increased fixed costs.
      d. Yes, dropping the line will reduce joint costs.
      e. Yes, dropping the line will reduce cost of goods sold and increase revenues.
      ANS: B
      Current net profit is $40,000. Dropping the luggage rack line will increase profit by $10,000 initially,
      but the fixed rent costs ($4,000) that are being covered by that line will have to be distributed to the
      other two lines. That means the cost of goods sold for each remaining line will increase by $2,000 (or
      $4,000 / 2). Cost of goods sold for the Bicycle line will increase to 112,000, resulting in profit of
      $28,000; cost of goods sold for the Ski line will increase to 142,000, resulting in a profit of $18,000.
      Total profit will be $46,000, or $6,000 more than if the company kept the Luggage line. Therefore,
      Kule should drop the line.

      PTS: 1           REF: 281-282        OBJ: 18-4 TYPE: App
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

100. One popular cost-oriented pricing tactic is culling low-profit margin products from the product line.
     Which of the following statements does NOT describe a reason why a marketing manager would want
     to avoid this tactic?
     a. The low-margin item may be a large volume contributor to profit.
     b. The tactic focuses special attention on the costs of producing each line and their
         contribution to overhead.
     c. The loss of one item in the line may reduce the economies of scale.
     d. The image of the rest of the product line may suffer if there is a "hole" in the line.
     e. Other items in the line will now have to cover more fixed costs.
      ANS: B
      This pricing tactic does force a company to carefully consider the costs of each line and its overall
      contribution to overhead and fixed costs.

      PTS: 1           REF: 281-282        OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy | TB&E Model
      Product

101. When using _____, price is not set on the product until the item is either finished or delivered.
     a. price shading
     b. escalator pricing
     c. delayed-quotation pricing
     d. bid pricing
     e. two-part pricing
      ANS: C           PTS: 1              REF: 282            OBJ: 18-5 TYPE: Def
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

102. Delayed-quotation pricing:
     a. requires the seller to place a later date on the product invoice to help accounts receivable
        in recording transactions
     b. allows the final selling price to reflect cost increases incurred between the time the order is
        placed and the final delivery takes place
     c. prevents the competitor from submitting an earlier bid
     d. requires a seller to submit a bid after the closing date
     e. is also known as price-shading bidding
      ANS: B
      Delayed-quotation pricing delays the setting of the final price.

      PTS: 1           REF: 282            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

103. A(n) _____ allows for price increases based on the cost-of-living index or some other formula.
     a. price-shading index
     b. factorial clause
     c. quotation index differential
     d. escalator price clause
     e. inelastic demand index
      ANS: D           PTS: 1              REF: 282                        OBJ: 18-5 TYPE: Def
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

104. Escalator pricing is:
     a. a demand-oriented pricing tactic
     b. similar to delayed-quotation pricing
     c. similar to price shading
     d. a form of market penetration pricing
     e. also called postage stamp pricing
      ANS: B
      Escalator pricing allows for price increases and delays the setting of the final price.

      PTS: 1           REF: 282            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing
105. Business-to-business salespeople often use _____ to heighten the demand for certain items in a
     product line. It is a discounting practice that is often done routinely without much forethought.
     a. decremental pricing
     b. price lining
     c. devaluation
     d. price shading
     e. consumer discounts
      ANS: D           PTS: 1              REF: 282-283                  OBJ: 18-5 TYPE: Def
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

106. For sports marketers, an inelastic demand curve means they have greater flexibility in making pricing
     decisions. What can a sports marketer do to make demand for his or her product more inelastic?
     a. have a winning team that people want to see play
     b. sell the rights to buy a season pass
     c. eliminate all quantity discounts
     d. use discriminatory pricing
     e. any of these strategies will help render demand more inelastic
      ANS: A           PTS: 1              REF: 282                      OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Strategy

107. What can a marketing manager do to make demand for his or her product more inelastic?
     a. eliminate brand equity
     b. eliminate any unique products from the product line
     c. cultivate selected demand
     d. avoid making any product changes
     e. implement escalator pricing
      ANS: C
      The marketing manager would need to use some demand-oriented tactic. Escalator pricing is a cost-
      oriented tactic. Creating unique products and changing packaging are both recommended tactics.

      PTS: 1           REF: 282            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Strategy

108. Which of the following pricing methods can be used to build market share during a recession?
     a. price lining
     b. resale price maintenance
     c. psychological pricing
     d. bundling
     e. variable pricing
      ANS: D
      The other commonly used technique is value-based pricing.

      PTS: 1           REF: 283            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

109. During a recent worldwide recession when wine usage was declining, Nickel & Nickel launched a new
     brand of wine, which it sold at $125 a bottle. The wine is allowed to age three times as long as lower-
     priced wines, and the grapes used in the wine's production are hand-picked. Wine lovers appreciate
     how both production techniques improve wine quality. Nickel & Nickel used _____ to build market
     share.
     a. value-based pricing
      b.   unbundling
      c.   price lining
      d.   status quo pricing
      e.   leader pricing
      ANS: A
      Value-based pricing indicates the consumers are getting value for their money.

      PTS: 1           REF: 283            OBJ: 18-5 TYPE: App
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

110. Two effective pricing tactics, which can be used during a recession, to hold or build market share are:
     a. flexible pricing and price shading
     b. price shading and price lining
     c. unbundling and price shading
     d. value-based pricing and bundling
     e. price lining and escalator pricing
      ANS: D
      Value-based pricing stresses that customers are getting a good value for their money. If features are
      added to a bundle, customers may perceive the offering as having a greater value.

      PTS: 1           REF: 283            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

111. During a recent recession, many manufacturers determined that their suppliers were an excellent
     source of cost savings. Specific cost-reduction strategies manufacturers have used with their suppliers
     include:
     a. offer help in boosting productivity of suppliers
     b. renegotiate contracts
     c. set annual across-the-board cost reduction targets for suppliers
     d. improve economies of scale by cutting number of suppliers
     e. all of the choices
      ANS: E           PTS: 1              REF: 283            OBJ: 18-5 TYPE: Comp
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

      Art Supplies

      It's September and Sophia wants to buy some arts and crafts supplies for an after-school program she is
      developing for her daughter's elementary school. In her Sunday newspaper was a flyer from Michael's,
      an arts and crafts retailer. As she looked through the newspaper insert, she noticed that if she
      purchased three or more bottles of Alene's Tacky Glue, the regular price of $1.50 each was reduced to
      $1.15 each. She also saw that the store priced its plastic storage boxes at $1.99, $3.99, and $5.99. She
      thought they would be useful for storing each individual child's projects. On the front page of the flyer
      was an ad for Funky Girls Gel Pens, something she knew her daughter would love to use. The price at
      Michael's was $6.99 lower than the price she had found at the other stores that carried the pens. She
      thought that some of the older girls might like to start a scrapbook and was pleased to find that
      Michael's had a scrapbook starter kit, which includes scissors, book, pages, and stickers for only $15.
      The items could be purchased separately for $19.99. The flyer also announced that all flag-related
      items leftover from its Fourth of July sale were reduced by 40 percent.

112. Refer to Art Supplies. Which type of discount is being using to price the tacky glue?
     a. noncumulative quantity discount
     b. promotional allowance
      c. seasonal discount
      d. cash discount
      e. cumulative quantity discount
      ANS: A
      A noncumulative quantity discount is a reduction from list price that applies to a single order rather
      than to the total volume placed during a specific period.

      PTS: 1           REF: 276            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

113. Refer to Art Supplies. Which of the following merchandise is offered in the flyer with a seasonal
     discount?
     a. tacky glue
     b. plastic storage boxes
     c. flag-related items
     d. Funky Girls Gel Pens
     e. scrapbook starter kit
      ANS: C
      Seasonal discounts are pricing reductions for buying merchandise out of season.

      PTS: 1           REF: 276            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

114. Refer to Art Supplies. What pricing practice was used to price the plastic storage boxes?
     a. seasonal pricing
     b. price shading
     c. price lining
     d. inelastic pricing
     e. cumulative pricing
      ANS: C
      Price lining is the practice of offering a product line with several items at specific price points.

      PTS: 1           REF: 279            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

115. Refer to Art Supplies. Which pricing tactic was Michael's probably using with its Funky Girls Gel
     Pens?
     a. seasonal pricing
     b. psychological pricing
     c. price lining
     d. price bundling
     e. leader pricing
      ANS: E
      Leader pricing is an attempt by the marketing manager to attract customers by selling a product near or
      at cost.

      PTS: 1           REF: 278            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing

116. Refer to Art Supplies. What pricing practice was used with the scrapbook starter kit?
     a. seasonal pricing
      b.   psychological pricing
      c.   price lining
      d.   price bundling
      e.   leader pricing
      ANS: D
      Price bundling is marketing two or more products for a special price.

      PTS: 1           REF: 280            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

      Mrs. K's Premium Wisconsin Cheese

      Sharyl Kabbes manufactures dairy products on her farm outside of Milwaukee, Wisconsin. Her
      products carry the brand name Mrs. K's Premium Wisconsin. The company sells milk, cheese, and
      sausage products. The products are sold individually or in sets that include a variety of cheeses and
      sausage products for a special price. Currently, the products are sold only in the state of Wisconsin.
      Mrs. K's products were introduced with a high price relative to competition. Kabbes says that her
      products are premium and, therefore, justify the high initial price. To get retailers to carry Mrs. K's
      products, the company offers discounts to buyers who will transport the products from the Kabbes
      Farm to their warehouses. Kabbes also offers retailers money to run ads for Mrs. K's products.

      Because Mrs. K's products are perishable, transportation is very important, and some of her customers
      could not take advantage of the discount offered for picking up the product from the farm. As a result,
      Kabbes has decided to divide the state of Wisconsin into several segments and base her freight charges
      on the location of the buyer within these segments.

117. Refer to Mrs. K's Premium Wisconsin Cheese. The introductory pricing policy chosen by Mrs. K's is
     exemplifies a _____ policy.
     a. price-bracketing
     b. penetration pricing
     c. price-lining
     d. price-fixing
     e. price-skimming
      ANS: E
      Price skimming denotes high price relative to prices of competitors.

      PTS: 1           REF: 273            OBJ: 18-1
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

118. Refer to Mrs. K's Premium Wisconsin Cheese. The type of discount offered by Mrs. K's to buyers who
     are willing to assume the transportation of products from the farm to their warehouses is called a:
     a. seasonal discount
     b. promotional allowance
     c. quantity discount
     d. functional discount
     e. potential (or base) allowance
      ANS: D
      Functional discounts are given to channel intermediaries who perform ordinary services and tasks
      (such as transportation) within a channel of distribution.

      PTS: 1           REF: 276            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing
119. Refer to Mrs. K's Premium Wisconsin Cheese. The money offered by Mrs. K's to retailers to advertise
     the company's products is called a:
     a. rebate
     b. quantity discount
     c. promotional allowance
     d. functional discount
     e. cash discount
      ANS: C
      A promotional allowance is a payment to a dealer for promoting a manufacturer's product.

      PTS: 1           REF: 276            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Promotion

120. Refer to Mrs. K's Premium Wisconsin Cheese. Dividing the state of Wisconsin into segments and
     pricing products based on the freight charges to different segments represents the use of _____ pricing.
     a. FOB origin
     b. uniform delivered
     c. freight absorption
     d. zone
     e. basing-point
      ANS: D
      Zone pricing requires dividing the firm's marketing area into zones and charging a flat freight rate to
      all customers within a given zone.

      PTS: 1           REF: 277            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

121. Refer to Mrs. K's Premium Wisconsin Cheese. Mrs. K's sells some products in sets that include a
     variety of cheeses and sausage products for a special price. This is known as:
     a. price bundling
     b. two-part pricing
     c. psychological pricing
     d. price lining
     e. aggregate pricing
      ANS: A
      Marketing two or more goods in a single package for a special price is known as price bundling.

      PTS: 1           REF: 280            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Product

      American Girl Catalog

      The American Girl catalog began as a concept to introduce girls who lived in the past to today's girls.
      Each historically accurate doll is carefully crafted and dressed and has books to describe her life. For
      example, Kristen is an 1854 pioneer girl who is growing up in Minnesota. Her story begins with her
      long sea voyage from Sweden. The basic doll dressed in a calico dress and striped apron and the
      hardcover story of how she got to Minnesota cost $90. Six more hardback books of Kristen's life are
      available for $80. Kristen's nightgown costs $20, and a matching one for the doll owner is an
      additional $40. Buy both together and the price is only $50. A hand-painted wooden bed and trunk for
      Kristen are available for $220. Shipping costs vary with the price of the merchandise ordered and are
      not connected to weight or distance.
122. Refer to American Girl Catalog. In order to determine how to price the doll, American Girl most likely
     used a four-step process. The first step in this process was to:
     a. estimate demand
     b. establish pricing goals
     c. determine a base price
     d. estimate profits
     e. estimate costs
      ANS: B
      See Exhibit 18.1.

      PTS: 1           REF: 271            OBJ: 18-1
      TOP: AACSB Reflective Thinking | TB&E Model Strategy

123. Refer to American Girl Catalog. While a doll can be purchased at Wal-Mart for less than $10,
     American Girl markets its dolls at a price much higher than the prices of its competitors. It most likely
     uses a _____ strategy.
     a. price-skimming
     b. psychographic pricing
     c. penetration
     d. price baiting
     e. status quo pricing
      ANS: A           PTS: 1              REF: 273            OBJ: 18-1
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

124. Refer to American Girl Catalog. What kind of geographic pricing does American Girl use?
     a. FOB origin pricing
     b. FOB factory
     c. zone pricing
     d. freight absorption pricing
     e. uniform delivered pricing
      ANS: E           PTS: 1              REF: 277            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Distribution

125. Refer to American Girl Catalog. Look at the prices of items found in the American Girl catalog. Which
     fine-tuning pricing tactic did American Girl use?
     a. disintermediation
     b. cross-docking
     c. unbundling
     d. psychological pricing
     e. penetration pricing
      ANS: D
      This is even-numbered pricing. Odd-even pricing is also called psychological pricing.

      PTS: 1           REF: 280            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

126. Refer to American Girl Catalog. Why does American Girl use even-numbered pricing?
     a. because no one else does
     b. because it is the norm in the retail catalog industry
     c. because even-numbered pricing is used to denote quality
      d. because even-numbered pricing makes consumers feel they are paying a lower amount
      e. because it is the norm in the toy industry
      ANS: C           PTS: 1              REF: 280            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy

127. Refer to American Girl Catalog. When a customer buys the matching nightgown set for the doll and
     her owner, American Girl priced the items using:
     a. price bundling
     b. markdown pricing
     c. psychological pricing
     d. penetration pricing
     e. status quo pricing
      ANS: A
      The two items sold together are priced less expensively than if purchased separately.

      PTS: 1           REF: 280            OBJ: 18-3
      TOP: AACSB Reflective Thinking | TB&E Model Pricing | TB&E Model Strategy


ESSAY

  1. List in order the four steps used to set the right price for a product.

      ANS:
      1. Establish pricing goals.
      2. Estimate demand, costs, and profits.
      3. Choose a price strategy to help determine a base price.
      4. Fine-tune the base price with pricing tactics.

      PTS: 1          REF: 271             OBJ: 18-1
      TOP: AACSB Analytic | TB&E Model Pricing

  2. What activities occur once the marketing manager has established pricing goals? Why are these
     activities important?

      ANS:
      The marketing manager must first estimate quantity demand levels and elasticity of demand, which
      allows for an estimate of revenues at a variety of price levels. Next, corresponding costs should be
      determined for each price. Then the manager can estimate the amount of profit and market share that
      can be earned at each possible price. Alternative pricing policies can be examined in terms of
      revenues, costs, and profits. This information becomes the core of the price policy by determining
      which price can best meet the firm's pricing goals.

      PTS: 1          REF: 271             OBJ: 18-1
      TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

  3. What are the three basic strategies for setting a price on a new good or service? Briefly describe each
     strategy.

      ANS:
      PRICE SKIMMING. With this method, a high introductory price is charged that skims the top off a
      market in which there is greater demand than supply. The high introductory price attracts a smaller
      market share but recoups costs quickly.
    PENETRATION PRICING. With this method, a firm charges a relatively low price, hoping to reach
    the mass market in the early stages of the product life cycle. The low price allows the product to
    penetrate a large portion of the market, resulting in large market share and lower production costs.

    STATUS QUO PRICING. With this method, price is set identical or close to that of the competition.
    This strategy may be used more often by small firms for survival or ease of use but ignores demand
    and cost.

    PTS: 1          REF: 273-274         OBJ: 18-1
    TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

4. Under what conditions is each of the three basic pricing methods successful?

    ANS:
    PRICE SKIMMING is successful when (1) demand is greater than supply, (2) there are barriers to
    competitive entry, such as legal protection or technological breakthroughs, (3) production cannot be
    expanded rapidly, and (4) customers perceive a high value for the product.

    PENETRATION PRICING is successful when (1) the market is price-sensitive, (2) economies of mass
    production are feasible, and (3) the firm has substantial resources to sustain the short-run losses
    necessary to obtain penetration.

    STATUS QUO PRICING can be successful when (1) the firm is comparatively small, and (2) the firm
    needs a safe route to long-term survival.

    PTS: 1          REF: 273-274         OBJ: 18-1
    TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

5. List the three basic pricing methods. Name one advantage and one disadvantage associated with using
   each method.

    ANS:
    PRICE-SKIMMING advantages include (1) quick recovery of product development or educational
    costs, (2) pricing flexibility that allows subsequent lowering of price, and (3) the ability to market
    prestige products successfully. Disadvantages include encouragement of competitive entry into the
    market.

    PENETRATION PRICING advantages include (1) a tendency to discourage competitive entry, (2)
    large market share due to high volume sold, and (3) lower production costs resulting from economies
    of scale. Disadvantages include (1) lower profits per unit, (2) higher volume required to reach the
    break-even point, (3) slow recovery of development costs, and (4) inability to later raise prices.

    STATUS QUO POLICIES have the advantage of simplicity. Disadvantages include ignoring demand
    and cost.

    PTS: 1          REF: 273-274         OBJ: 18-1
    TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

6. Which pricing method (skimming, penetration, or status quo) would be most appropriate for each of
   the following products: (1) a new kind of automatic vacuum cleaner; (2) brightly colored wooden
   blocks to be used as a child's toy; (3) a new, low-cost, no-calorie fat substitute; (4) a home computer;
   and (5) a designer perfume. Briefly justify your answers.
   ANS:
   VACUUM CLEANER. Skimming could be used, because there are innovators and early adopters who
   would like to be "first" to own the product. It is likely that competition could also follow fairly
   quickly, further justifying a skimming policy.

   CHILD'S BLOCKS. Status quo pricing could be used, because this type of toy is a mature product
   with many substitutes. Penetration pricing could be argued if one assumes the producer found
   manufacturing cost advantages.

   FAT SUBSTITUTE. Penetration pricing would quickly gain a large market share and is appropriate
   for a low-cost item. Skimming could be argued if one assumes greater demand than supply for the
   product.

   HOME COMPUTER. Penetration pricing is appropriate because of the large amount of competition in
   this particular market.

   PERFUME. Skimming would be appropriate, because a lower introductory price might reduce the
   high-prestige perception of the product.

   PTS: 1          REF: 273-274         OBJ: 18-1
   TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

7. Some pricing decisions are subject to government regulation. Name and define three pricing practices
   that are illegal.

   ANS:
   UNFAIR TRADE PRACTICES occur when firms sell below costs. Many state unfair trade practice
   acts put a lower limit on wholesale and retail prices; wholesalers and retailers must take a minimum
   percentage markup.

   PRICE FIXING is an agreement between two or more firms on the price they will charge for a product
   or service. The Sherman Act and the Federal Trade Commission Act govern price fixing practices.

   PRICE DISCRIMINATION occurs when a firm sells to two or more different buyers at different
   prices, and the result reduces competition. Price discrimination can also occur if the seller
   discriminates between buyers in terms of supplementary services provided, or if the buyers use their
   power to force sellers into discriminatory practices. The Robinson-Patman Act of 1936 prohibits these
   forms of price discrimination.

   PREDATORY PRICING is the practice of charging a very low price with the intent of driving
   competitors out of business or out of the market. This practice is illegal under the Sherman Act and the
   Federal Trade Commission Act.

   PTS: 1           REF: 274-275        OBJ: 18-2
   TOP: AACSB Ethics | TB&E Model Pricing

8. A base price may be lowered through the use of a discount. Discounts take a variety of forms and have
   several different objectives. Name and define three types of discounts (do not include allowances or
   rebates). State the main objective of the each type of discount you identify.

   ANS:
   QUANTITY DISCOUNTS are offered to buyers who purchase multiple units or above a specified
   dollar amount. The objectives of the quantity discount include selling large volumes and encouraging
   customer loyalty (through cumulative quantity discounts).
     CASH DISCOUNTS are price reductions offered to buyers who pay promptly. One objective is to
     save the seller carrying charges, billing expenses, and expenses associated with extending credit.
     Another objective is to avoid bad debt.

     FUNCTIONAL (or TRADE) DISCOUNTS are compensation to wholesalers and retailers for
     performing channel functions. The objective is to compensate the channel member for services
     rendered or to encourage additional functions to be performed by the trade.

     SEASONAL DISCOUNTS are price reductions for buying merchandise out of season. The objectives
     of seasonal discounts include shifting the storage function forward to the purchaser and enabling a
     steady manufacturing schedule.

     PTS: 1          REF: 275-276         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

 9. Distinguish between a cumulative and a noncumulative discount.

     ANS:
     A cumulative quantity discount is a deduction from list price that applies to the buyer's total purchases
     made during a specific period and is intended to encourage customer loyalty.

     A noncumulative quantity discount is a deduction from list price that applies to a single order and is
     intended to encourage orders in large quantities.

     PTS: 1          REF: 276             OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing

10. What is a promotional allowance? What is the difference between a promotional allowance and a
    functional discount? Give two specific examples of promotional allowances.

     ANS:
     A promotional allowance is a payment to a dealer for promoting the manufacturer's products. A
     promotional allowance is similar to a functional discount as a pricing tool but also serves as a
     promotional device. Like functional discounts (and other forms of discount), promotional allowances
     must be made available to all purchasers on essentially the same terms. Examples of promotional
     allowances include cooperative advertising (in which the manufacturer pays for a portion of retailer-
     based advertising) or display assistance (in which the manufacturer pays for a special display or
     provides free goods for the display).

     PTS: 1          REF: 276             OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Promotion

11. Imagine you are the marketing manager for Tinpot Alley. It manufactures all types of decorative metal
    work including large plates and porch railing. You are responsible for coming up with a rebate plan.
    What is a rebate? What different types of rebates could you elect to use? Why would you prefer to use
    a rebate rather than a simple price reduction?

     ANS:
     A rebate is a cash refund given for the purchase of the product during a specific period. There are
     several options for rebates, including instant rebates, product rebates, and mail-in rebates. The
     advantage of a rebate over a simple price reduction for stimulating demand is that a rebate is a
     temporary inducement that can be taken away without altering the basic price structure. Consumers are
     often less resistant to paying the regularly marked price once the rebate is discontinued.
     PTS: 1          REF: 276             OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Promotion

12. What is value-based pricing? What is the basic assumption marketers must make about their markets
    before implementing a value-based pricing strategy?

     ANS:
     Value-based pricing is a pricing strategy that has grown out of the quality movement. Instead of
     figuring prices based on costs or competitors' prices, it starts with the customers, considers the
     competition, and then determines the appropriate price. The basic assumption is that the firm is
     customer driven, seeking to understand the attributes customers want in the goods and services they
     buy and the value of that bundle of attributes to customers.

     PTS: 1          REF: 276-277         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

13. Geographically dispersed sellers often result in significant freight costs. Define four types of
    geographic pricing tactics that can be selected by a marketing manager to moderate the impact of
    freight costs on its more dispersed customers. For each tactic defined, specify the circumstances that
    would prompt the selection of that geographic pricing tactic.

     ANS:
     FOB ORIGIN PRICING. This price tactic requires the purchaser to pay for the cost of transportation
     from the shipping point. A manager would choose to use FOB origin pricing if he or she is not
     concerned about total costs varying among the firms' clients or if freight charges are not a significant
     pricing variable.

     UNIFORM DELIVERED PRICING. With this price tactic, the seller pays the actual freight charges,
     but bills every buyer an identical, flat freight charge. This equalizes the total cost of the product for all
     buyers, regardless of location. A manager would select this policy if the firm is trying to maintain a
     nationally advertised price or when transportation charges are a minor part of total costs.

     ZONE PRICING. This price tactic is a modification of uniform delivered pricing in which the
     geographic selling area is divided into zones. A flat freight rate is charged to all customers in a given
     zone, but different rates will apply to each zone. A marketing manager would use this strategy to
     equalize total costs among purchasers within large geographic areas.

     FREIGHT ABSORPTION PRICING. With this price tactic, the seller pays all or part of the actual
     freight charges and does not pass these charges along to the customer. A manager would choose this
     tactic if competition is extremely intense or if the firm is trying to break into new market areas.

     BASING-POINT PRICING. This method requires the seller to designate a location as a basing point
     and charge all purchasers the freight cost from that point (regardless of the point from which the goods
     are actually shipped). This tactic has waned in popularity due to several adverse court rulings.

     PTS: 1          REF: 277-278         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Distribution

14. What type of geographic pricing policy would a marketing manager most appropriately choose for the
    following products: (1) nationally advertised bubble gum, (2) rebuilt engines for jet airplanes, and (3)
    bulk amounts of a rare spice harvested from a single mountain in Canada and used in high-priced
    restaurants. Justify your answers, and specify any assumptions you used to arrive at your answer.
     ANS:
     Geographic pricing policies should be compatible with the total price structure of the firm, so
     assumptions about the company's pricing objectives and other pricing policies will affect responses.
     Additionally, assumptions about competitors' practices and customs in the industry are important.

     BUBBLE GUM. In this case, identical retail prices would be sought, so the bubble gum should be
     delivered at the same price throughout the country. This would result in a pricing policy of uniform
     delivered pricing or possibly freight absorption pricing if competition is extremely intense.

     ENGINES. Because engines are large and heavy, transportation costs are an important component of
     pricing. In this case, FOB origin pricing could be used to put the burden of transportation on the
     purchasers. This pricing policy could be assumed if there were few competitors in the jet engine
     business. Otherwise, basing-point pricing would be the most appropriate pricing policy, though this
     type of pricing is being used less frequently due to adverse court rulings.

     SPICE. Zone pricing would be appropriate in this case. Because the spices are sold in bulk, it should
     be assumed that transportation costs are not insignificant. Uniform delivered pricing is not appropriate
     because there is no heavy competition. FOB origin pricing could be used as well, because other pricing
     aspects of the spice might outweigh the transportation costs.

     PTS: 1          REF: 278-279         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Distribution

15. Marketing managers can use a wide variety of special pricing tactics to fine-tune prices. Name and
    define five of the special pricing tactics that are legal. For each tactic, give an example of a specific
    company, industry, or product that would use the tactic.

     ANS:
     SINGLE-PRICE TACTIC means all goods and services are offered at the same price (or perhaps two
     or three prices). Examples of retailers include One Price Clothing Stores, Dre$$ to the Nine$, Your
     $10 Store, and Fashions $9.99.

     FLEXIBLE PRICING OR VARIABLE PRICING means different customers pay different prices for
     essentially the same merchandise purchased in equal quantities. Car dealers, many appliance retailers,
     and manufacturers of industrial installations commonly used this method.

     PROFESSIONAL SERVICES PRICING refers to the charging of an hourly rate or a fee based on
     some problem solution or performance. Lawyers, architects, are management consultants are all
     examples.

     PRICE LINING is the practice of offering a product line with several items at specific pricing points.
     This method is used by The Limited and many boutiques.

     LEADER PRICING is a method used to attract customers to a store by offering a product at or below
     cost with the hope the customer will buy other merchandise while in the store. Supermarkets are the
     most used example.

     ODD-EVEN PRICING OR PSYCHOLOGICAL PRICING uses a price ending in an odd number to
     connote a bargain and a price ending in an even number to connote quality. Discount stores use odd
     pricing, and specialty boutiques use even pricing.

     PRICE BUNDLING is marketing two or more products in a single package for a special price. The
     tourist industry does this frequently as do fast-food restaurants when their deal for drink, a sandwich,
     and an order of fries.
     TWO-PART PRICING means establishing two separate charges to consume a single good or service.
     Examples would include health and tennis clubs that charge both a membership fee and a fee each time
     the facilities are used.

     PTS: 1          REF: 278-279         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

16. Two reasons are given to explain why some companies price their products too low thereby reducing
    company profits. What are they?

     ANS:
     First, managers attempt to buy market share through aggressive pricing. Usually, these price cuts are
     quickly met by competitors. Thus, any gain in market share is short-lived, and overall industry profits
     end up falling. Second, managers have a natural tendency to make decisions that can be justified
     objectively. Managers, however, often lack the hard data needed to make an accurate assessment of the
     market and what pricing strategy should be used. Managers tend to make pricing decisions based on
     easily gathered, short-term focused information, such as costs, sales, market share, and competitors’
     prices rather than on long-term profitability.

     PTS: 1          REF: 277             OBJ: 18-3 TYPE: Comp
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

17. What are consumer penalties? What two reasons that businesses give for requiring consumers to pay
    them?

     ANS:
     Consumer penalties are extra fees paid by the consumer for violating the terms of purchase
     agreements. Businesses impose consumer penalties for two reasons. They will allegedly (1) suffer an
     irreversible revenue loss unless the penalty is charged and/or (2) incur significant additional
     transaction costs should customers be unwilling or unable to comply with the purchase agreement.

     PTS: 1          REF: 281             OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing

18. Name five of the special pricing tactics. Give one advantage and one disadvantage associated with
    using each of the tactics you have named.

     ANS:
     SINGLE-PRICE TACTIC. Advantages include (1) removal of price comparisons from the buyer's
     decision-making process, (2) a simplified pricing system, and (3) minimization of clerical errors.
     Disadvantages include (1) continually rising costs and (2) necessity for frequent revisions of the
     selling price.

     FLEXIBLE (or VARIABLE) PRICING. Advantages include (1) possibility of adjustments for meeting
     or beating another seller's price, (2) ability for the seller to close a sale with price-conscious
     consumers, and (3) ability to procure business from a potential high-volume shopper. Disadvantages
     include (1) the lack of consistent profit margins, (2) the potential ill will of high-price purchasers, (3)
     the tendency for salespeople to automatically lower the price in order to make a sale, and (4) the
     possibility of a price war among sellers.
     PROFESSIONAL SERVICES PRICING. Advantages include (1) prices justified according to the
     education and experience of the service provider, and (2) the simplicity of flat-rate pricing.
     Disadvantages include (1) difficulty in attaching dollar amounts to experience, education, or
     certifications, and (2) a temptation to charge "all that the traffic will bear" in an inelastic demand
     situation.

     PRICE LINING. Advantages include (1) reduction of confusion for salespeople and consumers, (2) a
     wider variety of merchandise offered to the buyer at each price, (3) the ability of the seller to reach
     several market segments, and (4) smaller total inventories for the seller. Disadvantages include (1)
     confusing changes in price line prices in times of rising costs and (2) difficulty in determining where to
     place the prices within a line.

     LEADER PRICING. Advantages include (1) increase in store patronage, (2) potential higher volume
     of sales per customer, and (3) inducement of store switching. Disadvantages include (1) potential of
     consumers to stock up on only the leader items and (2) lack of response because of competition with
     other stores offering similar bargains.

     BAIT PRICING. Advantages may include (1) increase in store patronage, (2) potential higher volume
     of sales per customer, and (3) inducement of store switching. The main disadvantage is that the
     practice is illegal.

     ODD-EVEN (or PSYCHOLOGICAL) PRICING. Advantages include (1) implied bargains (odd) or
     quality (even) and (2) stimulation of demand for some products. Disadvantages include (1) creation of
     a saw-toothed demand curve and (2) changes in the price elasticity of demand.

     PRICE BUNDLING. Advantages include (1) stimulation of demand for the bundled items if the
     consumers perceive the price as a good value, (2) better coverage of constant fixed costs (especially in
     service industries), and (3) assistance in selling the maximum number of options (on a car, for
     example). Disadvantages include (1) customers' resistance if one of the bundled items is not wanted
     and (2) consumers' incorrect value perceptions.

     PRICE UNBUNDLING. Advantages include keeping costs down. A possible disadvantage is that
     customers may not want to pay "extra" for items that have typically been bundled.

     TWO-PART PRICING. Advantages include (1) consumers' preference of two-part pricing when they
     are unsure of utilization, (2) high-use consumers paying a higher total price, and (3) possible increase
     in revenue for the seller by attracting low-use consumers. Disadvantages include (1) difficulty in
     establishing pricing levels from usage estimates, and (2) resistance by high-use consumers.

     PTS: 1          REF: 278-280         OBJ: 18-3
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

19. What is product line pricing? What three relationships among products in the line must managers be
    aware of before setting prices? For each relationship, give an example of a product that fits the
    situation.

     ANS:
     Product line pricing is setting prices for the entire line of products rather than for a single component
     of the line. In product line pricing, the marketing manager attempts to achieve maximum profits or
     other goals for the entire line. Before determining price, the manager must determine the type of
     relationship that exists among the various products in the line. Three types of relationships exist:
     complementary, substitute, and neutral.
     COMPLEMENTARY PRODUCTS. In this case, an increase in sales for one item in the line will
     increase demand for a complementary product in the line. Examples of complementary products
     include shampoo and conditioner or skis and ski poles.

     PRODUCT SUBSTITUTES. Items in a line may also act as substitutes for one another. If a buyer
     purchases one item in the line, he or she will be less likely to purchase a second, substitutable item in
     the line. Examples of substitutable items would be liquid and powder Tide laundry detergent or paste
     and liquid Turtle Wax car polish.

     NEUTRAL RELATIONSHIP. In this case, the demand for one product is not related to the demand
     for any other product. Examples include Ralston Purina's sale of chicken feed and Wheat Chex or
     Gillette's sale of disposable razors and disposable writing pens.

     PTS: 1          REF: 281             OBJ: 18-4
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

20. Nellie Tompkins is the owner and operator of Hot Mamma Salsa, which she sells at craft festivals. She
    only makes and sells three types of salsa--peach, pear, and pineapple salsa. The joint costs of leasing
    her professional kitchen for manufacturing, travel to craft shows, insurance, and so on are allocated on
    an equal basis to the three types of salsas sold. Last year's sales figures and allocated joint costs follow.
    Should Hot Mamma Salsa stop selling its pear salsa? Why or why not?

                                           Pear Salsa         Peach Salsa      Pineapple Salsa
     Sales                                   $4,000               $8,000               $9,000
     Less: Cost of goods sold                  5,000               5,000                5,000
     Gross margin                           ($1,000)              $3,000               $4,000

     ANS:
     Hot Mamma Salsa should continue to produce and sell all three types of salsas. An investigation of
     overall figures shows that a $6,000 profit was earned on the three items in the line:

                                         Pear Salsa         Peach Salsa        Pineapple Salsa        Total
     Sales                                 $4,000               $8,000                 $9,000       $21,000
     Less: Cost of goods sold                5,000               5,000                  5,000        15,000
     Gross margin                         ($1,000)              $3,000                 $4,000       $ 6,000

     The pear salsa should not be dropped just because it is currently showing a loss; the joint costs would
     have to be allocated to the remaining two lines:

                                         Peach Salsa      Pineapple Salsa               Total
     Sales                                   $8,000               $9,000              $17,000
     Less: Cost of goods sold                 7,500                7,500               15,000
     Gross margin                            $ 500                $1,500              $ 2,000

     Equal allocation of joint costs may not be the right way to distribute the costs. Other allocation bases
     that may be used include weighting, market value, or quantity sold. Other allocation methods would
     change the figures for each type of salsa, but not overall figures.

     PTS: 1          REF: 281-282         OBJ: 18-4
     TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

21. When the economy is characterized by high inflation, special pricing tactics are often necessary. One
    popular cost-oriented tactic is culling low-profit margin products from the product line. Why might
    this tactic backfire? What two other cost-oriented tactics can be used to guard against inflation?
    Describe these tactics.
    ANS:
    Culling low-profit margin products from a product line may backfire because of (1) the high volume
    and thus high profitability of a low-profit margin item; (2) a loss of economies of scale as certain
    products are eliminated, which lowers the margins on other items; or (3) a lowering of the price/quality
    image of the entire line. Instead of culling these products, two other cost-oriented tactics may be used:
    delayed-quotation pricing and escalator pricing.

    DELAYED-QUOTATION PRICING. With this tactic, price is not set on the product until the item is
    either finished or delivered. This is a popular tactic for builders of nuclear power plants, ships, and
    airports.

    ESCALATOR PRICING. With this tactic, the final selling price will reflect cost increases incurred
    between the time when the order is placed and delivery is made. This tactic is used for complex
    products of long duration, with new customers, or with inelastic demand products.

    PTS: 1          REF: 282             OBJ: 18-5
    TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Product

22. How do value-based pricing, unbundling, and bundling help marketers hold onto market share during a
    recession?

    ANS:
    Value-based pricing stresses to customers that they are getting a good value for their money. Products
    that typically use prestige pricing can introduce products at a lower price, thereby earning lower profit
    margins, which are typically offset by increased sales volume.

    Unbundling allows a marketer to start charging separately for some products that were sold together
    prior to the economic recession. By selling items separately, the markets have a lower base price,
    which often appeals to consumers.

    Bundling can stimulate demand. When features are added to a product, consumers may perceive the
    offering as having greater value, which appeals to some consumers.

    PTS: 1          REF: 283             OBJ: 18-5
    TOP: AACSB Analytic | TB&E Model Pricing | TB&E Model Strategy

				
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