126) Pricing and price competition account for the number-one problem facing many marketing executives. What are some of the frequent problems that companies encounter?
Answer: The pricing environment changes at a fast pace, and value-seeking customers have put increased pricing pressure on many companies. However, companies are often too quick to reduce prices in order to get a sale rather than convincing buyers that their products are worth a higher price. A company's pricing, in addition, is often too cost-oriented rather than customer-value oriented. Companies have prices that are not revised often enough to reflect market changes. Another common problem is pricing that does not take the rest of the marketing mix into account.
Diff: 2 Page Ref: 290
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-1
127) Discuss the importance of consumer perceptions of value and costs to setting prices.
Answer: Customer perceptions of value set the upper limit for prices, and costs set the lower limit. However, in setting prices within these limits the company must then consider other internal and external factors. Internal factors affecting pricing include the company's overall marketing strategy, objectives, and marketing mix, as well as other organizational considerations. External factors include the nature of the market and demand, competitors' strategies and prices, and other environmental factors.
Diff: 2 Page Ref: 291
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
128) Explain how break-even analysis can be used for target return pricing.
Answer: The firm determines the price at which it will break even. The firm can also add the target profit to the fixed costs and then determine the new, "break-even point," which now includes the target return. Pricing decisions can be made by examining where the total revenue and total cost curves intersect on a break-even chart at different price points and sales volume.
Diff: 2 Page Ref: 298
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
129) Identify and describe the internal factors affecting a firm's pricing decisions.
Answer: The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions. Costs set the floor for the company's price, which must cover all the costs of making and selling the product, plus a fair rate of return. In order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.
Diff: 2 Page Ref: 300
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-3
130) Compare pure competition with oligopolistic competition.
Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Under oligopolistic competition, the market consists of few sellers who are highly sensitive to each other's pricing and marketing strategies. The product can be uniform or nonuniform. There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors' strategies and moves.
Diff: 3 Page Ref: 301-302
AACSB: Reflective Thinking Skills
Skill: Critical Thinking
Objective: 10-3
131) Compare oligopolistic competition with a pure monopoly.
Answer: Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other's pricing and marketing strategies. There are few sellers because it is difficult for new sellers to enter the market. Under a pure monopoly, the market consists of one seller. Pricing is handled differently in each case. The seller may be a government monopoly, a private nonregulated monopoly, or a private regulated monopoly.
Diff: 3 Page Ref: 302
AACSB: Reflective Thinking Skills
Skill: Critical Thinking
Objective: 10-3
132) Describe what a demand curve is and explain how it helps businesses.
Answer: It estimates consumer demand at different prices. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices.
Diff: 2 Page Ref: 303
AACSB: Analytic Skills
Skill: Application
Objective: 10-3
133) What does price elasticity reveal about a product?
Answer: Price elasticity is a measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic.
Diff: 2 Page Ref: 303
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-3
134) The company must consider the impact its prices will have on resellers. Identify three ways the company can help resellers.
Answer: First, the company should set prices that give resellers a fair profit. The company should also encourage their support. Finally, the company should help resellers to sell the product effectively.
Diff: 2 Page Ref: 304
AACSB: Analytic Skills
Skill: Application
Objective: 10-3
135) When setting prices, the company must consider its external environment. Describe four parts of the external environment and how they affect businesses.
Answer: Economic conditions affect both the costs of producing a product and consumer perceptions of the product's price and value. The company should encourage and support resellers and help them to sell the product effectively. The governmentin the form of local, state, and federal lawsis another important influence on pricing decisions. Social concerns impact pricing, especially when a company's short-term sales, market share, and profit goals may have to be tempered by broader societal considerations.
Diff: 2 Page Ref: 303-304
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-3
136) How important is price among the elements of the marketing mix?
Answer: In recent decades, nonprice factors have gained increasing importance. However, price still remains one of the most important elements determining a firm's market share and profitability.
Diff: 2 Page Ref: 290
AACSB: Reflective Thinking Skills
Skill: Critical Thinking
Objective: 10-1
137) Why is price considered to be one of the most flexible elements of the marketing mix?
Answer: Price can be changed quickly.
Diff: 2 Page Ref: 290
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-1
138) Explain the concept of a price floor.
Answer: A price floor is the lowest price charged at which the company still earns some profits.
Diff: 2 Page Ref: 291
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
139) Explain the concept of a price ceiling.
Answer: A price ceiling is the highest price charged at which there is still some consumer demand.
Diff: 2 Page Ref: 291
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
140) What must a company using value-based pricing find out about its customers?
Answer: The company must determine the specific value that individual buyers assign to different competitive offers.
Diff: 3 Page Ref: 292
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
141) Explain the strategy of good-value pricing.
Answer: With good-value pricing, a marketer offers just the right combination of quality and good service at a fair price.
Diff: 2 Page Ref: 292
AACSB: Analytic Skills
Skill: Application
Objective: 10-2
142) Explain the strategy of high-low pricing.
Answer: Using high-low pricing, a company sets higher prices on an everyday basis, but then runs frequent promotions to temporarily lower prices on selected items.
Diff: 2 Page Ref: 293
AACSB: Analytic Skills
Skill: Application
Objective: 10-2
143) What costs make up a product's total cost?
Answer: Fixed costs and variable costs make up total cost.
Diff: 2 Page Ref: 296
AACSB: Analytic Skills
Skill: Application
Objective: 10-2
144) Explain the significance of a downward-sloping experience curve.
Answer: Not only will the company's unit production cost fall, but it will fall faster if the company makes and sells more during a given time period.
Diff: 3 Page Ref: 297
AACSB: Reflective Thinking Skills
Skill: Critical Thinking
Objective: 10-2
145) A marketer's fixed costs are $400,000, the variable cost is $16, and the company expects the product to sell for $24. What is the company's break-even point in units?
Answer: The break-even point in units is 50,000 units.
Diff: 3 Page Ref: 298
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
146) A marketer's fixed costs are $400,000, the variable cost is $16, and the company expects the product to sell for $24. What is the company's break-even point in dollar sales?
Answer: The break-even point in dollar sales is $1,200,000.
Diff: 3 Page Ref: 298
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
147) A marketer's fixed costs are $400,000, the variable cost is $16, and the company expects the product to sell for $24. If the marketer has sales of $1,440,000, what is its profit on this product?
Answer: The profit is $80,000.
Diff: 3 Page Ref: 298
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-2
148) Who typically sets prices in small companies? In large companies?
Answer: Top management sets prices in small companies, whereas divisional or product line managers typically set prices in large companies.
Diff: 2 Page Ref: 301
AACSB: Analytic Skills
Skill: Application
Objective: 10-3
149) Explain a pure monopoly.
Answer: The market consists of one seller that dominates the market.
Diff: 2 Page Ref: 302
AACSB: Reflective Thinking Skills
Skill: Application
Objective: 10-3
150) If demand is elastic, will sellers consider lowering their prices? Explain.
Answer: Yes. A lower price will produce more needed revenue, as consumers will respond to the change in price and buy more.
Diff: 2 Page Ref: 303
AACSB: Reflective Thinking Skills
Skill: Critical Thinking
Objective: 10-3
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