Chapter 8 Pricing
1) Which of the following pricing objectives does an organization adopt when it sets the price
of its products with the view to maintain positive cash flow during traumatic business
situations?
A) profit maximization pricing objective
B) market skimming pricing objective
C) market share maximization pricing objective
D) survival pricing objective
Answer: D
Rationale:
The survival pricing objective is chosen when a company is facing challenging circumstances
and needs to ensure its immediate survival. This objective involves setting prices at a level
that covers variable costs and contributes towards fixed costs, enabling the company to stay
afloat during difficult times. It focuses on maintaining positive cash flow rather than
maximizing profits, as the primary goal is to endure the crisis and sustain operations until
conditions improve.
2) Which of the following pricing objectives does an organization adopt when it sets the price
of its products with the view to make as great a financial gain from product sales as possible,
often using demand curves?
A) profit maximization pricing objective
B) survival pricing objective
C) market share maximization pricing objective
D) product-quality leadership pricing objective
Answer: A
Rationale:
The profit maximization pricing objective is pursued when a company aims to generate the
highest possible financial gain from its product sales. This objective involves analyzing
demand curves and determining the price that will yield the greatest profit margin. It
considers factors such as production costs, market demand, and competitor pricing to
optimize revenue and profitability. Unlike survival pricing, which focuses on immediate cash
flow, profit maximization seeks to achieve long-term financial success by maximizing the
surplus between revenue and costs.
3) Which of the following pricing objectives does an organization adopt when it sets the price
of its products generally low with the view to control as great a portion of the market as
possible?
A) profit maximization pricing objective
B) market share maximization pricing objective
C) market skimming pricing objective
D) product-quality leadership pricing objective
Answer: B
Rationale:
Market share maximization pricing objective involves setting prices low to capture a
significant portion of the market. By keeping prices low, the organization aims to attract more
customers, increase market share, and potentially deter competitors. This strategy prioritizes
gaining a larger market share over immediate profit maximization.
4) Which of the following pricing objectives does an organization adopt when it sets the price
of its products high shortly after product launch in order to recoup development costs?
A) survival pricing objective
B) product-quality leadership pricing objective
C) market skimming pricing objective
D) market share maximization pricing objective
Answer: C
Rationale:
Market skimming pricing objective involves setting high prices initially to target early
adopters or customers willing to pay a premium for the product. This strategy is often
employed to recoup development costs quickly, especially for innovative or technologically
advanced products. As demand stabilizes, the organization may gradually lower prices to
attract more price-sensitive customers.
5) Which of the following pricing objectives does an organization adopt when it sets the price
of its products high in order to indicate product superiority?
A) market share maximization pricing objective
B) market skimming pricing objective
C) profit maximization pricing objective
D) product-quality leadership pricing objective
Answer: D
Rationale:
Product-quality leadership pricing objective involves setting higher prices to convey the
message of superior quality or value compared to competitors. This strategy is commonly
used for products positioned as premium or luxury items, where customers are willing to pay
more for perceived excellence. The higher price is often justified by superior features,
craftsmanship, or brand reputation, allowing the organization to establish itself as a leader in
product quality.
6) Haddock Partiers was once the premier supplier of party-equipment for a range of
occasions in the Dallas area. However, post-recession Haddock has seen a slump in sales and
is planning to slash the profit margins on most of its products to the bare minimum so that it
can tide over the difficult market situation. Which of the following pricing objectives would
best serve Haddock Partiers?
A) profit maximization pricing objective
B) market share maximization pricing objective
C) survival pricing objective
D) product-quality leadership maximization objective
Answer: C
Rationale:
Haddock Partiers is facing a difficult market situation post-recession, and their primary
concern is to survive the challenging economic conditions. By adopting a survival pricing
objective, the company aims to set prices at a level that allows it to cover its costs and remain
operational, albeit with minimal profit margins. This strategy prioritizes short-term survival
over maximizing profits or market share, which is crucial for Haddock Partiers to weather the
current downturn and potentially regain stability in the future.
7) DealIt! is an online retailer of electronic goods. After HP announced that it was spinning
off its hardware division and consequently selling its tablet devices at throwaway prices, a
huge demand for these devices arose. DealIt! was one of the few retailers to still hold stock of
the tablet devices. DealIt! decided to sell the HP tablet devices at prices 25% more than those
offered by the official HP online store. Customers lapped up the goods as they still presented
a bargain for them. Which of the following pricing objectives did DealIt! pursue in the above
case?
A) survival pricing objective
B) profit maximization pricing objective
C) market share maximization pricing objective
D) market skimming pricing objective
Answer: B
Rationale:
DealIt! chose to sell the HP tablet devices at prices higher than those offered by the official
HP online store, indicating their pursuit of maximizing profits. Despite the higher price,
customers still found the tablets to be a bargain, leading to increased sales and higher profit
margins for DealIt! This strategy prioritizes maximizing profits over other objectives such as
market share or survival.
8) Dinpro has been a major player in the surgical supplies market for over two decades.
However, it has steadily lost ground to United Surgicals over the past two years, with over
half the customers preferring to do business with it. Identifying this downward trend, Dinpro
has decided that it can wrest back the market leader position through a shrewd pricing
strategy. Which of the following pricing strategies would best help Dinpro regain the market
leader status?
A) setting product prices higher than those of United Surgicals to indicate better product
quality
B) introducing innovative products and setting their prices high shortly after launch to recoup
development costs
C) withdrawing company products from circulation to create an artificial demand and selling
products at higher prices
D) selling products at prices lower than those of the competition to maximize market share
Answer: D
Rationale:
Dinpro aims to regain market leader status by undercutting its competition, United Surgicals,
in terms of pricing. By offering products at lower prices, Dinpro seeks to attract more
customers and increase its market share. This strategy prioritizes maximizing market share
over short-term profits, which is crucial for Dinpro to regain its competitive position in the
market.
9) Monchen Labs is a company that prides itself on innovating cutting-edge technologies in
the radio-diagnostics equipment industry. The firm, as a policy, prices its newly-launched
products nearly 50-60% higher than what it would sell the same products for nearly a year
after their launch. The firm justifies the high pricing as a means to recoup the rather
prohibitive R&D costs involved in the development process. Which of the following pricing
objectives does Monchen Labs follow in this case?
A) market skimming pricing objective
B) market share maximization pricing objective
C) product-quality leadership pricing objective
D) survival pricing objective
Answer: A
Rationale:
Monchen Labs follows a market skimming pricing objective by initially setting high prices
for its newly-launched products. This strategy allows the company to target customers willing
to pay a premium for cutting-edge technology and recoup the high R&D costs. Over time, as
demand stabilizes and competition increases, Monchen Labs gradually reduces prices to
capture broader market segments.
10) Steeple Kitchens manufactures and markets an exclusive range of kitchen appliances,
such as electric chimneys, ovens, and stoves. The firm's advertising efforts have long focused
on showing its products as the very best in quality and performance. However, the kitchen
appliance market, shaped by cost competition, has not shown any signs of identifying a clear
market leader. Which of the following would best help Steeple to project itself as a leader in
product-quality?
A) giving away free complementary goods upon purchase to its customers
B) recasting itself as a seller of low-cost, easily replaceable, and simple-to-operate products
C) setting higher prices than competitors to indicate greater quality
D) offering no warranty on new products to signal high confidence in the quality of their
products
Answer: C
Rationale:
Setting higher prices than competitors can signal greater quality and exclusivity in the minds
of consumers. Steeple Kitchens can leverage this strategy to position itself as a leader in
product-quality, aligning with its advertising efforts that emphasize superior quality and
performance. While this approach may not directly maximize market share, it can attract
discerning customers who prioritize quality over price.
11) Which of the following represents a fixed cost in the production of a product or service?
A) material
B) rent
C) labor
D) advertising
Answer: B
Rationale:
Fixed costs are expenses that do not vary with the level of production or sales. Rent is a
classic example of a fixed cost because it remains constant regardless of how much product is
produced or sold. Whether a company produces a lot or a little, the rent payment stays the
same. Therefore, rent represents a fixed cost in the production of a product or service.
12) Which of the following represents a variable cost in the production of a product or
service?
A) labor
B) rent
C) utilities
D) equipment
Answer: A
Rationale:
Variable costs are expenses that change in proportion to the level of production or sales.
Labor is a prime example of a variable cost because as production increases, more workers
may be needed, leading to higher labor expenses. Conversely, if production decreases, fewer
workers may be required, resulting in lower labor costs. Therefore, labor represents a variable
cost in the production of a product or service.
13) Costs associated with the materials and labor required to make each unit of a product are
called ________.
A) fixed costs
B) switching costs
C) variable costs
D) sunk costs
Answer: C
Rationale:
Variable costs are expenses that vary with the level of production or sales. In the context of
manufacturing a product, costs related to materials and labor required to make each unit are
considered variable costs. As production increases, the expenditure on materials and labor
also increases proportionally. Conversely, if production decreases, these costs decrease
accordingly. Therefore, variable costs accurately describe the expenses associated with the
materials and labor required to produce each unit of a product.
14) Which of the following factors reduces unit costs over the product life cycle?
A) smaller orders of materials
B) greater turnover of personnel
C) increased promotion and training efforts
D) increased use of specialized equipment
Answer: D
Rationale:
Increased use of specialized equipment can reduce unit costs over the product life cycle.
Specialized equipment often enhances efficiency and productivity in manufacturing
processes, leading to economies of scale and lower per-unit production costs. As the
production volume increases and the equipment becomes more optimized, the fixed costs
associated with the equipment are spread over a greater number of units, reducing the overall
unit costs. Therefore, increased use of specialized equipment is the factor that most likely
reduces unit costs over the product life cycle.
15) Which of the following factors contributes to higher unit costs during the introduction
stage of the product life cycle?
A) service costs
B) training
C) specialized equipment
D) multiple product variants
Answer: B
Rationale:
During the introduction stage of the product life cycle, higher unit costs can be attributed to
factors such as the need for extensive training. Introducing a new product often requires
significant training for personnel involved in manufacturing, marketing, and customer
support. This training could involve familiarizing employees with new processes,
technologies, or customer service protocols associated with the new product. The initial
training costs incurred during this stage contribute to higher unit costs. Therefore, training is
the factor that most likely contributes to higher unit costs during the introduction stage of the
product life cycle.
16) Which of the following pricing objectives is best suited for use during the introductory
stage of the life cycle of first-generation high-end technology products?
A) market skimming pricing objective
B) survival pricing objective
C) product-quality leadership pricing objective
D) market share maximization pricing objective
Answer: A
Rationale:
The market skimming pricing objective is best suited for the introduction stage of the life
cycle of first-generation high-end technology products. This strategy involves setting a high
initial price to "skim" revenue layers from the market. High-end technology products often
target early adopters who are willing to pay a premium for the latest innovations and features.
By initially setting a high price, the company can capitalize on the willingness of these
consumers to pay more, maximizing revenue and recouping development costs quickly. As
the product matures and competitors enter the market, the price can gradually decrease to
attract broader segments of consumers. Therefore, the market skimming pricing objective
aligns well with the characteristics of first-generation high-end technology products.
17) Which of the following products/services would be best served by the adoption of a
market skimming pricing objective during the introduction stage of its life cycle?
A) a low-calorie variant of a popular cool drink
B) a new direct-to-home satellite television service
C) a first-generation video game console
D) a brand of prepaid, discardable cell phones
Answer: C
Rationale:
A first-generation video game console would be best served by the adoption of a market
skimming pricing objective during the introduction stage of its life cycle. High-end
technology products, such as video game consoles, often generate significant interest and
demand from early adopters who are willing to pay a premium for the latest features and
innovations. By initially setting a high price, the company can maximize revenue from these
early adopters before gradually lowering the price to attract broader segments of consumers
as the product matures and competition increases. Therefore, the market skimming pricing
objective is well-suited for a first-generation video game console.
18) Which of the following pricing objectives is best suited for use during the introductory
stage of the life cycle of lower-end products going to mass markets?
A) product-quality leadership pricing objective
B) market share maximization pricing objective
C) profit maximization pricing objective
D) market skimming pricing objective
Answer: B
Rationale:
The market share maximization pricing objective is best suited for use during the
introductory stage of the life cycle of lower-end products going to mass markets. Lower-end
products targeting mass markets often prioritize capturing a significant share of the market
quickly to establish a strong presence and competitive advantage. Setting a competitive price
that encourages widespread adoption and attracts a large customer base helps maximize
market share during the introductory stage. While profit maximization and product-quality
leadership objectives may be important in later stages of the product life cycle, during the
introduction stage, the primary focus is on gaining market share to position the product
favorably in the market. Therefore, the market share maximization pricing objective aligns
well with the goals of introducing lower-end products to mass markets.
19) Which of the following products/services would be best served by the adoption of a
market share maximization pricing objective during the introduction stage of its life cycle?
A) a brand of first-generation LED television sets
B) a new brand of cheese
C) a new range of video game consoles
D) leather jackets sporting new designs
Answer: B
Rationale:
A new brand of cheese would be best served by the adoption of a market share maximization
pricing objective during the introduction stage of its life cycle. When introducing a new
product like cheese to the market, particularly one without significant technological
advancements or unique features, the primary objective is often to gain widespread
acceptance and capture a significant share of the market. Setting competitive prices that
encourage trial and adoption by consumers can help maximize market share. Unlike products
with higher technological complexity or unique features like LED television sets or video
game consoles, where other pricing strategies might be more appropriate, a new brand of
cheese can benefit from a market share maximization pricing objective to establish itself in
the market quickly.
20) Which of the following approaches to distribution channels should manufacturers adopt
during the introductory stage of a product's life cycle?
A) Manufacturers should avoid using external distribution channels.
B) Manufacturers should offer trade discounts to distribution channel members.
C) Manufacturers should limit the number of channel partners.
D) Manufacturers should use online distribution channels more than traditional channels.
Answer: B
Rationale:
During the introductory stage of a product's life cycle, manufacturers should offer trade
discounts to distribution channel members. This strategy helps incentivize intermediaries
such as wholesalers and retailers to carry the new product and promote its distribution.
Offering trade discounts encourages channel members to take on the risk associated with
introducing a new product by providing them with higher profit margins or other financial
incentives. By offering these discounts, manufacturers can build strong relationships with
distribution channel partners, enhance product visibility, and accelerate market penetration
during the critical introductory phase. Therefore, offering trade discounts to distribution
channel members is a beneficial approach for manufacturers during the introductory stage of
a product's life cycle.
21) Which of the following pricing objectives is suitable during the growth stage in the life
cycle of near-commodity goods?
A) market share maximization pricing objective
B) product-quality leadership pricing objective
C) market skimming pricing objective
D) profit maximization pricing objective
Answer: A
Rationale:
During the growth stage of the product life cycle, near-commodity goods are typically
characterized by increasing demand and competition. In this stage, it is essential to capture
and expand market share rapidly. Adopting a market share maximization pricing objective
allows companies to set competitive prices to attract a larger customer base and gain a
significant share of the growing market. By focusing on maximizing market share during the
growth stage, companies can establish a strong position in the market and potentially deter
competitors from gaining significant traction. Therefore, the market share maximization
pricing objective is suitable for near-commodity goods during the growth stage.
22) Which of the following is true of the growth stage of a product's life cycle?
A) During the growth stage, revenue decreases rapidly as customers adopt the new product or
service.
B) During the growth stage, the competitor impact shifts from focusing on direct competitors
to indirect ones.
C) High material costs and labor costs, coupled with low production volumes, drive up the
costs of manufacturing in the growth stage.
D) During the early part of the growth stage, pricing objectives should focus on profit
maximization.
Answer: D
Rationale:
During the growth stage of a product's life cycle, demand for the product increases rapidly as
more customers adopt it. This increased demand often allows companies to achieve
economies of scale in production, which can lead to lower per-unit production costs.
Additionally, as the product gains popularity and market acceptance, competitors may enter
the market, intensifying competition. However, during the early part of the growth stage,
companies often focus on maximizing profits from the increasing demand. This may involve
setting prices to capitalize on the growing market while still maintaining profitability.
Therefore, during the growth stage, pricing objectives should focus on profit maximization,
especially in the early stages of rapid growth.
23) Which of the following product life cycle stages involves the highest manufacturing
costs?
A) introductory stage
B) growth stage
C) maturity stage
D) decline stage
Answer: A
Rationale:
The introductory stage of the product life cycle typically involves the highest manufacturing
costs. During this stage, significant investment is required in research, development, and
initial production setup. Manufacturing costs tend to be high due to factors such as low
production volumes, limited economies of scale, and the need for specialized production
processes. Additionally, costs associated with marketing, distribution, and promotion to create
awareness and generate demand further contribute to the overall high manufacturing costs in
the introductory stage.
24) Which of the following strategies should manufacturers follow during the maturity stage
of a product's life cycle?
A) In order to maintain efficient distribution and encourage channel participation, firms
should offer uniform trade discounts across all distribution channels.
B) The pricing objectives during the maturity stage of a product life cycle should be market
skimming.
C) During the maturity stage, the distribution strategy should move from being intensive
(many channels) to selective (only a few channels).
D) Firms should differentiate their offerings from those of competitors and avoid "price wars"
with competitors.
Answer: D
Rationale:
During the maturity stage of a product's life cycle, competition tends to intensify as the
market becomes saturated with similar offerings. In response to this competitive pressure,
manufacturers should focus on differentiating their products from those of competitors to
maintain or increase market share. By offering unique features, superior quality, enhanced
customer service, or innovative marketing approaches, firms can stand out in the marketplace
and retain customer loyalty. Engaging in "price wars" with competitors can erode profitability
and undermine the perceived value of the product. Therefore, manufacturers should avoid
price-based competition and instead focus on differentiation strategies to succeed during the
maturity stage of the product life cycle.
25) Which of the following product life cycle stages is most susceptible to changes in the
market environment, such as new legislation?
A) introduction stage
B) growth stage
C) maturity stage
D) decline stage
Answer: C
Rationale:
The maturity stage of the product life cycle is most susceptible to changes in the market
environment, such as new legislation. During this stage, the market is relatively stable, with
established competitors and a well-defined customer base. Any changes in the market
environment, such as the introduction of new regulations or shifts in consumer preferences,
can significantly impact the competitive landscape and demand for the product. Additionally,
in mature markets, companies often operate with narrower profit margins, making them more
sensitive to changes that may affect costs or revenue. Therefore, the maturity stage is the
most susceptible to external factors like new legislation that can influence market dynamics.
26) Which of the following is a feature of the decline stage in a product or service's life
cycle?
A) use of survival pricing strategies if sales decline
B) increase in number of distribution channels
C) lower costs per unit as compared to maturity stage
D) high susceptibility to changes in market environment
Answer: A
Rationale:
A feature of the decline stage in a product or service's life cycle is the use of survival pricing
strategies if sales decline. During the decline stage, demand for the product or service
decreases as it becomes obsolete or faces competition from newer alternatives. In response to
declining sales, companies often employ survival pricing strategies, which involve reducing
prices to maintain sales volume and prolong the product's life cycle. This may include
offering discounts, promotions, or other pricing incentives to attract remaining customers or
liquidate inventory. Survival pricing strategies aim to generate enough revenue to cover
variable costs and potentially recoup some fixed costs before discontinuing the product or
service. Therefore, the use of survival pricing strategies is a characteristic feature of the
decline stage in a product or service's life cycle.
27) Which of the following product life cycle stages is least affected by negative
environmental impacts, such as new legislation and introduction of substitute products?
A) introduction stage
B) growth stage
C) maturity stage
D) decline stage
Answer: D
Rationale:
The decline stage of the product life cycle is least affected by negative environmental
impacts, such as new legislation and the introduction of substitute products. During the
decline stage, the product is already experiencing reduced demand and sales as it becomes
obsolete or faces competition from newer alternatives. Therefore, negative environmental
impacts or the introduction of substitute products have less influence on the product's
trajectory during this stage compared to earlier stages. In the decline stage, the focus is often
on managing the product's decline and possibly discontinuing it, rather than responding to
external market factors.
28) Triad Systems is a maker of computer peripherals. The firm's compact disc (CD) drive
brand was once highly sought after for its durability and low costs. However, with the
introduction of flash drives and other faster memory storage technologies, the CD drive
market has declined, and almost all of Triad's competitors in the market have discontinued
production of CD drives. Triad Systems is possibly the lone seller of CD drives today.
However, considering the fact that most of the support software for technological products
such as mobile phones and operating systems are distributed in CD form, there are still users
who buy CD drives. Which of the following strategies would prove most advantageous to
Triad Systems?
A) Triad should discontinue distribution through low value-added channels such as mail order
and telephone sales.
B) Triad should raise prices of the CD drives as there is no acceptable substitute to its product
in the market.
C) Triad should adopt an intensive distribution strategy involving multiple channels to boost
sales of the declining product.
D) Triad should develop product variants, such as CD drives with USB slots, to extend the
life cycle of the product.
Answer: B
Rationale:
Triad Systems should raise prices of the CD drives as there is no acceptable substitute to its
product in the market. Despite the decline in the overall market for CD drives due to the
introduction of newer technologies, there are still users who rely on CDs for software
distribution. As Triad Systems is possibly the lone seller of CD drives today, it can leverage
its position by raising prices. Since there are still customers who need CD drives for specific
purposes, they may be willing to pay a premium for a product that meets their requirements.
By raising prices, Triad Systems can capitalize on this remaining demand and potentially
improve profitability despite the overall decline in the market.
29) Which of the following distribution channels is best suited for products in the decline
stage of their life cycle?
A) personal selling
B) sales promotion
C) mail order
D) trade shows
Answer: C
Rationale:
Mail order distribution is best suited for products in the decline stage of their life cycle.
During the decline stage, demand for the product decreases, and maintaining traditional
distribution channels may become less viable due to declining sales volumes. However, mail
order distribution allows companies to reach niche or geographically dispersed markets
efficiently without the need for extensive physical retail presence. It also provides flexibility
in managing inventory levels and reducing overhead costs associated with maintaining brickand-mortar stores. By utilizing mail order distribution, companies can continue to serve
remaining customers who still have demand for the product while minimizing distribution
costs during the decline stage.
30) Which of the following is true of the competitor impact in the decline stage of the product
life cycle?
A) Few competitors are attracted to declining markets.
B) Indirect competition places ceiling on the prices of products.
C) Direct competition begins in earnest making distinct value proposition critical.
D) Possible price reductions will be required to react to competitor actions.
Answer: A
Rationale:
True of the competitor impact in the decline stage of the product life cycle is that few
competitors are attracted to declining markets. During the decline stage, as demand for the
product diminishes and sales decline, fewer competitors are attracted to the market.
Companies may discontinue or exit the market altogether as it becomes less profitable or
economically viable. With fewer competitors, the intensity of competition decreases,
allowing remaining firms to focus on serving the remaining customer base and managing the
decline of the product rather than engaging in aggressive competitive tactics. Therefore,
during the decline stage, the impact of competitors is generally reduced compared to other
stages of the product life cycle.
31) In which of the following situations is the adoption of a survival pricing objective most
appropriate?
A) A wholesaler has a large stock of processed foods left unsold after a hurricane alert turned
out to be misplaced.
B) An electronics maker is introducing a top-of-the-line LCD television range that
incorporates the latest in 3D technology.
C) An automobile firm that specializes in mid-range sedans wishes to project itself as a maker
of inexpensive, yet luxurious cars that can match more expensive supercars.
D) A furniture maker is setting up a new store in an up-and-coming neighborhood in the
affluent part of the town.
Answer: A
Rationale:
The adoption of a survival pricing objective is most appropriate in situations where a business
faces urgent challenges or unexpected circumstances threatening its viability. In the scenario
described in option A, the wholesaler has a large stock of processed foods left unsold after a
hurricane alert turned out to be misplaced. This situation represents a pressing need to sell off
excess inventory to avoid financial losses or operational disruptions. By adopting a survival
pricing objective, the wholesaler aims to quickly liquidate the unsold stock by setting prices
at levels that encourage rapid sales, even if it means accepting lower profit margins. This
approach helps the business address immediate challenges and mitigate the negative impact
of the unexpected event.
32) The market share maximization pricing objective for a product is appropriate when
________.
A) the product incorporates innovative technology
B) demand is relatively elastic
C) customers are not very sensitive to price
D) there is low competition in the market
Answer: B
Rationale:
The market share maximization pricing objective for a product is appropriate when demand is
relatively elastic. Elastic demand means that changes in price have a significant impact on the
quantity demanded by consumers. In such cases, setting competitive prices to capture a larger
market share can lead to increased sales volume and revenue. When demand is elastic,
consumers are more responsive to changes in price, so offering competitive pricing can
attract customers away from competitors and help the firm gain a larger share of the market.
Therefore, the market share maximization pricing objective is particularly suitable when
demand is relatively elastic, allowing the firm to capitalize on its pricing strategy to increase
market share.
33) Which of the following pricing approaches is suitable for implementation of a survival
pricing objective?
A) perceived-value pricing approach
B) demand-based pricing approach
C) penetration pricing approach
D) markup pricing approach
Answer: D
Rationale:
The markup pricing approach is suitable for implementation of a survival pricing objective.
In a survival pricing scenario, the primary goal is to generate sufficient revenue to cover costs
and ensure the survival of the business, rather than maximizing profits. The markup pricing
approach involves adding a predetermined markup percentage to the cost of the product to
determine its selling price. This approach allows businesses to ensure that each unit sold
contributes towards covering both variable and fixed costs, thereby supporting the company's
survival. By setting prices based on a markup over costs, the business can maintain a
minimum level of profitability necessary to sustain operations during challenging times.
34) Which of the following is a reason why a target-return pricing approach does not
necessarily result in an optimum profit for a firm?
A) The target-return pricing approach is highly influenced by the prices set by competitors.
B) The target-return pricing approach ignores the current demand for the product.
C) The target-return pricing approach uses the perceived value of the product as a basis for
setting the final price.
D) The target-return pricing approach is too complex and expensive to implement.
Answer: B
Rationale:
A reason why a target-return pricing approach does not necessarily result in an optimum
profit for a firm is that it ignores the current demand for the product. The target-return pricing
approach typically involves setting prices based on a desired return on investment or profit
margin. However, this approach may not align with the market demand for the product. If the
price set based on the desired profit margin exceeds what consumers are willing to pay or the
demand for the product is relatively elastic, sales volume may decrease, resulting in lower
overall profits for the firm. Therefore, while the target-return pricing approach provides a
framework for achieving a specific profit objective, it may not always optimize profits if it
disregards the current market demand for the product.
35) Which of the following products is most likely to be priced according to the perceivedvalue approach?
A) industrial machinery
B) processed foods
C) luxury watches
D) kitchen appliances
Answer: C
Rationale:
Luxury watches are most likely to be priced according to the perceived-value approach.
Perceived-value pricing involves setting prices based on the value that consumers perceive
the product to have. Luxury watches often carry brand prestige, craftsmanship, and
exclusivity, which contribute to their perceived value in the eyes of consumers. As a result,
luxury watch brands can command premium prices that reflect the perceived value of their
products, rather than simply the cost of production or materials. Consumers are willing to pay
higher prices for luxury watches because they perceive them to be of higher quality, status
symbols, or collector's items. Therefore, luxury watches are a prime example of products that
are priced according to the perceived-value approach.
36) The ________ approach attracts customers by charging consistently low pricing and
avoiding short-term discounts and other promotions.
A) perceived-value pricing
B) markup pricing
C) value pricing
D) target-return pricing
Answer: C
Rationale:
The value pricing approach attracts customers by charging consistently low pricing and
avoiding short-term discounts and other promotions. Value pricing focuses on offering
customers the best value for their money by providing quality products or services at
competitive prices. Unlike perceived-value pricing, which emphasizes the perceived worth of
the product in the eyes of the customer, value pricing aims to deliver tangible benefits and
affordability to customers. By consistently offering low prices without relying on short-term
promotions, businesses employing the value pricing approach build trust and loyalty with
customers who appreciate the affordability and reliability of their products or services.
Therefore, value pricing is the approach that attracts customers by charging consistently low
pricing and avoiding short-term discounts and promotions.
37) The demand-based pricing approach is suited for situations where ________.
A) the same product can be purchased from multiple sources
B) a single market intermediary dominates the entire distribution chain
C) customers are not very sensitive to changes in the price of products
D) recouping the costs of manufacturing the product becomes essential to survival
Answer: A
Rationale:
The demand-based pricing approach is suited for situations where the same product can be
purchased from multiple sources. Demand-based pricing involves setting prices based on the
level of demand for the product or service in the market. When multiple sources offer the
same product, competition among sellers affects the demand for the product, which in turn
influences pricing decisions. In such situations, businesses may adjust prices according to
variations in demand, competitor pricing, or other market dynamics to remain competitive
and capture a share of the market. The ability for customers to choose from multiple sources
means that demand-based pricing strategies, which take into account market demand and
competitive factors, are particularly suitable.
38) In which of the following industries is the going-rate pricing approach most often used?
A) mobile phones
B) jewelry
C) automobiles
D) airlines
Answer: D
Rationale:
The going-rate pricing approach is most often used in the airline industry. Going-rate pricing
involves setting prices based on prevailing market rates or prices charged by competitors. In
the airline industry, prices for flights are often influenced by factors such as demand, fuel
costs, competitive pricing, and regulatory constraints. Airlines frequently adjust their fares in
response to changes in market conditions, competitor pricing strategies, and seasonal demand
fluctuations. Due to the dynamic nature of the airline industry and the presence of numerous
competitors, airlines commonly employ going-rate pricing to remain competitive and attract
passengers while maximizing revenue. Therefore, the going-rate pricing approach is most
often used in the airline industry.
39) Which of the following is characteristic of pricing products/services according to the
going-rate approach?
A) Prices of products have little relation to the actual cost of manufacturing them.
B) Market leaders set the prices, which are then adopted by smaller firms.
C) Optimum profits are not gained as current demand and competitor's prices are ignored.
D) Early adopters of new technologies are the targeted customer segment with this approach.
Answer: B
Rationale:
Characteristic of pricing products/services according to the going-rate approach is that market
leaders set the prices, which are then adopted by smaller firms. The going-rate pricing
approach involves setting prices based on prevailing market rates or prices charged by
industry leaders or dominant competitors. Smaller firms or followers in the market often
adopt the prices set by market leaders to remain competitive and avoid pricing themselves out
of the market. In industries where price leadership is established by a few key players,
smaller firms tend to follow the pricing strategies of these market leaders rather than setting
their own prices independently. Therefore, the characteristic of the going-rate approach is that
market leaders set the prices, which are then adopted by smaller firms.
40) Which of the following pricing objectives is best implemented through a penetration
pricing approach?
A) profit maximization pricing objective
B) market share maximization pricing objective
C) market skimming pricing objective
D) product/service-quality leadership pricing objective
Answer: B
Rationale:
The market share maximization pricing objective is best implemented through a penetration
pricing approach. Penetration pricing involves setting low initial prices for a product or
service with the goal of quickly capturing a significant share of the market. By offering
attractive prices that undercut competitors, businesses employing penetration pricing aim to
stimulate demand, attract customers, and establish a strong foothold in the market. While this
strategy may initially result in lower profit margins, the focus is on maximizing market share
and gaining a competitive advantage. Penetration pricing is particularly effective when the
goal is to rapidly penetrate new markets, gain traction against established competitors, or
encourage widespread adoption of a new product or service. Therefore, the market share
maximization pricing objective is best implemented through a penetration pricing approach.
41) Which of the following product categories is typically priced according to the penetration
pricing approach?
A) high-end electronics
B) industrial equipment
C) automobiles
D) consumer packaged goods
Answer: D
Rationale:
Consumer packaged goods are typically priced according to the penetration pricing approach.
Penetration pricing involves setting low initial prices for products with the aim of quickly
capturing a significant share of the market. Consumer packaged goods often face intense
competition and are sold in markets with a large number of substitutes. To gain market share
and establish brand loyalty, manufacturers of consumer packaged goods frequently use
penetration pricing to attract price-sensitive consumers, encourage trial purchases, and build a
customer base. By offering competitive prices, manufacturers can penetrate the market
quickly and potentially gain a sustainable competitive advantage. Therefore, consumer
packaged goods are typically priced according to the penetration pricing approach.
42) Which of the following customer segments is typically targeted by marketers using a
creaming pricing approach?
A) early adopters
B) laggards
C) late majority
D) early majority
Answer: A
Rationale:
Early adopters are typically targeted by marketers using a creaming pricing approach.
Creaming pricing, also known as market skimming, involves setting high initial prices for a
product to maximize profits from the most eager and price-insensitive customers. Early
adopters are individuals who are quick to adopt new technologies or innovations and are
often willing to pay premium prices to be among the first to own the product. Marketers
leverage the enthusiasm and willingness to pay of early adopters to capture substantial profits
before gradually lowering prices to attract more price-sensitive customer segments. By
targeting early adopters with high initial prices, marketers can maximize revenue and
establish a perception of exclusivity and value for the product. Therefore, early adopters are
typically targeted by marketers using a creaming pricing approach.
43) Which of the following products is best suited for pricing under the creaming approach?
A) office supplies
B) high-end computers
C) packaged foods
D) industrial machinery
Answer: B
Rationale:
High-end computers are best suited for pricing under the creaming approach. Creaming
pricing, also known as market skimming, involves setting high initial prices for a product to
maximize profits from the most eager and price-insensitive customers. High-end computers
typically target a niche market of tech enthusiasts, professionals, or gamers who value
performance, features, and brand reputation. These customers are often willing to pay
premium prices for cutting-edge technology and superior specifications. By pricing high-end
computers using the creaming approach, manufacturers can capture substantial profits from
early adopters and enthusiasts before gradually lowering prices to attract broader market
segments. Therefore, high-end computers, catering to a niche market with price-insensitive
customers, are best suited for pricing under the creaming approach.
44) ________ are price discounts given to distribution channel members like wholesalers and
retailers to carry merchandise.
A) Slotting fees
B) Carrying costs
C) Trade margins
D) Franchise fees
Answer: C
Rationale:
Trade margins are price discounts given to distribution channel members like wholesalers and
retailers to carry merchandise. Trade margins, also known as wholesale margins or distributor
margins, represent the difference between the price at which manufacturers sell products to
intermediaries and the price at which intermediaries sell products to end customers. These
discounts incentivize intermediaries to carry and promote the manufacturer's products,
allowing for wider distribution and increased sales. Trade margins are a common component
of pricing strategies aimed at channel management and maintaining effective distribution
channels. They help compensate intermediaries for their role in the distribution process and
encourage their cooperation in promoting and selling the manufacturer's products. Therefore,
trade margins are price discounts given to distribution channel members to carry
merchandise.
45) Which of the following is a unique feature of demand-based pricing?
A) The prices at the decline stage are generally higher than those at any other stage in the
product life cycle.
B) The demand-based pricing curve nears the unit cost curve at the end of the life cycle.
C) Demand-based pricing is effective for companies with an effective monopoly in their
respective industries.
D) Demand-based pricing can be volatile as fickle customers change their demand for the
product or service.
Answer: D
Rationale:
A unique feature of demand-based pricing is that it can be volatile as fickle customers change
their demand for the product or service. Demand-based pricing involves setting prices based
on the level of demand for the product or service in the market. However, customer demand
is subject to various external factors such as changing economic conditions, shifting
consumer preferences, and the introduction of new competitors or substitutes. As a result,
demand for a product or service may fluctuate over time, leading to changes in pricing
strategies. Companies relying on demand-based pricing must continuously monitor market
dynamics and adjust prices accordingly to remain competitive and responsive to shifting
demand patterns. Therefore, the volatility of customer demand and the need for frequent price
adjustments are unique features of demand-based pricing.
46) Which of the following is an exception that would force going-rate prices to deviate from
unit costs?
A) long periods of stable economic conditions that bring about economic prosperity
B) shifts in the perception of product category, such as a product previously considered a
luxury item becoming a commodity
C) sudden spikes in prices due to perceived future cost increases
D) presence of a few major players in the industry
Answer: C
Rationale:
An exception that would force going-rate prices to deviate from unit costs is sudden spikes in
prices due to perceived future cost increases. Going-rate pricing involves setting prices based
on prevailing market rates or prices charged by competitors. However, unexpected spikes in
prices of raw materials, production inputs, or other factors can lead to cost increases for the
manufacturer. In response to these cost pressures, companies may need to adjust their prices
to reflect the higher production costs and maintain profitability. While going-rate pricing
typically follows market trends and competitor pricing, significant cost increases may
necessitate deviations from unit costs to ensure pricing remains aligned with profitability
goals. Therefore, sudden spikes in prices due to perceived future cost increases can force
going-rate prices to deviate from unit costs.
47) Which of the following pricing approaches is most likely to accommodate prices lower
than the unit cost for short periods of time?
A) penetration pricing approach
B) creaming pricing approach
C) target-return pricing approach
D) markup pricing approach
Answer: A
Rationale:
The penetration pricing approach is most likely to accommodate prices lower than the unit
cost for short periods of time. Penetration pricing involves setting low initial prices for a
product with the aim of quickly capturing market share or stimulating demand. In some cases,
companies may intentionally price their products below the unit cost during promotional
periods or introductory offers to attract customers, encourage trial purchases, and gain a
foothold in the market. While selling below the unit cost may result in short-term losses, the
objective of penetration pricing is to achieve long-term profitability by establishing a
customer base and generating future sales. Therefore, the penetration pricing approach is
most conducive to accommodating prices lower than the unit cost for short periods of time.
48) The success of a new product or service will deter competitors from entering the market.
Answer: False
Rationale:
The statement is false. The success of a new product or service often attracts competitors to
enter the market, especially if the product demonstrates significant profitability or fills a gap
in the market. Competitors may attempt to replicate or improve upon the success of the new
product, leading to increased competition within the market over time.
49) Direct competitors have little impact on a new product or service during its introductory
phase.
Answer: True
Rationale:
The statement is true. During the introductory phase of a new product or service, direct
competitors typically have little impact as the focus is on establishing the product in the
market and gaining consumer acceptance. Direct competitors may not yet have responded
with their own offerings or may be in the process of developing competitive responses.
50) The use of specialized equipment to substitute manual labor drives up manufacturing
costs in the long term.
Answer: False
Rationale:
The statement is false. The use of specialized equipment to substitute manual labor often
results in lower manufacturing costs in the long term. While the initial investment in
specialized equipment may be high, it can lead to increased efficiency, higher production
volumes, and lower per-unit manufacturing costs over time. Additionally, specialized
equipment can improve product quality and consistency, reduce labor costs, and enhance
overall production capabilities. Therefore, the use of specialized equipment generally results
in cost savings rather than driving up manufacturing costs in the long term.
51) The market share maximization objective intends to capture market share by highlighting
a product's superior quality through higher prices.
Answer: False
Rationale:
The statement is false. The market share maximization objective aims to capture a larger
portion of the market by offering competitive prices or other incentives to attract customers.
While a product's superior quality may contribute to its ability to capture market share,
market share maximization does not necessarily involve higher prices. Instead, companies
may use strategies such as penetration pricing or aggressive marketing to gain market share,
regardless of whether the product's price reflects its quality.
52) When a product or service is new to the market, its pricing should reflect prices of
indirect competitors, not direct competitors.
Answer: True
Rationale:
The statement is true. When a product or service is new to the market, its pricing strategy
may be influenced more by indirect competitors rather than direct competitors. Direct
competitors offer similar products or services, which may already have established pricing
structures. However, indirect competitors offer products or services that serve similar needs
or purposes but may not be identical to the new offering. Pricing based on indirect
competitors allows the new product or service to differentiate itself in the market while still
addressing consumer needs and expectations.
53) Manufacturer costs are the lowest during the introduction stage of the product life cycle.
Answer: False
Rationale:
The statement is false. Manufacturer costs are typically higher during the introduction stage
of the product life cycle. During this stage, manufacturers often incur significant expenses
related to product development, research, and initial production setup. Additionally, low
production volumes and inefficiencies in the early stages of manufacturing can contribute to
higher per-unit costs. As production ramps up and economies of scale are achieved in later
stages of the product life cycle, manufacturer costs may decrease.
54) In the growth stage, trade discounts given to channel members to add new products or
services to their systems should be lower than those given in the introduction stage.
Answer: True
Rationale:
The statement is true. In the growth stage of the product life cycle, demand for the product or
service increases, and distribution channels may expand to accommodate growing sales
volumes. As a result, the need for trade discounts to incentivize channel members to add new
products or services to their systems may diminish compared to the introduction stage. With
increased demand and market acceptance, channel members may be more willing to carry the
product without the need for as high of trade discounts as in the introduction stage.
55) The pricing objective during the maturity stage of the product life cycle should be longterm survival.
Answer: False
Rationale:
The statement is false. The pricing objective during the maturity stage of the product life
cycle is typically to maximize profits while defending market share. In the maturity stage,
competition intensifies as more competitors enter the market and sales growth levels off.
Therefore, companies often focus on maintaining profitability through efficient operations,
effective marketing, and strategic pricing strategies rather than solely on long-term survival.
56) During the maturity stage, a company's distribution approach moves from selective (only
a few channels) to intensive (many channels).
Answer: True
Rationale:
The statement is true. During the maturity stage of the product life cycle, companies often
expand their distribution channels to reach a broader customer base and maintain market
share. This shift typically involves moving from a selective distribution approach, where
products are distributed through a limited number of channels, to an intensive distribution
approach, where products are available through multiple channels, including retail stores,
online platforms, wholesalers, and more. By adopting an intensive distribution strategy,
companies aim to maximize product availability, accessibility, and convenience for
customers, thereby sustaining sales and competitiveness during the maturity stage.
57) The growth stage is typically the longest one in the product life cycle.
Answer: False
Rationale:
The statement is false. The growth stage is not typically the longest one in the product life
cycle. While the duration of each stage varies depending on factors such as industry, market
conditions, and product characteristics, the growth stage is generally shorter compared to the
maturity stage. During the growth stage, sales and demand for the product increase rapidly as
awareness spreads, new customers adopt the product, and market acceptance grows.
However, this phase eventually transitions into the maturity stage, where sales growth levels
off, competition intensifies, and market saturation may occur, leading to a longer duration of
the maturity stage in many cases.
58) Products at the decline stage of their life cycle have little to lose with negative
environmental impacts.
Answer: True
Rationale:
The statement is true. Products at the decline stage of their life cycle often have little to lose
with negative environmental impacts because their sales and market presence are dwindling.
In the decline stage, sales decrease as consumer demand wanes, and the product becomes less
profitable or relevant in the market. As a result, companies may be less concerned about
negative environmental impacts affecting the product's sales or reputation, as they may be
more focused on managing the decline and potentially phasing out the product. Additionally,
companies may allocate fewer resources to environmental initiatives for products in the
decline stage compared to those in growth or maturity stages.
59) The survival pricing objective is most effective when used in a long-term capacity.
Answer: False
Rationale:
The statement is false. The survival pricing objective is not necessarily most effective when
used in a long-term capacity. Survival pricing is a short-term strategy employed during
periods of crisis, intense competition, or other challenges to ensure the company's immediate
survival. It involves setting prices low enough to cover variable costs and contribute towards
fixed costs, without necessarily maximizing profits. While survival pricing may be necessary
to weather temporary challenges, relying on this strategy indefinitely may not be sustainable
in the long term. Instead, companies should aim to implement broader strategic initiatives to
improve competitiveness, efficiency, and profitability over the long term.
60) The market share maximization pricing objective is appropriate when demand is inelastic.
Answer: False
Rationale:
The statement is false. The market share maximization pricing objective is typically
appropriate when demand is elastic rather than inelastic. Market share maximization involves
setting prices to capture a larger portion of the market by offering competitive prices or other
incentives to attract customers. In markets where demand is elastic, meaning consumers are
sensitive to changes in price, companies may adjust prices to gain market share without
significantly reducing overall demand. By contrast, in markets where demand is inelastic,
consumers are less sensitive to price changes, and companies may prioritize profit
maximization over market share maximization. Therefore, the market share maximization
pricing objective is generally more suitable in markets with elastic demand.
61) The market skimming pricing objective is appropriate when customers are not very
sensitive to price.
Answer: True
Rationale:
The statement is true. The market skimming pricing objective, also known as price skimming,
involves setting high initial prices for a product or service when customers are less sensitive
to price. This strategy is often employed for innovative or unique products with features or
benefits that justify premium pricing. Customers who are early adopters or value the
product's attributes are willing to pay higher prices, allowing the company to capture
maximum revenue from these segments of the market before gradually lowering prices to
attract more price-sensitive customers. Therefore, the market skimming pricing objective is
appropriate when customers are not very sensitive to price.
62) The markup pricing approach is easy to implement and typically results in the highest
profit for the firm as it is free to fix the markup percentage.
Answer: False
Rationale:
The statement is false. While the markup pricing approach is relatively simple to implement,
it does not necessarily result in the highest profit for the firm. Markup pricing involves
adding a predetermined markup percentage to the cost of production to determine the selling
price. However, this approach does not take into account factors such as demand,
competition, or customer perceptions of value, which can affect the optimal pricing strategy.
Additionally, setting the markup percentage arbitrarily without considering market conditions
or profit maximization goals may lead to suboptimal pricing decisions and potentially lower
profitability. Therefore, while markup pricing is easy to implement, it may not always result
in the highest profit for the firm.
63) Prices fixed under the perceived value approach are often not based on the actual cost of
manufacturing the product.
Answer: True
Rationale:
The statement is true. Prices fixed under the perceived value approach are typically based on
the value that customers perceive the product to have, rather than the actual cost of
manufacturing. Perceived value pricing involves setting prices based on the perceived
benefits, features, or brand image of the product, rather than solely on production costs.
Companies often use marketing strategies to enhance the perceived value of their products,
allowing them to command higher prices in the market. As a result, prices set under the
perceived value approach may not always correlate directly with the costs of manufacturing
the product.
64) The demand-based pricing approach is suited for situations where the distribution
channels for the product are restricted to one or two sources.
Answer: False
Rationale:
The statement is false. The demand-based pricing approach is suited for situations where
customer demand plays a significant role in determining prices, rather than the number of
distribution channels. Demand-based pricing involves setting prices based on the level of
demand for the product or service in the market. Factors such as customer preferences,
purchasing power, and competitive offerings influence pricing decisions under this approach,
regardless of the number of distribution channels. Companies may adjust prices dynamically
in response to changes in demand, regardless of whether the product is distributed through
one or multiple sources.
65) The going-rate pricing approach is usually employed in industries dominated by a few
major players.
Answer: True
Rationale:
The statement is true. The going-rate pricing approach, also known as price leadership or
price following, is often employed in industries dominated by a few major players. In such
industries, market leaders or dominant firms set prices that competitors then follow or match.
This pricing strategy is common in markets where price competition is limited, and industry
leaders have significant influence over market dynamics. Competitors may choose to adopt
going-rate pricing to avoid price wars, maintain stability, or align their prices with prevailing
market rates. Therefore, the going-rate pricing approach is usually employed in industries
where a few major players exert significant pricing power.
66) The creaming or skimming pricing approach targets customers who perceive greater
value in buying innovative products.
Answer: True
Rationale:
The statement is true. The creaming or skimming pricing approach, also known as price
skimming, targets customers who perceive greater value in buying innovative products. This
strategy involves setting high initial prices for innovative or unique products with features or
benefits that justify premium pricing. Customers who are early adopters or value the
product's attributes are willing to pay higher prices, allowing the company to capture
maximum revenue from these segments of the market before gradually lowering prices to
attract more price-sensitive customers. Therefore, creaming or skimming pricing targets
customers who perceive greater value in buying innovative products.
67) Going-rate pricing is immune to changes arising from perceived future cost increases.
Answer: False
Rationale:
The statement is false. Going-rate pricing is not immune to changes arising from perceived
future cost increases. Going-rate pricing involves setting prices based on prevailing market
rates or prices charged by competitors. However, if there are significant future cost increases
perceived in the market, such as rising raw material prices or production costs, companies
may need to adjust their prices to reflect these changes. While going-rate pricing may provide
a benchmark for pricing decisions, companies must still consider factors such as cost
fluctuations, demand dynamics, and competitive pressures when setting prices. Therefore,
going-rate pricing is not immune to changes arising from perceived future cost increases.
68) What are unit costs? What are its components?
Answer: Unit cost is the cost incurred to produce each unit of a product. It will impact
production costs during the entire lifetime of the product or service. Unit costs are made up of
fixed costs (costs that do not vary with the quantity of products sold, such as overhead costs
like rent and utilities) and variable costs (costs associated with the materials and labor
required to make each unit of product).
69) How do environmental factors affect pricing during a product or service's life cycle?
Answer: Economic constraints, legal situations, and other environmental factors can affect
pricing throughout the life cycle. While environmental factors can sometimes have negative
effects on the organization, they can also trigger the development of new products and
services. For example, increased gasoline prices spurred the market introduction of hybrid
and electric automobiles.
70) What effect do costs have on a product/service's pricing during the introduction stage?
Answer: At the introduction stage, costs are very high. For products, the low quantities being
produced causes high material costs (material prices per unit generally drop as volume
increases) and high labor costs (expensive machinery to replace manual labor cannot be
justified at such low production volumes). For services, costs are also high because of the
intensity of staff training in the new services.
71) What impact do competitors have on pricing during the growth stage of a product or
service?
Answer: During the growth stage, the competitor impact shifts from focusing on indirect
competitors to direct ones. As more competitors enter, companies must ensure that the
product or service has a distinct value proposition for the customer and that the proposition is
clearly communicated, or else they risk losing market share to competitors.
72) How can profits be maximized during the maturity stage of a product/service life cycle?
Answer: Profit during the maturity life cycle stage can be maximized by pricing to maintain
market share and introducing product/service variants to extend the life cycle.
73) What are the characteristics of the decline stage of the product/service life cycle?
Answer: At the decline stage, sales begin to decrease as the market saturates, the product
becomes technologically obsolete (like manual typewriters), and the service goes out of
fashion (chauffeurs are rare now), or customer tastes change (no more tail fins on cars).
74) What are the features of a survival pricing objective?
Answer: The survival pricing objective sets pricing low with the objective of maintaining
positive cash flow to get through a crisis situation. The objective is sometimes used if the
company is plagued by overcapacity or intense competition. Survival mode should only be
used in the short term. In the long term, the company must learn how to add value.
75) What are the features of a value pricing approach?
Answer: The value pricing approach, sometimes referred to as everyday low pricing (EDLP)
at retailers, attracts customers by charging consistently low pricing and avoiding short-term
discounts and other promotions. To execute value pricing, the company must engineer its
operations to become a low-cost provider. Southwest employs this approach, offering low
fares while still delivering strong customer service.
76) Describe the value-in-use pricing approach with an example.
Answer: In industrial markets, a variation of the demand-based pricing approach is called
value-in-use pricing, where the price represents the value the product is worth in its likely
usage scenario. Here, higher-priced products can still be a good value if they result in a lower
total cost of operations for the organization. For example, synthetic engine oils, such as those
from Mobil 1, can justify higher prices than conventional petroleum-based oils because they
can reduce the frequency of engine oil changes, resulting in lower total overall costs.
77) What are market development funds?
Answer: Market development funds are payments given by manufacturers to distribution
channel members to market the manufacturer's brand, generally as part of a specific plan
ratified by the channel members and the manufacturer.
78) What are the two unique characteristics of the demand-based pricing approach?
Answer: Demand-based pricing is based on customer demand, which gives it two unique
characteristics. First, the price might have little to do with unit cost. Second, pricing can be
volatile as fickle customers change their demand for the product or service.
79) What are the different types of objectives that organizations can select to price their
products or services?
Answer: Organizations can select from different pricing objectives, depending on the
situation. Objectives include:
• Survival pricing objective: Setting price with the objective of maintaining positive cash
flow for short-term survival during traumatic business situations.
• Profit maximization pricing objective: Setting prices with the objective of maximizing
profitability, often using demand curves.
• Market share maximization pricing objective: Setting prices (generally low), with the
objective of maximizing market share.
• Market skimming pricing objective: Setting prices high shortly after product launch with the
objective of recouping development costs.
• Product/service-quality leadership pricing objective: Setting prices high with the objective
of signaling high quality.
80) What are the factors that can reduce unit cost over the life cycle of a product or service?
Answer: Three factors can reduce unit cost over the life cycle. The first factor, known as
economies of scale, reduces unit cost as quantities increase (especially during the growth
phase) because manufacturers get quantity discounts for larger orders of materials. The
second factor is the use of specialized equipment to reduce long-term production costs. The
third factor is the experience curve (also called the learning curve), which tends to reduce
production cost over time as manufacturers gain accumulated production experience and
learn what works and what does not. Service costs vary over the life cycle as well. Costs are
often high during introduction due to heavy training and promotion efforts.
81) How does the market share maximization pricing objective differ from the market
skimming pricing objective?
Answer: With the market share maximization pricing objective, prices are set (generally
fairly low) with the objective of maximizing market share. The idea behind this objective is
that lower prices lead to higher sales volume, which lead to lower unit costs, which in turn
leads to higher long-run profit. This objective is appropriate when demand is relatively elastic
(customers are sensitive to price, so the quantity demanded will increase significantly as price
decreases).
In contrast, in the market skimming method, prices are set very high with the objective of
skimming the upper 10 percent of the market. The objective is appropriate when demand is
relatively inelastic (customers are not very sensitive to price). Companies often use this
objective if they are unveiling a new technology that is unique to the industry.
82) Describe the perceived-value and going-rate pricing approaches.
Answer: Perceived-value pricing approach: In this method, the company conducts market
research to find out the perceived value of the product or service by consumers. Consumers
might feel that a particular product is worth a higher price because they believe it to be
superior to competitive products. Note that the price often has little to do with the actual cost
to make the product or deliver the service. The approach is often used when the product or
service's brand is seen as a status symbol, such as those of luxury watches, perfumes, and
cars.
Going-rate pricing approach: Here, the firm aligns its price with those of its competitors,
believing that the prices reflect the collective wisdom of the industry. In this approach,
market leaders set prices, which are then adopted by smaller firms in the industry. This
approach is often used in concentrated industries (industries dominated by a few major
players) like gasoline, airlines, and hotels. For example, in the home improvement warehouse
market, prices at market follower Lowe's are often similar to market leader Home Depot.
83) Describe the pricing impacts of the going-rate and creaming pricing approaches.
Answer: Going-rate pricing: Most organizations who use going-rate pricing either are
commodity based (such as gasoline stations) or sell to business markets (such as industrial
supplies). As such, prices generally follow unit cost, with some exceptions. Exceptions could
include a sudden spike in prices due to perceived future cost increases (such as the impact of
rising gasoline prices on shipping costs) or a long-term reaction to changing economic
conditions (like general reductions in industrial supply prices during recessionary periods).
Creaming or skimming pricing: In a completely opposite approach from penetration pricing,
creaming or skimming pricing employs very high pricing in the introduction phase. It can be
effective for companies with an effective monopoly, where consumers perceive no
substitutes. Once competitors offer similar products/services during the growth and maturity
phases, the company must reduce its prices or risk losing market share.
Test Bank for Marketing Planning
Stephan Sorger
9780132544702
