CH-9-10 E-Commerce and the Entrepreneur – Essentials of Entrepreneurship and Small Business Management : Exam Guide

This Document Contains Chapters 9 to 10 Chapter 9 E-Commerce and the Entrepreneur 1) One of the most valuable attributes of the Web is the ability to: A) provide companies with instantaneous customer feedback. B) enable the site to create an appearance that the organization is able to meet customer needs that, in fact, are not possible based on its actual resources. C) eliminate advertising expenses and the amount of printed materials needed to facilitate promotional efforts. D) encourage the use of credit cards as a means of paying for the online transaction. Answer: A 2) Experts estimate that nearly ________ of the world's online population has used the Internet to make a purchase. A) 46 percent B) 66 percent C) 84 percent D) 96 percent Answer: C 3) A study by the Pew Internet and American Life Project reports that ________ percent of Americans research products and services online before buying them, an increase of ________ percent in the year 2000. A) 40; 15 B) 40; 35 C) 60 ;15 D) 60; 35 Answer: D 4) An estimated ________ percent of small business owners in the U.S. have Web sites. A) 25 percent B) 64 percent C) 75 percent D) 85 percent Answer: B 5) The Internet penetration rate is greatest in North America with 78.3% and the second region of the world in penetration is: A) Oceania/Australia. B) Europe. C) Latin America/Caribbean. D) Middle East. Answer: A 6) Which of the following is an important issue that business owners should consider before launching an e-commerce effort? A) How to develop long-term relationships with customers B) How to exploit the interconnectivity and the opportunities it creates to transform relationships with its suppliers, customers, and external stakeholders C) How to measure the success of its Web-based sales effort D) All of the above Answer: D 7) All of the following represent benefits of selling on the Web except: A) opportunity to increase revenues. B) power to educate and inform. C) ability to remain open 24 hours a day. D) ability to advertise in a cheaper media form. Answer: D 8) To avoid unpleasant surprises in launching an e-commerce effort an entrepreneur should: A) test the Web site with real customers to make sure it is easy to navigate. B) avoid being talked into establishing a privacy policy. C) cancel all current advertisements in other media. D) not try to out-guess customers, and handle order fulfillment as orders come in. Answer: A 9) The Web is one of the most efficient ways of reaching both new and existing customers and when properly promoted, a Web site can: A) reduce a company's cost of generating sales leads. B) be an affordable way to reach customers beyond your geographic area. C) provide an efficient method to provide information about a company and their products. D) All of the above Answer: D 10) Entrepreneurs should make sure they do not fall victim to any of the e-commerce myths. Which of the following is not an e-commerce myth? A) Setting up a business on the Web is easy and inexpensive. B) If I launch a site, customers will flock to it. C) Making money on the Web is easy. D) Privacy and site security is an important issue on the Web. Answer: D 11) To be successful online, small companies must create Web sites with features that appeal to experienced Web shoppers, such as: A) simple navigation and customer reviews. B) solid security and quick access to product information. C) videos and blogs. D) The successful Web site will include all the above. Answer: D 12) The intentional and targeted promotion of a Web site is: A) critical to online success. B) optional because once you are on the Web, you will get traffic and sales. C) a luxury that most small businesses can not afford. D) contrary to current Web trends. Answer: A 13) Successful e-tailers have discovered that these factors enhance their reputations for online customer service: A) comprehensive FAQ pages and e-mail order confirmation with shipment notices. B) visible telephone and e-mail contact information. C) quick responses to questions with meaningful information. D) All of these factors enhance a Web-based reputation. Answer: D 14) ________ monitor customers' behavior while they are on a site, giving Web-based businesses the information they need to make their Web sites and their online ________ efforts more effective. A) Wikis; social marketing B) Tracking tools; marketing C) Tracking tools; security D) Tracking tools; listings Answer: B 15) An important part of any e-commerce effort is: A) the use of current technology and its successful implementation. B) the ability to understand the underlying business and to develop a workable business model. C) to have a site that is fast and dependable. D) to have high traffic to the site, regardless of the customers' interest in what the site actually offers. Answer: B 16) Before a Web site can become the foundation for a successful e-business: A) the technology must be right. B) it should be previewed by a Web designer. C) it must be created with the target audience in mind. D) the physical storefront must be established. Answer: C 17) Building a Web strategy based on a clear definition of the company's target audience and an understanding of those customers' needs, wants, likes, and dislikes is: A) relatively unimportant for a company's Web site due to its flexibility. B) something that the entrepreneur no longer has to focus on to realize success. C) also critically important for a company's presence on the Web. D) an exercise that should eventually be addressed after the site is launched. Answer: C 18) The entrepreneurs who are proving to be the most successful in e-commerce are those who know how: A) their industries work, inside and out. B) technology works, inside and out. C) to turn a profit. D) to effectively finance their e-commerce effort. Answer: A 19) The most common reasons for leaving a site without purchasing include which of the following? A) Shipping charges were too high. B) Site did not look trustworthy. C) Customers could not find the items they were looking for. D) All of the above Answer: D 20) Which of the following is not a common reason customers leave Web sites before checking out? A) Total shipping charges were too high. B) The privacy policy was not posted. C) The shopping cart was too hard to find. D) The site did not appear trustworthy. Answer: B 21) There is plenty of room for improvement in customer service on the Web. Research by Harris Interactive reports that more than ________ of online shippers said that they expect higher levels of customer service than they do in offline, traditional stores. A) 2 percent B) 12 percent C) 22 percent D) 52 percent Answer: C 22) The most significant ways online companies can bolster customer service include all of the following except: A) create a well-staffed and well-trained customer response team. B) offer a simple return policy. C) provide an easy order tracking process. D) make financing available. Answer: D 23) The single most common reason for abandoning online shopping carts is: A) shipping and handling charges were too high. B) delivery times were too long and the checkout process required too much information and time. C) there was insufficient product information available. D) the inability to compare the final price before buying. Answer: A 24) The ________ while downloading a Web page is one of the most important determinants of its sales effectiveness. A) visual stimuli B) "flash and show" C) memory required D) time required Answer: D 25) Although e-commerce can lower many costs of doing business, it still requires: A) a professional Web designer's input. B) a basic infrastructure in the distribution channel to process orders, maintain inventory, fill orders, and handle customer service. C) a brick-and-mortar store presence. D) None of the above Answer: B 26) According to Gerry Goldsholle, founder of two Web sites aimed at small companies, he suggests to "________" when you first launch your Web site. A) Make sure it is perfect B) Try it, learn from it, and fix it C) Work to get all the information D) Create your copy and don't worry about visuals Answer: B 27) The amount of time the average person spends online is ________ than he or she spends watching television. A) less B) about the same C) almost one-half D) more Answer: D 28) Rather than trying to compete head to head with the dominant players on the Web with greater access to resources, entrepreneurs should consider focusing on: A) serving a market niche. B) serving a geographic niche. C) only brick-and-mortar retail channels. D) building a Web site in-house. Answer: A 29) Many Web sites seek to create, develop, and facilitate a: A) technology that is fast and complex. B) site that appeals to a broad range of diverse visitors. C) community of customers with similar interests. D) site that provides a variety of information that most anyone can find useful. Answer: C 30) Customers will typically welcome well-constructed permission e-mail that directs them to company sites for information or special deals, unlike unsolicited and universally despised e-mail known as: A) spam. B) electronic flyers. C) voice mail. D) clipboards. Answer: A 31) Strategies for successful e-commerce efforts should include all of the following except: A) focusing on a niche market. B) developing a community of customers. C) attracting visitors by giving away "freebies." D) adding value to recipients by sending spam e-mail. Answer: D 32) For entrepreneurial companies that lack brand and name recognition, and if building name recognition is one of the keys to success on the Web, one effective and affordable option may be to: A) invest more in online promotion. B) rely on viral marketing. C) develop better brand recognition. D) form strategic alliances with larger companies that can add credibility. Answer: D 33) Visitors begin to evaluate the credibility of a Web site as soon as they arrive. Which of the following does not help develop a site's credibility? A) Posting a privacy policy B) Citing reference sources C) Presenting fair and objective information D) Avoiding the promotion of brand names Answer: D 34) Businesses selling less well-known brands should: A) reduce prices. B) offer freebies. C) use customer testimonials and endorsements. D) All of the above Answer: C 35) Approximately ________ of Web users speak English. A) 38 percent B) 27 percent C) 37 percent D) 29 percent Answer: B 36) An estimated ________ percent of adults participate in social networks and the highest level of participation is social media is among adults ________ years of age. A) 65; over 30 B) 65; under 30 C) 55; over 30 D) 55; under 30 Answer: B 37) One common mechanism to attract international visitors is to include several: A) alternative forms of payment options. B) language buttons. C) images reflecting multiple cultures. D) colors and symbols reflective of international cultures. Answer: B 38) A Web site or an application that combines content from multiple sources is a: A) mashup. B) Really Simple Syndication (RSS) C) wiki. D) widget. Answer: A 39) Examples of Web 2.0 tools include: A) mashups and podcasts. B) social networking and RSS feeds. C) wikis and blogs. D) All the above Answer: D 40) Some companies use ________ to encourage customers to participate in the design of their products, a process called ________. A) wikis; co-creation B) wikis; collaboration C) widgets; co-creation D) mashups; co-creation Answer: A 41) Search engine listings that are the result of "spiders," powerful programs that crawl around the Web and analyze sites for keywords links, and other data are : A) wikis, or Web 2.0 listings. B) widgets, or organic listings. C) mashups, or natural listings. D) natural, or organic listings. Answer: D 42) An effective search engine optimization (SEO) strategy can be maintained through: A) natural, or organic, listings. B) paid or sponsored listings. C) paid inclusions. D) All of the above Answer: D 43) A situation that occurs when a company pays for clicks that are generated by someone with no interest in or intent to purchase its products or services is called: A) paid inclusion. B) unpaid inclusion. C) click fraud. D) an unnatural listing. Answer: C 44) When creating a Web site, the goal is to create a design: A) in which customers "see themselves" when they visit. B) that is flashy. C) in which customers cannot relate. D) that is inclusive of everyone in most every situation. Answer: A 45) A company that pays a search engine for the right to submit either selected pages or the entire content of the Web site is referred to as: A) click fraud. B) web analytics. C) paid or sponsored listings. D) Really Simple Syndication (RSS). Answer: C 46) Perhaps the best domain name is one that: A) customers can easily guess if they know the company's name. B) is complex to stop competitors from copying it. C) sounds very much like a larger competitor's name. D) does not use the company's initials. Answer: A 47) The ideal domain name should be: A) short. B) memorable. C) easy to spell. D) All of the above Answer: D 48) All of the following are effective ways to encourage customers to return to a site except: A) offer "frequent buyer" programs. B) clearly state prices and shipping charges. C) advertise with "pop-ups." D) provide a search function. Answer: C 49) To launch a successful Web site, business owners should consider: A) a simple design that is easy to navigate. B) that in order to stand out on the Web, the a site really has to sparkle. C) all the "bells" and "whistles" technology can provide. D) that flash makes a Web site better. Answer: A 50) Responsible online merchants should make sure shipping and handling charges are: A) reasonable. B) displayed early in the buying process. C) easy to find. D) All of the above Answer: D 51) A successful Web site should include all of the following characteristics except: A) a FAQ section. B) continuous automated music that cannot be cut off. C) updated and timely information. D) readable font sizes. Answer: B 52) The pages on which visitors land after they click on a sponsored link in a search engine, e-mail ad, or online ad are referred to as: A) landing pages. B) the home page. C) the transition page. D) the search page. Answer: A 53) Popular social media tools for small businesses include: A) social networking. B) online videos. C) Webcasts. D) All the above Answer: D 54) One of the most valuable benefits of giving customers a reason to return to your site is that it can be an effective tool to: A) deter competitive action. B) increase traffic. C) build customer loyalty. D) establish online habits. Answer: C 55) The purchase funnel identifies ways to improve the online shopping experience. The process begins with ________ and ends with ________. A) promoting an online presence; a streamlined checkout process B) making the site easy to find; a streamlined checkout process C) promoting the URL; a purchase D) creating customer confidence; the payment process Answer: A 56) Tools that measure a Web site's ability to attract customers, generate sales, and keep customers coming back are: A) Web analytics. B) recency. C) cost per acquisition tools. D) conversion tools. Answer: A 57) The number of visitors to a company's Web site who view a single page and leave without viewing other pages is referred to as the: A) stickiness of the site. B) click-stream. C) conversion ratio. D) bounce rate. Answer: D 58) A measurement of the cost a company incurs to generate each purchase or customer registration is the: A) cost per acquisition, or CPA. B) bounce rate. C) conversion ratio. D) browser-to-buy ratio. Answer: A 59) The percentage of shoppers who place at least one item in a shopping cart but never complete the transaction is called the: A) bounce rate. B) cart abandonment rate. C) conversion rate. D) cost per acquisition. Answer: B 60) The ________ is the percentage of visitors to the site who actually make a purchase and the average is about ________ percent A) conversion rate; 1.2 B) bounce back rate: 3.2 C) conversion rate; 3.2 D) cost per acquisition; 3.2 Answer: C 61) To minimize the likelihood of invasion by hackers, e-commerce companies rely on several tools, including: A) virus detection software. B) intrusion detection software. C) firewalls. D) All of the above Answer: D 62) The security software that can trace a hacker's location is identified by which of the following? A) Virus detection software B) Intrusion detection software C) A firewall D) A viral site Answer: B 63) A combination of hardware and software that allows employees to have access to the Internet but keeps unauthorized users from entering the company's network is called: A) virus detection software. B) intrusion detection software. C) a firewall. D) Web protection. Answer: C 64) Web sites have two conflicting goals regarding security. The first is to establish a presence on the Web so that customers from across the globe can have access to its site, and the second goal is to: A) maintain a database system of customer information and preferences. B) have a system in place to prosecute hackers. C) maintain a high level of security so that the business, its site, and the information it collects are safe from hackers and intruders intent on doing harm. D) develop an in-house payment processing system. Answer: C 65) A valuable method of preventing online fraud is to: A) ask customers for their card verification value. B) not accept credit cards. C) run background checks on customers. D) All of the above Answer: A 66) The most common problem is the online transactions that customers dispute, referred to as: A) acts of fraud. B) chargebacks. C) torts. D) recency. Answer: B 67) E-commerce is replacing traditional retailing. Answer: False 68) A study by the Pew Internet and American Life Project reports that 58 percent of Americans research products and services online before buying them, an increase of 35 percent from the year 2000. Answer: True 69) Online sales and Internet activity will account for more than 50 percent of total retail sales. Answer: True 70) Research indicates that younger audiences do not take the time to seek product information before they make a purchase. Answer: False 71) The Web is one of the most efficient ways of reaching both new and existing customers. Answer: True 72) More than 75 percent of small business owners who have Web sites engage in e-commerce. Answer: False 73) For many entrepreneurs, the key barrier to not using the Web as a business tool is that they do not see any benefits to selling online. Answer: False 74) The Web typically lacks the ability to lower the cost of doing business. Answer: False 75) Companies quickly learn that setting up a Web site is only the first investment required. The site leads to an ongoing investment of resources—time, money, energy and talent. Answer: True 76) Measuring the success of its Internet-based sales effort is essential if a company is to remain relevant to customers whose tastes, need, and preferences are always changing. Answer: True 77) Measuring the success of its Web-based sales is not essential because customer tastes and preferences are always changing. Answer: False 78) Listing a site with a popular Web search engine will guarantee that surfing customers will find your site. Answer: False 79) Virtual shop owners using banner ads have no reason to buy ads in traditional advertising media. Answer: False 80) Experienced online shoppers tend to be unforgiving, quickly clicking to another site if their shopping experience is unsatisfactory or they are unable to find the products and information they want. Answer: True 81) Making money on the Web is easy. Answer: False 82) It is important that customers trust the Web sites they visit. and one study reports that 94 percent of consumers believe that online privacy is important. Answer: True 83) Businesses that publish privacy policies, and then adhere to them, build trust among their customers, an important facet of doing business on the Web. Answer: True 84) One of the surest ways to alienate online customers is to abuse the information collected from them by selling it to third parties or by spamming them with unwanted solicitations. Answer: True 85) Trust is the foundation on which the long-term customer relationships that are so crucial to the Web success are built. Answer: True 86) A key aspect of an online strategy is to create it with the target audience in mind. Answer: True 87) Building a successful e-business does not necessarily require a well-thought-out strategy, it simply involves securing a good URL and getting online. Answer: False 88) The concept of a traditional marketing strategy is not necessary in building a successful e-business. Answer: False 89) The most important part of any e-commerce effort is technology. Answer: False 90) E-commerce requires focusing on technology first and then determining how the technology fits the business idea. Answer: False 91) Before your Web site can become the foundation of a successful e-business, you must create it with your target audience in mind. Answer: True 92) On the Web, service is not as important as it is in a traditional retail environment. Answer: False 93) For some businesses, e-mail takes a very low priority. Answer: True 94) The most common reason online customers abandon their shopping carts is that the shipping charges are too high. Answer: True 95) Establishing a policy of responding to all customer e-mails within 24 hours and sending customers order and shipping confirmations and "thank you for your order" e-mails are not very important to enhancing online customer service. Answer: False 96) Flash always makes a Web site better. Answer: False 97) Web-based companies should not be concerned with supply-chain management, warehouses, or typical customer service policies. Answer: False 98) Although e-tailers avoid the major problems that managing inventory presents, they lose control over delivery times and service quality. Answer: True 99) The greatest opportunities for e-commerce lie in the retail sector. Answer: False 100) An important factor of e-commerce is speed. Answer: True 101) It is better to avoid delays in going online by simply getting your site up and running, and then fixing it, tweaking it, and updating it to meet changing customer demands, rather than taking so much time trying to create the perfect online store at first attempt - try it, learn from it, and then fix it. Answer: True 102) The goals of e-commerce are not different from traditional offline businesses; to increase sales, improve efficiency, and boost profits by serving customers better. Answer: True 103) Launching an e-business is very different from launching a traditional off-line company. Answer: False 104) The typical Internet user now spends more time on the Internet than watching television. Answer: True 105) How a company integrates the Web into its overall business strategy is a major factor in determining how successful it ultimately will become. Answer: True 106) Rather than try to compete head to head with the dominant players on the Web who have almost unlimited resources and recognition, entrepreneurs should consider focusing on serving a market niche. Answer: True 107) A marketing niche can be defined by customer profile, product, product usage, and many other ways. Answer: True 108) Before launching into the design of their Web sites, entrepreneurs must develop a clear picture of their target customers. Answer: True 109) A method of increasing customer loyalty and establishing better relationships is to develop a community of customers with similar interests who can use chat rooms, message boards, guest books, etc. Answer: True 110) You should never offer your customers "freebies" unless they are truly valuable and expensive; otherwise, you will earn a negative reputation among your customers. Answer: False 111) Most customers welcome well-constructed permission e-mail that directs them to a company's site for information or special deals; however, they usually do not appreciate spam. Answer: True 112) One of the simplest ways to establish credibility with customers is to use brand names they know and trust. Answer: True 113) A method small businesses might use to achieve more of the brand and name recognition that larger, more established companies have is to form strategic alliances with bigger companies. Answer: True 114) Almost 75 percent of Internet users live within the United States. Answer: False 115) Really Simple Syndication (RSS) is an application that allows subscribers to aggregate content from their favorite Web sites into a single feed. Answer: False 116) A mashup is a Web site or an application that combines content from multiple sources into a single Web service. Answer: True 117) Mashups, blogs, social networking, RSS feeds, wikis and widgets are popular Web 2.0 tools used by businesses. Answer: True 118) A wiki is a low-cost application that appears like a small television screen on a Web site, a blog, or a computer desktop and performs a specific function. Answer: False 119) An effective search engine optimization (SEO) strategy must recognize the three basic types of search engine results, natural or organic listings, paid or sponsored listings, and paid inclusion. Answer: True 120) Paid or sponsored listings are long, heavy-text advertisements with links to the sponsoring company's Web site that appear on the results page of a search engine when the user types in a keyword or phrase. Answer: False 121) The more innovative your domain and name, the better. Answer: False 122) Establishing hyperlinks with different product types will ensure you cover a variety of different customers and give customer what they want. Answer: False 123) The better Web sites avoid clutter, include a menu bar for easier navigation, include a FAQ section, and are careful about typos, formatting, font sizes, and colors. Answer: True 124) Responsible online merchants should keep shipping and handling charges reasonable, but do not need to show them early on in the check-out process. Answer: False 125) The conversion ratio, or browse-to-buy ratio is the proportion of visitors to a site who visit, but do not actually make a purchase. Answer: False 126) The bounce rate measures the percentage of shoppers who place at least one item in a shopping cart but never complete the transaction. Answer: False 127) The conversion rate measures the proportion of visitors to a site who actually make a purchase. Answer: True 128) Web analytics are a variety of tools that measure a Web sites' ability to attract customers, generate sales, and keep customers coming back. Answer: True 129) Virus detection software, intrusion detection software, and a firewall are tools that minimize the likelihood of invasion by hackers, and eliminate your responsibility for damages they inflict. Answer: False 130) Intrusion detection software scan computer drives for viruses designed to harm computers and the information they contain. Answer: False 131) An important way to prevent online credit card fraud is to ask customers not only for their card number and expiration date, but also for the three-digit number above the signature panel on the back of the credit card-the card verification value. Answer: True 132) Click-through rate measures the proportion of people who see an online ad and actually click on it to reach the company's Web site. Answer: True 133) How significant are the Internet and a Web site presence to small businesses of the twenty-first century? How have they transformed the way we do business? Answer: Although e-commerce will not replace traditional retailing, no retailer, from the smallest corner store to industry giants, can afford to ignore the impact of the World Wide Web. It is connecting customers and suppliers in a way that is creating a new industrial order. Speed and flexibility are what is important. Pricing is no longer a simple chore. The Internet allows companies to collect more information on consumers and gives shoppers an unlimited source of information and the ability to track their merchandise from ordering to delivery date. The Web operates with the speed of light, anywhere in the world, 24 hours a day. 134) Identify the benefits of selling on the Web. Answer: The benefits of selling on the Web include: • the opportunity to increase revenue. • the ability to expand their reach into global markets. • the ability to remain open 24 hours a day, seven days a week. • the capacity to use the Web's interactive nature to enhance customer service. • the power to educate and to inform. • the ability to lower the cost of doing business. • the ability to spot new business opportunities and to capitalize on them. • the ability to grow faster. • the power to track sales results. 135) After years of being an entrepreneur, Wynn has come to you for help in establishing his first Web site. He has expressed a desire to have a site with all the "bells and whistles" he can get. What should your advice to him be? Which other factors should he consider before launching an e-commerce site? Answer: Keeping up with technology does not necessarily mean, "more is better." In developing a Web site, the primary focus should be a simple design, easy navigation, and quick download. Avoid busy clutter ("bells and whistles") and provide meaningful information in a secure environment. A successful Web site plan should include promotional and advertising support. The factors to be considered include: 1. How a company exploits the Web's interconnectivity and the opportunities it creates to transform relationships with its suppliers and vendors, its customers, and other external stakeholders is crucial to its success. 2. Web success requires a company to develop a plan for integrating the Web into its overall strategy. The plan should address issues such as site design and maintenance, creating and managing a brand name, marketing and promotional strategies, sales, and customer service. 3. Developing deep, lasting relationships with customers takes on even greater importance on the Web. Attracting customers on the Web costs money, and companies must be able to retain their online customers to make their Web sites profitable. 4. Creating a meaningful presence on the Web requires an ongoing investment of resources-time, money, energy, and talent. Establishing an attractive Web site, with attractive photographs of products, is only the beginning. 5. Measuring the success of its Web-based sales effort is essential to customers whose tastes, needs, and preferences are always changing. 136) Identify the 10 myths of e-commerce and capture one aspect that negates that myth. Answer: The 10 myths of e-commerce include: 1. If I launch a site, customers will flock to it: Web sites demand careful and targeted promotion. 2. Online customers are easy to please: Online customers are highly demanding and will quickly leave your site for another when dissatisfied. 3. Making money on the Web is easy: The costs can be great and the competition is fierce. 4. Privacy is not an important issue on the Web: privacy is of great concern to customers and they are cautious visitors and savvy shoppers. 5. The most important part of any e-commerce effort is technology: Technology is where it begins and then it requires the execution of a careful and targeted plan. 6. "Strategy? I don't need a strategy to sell on the Web! Just give me a Web site, and the rest will take care of itself:" A solid Web strategy is essential, just as it is for any business. 7. On the Web, customer service is not as important as it is in a traditional retail store: People have high expectations on the Web and their needs must be met to bring them back to the site. 8. Flash makes a Web site better: The site must have substance-i t needs to be content rich and fast. 9. It's what's up front that counts: It is what visitors and shoppers come away with that matters to them and brings them back to the site. 10. It's too late to get on the Web: It is never too late to establish an effective presence on the Web. 137) Identify the guidelines for building a successful Web strategy for a small e-company. Answer: • Focusing on a niche in the market • Develop a community of customers • Attract visitors by giving away "freebies" • Make creative use of e-mail, but avoid becoming a "spammer" • Make sure your Web site says "credibility" • Make the most of the Web's global reach • Promote your Web site online and offline • Use the tools of Web 2.0 to attract and retain customers • Develop an effective search engine optimization (SEO) strategy 138) Identify and briefly explain five of the design characteristics that contribute to a successful Web site. Answer: The five choices may come from this list of design characteristics that contribute to a successful Web page and include: • understand your target customer. • give customers what they want. • select an intuitive domain name. • make your Web site easy to navigate. • add wish list capability. • use online videos. • create a gift idea center. • provide customer ratings and reviews. • use online videos. • establish the appropriate call to action on each page. • build loyalty by giving online customers a reason to return to your Web site. • establish hyperlinks with other businesses, preferably those selling products or services that complement yours. • include an e-mail option and a telephone number in your site. • give shoppers the ability to track their orders online. • offer Web shoppers a special all their own. • follow a simple design for your Web page. • create a fast, simple checkout process. • provide customers multiple payment options. • assure customers that their online transactions are secure. • establish reasonable shipping and handling charges and post them up font. • confirm transactions. • keep your site updated. • test your site often. • rely on analytics to improve your site. • consider hiring a professional to design your site. 139) What does it mean to create a "simple" Web site? Identify a Web site that you feel meets this requirement and discuss why you selected it. Answer: Specific tips include: avoid clutter, avoid slow downloading of huge graphics, include a menu bar at the top, make the site easy to navigate, incorporate meaningful content, include FAQs, identify privacy and return policies, avoid fancy typeface, do not misspell words, don't use small fonts on busy backgrounds, use contrasting colors, and be careful with frames. Test the site on different monitors and Web browsers. Expect students to describe their site of choice and clearly support that selection. Mini-Case 9-1: Marketing a Nonprofit - Virtual Opportunities New Wave Chance Youth Club is a local youth organization supported solely by the donations of individuals and the local church community. Its co-founders, Valerie and Kristen, are considering launching a Web site to promote upcoming events and raise money for a new gym. Their good friend Paul has volunteered to develop a Web site, which they feel will help promote their efforts. 140) How might a Web site benefit the youth club? Answer: The youth club may find benefits from a Web site through the: • opportunity to increase donations. • opportunity to expand their fund raising efforts into a larger market. • ability to remain open 24 hours a day, seven days a week. • capacity to use the Web's interactive nature to enhance the services the club offers. • power to educate and to inform. • ability to lower fund raising costs. • ability to spot and capitalize on new opportunities. • possibility to generate reports and track results. Note: Students should be able to apply the benefits of selling on the Web to this nonprofit situation. 141) The building fund manager, Mr. Grover, has been overwhelmed by the generosity of the community and numerous requests to donate supplies. Describe how the Web site may be able to help him organize the donation requests and determine the type and quality of the building supplies needed? Answer: Posting a list of requirements the organization will need on the Web site, as well as the quality of donations needed, will assist Grover in organizing and keeping track of a great deal of information. It will also save a considerable amount of time in determining which donations to accept and what supplies will still be needed. Any donations not used could be sold via a silent auction to raise other needed funds. 142) What other type of activities should New Wave Chance implement to support the success of the new Web site? Answer: According to Myth 2, "If I launch a site, customers will flock to it." To avoid developing a Web site that no one knows about or can find, New Wave Chance should print its Web URL on everything it publishes. It should distribute flyers and newsletters to schools and local organizations in the community, and send out press releases with the URL. Note: Students should be able to apply the basic e-commerce suggestions for designing a "Killer Web Site." • Understand your target customer. • Select a domain name that is consistent with the image you want to create for your company, and register it. The ideal domain name should be short, memorable, indicative of a company's business or business name, and easy to spell. • The page should be easy to find. • Give customers want they want. • Build loyalty by giving online customers a reason to return to your Web site. • Establish hyperlinks with other businesses, preferably those selling products or services that complement yours. • Include an e-mail option and a telephone number in your site. • Give shoppers the ability to track their orders online. • Offer Web shoppers a special all their own. • Follow a simple design for your Web page. Specific tips include: avoid clutter, avoid slow downloading of huge graphics, include a menu bar at the top, make the site easy to navigate, incorporate meaningful content, include FAQs, identify privacy and return policies, avoid elaborate typeface, do not misspell words, don't use small fonts on busy backgrounds, use contrasting colors, and be careful with frames. Test the site on different monitors and Web browsers. • Assure customers that their online transactions are secure. Use proper security software and encryptions devices. • Post shipping and handling charges up front. • Keep your site updated. • Consider hiring a professional to design your site, but do not give him/her free reign. Chapter 10 Pricing Strategies 1) Setting prices for products and services requires entrepreneurs to balance a multitude of complex forces as entrepreneurs determine prices for their goods and services that will draw customers and: A) position prices lower than all competitors. B) produce a profit. C) effectively compete with online alternatives. D) have high volume/high margin sales. Answer: B 2) Which of the following statements about price is true? A) Price measures what the customer must exchange to obtain goods and services in the marketplace. B) Target market, business image, and price are closely related. C) For most goods and services, there is an acceptable price range and not a single "ideal price." D) All of the above Answer: D 3) A common pricing mistake entrepreneurs make is lowering prices because they fail to recognize the: A) extra value, convenience, service, and quality they offer their customers. B) advantages they have due to their lower cost structure. C) complexities that larger competitors have to face. D) driving need that all customers have to find the lowest price possible. Answer: A 4) The top business challenge that drives pricing decisions is the: A) increased price transparency. B) increased price sensitivity of customers. C) need to protect the brand's image. D) increased pricing aggressiveness from competitors. Answer: B 5) ________ frequently convey the idea of quality, prestige, and uniqueness to customers. A) Effective packaging B) Low prices C) High prices D) High profile promotions Answer: C 6) A key ingredient to setting prices properly is to understand a company's: A) cost structure. B) most aggressive price competitor. C) target market. D) profit expectations. Answer: C 7) An entrepreneurial company can differentiate itself by creating a distinctive image in customers' minds or by offering: A) superior service and quality. B) exceptional design and convenience. C) speed and performance. D) All the above provide the opportunity for differentiation. Answer: D 8) In general, entrepreneurs should ________ head-to-head price competition with firms that can more easily achieve lower prices through lower cost structures. A) avoid B) take on C) meet D) exit the market when faced with Answer: A 9) Generally, entrepreneurs should avoid head-to-head price competition with other firms that can more easily achieve lower prices through: A) offering lower value products and services. B) a better designed Web site. C) geographic advantages. D) lower cost structures. Answer: D 10) A business with a 25 percent gross profit margin that reduces its price by 10 percent would have to ________ its sales volume just to break even. A) double B) triple C) quadruple D) match Answer: B 11) Which of the following statements concerning the impact of competition on a small company's prices is true? A) When setting prices, a business owner must either match or beat competitors' prices on similar products or services. B) Because federal laws prohibit the practice as an unfair trade practice, business owners should not monitor their rivals' prices on identical items. C) When going up against larger, more powerful rivals, small firms should consider using nonprice competition as a way to differentiate their products or services rather than head-to-head price competition. D) All of the above Answer: C 12) One key to setting prices properly is based on understanding a company's: A) buying power. B) competitive position. C) target market. D) cost structure. Answer: C 13) ________ value is the price customers would be willing to pay if they perfectly understood the benefits offered, while ________ value is what determines the price they are willing to pay. A) Objective; perceived B) Perceived, objective C) Objective; quantitative D) Perceived; real Answer: A 14) Ultimately, the "right" price for a product or service depends on one factor: A) the lowest price possible. B) premium prices. C) the value that it provides for a customer. D) the most effective advertising campaign. Answer: C 15) One of the most important determinants of customers' response to a price is whether they perceive the price to be a fair exchange: A) compared to what they have paid in the past. B) regardless of their actual experience with the product. C) based on their expectation, not reality. D) for the value they receive from the product or service. Answer: D 16) The final price a business owner sets within the acceptable price range depends on: A) the cost of the product or service. B) the desired "image" he wants to create in the customer's mind. C) the maximum price customers are willing to pay. D) All of the above Answer: D 17) Businesses facing rapidly rising costs should consider: A) offer products in smaller sizes or quantities. B) communicate with customers about the cost increases. C) anticipate rising material costs and try to lock in prices early. D) All the above Answer: D 18) The acceptable price range of a product or service is the area between the ________ defined by customers in the market and the ________ established by the company's cost structure. A) price floor; price ceiling B) image; quality C) price ceiling; price floor D) price floor; value Answer: C 19) The "ideal price" for a product: A) is high enough to cover costs and to generate a profit. B) is low enough to produce adequate sales volume. C) today may be different from the "ideal price" tomorrow. D) All of the above Answer: D 20) Management consulting firm McKinsey and Company states that more than ________ percent of the pricing problems on new products are the result of companies setting prices that are too low. A) 20 B) 40 C) 60 D) 80 Answer: D 21) When pricing a new product, a small business owner should strive to always satisfy which three objectives? A) Product acceptance, maintaining market share, and earning a profit B) Quick acceptance, extensive distribution, and quickly recovering costs C) Recovering initial development costs, recovering initial promotional costs, and discouraging competition D) Discouraging competition, recovering development costs, and developing a prestige image Answer: A 22) A pricing technique that sets different prices on the same products and services for different customers using the information that a company collects about its customers is called: A) market penetration. B) customized or dynamic pricing. C) predatory pricing. D) price skimming. Answer: B 23) ________ pricing strategies work best in markets where no "elite" segments exist or in highly competitive markets where similar products are trying to gain a foothold. A) Skimming B) Sliding-down-the-demand-curve C) Odd D) Penetration Answer: D 24) Once a company has invested time and money developing a unique new product, in order to recoup some of the high R&D costs, they will likely use a: A) skimming pricing strategy. B) penetration pricing strategy. C) sliding-down-the-demand-curve pricing strategy. D) discount pricing strategy. Answer: A 25) ________ is a short-term strategy that assumes that competition will eventually emerge. A) Life cycle pricing B) Odd pricing C) Price lining D) Penetration pricing Answer: A 26) A pricing technique that sets prices that always end in numbers like "99" for prices such as $9.99 and $19.99 is an example of: A) odd pricing. B) price lining. C) customized pricing. D) zone pricing. Answer: A 27) CD Connection sells popular CDs at three price levels: $11, $14, and $17. This illustrates which of the following pricing techniques? A) Odd pricing B) Leader pricing C) Price lining D) Suggested retail pricing Answer: C 28) ________ pricing is a technique that involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices. A) Leader B) Markup C) Markdown D) Multiple unit Answer: A 29) Your local grocery store uses a pricing technique known as ________ on a weekly basis, in which they mark down the price of several popular items, sometimes well below their normal price, in an effort to increase customer traffic and to boost sales of other items. A) odd pricing B) leader pricing C) price lining D) suggested retail pricing Answer: B 30) Although many retailers must match competitors' prices on identical items, maintaining a ________ pricing policy may not be healthy for a small business because it robs the company of the opportunity to create a distinctive image in its customers' eyes. A) markup B) follow-the-leader C) below-market D) matching Answer: B 31) A technique offering customers discounts if they purchase in quantity is referred to as: A) optional product pricing. B) bundling. C) multiple-unit pricing. D) customized pricing. Answer: C 32) Optional product pricing involves selling the base product at: A) what may be a "standard" margin and selling the options or accessories at a higher markup. B) a high markup, with the accessories at a competitive price. C) one price with deep discounts on accessories. D) a high margin with the accessories offered as a part of the bundle. Answer: A 33) An MP3 player is sold at a price close to the break even point, but the accessories for the product are priced at a premium, offering impressive contribution margins. This is an example of: A) byproduct pricing. B) bundling. C) captive-product pricing. D) multiple-unit pricing. Answer: C 34) A technique that involves selling a product for a low price and charging a higher price for the accessories that accompany it is called: A) multiple-unit pricing. B) optional product pricing. C) captive-product pricing. D) by product pricing. Answer: C 35) A technique in which a company uses the revenues from the sale of those products that were once considered as waste to be more competitive in pricing their main product is: A) by-product pricing B) optional-product pricing C) bundling pricing D) captive-product pricing Answer: A 36) ________ is the difference between the cost of a product or service and its selling price. A) Markup B) Break-even price C) Contribution margin D) Absorption costing Answer: A 37) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's percentage (of cost) markup is: A) 46.7 percent. B) 87.5 percent. C) 53.3 percent. D) 114.3 percent. Answer: D 38) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's percentage (of retail price) markup is: A) 46.7 percent. B) 87.5 percent. C) 53.3 percent. D) 114.3 percent. Answer: C 39) The Sound Shop buys a popular programmable telephone from a supplier for $12.19. If the desired markup of retail price on the telephone is 35 percent, the retail price should be: A) $34.83. B) $18.75. C) $16.46. D) $20.11. Answer: C 40) Which of the following is/are true regarding cost-plus pricing? A) It encourages the manufacturer to operate efficiently. B) It fails to consider competitors' prices appropriately. C) It fails to guarantee the manufacturer a desired profit margin. D) Only A and C Answer: B 41) A reliable cost accounting system is necessary for accurate pricing. The traditional method of product costing, where the costs of direct materials, direct labor, and factory overhead are included in a finished product's total cost is called ________. A) absorption costing B) break-even pricing C) direct costing D) absorption pricing Answer: A 42) Pandecker, Inc., estimates the variable costs of producing one unit to be $11.26. The company plans to produce 26,500 units. The fixed costs the company expects to incur are $82,770. If Pandecker's profit target is $75,000, what price should it charge? A) $14.38 B) $35.17 C) $17.21 D) $11.26 Answer: C 43) ________ tells what portion of the total revenue remains, after covering variable costs, to contribute toward meeting fixed expenses and earning a profit. A) The full absorption statement B) The break-even selling price C) The contribution percentage D) Cost-plus pricing Answer: C 44) Pandecker, Inc., estimates the variable costs of producing one unit to be $11.26. The company plans to produce 26,500 units. The fixed costs the company expects to incur are $82,770. What is Pandecker's break-even selling price? A) $14.38 B) $35.17 C) $11.26 D) $3.12 Answer: A 45) Which of the following is/are not true regarding pricing for service firms? A) A service firm must establish a price based on the materials used to provide the service, the labor employed, an allowance for overhead, and a profit. B) Most service firms base their prices on an hourly rate-usually actual hours, but sometimes standard hours are used. C) For most service firms, labor and profit comprise the largest portion of the cost of the service. D) None of the above Answer: C 46) It has been reported that the use of credit cards increases the ________ of customer spending. A) probability B) speed C) magnitude D) All of the above Answer: D 47) Small companies have three options for selling to customers on credit: A) credit cards, manufacturer credit, and trade credit. B) credit cards, installment credit, and trade credit. C) credit cards, installment credit, and poor credit. D) debit cards, installment credit, and trade credit. Answer: B 48) The fee that banks collect from retailers whenever customers use a credit or a debit card to pay for a purchase is known as the: A) interchange fee. B) chargeback fee. C) processing fee. D) installment fee. Answer: A 49) The use of credit cards by consumers: A) has little real impact on sales. B) broadens a small company's customer base. C) costs businesses nothing and adds significantly to their sales. D) has no impact on pricing decisions. Answer: B 50) A customer who purchases a television from Ace Appliance Store and pays for it in 36 monthly payments is most likely using: A) trade credit. B) charge account credit. C) installment credit. D) debit card credit. Answer: C 51) One of the requirements to be able to offer ________ is to make certain that the firms' cash position is ________. A) installment credit; positive B) installment credit; strong enough to support the additional pressure C) trade credit; positive D) trade credit; strong enough to support the additional pressure Answer: D 52) Which of the following businesses would be most likely to offer installment credit to its customers? A) A retailer of major appliances B) A convenience store C) A printer D) A clothing retailer Answer: A 53) The prices a small business charges influence its image in the marketplace. Answer: True 54) The desired image for the business, the target market the owner is trying to reach, and the prices charged are all closely related to one another. Answer: True 55) A study by Rafi Mohammed, author of The Art of Pricing, found that companies that raised prices by 1 percent saw profits increase by 11 percent and those that raised prices by 10 percent realized profit increases of 100 percent. Answer: True 56) To avoid major pricing mistakes, business owners should "shop" their competitors and asses their prices, especially on identical products. Answer: True 57) Without the advantage of a unique business image, a small business must match local competitors' prices or risk losing sales and customers. Answer: True 58) The most common pricing mistake small business owners make is setting the price for the products and services they sell too high. Answer: False 59) The best way to survive a price war is to engage in the battle and emphasize the unique features, benefits, and value your company offers its customers. Answer: False 60) The most effective technique by which small companies can gain a competitive edge over their larger rivals is to charge lower prices for the goods and services they sell. Answer: False 61) Price is a measure of what the customer must exchange to obtain goods and services, and is an indicator of value to the customer. Answer: True 62) A common pricing mistake entrepreneurs often make is failing to recognize the extra value, convenience, service, and quality they offer their customers-all of which customers are willing to pay for. Answer: True 63) Perceived value is the price customers would be willing to pay if they perfectly understood the benefits offered, while objective value is what determines the price they are willing to pay. Answer: False 64) The "right" price depends on one factor: the value that it provides for customers. Answer: True 65) Entrepreneurs that face rapidly rising costs in their business should consider strategies that facilitate better customer communication, efficiencies, passing along cost increases, emphasizing value, and anticipating rising costs to lock in prices. Answer: True 66) For most products, there is an acceptable price range, not a single ideal price. Answer: True 67) Customized or dynamic pricing sets different prices on the same products and services for different customers using the information that a company collects about its customers. Answer: True 68) Dynamic pricing may raise ethical questions. Answer: True 69) When pricing any new product, the owner should try to accomplish three objectives: 1) get the product accepted; 2) maintain market share; and 3) earn a profit. Answer: True 70) Management consulting firm McKinsey and Company claims that ________ of the pricing problems on new products are the result of companies setting prices that are too low. A) 10 to 20 percent B) 40 to 50 percent C) 60 to 70 percent D) 80 to 90 percent Answer: D 71) Market penetration pricing is a short-term pricing strategy that achieves high profits quickly. Answer: False 72) Entrepreneurs have three basic strategies to choose from when establishing a new product's price: a penetration pricing strategy; a skimming pricing strategy; and life cycle pricing strategy. Answer: True 73) If a company wants quick acceptance and extensive distribution when introducing a new product into a highly competitive market with a large number of similar products, a market penetration pricing is the best strategy. Answer: True 74) A market penetration pricing strategy is designed to recover a company's development and promotional cost of a new product very quickly. Answer: False 75) A skimming price strategy is used to introduce relatively low-priced goods into a market where no "elite" segment exists. Answer: False 76) A skimming pricing strategy sets a relatively high price for a product to appeal to the segment of the market that is not sensitive to price. Answer: True 77) Life cycle pricing is a short-term pricing strategy that assumes that competition will eventually emerge and the price will be lowered. Answer: True 78) James decides to price his products in his small hardware store with ".95," thinking that customers will perceive a price of $9.95 is much lower than a price of $10. This is an example of odd pricing. Answer: True 79) A technique that greatly simplifies the pricing function by pricing different products in a product line at different price points, depending on their quality, features and cost, is referred to as odd pricing. Answer: False 80) Price lining occurs when a small company raises the price of all of its goods by the same percentage to cover operating expenses. Answer: False 81) It is much easier to lower a product's price once it is on the market than to increase it after its introduction. Answer: True 82) Leader pricing is a technique in which a small company marks down the price of a popular item below its normal price in an attempt to increase customer traffic and to boost sales of other items. Answer: True 83) Captive-product pricing is a technique that involves selling a product for a low price and charging a higher price for the accessories that accompany it. Answer: False 84) The manufacturer's suggested price takes into account the small firm's cost structure and its competitive situation. Answer: False 85) The manufacturer's suggested retail prices may create an undesirable image for the small firm. Answer: True 86) A manufacturer can force a small business to charge the "manufacturer's suggested retail price." Answer: False 87) When a small business owner does not want to make a pricing decision, he can use a suggested retail pricing strategy. Answer: True 88) The best pricing strategy for a small business owner to follow is to charge the manufacturer's suggested retail price. Answer: False 89) Markup is the difference between the cost of a product or service and its selling price. Answer: True 90) Most stores find it most practical to use a flexible markup, which assigns various markup percentages to different types of products. Answer: False 91) Below-market pricing strategies can be risky for small companies because they require businesses to constantly achieve high sales volume to remain competitive. Answer: True 92) Even though cost-plus pricing is simple, it does not encourage a small business to use its resources efficiently. Answer: True 93) For setting prices, full absorption financial statements are much more useful to the small business owner than are direct cost statements. Answer: False 94) Direct (variable) costing includes in the unit cost of a product only those costs that vary with the quantity of units produced. Answer: True 95) Break-even pricing will determine the price that will cover total fixed and variable costs and generate a reasonable profit. Answer: False 96) Because the manufacturer's capacity in the short run is fixed, pricing decisions should be aimed at employing these resources most efficiently. Answer: True 97) For most service firms, labor and profit comprise the greatest portion of the cost of the service. Answer: False 98) The typical consumer in the United States has 7.7 credit cards. Answer: True 99) The interchange fee is a bank charge that retailers pay whenever customers use a credit or a debit card to pay for a purchase. Answer: True 100) The use of credit cards increases the probability, speed, and magnitude of customer spending. Answer: True 101) Because installment credit absorbs a company's cash, many small businesses rely on financial institutions to provide it for their customers. Answer: True 102) One advantage of installment loans for a small business is that the business owner retains a security interest in the item sold as collateral on the loan. Answer: True 103) A small business must carefully assess its own cash position before offering trade credit to its customers. Answer: True 104) What does it mean to "focus on value" in relationship to establishing a price? In your response, discuss how customers recognize and evaluate value. Answer: The "right" price for a product depends on the value that it provides for customers. One of the most important determinants is a customer's response to a price where they perceive the price to be a fair exchange for the value they receive from the product or service. There are two aspects of value: objective value and perceived value. Objective value of the products and services is what customers would be willing to pay if they understood perfectly the benefits that a product or service delivers. In reality, customers rarely have access to perfect information. Perceived value is what customers base their assessment upon when they do not have access to "perfect information" and, therefore, depend upon their perception of what the product or service is worth. Companies can influence customers' perception of value, and price is one way a company can communicate value to customers. 105) Name and explain the three basic pricing strategies a small business owner has in establishing a new product's price. Answer: Three basic strategies to choose from in establishing the new product's price include: 1. Market penetration-Set price just above total unit cost to develop a wedge in the market and quickly achieve a high volume of sales. 2. Skimming-Set a higher-than-normal price in an effort to quickly recover the initial developmental and promotional costs of the product. 3. Life cycle pricing-Set product price high, but with technological advancement, the firm can lower costs quickly and reduce the product's price sooner than competition can. When introducing a new product, the owner should seek to satisfy three objectives: 1. Getting the product accepted 2. Maintaining market share as competition grows 3. Earning a profit 106) Describe two situations; one where you consider dynamic pricing is ethical and the other where dynamic pricing is unethical. Answer: Refer to the discussion in "Ethics and Entrepreneurship" for information to assess students' response to this question. Dynamic pricing is ethical when used for airline tickets, where prices fluctuate based on demand, availability, and booking time, allowing consumers to choose the best time to purchase. It is unethical when used during emergencies or natural disasters to significantly increase prices of essential goods like water and food, exploiting people's urgent needs. 107) There are at least eight different pricing strategies for established goods and services. Explain four of those strategies and under what conditions a business owner should use them. Answer: 1. Odd pricing-Establish prices that end in odd numbers with the belief that merchandise selling with an odd ending number ($12.95) is cheaper than an item evenly priced ($13.00). 2. Price lining-Manager stocks merchandise in several different price ranges, or price lines. Each category of merchandise contains items that are similar in appearance, quality, cost, performance, or other features making it less complicated for the customer. 3. Dynamic pricing-Setting different prices for the same products and services for different customers based on information collected. 4. Leader pricing-Small retailer marks down the customary price of a popular item in an attempt to attract more customers. 5. Geographic pricing -Pricing based on the geographic area also referred to as zone pricing 6. Discounts-When products make reductions from normal list prices in order to move stale, outdated, damaged, or slow-moving merchandise. This includes multiple unit pricing. 7. Bundling-A pricing method that involves grouping together several products or services, or both, into a package that offers customers extra value at a special price. 8. Optional-product pricing-This is a technique that involves selling the base product for one price but selling the options or accessories for it at a much higher markup. 9. Captive-product pricing-This technique involves selling a product for a low price and charging a higher price for the accessories that accompany it. 10. Byproduct pricing-This technique uses the revenue from the sale of byproducts to be more competitive in pricing the main product. 11. Suggested retail prices-Accepting the manufacturer's suggested price does not take into consideration the small firm's cost structure, image, or competitive situation. This approach does simplify pricing. 12. Follow the leader pricing-Basing prices on competitor's price points. 108) Explain the difference between absorption costing and variable (or direct) costing. Which one is more useful when establishing prices? Why? Answer: Full absorption costing is the traditional method of product costing. It "absorbs" the cost of direct materials, direct labor, plus a portion of fixed and variable factory overhead into each unit manufactured. Absorption costing is not very helpful in setting prices because it confuses the true relationships among price, volume, and costs by including fixed expenses in unit-cost computations. Direct costing includes only those costs of production that vary directly with the volume of production. Fixed overhead expenses are considered to be expenses of the period, thus, constant unit cost for the product regardless of the production level. The result is a clear picture of the price-costs-volume relationship. 109) Explain the different kinds of credit a small business can offer its customers and the impact each has on pricing. Answer: • Credit cards-Businesses should consider the one to six percent of the purchase price they will pay as a fee for their service. • Installment credit-Is financed over time and often requires small business owners to turn to local banks and credit unions. If they have the financial strength to carry their "own paper," it can be a major source of interest income, which technically can subsidize prices. • Trade credit-Also referred to as customer charge accounts, can be a drain on small business cash reserves. 110) Explain the advantages and the disadvantages of a small business accepting credit cards for customer purchases. Answer: When small businesses offer customers credit, they experience several advantages. Some of the benefits include: • Increases probability of sale; • Speed and magnitude of customer spending; • Higher service ratings by customers; • Retaining title of the merchandise until it is paid in full; and • When financing is offered, the interest received on the loans is often greater than the original amount paid for the item. However, there are costs incurred as well and this may result in disadvantages for the business. The main cost when issuing credit to customers is that credit cards are not free to businesses. Typically, small businesses must pay one to six percent of the total credit card charges for the use of the system. Mini-Case 10-1: Pricing for Profit Miller Manufacturing, Inc., produces electronic components for television circuitry. Variable costs comprise 67 percent of the product's selling price. The variable costs of producing a component include: Direct material $1.83/unit Direct labor $6.72/unit Variable factory overhead $ .86/unit Vicki Miller, President, expects to produce 80,000 electronic components and to incur $280,000 of fixed costs. 111) If Miller desires a profit of $120,000, what price should she set? Answer: 112) What is Miller Manufacturing's break-even price? Answer: 113) What is the minimum price that Miller Manufacturing should set for its electrical components? Answer: Minimum Price: Direct material $1.83/unit Direct labor $6.72/unit Variable factory overhead $ .86/unit Minimum Price $9.41 per unit Mini-Case 10-2: The Price is Right? "It is obvious what people want; I can't imagine why someone never thought of it before. What good is it to be wealthy if I have to stay around the house all day waiting for service representatives or doing paperwork?" Penny Matthews decided she would take those responsibilities off the backs of the people of Tucson, Arizona. "My business will arrange for all the services you need around the home (lawns mowed, plumbing, carpets cleaned, televisions repaired, pools cleaned, everything). My clients will be free to enjoy their lives without worrying about their houses. We will also arrange for parties to be completely catered. In addition, if you wish, we will pay all your bills and reconcile your bank statement. A life without the irritations of domestic hassles; that's our service." Penny was explaining the idea to her close friend and banker, Wallace Trevillian. "You have definitely thought about this for some time and put months of work into its planning," said Wallace. "What do you plan to charge for these services?" "That's a good question, Wallace. I haven't thought about it." 114) How would Penny Matthews go about determining how to price the services her business plans to offer? Answer: This case addresses the issue of establishing a price for a service. Penny could charge clients for her services based on an hourly fee developed from estimates of materials used, labor employed, an allowance for overhead, and a profit. She must estimate the total cost per productive hour. Next, she can compute the hourly price: Finally, Penny might adjust this price to reflect the proper image of her service. Test Bank for Essentials of Entrepreneurship and Small Business Management Norman M. Scarborough 9780132666794, 9780273787129, 9780134741086, 9780136109594, 9780133930382