Deck 12: Pricing Concepts and Management

Question 1

What are the benefits of cost-based pricing?

Answer 1

Cost-based pricing:
Cost-based pricing is defined as a method that adds a specific dollar amount to the cost of the product. As the basis for pricing the products it uses the cost of production. The cost involved in producing the product is termed as the selling price.
Benefits of cost-based pricing:
• Simple to calculate
• Flexible
• Super easy
• It becomes easy for the marketer to defend the prices.
• When there is an increase in costs the prices can be easily adjusted.
• It is suitable for the manufacturer with scalable production based on demand.

Question 2

Under what conditions is cost-plus pricing most appropriate?

Answer 2

Cost-plus pricing:
Cost-plus pricing is defined as a method that adds a specific dollar amount to the seller's cost. It is a simple and easy method.
Conditions appropriate for cost-plus pricing:
The cost-plus pricing is appropriate when the cost of production is difficult to estimate.
The examples considered are government using this pricing method for granting defence contracts and the projects which involve commercial construction and custom-made equipment.

Question 3

Setting the right price for a product is a crucial part of a marketing strategy. Price helps to establish a product's position in the mind of the consumer and can differentiate a product from its competition. Several decisions in the marketing plan will be affected by the pricing strategy that is selected. To assist you in relating the information in this chapter to the development of your marketing plan, focus on the following:
Using Table 21.1 as a guide, discuss each of the seven pricing objectives. Which pricing objectives will you use for your product? Consider the product life cycle, competition, and product positioning for your target market during your discussion.

The information obtained from these questions should assist you in developing various aspects of your marketing plan found in the "Interactive Marketing Plan" exercise at www.cengagebrain.com.

Answer 3

Pricing objectives:
It is defined as the set target and goals which defined what an organization wants to attain through pricing the product or service.
Pricing objectives and its implication:
• Profit: The profit recognizes the levels of costs and prices that permit the business to maximize the profit.
• Survival: The level of the price is adjusted, so that the business can increase the volume of its sales so as to balance the expenses of the organization.
• Quality of the product: The expenditures made on research and development is being recovered by setting the prices and maintains a high quality brand image.
• Return on the investment: This recognizes the levels of the price enabling the business to yield the targeted return on investment.
• Cash flow: For increasing the sales the level of prices are set.
• Market share: The levels of price are adjusted so that the organization can increase or maintain the sales corresponding to the sales made by the competitors.
• Status quo: The levels of price are recognized that helps to maintain and stabilize the sales and demand.
Pricing objective used for the Mobile phone :
• The pricing objective for a mobile phone company is obtaining the market share and maximizing the profit.
• A mobile company when launches the product, high prices are set generating higher profit and grasping the market share.
Life cycle of the product, competition and the position of the product for target market:
Diagram showing the life cycle of mobile phones:
• The above diagram defines the life cycle of the mobile phones which includes introduction, growth and maturity of the product. It is observed that when mobiles phones were introduced in 1985, the growth was very low till 1997. From 1998 to 2000 the subscription of mobile phones increased from 25% to 74%. And from 2000 onwards up till now the subscription rate is at 130% and above increasing day by day.
• The level of competition is intense because the numbers of mobile companies are increasing offering inexpensive bundle pricing strategies.
• The mobile phone company targets the market that will deliver them the greatest market penetration, the general business customers, the special business customers and the personal customers. The mobile phone company offers in package form the products and services which are prices suitably for every segment offering the services that are bets suitable for the needs of the customers.

Question 4

A retailer purchases a can of soup for 24 cents and sells it for 36 cents. Calculate the markup as a percentage of cost and as a percentage of selling price.

Question 5

Identify the eight stages in the process of establishing prices.

Question 6

What is differential pricing? In what ways can it be achieved?

Question 7

Pricing at the Farmers' Market
Whether they're outside the barn or inside the city limits, farmers' markets are becoming more popular as consumers increasingly seek out fresh and local foods. Today, more than 7,000 farmers' markets are open in the United States, selling farm products year-round or only in season. Although some are located within a short drive of the farms where the fruits and vegetables are grown, many operate only on weekends, setting up stands in town squares and city parks to offer a combination of shopping and entertainment. "These markets are establishing themselves as part of our culture in ways that they didn't used to be, and that bodes well for their continued growth," says the director of Local-Harvest. org, which produces a national directory of farmers' markets.
Selling directly to the public enables farmers to build relationships with local shoppers and encourage repeat buying week after week as different items are harvested. It also allows farmers to realize a larger profit margin than if they sold to wholesalers and retailers. This is because the price at which intermediaries buy must have enough room for them to earn a profit when they resell to a store or to consumers. Farmers who market to consumers without intermediaries can charge almost as much-or sometimes even more than-consumers would pay in a supermarket. In many cases, consumers are willing to pay a higher price for top-quality local products, and even more for products that have been certified organic by a recognized authority. Competition is a factor, however. Consumers who browse the farmer's market will quickly see the range of prices that farmers are charging that day for peppers, peaches, or pumpkins. Competition between farmer's markets is another issue, as a new crop of markets appears every season.
Urban Farmz, like other vendors, is adding unique and complementary merchandise to its traditional lineup of agricultural items. Diversifying by selling certified organic soap at its stand, online, and to wholesale accounts will "juice up the brand," as Caleb says. The producers of the organic soap sell it for $14 per bar on their own website, and they ask Urban Farmz to avoid any conflict by selling at a higher price. Thinking fast, Caleb suggests a retail price of $15.95 per bar, saying that this will give Urban Farmz a reasonable profit margin.
Will buyers accept this price? It's time for some competitive homework. The lavender-lemon verbena scent is very popular, and certified-organic products have cachet. Caleb thinks that visitors to the Urban Farmz website will probably not click away to save a dollar or two by buying elsewhere, because then they'll have to pay the other site's shipping fee, as well as the Urban Farmz site's shipping fee. Urban Farmz will also have to set a separate wholesale price when it sells the soap to local restaurants. Will this new soap be the product that boosts Urban Farmz's profits and turns the name into a lifestyle brand?
In the pursuit of profits, how might Urban Farmz use a combination of cost-based, demand-based, and competition-based pricing for the products it sells? Explain your answer.

Question 8

For what types of products would price skimming be most appropriate? For what types of products would penetration pricing be more effective?

Question 9

Setting the right price for a product is a crucial part of a marketing strategy. Price helps to establish a product's position in the mind of the consumer and can differentiate a product from its competition. Several decisions in the marketing plan will be affected by the pricing strategy that is selected. To assist you in relating the information in this chapter to the development of your marketing plan, focus on the following:
Review the various types of pricing strategies in Table 21.3. Which of these is the most appropriate for your product?

The information obtained from these questions should assist you in developing various aspects of your marketing plan found in the "Interactive Marketing Plan" exercise at www.cengagebrain.com.

Question 10

Describe bundle pricing, and give three examples using different industries.

Question 11

How does a return on an investment pricing objective differ from an objective of increasing market share?

Question 12

Why do customers associate price with quality? When should prestige pricing be used?

Question 13

Pricing at the Farmers' Market
Whether they're outside the barn or inside the city limits, farmers' markets are becoming more popular as consumers increasingly seek out fresh and local foods. Today, more than 7,000 farmers' markets are open in the United States, selling farm products year-round or only in season. Although some are located within a short drive of the farms where the fruits and vegetables are grown, many operate only on weekends, setting up stands in town squares and city parks to offer a combination of shopping and entertainment. "These markets are establishing themselves as part of our culture in ways that they didn't used to be, and that bodes well for their continued growth," says the director of Local-Harvest. org, which produces a national directory of farmers' markets.
Selling directly to the public enables farmers to build relationships with local shoppers and encourage repeat buying week after week as different items are harvested. It also allows farmers to realize a larger profit margin than if they sold to wholesalers and retailers. This is because the price at which intermediaries buy must have enough room for them to earn a profit when they resell to a store or to consumers. Farmers who market to consumers without intermediaries can charge almost as much-or sometimes even more than-consumers would pay in a supermarket. In many cases, consumers are willing to pay a higher price for top-quality local products, and even more for products that have been certified organic by a recognized authority. Competition is a factor, however. Consumers who browse the farmer's market will quickly see the range of prices that farmers are charging that day for peppers, peaches, or pumpkins. Competition between farmer's markets is another issue, as a new crop of markets appears every season.
Urban Farmz, like other vendors, is adding unique and complementary merchandise to its traditional lineup of agricultural items. Diversifying by selling certified organic soap at its stand, online, and to wholesale accounts will "juice up the brand," as Caleb says. The producers of the organic soap sell it for $14 per bar on their own website, and they ask Urban Farmz to avoid any conflict by selling at a higher price. Thinking fast, Caleb suggests a retail price of $15.95 per bar, saying that this will give Urban Farmz a reasonable profit margin.
Will buyers accept this price? It's time for some competitive homework. The lavender-lemon verbena scent is very popular, and certified-organic products have cachet. Caleb thinks that visitors to the Urban Farmz website will probably not click away to save a dollar or two by buying elsewhere, because then they'll have to pay the other site's shipping fee, as well as the Urban Farmz site's shipping fee. Urban Farmz will also have to set a separate wholesale price when it sells the soap to local restaurants. Will this new soap be the product that boosts Urban Farmz's profits and turns the name into a lifestyle brand?
Urban Farmz wants to price the organic soap at $15.95 per bar, while the soap maker prices the same soap at $14 per bar. What perceptions do you think consumers will have of each price? What recommendations do you have regarding this price difference?

Question 14

Compare and contrast a trade discount and a quantity discount.

Question 15

Setting the right price for a product is a crucial part of a marketing strategy. Price helps to establish a product's position in the mind of the consumer and can differentiate a product from its competition. Several decisions in the marketing plan will be affected by the pricing strategy that is selected. To assist you in relating the information in this chapter to the development of your marketing plan, focus on the following:
Select a basis for pricing your product (cost, demand, and/ or competition). How will you know when it is time to revise your pricing strategy?
The information obtained from these questions should assist you in developing various aspects of your marketing plan found in the "Interactive Marketing Plan" exercise at www.cengagebrain.com.

Question 16

What is the reason for using the term F.O.B.?

Question 17

Why must marketing objectives and pricing objectives be considered when making pricing decisions?

Question 18

Pricing at the Farmers' Market
Whether they're outside the barn or inside the city limits, farmers' markets are becoming more popular as consumers increasingly seek out fresh and local foods. Today, more than 7,000 farmers' markets are open in the United States, selling farm products year-round or only in season. Although some are located within a short drive of the farms where the fruits and vegetables are grown, many operate only on weekends, setting up stands in town squares and city parks to offer a combination of shopping and entertainment. "These markets are establishing themselves as part of our culture in ways that they didn't used to be, and that bodes well for their continued growth," says the director of Local-Harvest. org, which produces a national directory of farmers' markets.
Selling directly to the public enables farmers to build relationships with local shoppers and encourage repeat buying week after week as different items are harvested. It also allows farmers to realize a larger profit margin than if they sold to wholesalers and retailers. This is because the price at which intermediaries buy must have enough room for them to earn a profit when they resell to a store or to consumers. Farmers who market to consumers without intermediaries can charge almost as much-or sometimes even more than-consumers would pay in a supermarket. In many cases, consumers are willing to pay a higher price for top-quality local products, and even more for products that have been certified organic by a recognized authority. Competition is a factor, however. Consumers who browse the farmer's market will quickly see the range of prices that farmers are charging that day for peppers, peaches, or pumpkins. Competition between farmer's markets is another issue, as a new crop of markets appears every season.
Urban Farmz, like other vendors, is adding unique and complementary merchandise to its traditional lineup of agricultural items. Diversifying by selling certified organic soap at its stand, online, and to wholesale accounts will "juice up the brand," as Caleb says. The producers of the organic soap sell it for $14 per bar on their own website, and they ask Urban Farmz to avoid any conflict by selling at a higher price. Thinking fast, Caleb suggests a retail price of $15.95 per bar, saying that this will give Urban Farmz a reasonable profit margin.
Will buyers accept this price? It's time for some competitive homework. The lavender-lemon verbena scent is very popular, and certified-organic products have cachet. Caleb thinks that visitors to the Urban Farmz website will probably not click away to save a dollar or two by buying elsewhere, because then they'll have to pay the other site's shipping fee, as well as the Urban Farmz site's shipping fee. Urban Farmz will also have to set a separate wholesale price when it sells the soap to local restaurants. Will this new soap be the product that boosts Urban Farmz's profits and turns the name into a lifestyle brand?
Would you recommend that Urban Farmz use promotional pricing at the farmers' markets where it regularly sells its products? If so, which techniques would you suggest, and why?

Question 19

Why should a marketer be aware of competitors' prices?

Question 20

As discussed in this chapter, customers interpret and respond to prices in different ways, depending on the type of product, perceptions of product quality, and the customer's ability to judge product quality independent of the price. Because customers lack the ability to judge product quality, they sometimes use the price of the product as an indicator of product quality. Thus, the price-quality relationship can influence the purchase of some products. For each one of the following, indicate whether customers rely heavily, moderately, or hardly at all on the price to judge the quality of a product.

Question 21

List the characteristics of products that have inelastic demand, and give several examples of such products

Question 22

Explain why optimal profits should occur when marginal cost equals marginal revenue.

Question 23

Chambers Company has just gathered estimates for conducting a break-even analysis for a new product. Variable costs are $7 a unit. The additional plant will cost $48,000. The new product will be charged $18,000 a year for its share of general overhead. Advertising expenditures will be $80,000, and $55,000 will be spent on distribution. If the product sells for $12, what is the break-even point in units? What is the break-even point in dollar sales volume?