Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough)
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.
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
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.
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.
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
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.
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.
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
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.
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
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
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.
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
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.
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.
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
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
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
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
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
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
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.
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
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.
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
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.
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
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
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
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
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.
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.
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.
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.
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
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
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.
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.
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.
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
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
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
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
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
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
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
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.
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.
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.
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.
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
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