53) The prices a small business charges influence its image in the marketplace.
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.
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.
56) To avoid major pricing mistakes, business owners should “shop” their competitors and asses
their prices, especially on identical products.
57) Without the advantage of a unique business image, a small business must match local
competitors’ prices or risk losing sales and customers.
58) The most common pricing mistake small business owners make is setting the price for the
products and services they sell too high.
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.
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.
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.
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.
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.
64) The “right” price depends on one factor: the value that it provides for customers.
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.
66) For most products, there is an acceptable price range, not a single ideal price.
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.
68) Dynamic pricing may raise ethical questions.
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.
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
71) Market penetration pricing is a short-term pricing strategy that achieves high profits quickly.
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.
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.
74) A market penetration pricing strategy is designed to recover a company’s development and
promotional cost of a new product very quickly.
75) A skimming price strategy is used to introduce relatively low-priced goods into a market
where no “elite” segment exists.
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.
77) Life cycle pricing is a short-term pricing strategy that assumes that competition will
eventually emerge and the price will be lowered.
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.
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.
80) Price lining occurs when a small company raises the price of all of its goods by the same
percentage to cover operating expenses.
81) It is much easier to lower a product’s price once it is on the market than to increase it after its
introduction.
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.
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.
84) The manufacturer’s suggested price takes into account the small firm’s cost structure and its
competitive situation.
85) The manufacturer’s suggested retail prices may create an undesirable image for the small
firm.
86) A manufacturer can force a small business to charge the “manufacturer’s suggested retail
price.”
87) When a small business owner does not want to make a pricing decision, he can use a
suggested retail pricing strategy.
88) The best pricing strategy for a small business owner to follow is to charge the manufacturer’s
suggested retail price.
89) Markup is the difference between the cost of a product or service and its selling price.
90) Most stores find it most practical to use a flexible markup, which assigns various markup
percentages to different types of products.
91) Below-market pricing strategies can be risky for small companies because they require
businesses to constantly achieve high sales volume to remain competitive.
92) Even though cost-plus pricing is simple, it does not encourage a small business to use its
resources efficiently.
93) For setting prices, full absorption financial statements are much more useful to the small
business owner than are direct cost statements.
94) Direct (variable) costing includes in the unit cost of a product only those costs that vary with
the quantity of units produced.
95) Break-even pricing will determine the price that will cover total fixed and variable costs and
generate a reasonable profit.
96) Because the manufacturer’s capacity in the short run is fixed, pricing decisions should be
aimed at employing these resources most efficiently.
97) For most service firms, labor and profit comprise the greatest portion of the cost of the
service.
98) The typical consumer in the United States has 7.7 credit cards.
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.
100) The use of credit cards increases the probability, speed, and magnitude of customer
spending.
101) Because installment credit absorbs a company’s cash, many small businesses rely on
financial institutions to provide it for their customers.
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.
103) A small business must carefully assess its own cash position before offering trade credit to
its customers.
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.
105) Name and explain the three basic pricing strategies a small business owner has in
establishing a new product’s price.
106) Describe two situations; one where you consider dynamic pricing is ethical and the other
where dynamic pricing is unethical.
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.
108) Explain the difference between absorption costing and variable (or direct) costing. Which
one is more useful when establishing prices? Why?
109) Explain the different kinds of credit a small business can offer its customers and the impact
each has on pricing.
110) Explain the advantages and the disadvantages of a small business accepting credit cards for
customer purchases.
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?
112) What is Miller Manufacturing’s break-even price?
113) What is the minimum price that Miller Manufacturing should set for its electrical
components?
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?