Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 11 Pricing and Credit 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
8) 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
9) 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
10) 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
11) ________ 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
12) 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
13) 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
14) 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” (s)he wants to create in the customer’s mind
C) the maximum price customers are willing to pay
D) All of the above
15) Businesses facing rapidly rising costs should consider ________.
A) offering products in smaller sizes or quantities
B) communicating with customers about the cost increases
C) anticipating rising material costs and try to lock in prices early
D) All the above
16) The prices a small business charges influence its image in the marketplace.
17) 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.
18) 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.
19) To avoid major pricing mistakes, business owners should “shop” their competitors and assess
their prices, especially on identical products.
20) Without the advantage of a unique business image, a small business must match local
competitors’ prices or risk losing sales and customers.
21) The most common pricing mistake small business owners make is setting the price for the
products and services they sell too high.
22) 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.
23) 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.
24) Price is a measure of what the customer must exchange to obtain goods and services, and is
an indicator of value to the customer.
25) 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.
26) 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.
27) The “right” price depends on one factor — the value that it provides for customers.
28) 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.
29) 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.
30) What does it mean to “focus on value” in relationship to establishing a price? In your
response, discuss how customers recognize and evaluate value.
31) 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
32) 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
33) 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
34) 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
35) 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
36) 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.
37) 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
38) ________ 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
39) Once a company has invested time and money developing a unique new product, to recoup
some of the high R&D costs, they will likely use a ________ pricing strategy.
A) skimming
B) penetration
C) sliding-down-the-demand–curve
D) discount
40) ________ 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
41) 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 ________ pricing.
A) odd
B) price
C) customized
D) zone
42) 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
43) ________ 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
44) 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
45) 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
46) 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
47) 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
48) 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
49) A technique that involves selling a product for a low price and charging a higher price for the
accessories that accompany it is called ________ pricing.
A) multiple–unit
B) optional product
C) captive-product
D) by product
50) 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 ________
pricing.
A) by–product
B) optional-product
C) bundling
D) captive-product
51) Management consulting firm McKinsey and Company claims that ________ percent of the
pricing problems on new products are the result of companies setting prices that are too low.
A) 10 to 20
B) 40 to 50
C) 60 to 70
D) 80 to 90
52) For most products, there is an acceptable price range, not a single ideal price.
53) 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.
54) Dynamic pricing may raise ethical questions.
55) Market penetration pricing is a short-term pricing strategy that achieves high profits quickly.
56) 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.
57) 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.
58) A market penetration pricing strategy is designed to recover a company’s development and
promotional cost of a new product very quickly.
59) A skimming price strategy is used to introduce relatively low–priced goods into a market
where no “elite” segment exists.
60) 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.
61) Life cycle pricing is a short–term pricing strategy that assumes that competition will
eventually emerge and the price will be lowered.
62) 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.
63) 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.
64) Price lining occurs when a small company raises the price of all of its goods by the same
percentage to cover operating expenses.