Chapter 21—Setting Prices
ESSAY
1. Describe the six steps of the process that marketers can use to establish prices.
2. What are some of the objectives a firm might hope to achieve when setting prices?
3. How are pricing objectives similar to a corporation’s overall goals? How are they different?
4. How can a marketer use product quality as a pricing objective to influence purchasing decisions?
5. How might a marketer find information about a competitor’s prices? Why is this information
important?
6. Explain the difference between cost-plus and markup pricing.
7. Describe, compare, and contrast the three major bases for setting prices.
8. Explain differential pricing and then describe the four major types.
9. Compare and contrast price skimming and penetration pricing.
10. Identify and describe the four types of product-line pricing.
11. Identify and describe six types of psychological pricing.
12. What is bundle pricing? Give three examples, each one from a different industry.
13. Explain the ethical implications of professional pricing.
14. Under what conditions would a marketer most likely use a price leader strategy?
15. What are some issues to consider when determining a specific price?
MULTIPLE CHOICE
16. When establishing prices, a marketer’s first step is to
a.
determine demand.
b.
develop pricing objectives.
c.
select a pricing policy.
d.
evaluate competitors’ prices.
e.
determine a pricing method.
17. Marketers must take steps to make sure that the pricing objectives they set are consistent with the
organization’s ____ objectives and ____ objectives.
a.
advertising; marketing
b.
overall; marketing
c.
marketing; promotional
d.
overall; promotional
e.
overall; revenue
18. If Wrigley set its pricing objective as attaining 38 percent of the chewing gum market, what else would
be needed to make this a true pricing objective?
a.
Statement of demand elasticities
b.
Identification of cost structure
c.
Breakeven analysis
d.
Identification of a time period for accomplishment
e.
Establishment of a subsequent pricing policy
19. Which of the following is a requirement for setting pricing objectives?
a.
The objectives should be short-term oriented.
b.
There should be only one pricing objective.
c.
An evaluation of competitors’ prices should be made.
d.
The cost structure should be identified.
e.
The objectives should be explicitly stated.
20. The Office Place is an office supplies company who has just adjusted its price levels so that it can
increase its sales volume to match its expenses. The Office Place is most likely employing a(n) ____
objective.
a.
market share
b.
cash flow
c.
return on investment
d.
survival
e.
profit
21. Running a big sale in order to generate enough cash flow to pay creditors is typical in a situation in
which a firm’s primary pricing objective is
a.
status quo.
b.
profit.
c.
survival.
d.
market share.
e.
recovery.
22. Westin Hotels, Inc. has an objective of achieving a 25 percent return from its overall sales. This is an
example of a ____ pricing objective.
a.
market share
b.
cash flow
c.
return on investment
d.
profit
e.
status quo
23. Most pricing objectives based on ____ are achieved by trial and error because not all cost and revenue
data are available when prices are set.
a.
market share
b.
cash flow
c.
return on investment
d.
survival
e.
profit
24. Maintaining or increasing market share
a.
can be achieved even if industry sales are flat or decreasing.
b.
is an infrequently used pricing objective in most industries.
c.
depends upon the overall growth of the total industry.
d.
is a profit-related objective based on price.
e.
is directly tied to leading an industry in product quality.
25. Nabisco is considering two pricing objectives. The first is to sell one out of every three crackers
consumed in the world, an objective based on _______; the second is to meet, but not beat,
competitor’s prices of cookie products, which is a _____ objective.
a.
cash flow; market share
b.
market share; cash flow
c.
survival; status quo
d.
market share; survival
e.
market share; status quo.
26. A market share objective
a.
is not recommended when sales for the total industry are declining.
b.
is not especially useful when sales for the total industry are increasing.
c.
is not especially useful when sales for the total industry are flat.
d.
is useful primarily in an industry where total sales are increasing.
e.
can be used effectively whether total industry sales are rising or falling.
27. Under Armour is establishing a ______ pricing objective to maintain or increase its product’s sales in
relation to total industry sales.
a.
Return on investment
b.
Survival
c.
Product quality
d.
Market share
e.
Status quo
28. Which of the following pricing objectives sets prices to recover cash as quickly as possible?
a.
Market share
b.
Profit
c.
Cash flow
d.
Return on investment
e.
Product quality
29. A marketer is most likely to set prices according to a cash-flow objective when a
a.
trial-and-error approach to the market is acceptable.
b.
certain market share must be maintained.
c.
quick return on investment is desired.
d.
higher price is acceptable to the firm.
e.
product is expected to have a long life cycle.
30. Gambrell Designs thinks its new product, the Automatic Dog Walker, will have a short product life
cycle; therefore, its marketing department sets its primary pricing objective as
a.
market share.
b.
cash flow.
c.
profit.
d.
product quality.
e.
status quo.
31. Maintaining a certain market share, meeting competitors’ prices, maintaining a favorable image, and
achieving price stability are all associated with a ____ pricing objective.
a.
product quality
b.
market share
c.
survival
d.
profit
e.
status quo
32. Which pricing objective de-emphasizes price and can lead to a climate of nonprice competition in an
industry?
a.
Status quo
b.
Return on investment
c.
Market share
d.
Survival
e.
Cash flow
33. What type of pricing objective would an organization use if it were in a favorable position and desired
nothing more?
a.
Return on investment
b.
Cash flow
c.
Profit
d.
Status quo
e.
Survival
34. Which type of pricing objective can reduce a firm’s risk by helping to stabilize demand for its
products?
a.
Status quo
b.
Market share
c.
Survival
d.
Cash flow
e.
Return on investment
35. If an organization sets prices to recover research and development expenses and establish a premium
quality image for its product, it would be using a ____ pricing objective.
a.
survival
b.
return on investment
c.
market share
d.
product quality
e.
cash flow
36. The pricing of Clinique makeup considerably higher than brands such as Cover Girl, Revlon, and
Maybelline is used to communicate ____, which is the company’s primary pricing objective.
a.
market share
b.
product quality
c.
status quo
d.
profitability
e.
cash flow
37. Research indicates that both market share and ____ are good indicators of profitability.
a.
low pricing
b.
product quality
c.
limited competition
d.
sales growth
e.
ROI pricing
38. When consumers are making do with less expensive products and shopping more selectively,
manufacturers and retailers must focus on the ____ of their products.
a.
price
b.
quality
c.
availability
d.
value
e.
image
39. Kendra has been doing research for a smartphone manufacturing company. She has just been
reviewing the results of several focus groups and has found that for customers, value is a function of
the product’s
a.
quality attributes.
b.
price and brand name.
c.
price and durability.
d.
quality and functional attributes.
e.
quality relative to the quality of competing brands.
40. Marketers improve their ability to establish prices appropriately when
a.
there is nonprice competition.
b.
they know prices charged for competing brands.
c.
their products are of better quality than the competition’s.
d.
the main objective is image building.
e.
using psychological pricing.
41. Some grocery stores collect data on competitive prices
a.
by calling their competitors.
b.
on a quarterly basis.
c.
through stores’ purchase data.
d.
from their resellers.
e.
by using full-time comparison shoppers.
42. Marketers at organizations engaged in nonprice competition
a.
are more concerned about knowing competitors’ prices than are marketers in organizations
that are engaged in price competition.
b.
are not concerned about the prices of competing brands.
c.
need competitive price information to make sure that their products are priced at
approximately the same level as the prices of competing brands.
d.
rely on customers to help them gather information regarding the prices of competing
brands.
e.
experience high levels of price instability.
43. Competitors’ prices, along with the marketing variables they emphasize, are determining factors in
a.
the instability of prices in a particular industry.
b.
using markup pricing for consumer goods.
c.
how much marketing research a firm needs to collect.
d.
using differential pricing to demonstrate quality differences.
e.
how important price will be to customers.
44. Companies that focus on particular product categories and rely on everyday low pricing to acquire a
large market share through aggressive and competitive pricing strategies are often referred to as
a.
pioneers.
b.
category killers.
c.
comparison discounters.
d.
price leaders.
e.
category leaders.
45. The three primary bases for developing prices are
a.
profit, demand, and competition.
b.
supply, demand, and marketing objectives.
c.
demand, competition, and cost.
d.
markup, cost, and cost-plus.
e.
negotiation, periodicity, and randomness.
46. When a seller’s costs are usually determined during or after a product is made and then a specified
percentage or dollar amount is added to the cost to establish a price, an organization is using ____
pricing.
a.
markup
b.
demand-based
c.
differential
d.
cost-plus
e.
expensed-based
47. For custom-made equipment or commercial construction projects, which pricing method is most likely
used?
a.
Prestige
b.
Premium
c.
Differential
d.
Return-on-investment
e.
Cost-plus
48. Steinway produces concert grand pianos, often using the custom materials and designs desired by a
specific customer. The average price of these pianos runs about $50,000 depending on the exact piano.
What type of pricing does Steinway most likely use for these pianos?
a.
Markup
b.
Competition-based
c.
Cost-plus
d.
Demand-based
e.
Secondary-market
49. The federal government often uses ____ pricing when it grants defense contracts.
a.
markup
b.
differential
c.
breakeven
d.
cost-plus
e.
competition-based
50. Wet Seal, a retailer of swimwear, employs a commonly used cost-based pricing method called
a.
value pricing.
b.
cost-plus pricing.
c.
cost discounting.
d.
differential pricing.
e.
markup pricing.
51. Which of the following statements about markup pricing is correct?
a.
The use of similar markups reduces price competition.
b.
Markup pricing is inconvenient to use.
c.
Markup pricing results in a high price when demand is high and a low price when demand
is low.
d.
Markup pricing is a demand-based pricing method.
e.
Using markups makes pricing a time-consuming, difficult process.
52. Markup is measured either as a percentage of ____ or a percentage of ____.
a.
selling price; cost
b.
cost; profit
c.
revenue; contribution margin
d.
resources used; cost
e.
demand; competition
53. When determining markup as a percentage of cost, divide the markup amount by
a.
price.
b.
cost.
c.
quantity.
d.
revenue.
e.
100.
54. A retailer of Real Dry deodorant prices it at $2.00; it costs the retailer $1.40. What is the approximate
markup as a percentage of selling price?
a.
3 percent
b.
14.3 percent
c.
30 percent
d.
70 percent
e.
20 percent
55. Kohls pays $16.50 for a six-ounce bottle of cologne and sells it for $25.95. Its markup as a percentage
of cost is approximately ____ percent for this product.
a.
64
b.
36
c.
18
d.
57
e.
45
56. If a product is priced based on how many or how few people want it at a particular time and place,
____ pricing is being used.
a.
markup
b.
demand-based
c.
competitive
d.
peak
e.
differential
57. Amtrak is considering two pricing strategies for its service. One is to price its train tickets so that it is
less expensive to travel on weekends than during the week when there is heavy business travel, which
illustrates ____ pricing. The second is to price its train tickets so that the further away the travel date,
the greater the discount, which is best described as ___
a.
demand-based; secondary market pricing.
b.
demand-based; differential pricing.
c.
demand-based; periodic discounting.
d.
cost-plus; secondary markup.
e.
cost-plus; periodic discounting.
58. During July and August, Lakewood Links Golf Course, located in South Carolina, offers weekday
rates of $13 for a round of golf with a cart. During the rest of the year, the weekday rates are between
$25 and $35. This is an example of the use of
a.
differential pricing.
b.
incentives.
c.
competition-based pricing.
d.
demand-based pricing.
e.
random discounting.
59. If General Motors determines that it wants to sell 200,000 Chevrolet Acadias and sets the price at
$29,500 because it knows that at that price it will reach that goal, the firm would be using a ____
pricing method.
a.
cost-plus
b.
competition-based
c.
psychological
d.
comparison
e.
demand-based
60. Competition-based pricing is
a.
used when costs and revenues are secondary to competitors’ prices.
b.
not useful as a method of increasing market share.
c.
not useful if the competing products are homogeneous.
d.
not able to increase sales.
e.
used when competing products are heterogeneous.
61. When products in an industry are relatively homogeneous and price is a key purchase consideration,
a.
competition-based pricing becomes more important.
b.
demand-based pricing dominates pricing decisions.
c.
firms tend to use secondary-market pricing.
d.
cost-based methods like markup pricing are dominant.
e.
customary pricing is often used.
62. If local Shell gasoline stations look at BP stations’ prices as the primary method of determining its
own prices, Shell is using ________
a.
price fixing; which considers competition to be less important than costs.
b.
price fixing; which considers costs to be less important than competitor’s prices.
c.
market share pricing; which considers competition to be the ultimate pricing goal.
d.
competition-based pricing, which considers profit to be the ultimate pricing goal.
e.
competition-based pricing, which considers costs to be less important than competitor’s
prices.
63. If PepsiCo sets its twelve-pack price to match the price charged by Coca-Cola, Pepsi is using which of
the following pricing methods?
a.
Demand-based
b.
Cost-based
c.
Reference pricing
d.
Competition-based
e.
Price leader
64. The fact that senior citizens are charged a lower price at movie theaters than younger adults is an
example of ____ pricing.
a.
price-line
b.
promotional
c.
professional
d.
differential
e.
psychological
65. Executives in Japan decided to price Lexus luxury cars in the United States at $55,000 while pricing
them at $66,000 in their own country. This is an example of
a.
secondary-market pricing.
b.
price skimming.
c.
bait pricing.
d.
prestige pricing.
e.
random discounting.
66. Maria recently put her house on the market at an asking price of $260,000. She realizes, however, that
in order to sell the house, she may have to use
a.
secondary-market pricing.
b.
reference pricing.
c.
negotiated pricing.
d.
price lining.
e.
professional pricing.
67. A problem associated with ____ is that consumers can predict when prices will be lowered and delay
purchases until that time.
a.
random discounting
b.
penetration pricing
c.
reference pricing
d.
everyday low pricing
e.
periodic discounting
68. The “White Sale” that many department stores have every year a few weeks after Christmas is an
example of
a.
secondary pricing.
b.
off-peak pricing.
c.
periodic discounting.
d.
random discounting.
e.
captive pricing.
69. A manager at Kohls discovers that Macy’s has reduced the price of its children’s Levi’s from $31.99 to
$24.99, according to an advertisement in the Sunday newspaper. She immediately phones her store and
instructs the salesperson on duty to put a sign up next to their children’s Levi’s that reads, “SALE:
$24.99.” This is an example of what pricing strategy?
a.
Secondary-market pricing
b.
Bait-pricing
c.
Reference pricing
d.
Random discounting
e.
Comparison discounting
70. If a business decides to reduce its prices once in a while on an unsystematic basis, it is using
a.
price reduction planning.
b.
random discounting.
c.
bait pricing.
d.
periodic discounting.
e.
penetration pricing.
71. A sale that advertised prices “up to 65 percent off” the original price uses
a.
tensile pricing.
b.
random discounting.
c.
periodic discounting.
d.
bait pricing.
e.
psychological pricing.
72. The newest version of a product like Bose headphones is likely to use _____, while the new version of
Red Bull is likely to use _____ .
a.
penetration pricing; price skimming.
b.
price skimming; psychological pricing.
c.
psychological pricing; penetration pricing
d.
price skimming; penetration pricing
e.
price skimming; promotional pricing.
73. If Samsung uses _____ pricing for its newest version of laptops, it is probably most interested in
obtaining market share; and it is assuming
a.
premium pricing; that no other competitors are likely to enter the market soon.
b.
price skimming; that no other competitors are likely to enter the market soon.
c.
premium pricing; it needs to recoup R & D costs as soon as possible.
d.
penetration pricing; that no other competitors are likely to enter the market soon.
e.
penetration pricing; that other competitors could enter the market easily.
74. If Norelco introduced a new electric razor that sonically removes hair and priced it first at $175 and
then at $150 before reducing the price to $100, the firm’s initial pricing strategy is known as
a.
penetration pricing.
b.
psychological pricing.
c.
price lining.
d.
price skimming.
e.
odd-even pricing.
75. Sony management decided to use skimming as a pricing strategy for its newest line of high-definition
television (HDTV) sets. It should be aware that this strategy does not
a.
generate capital to cover research and development costs.
b.
discourage competitors from entering the market.
c.
provide flexibility in the introductory base price.
d.
protect the firm from covering costs if prices are set too low.
e.
reduce the stress that may be placed on the firm’s production capabilities.
76. When Sharp first introduced its line of graphing calculators, it set the price quite high; it has lowered
the price as competitors have entered the market. The pricing strategy initially used by Sharp is called
a.
customary pricing.
b.
odd-even pricing.
c.
penetration pricing.
d.
price skimming.
e.
prestige pricing.
77. A price-skimming strategy assumes that
a.
the initial demand is highly elastic.
b.
the product is efficient.
c.
it will be difficult to recoup development costs.