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o Contact the credit card company or the bank if you suspect an order may
be fraudulent before processing an order.
Debit Cards. In 2003, for the first time shoppers used credit and debit cards more
often than cash or checks. Compared to credit cards, the equipment to accept
debit cards is easy to install and the cost to the company is negligible. Interchange
speeds up the checkout process but also allows merchants to recognize customers
when they walk in the store; send personalized coupons, incentives, and rewards to
them; and generate useful reports.
Installment Credit. Small companies that sell big-ticket consumer durables (major
appliances, cars, boats, etc.) rely on installment credit. Customers are typically required to
discounts if customers pay their balances early; others impose penalties on late payers.
Layaway. Although technically not a form of credit, layaway plans enable
customers to purchase goods over time. The customer selects an item, pays a
deposit on it, and makes regular payments until it is paid in full. The retailer keeps
the item until the customer has finished paying.
intentional.
Part 3: Chapter Exercises
You Be the Consultant: “The Psychology of Pricing”
1. Use the Internet to find examples of businesses that use these or other
psychology-based pricing techniques and write a brief description of the company
2. Why do many entrepreneurs underprice their goods and services, especially
when they first get into business? Discuss the connection between the prices a
company establishes for its goods and services and the image it creates for the
company. (LO 2) (AACSB: Reflective thinking)
1. Work with a team of your classmates to define the ethical issues involved in
dynamic pricing. (LO 2) (AACSB: Ethical understanding and reasoning)
Expect the teams to demonstrate an understanding of dynamic pricing and the idea of
Copyright © 2019 Pearson Education, Inc.
Chapter 11, Page 184
The potential negative impact on loyal and repeat customers
2. What are the advantages and the disadvantages of dynamic pricing to the
companies that use it? To the customers of the companies that use it? (LO 2)
(AACSB: Ethical understanding and reasoning)
Companies: Advantages to companies that offer dynamic pricing include higher profit
3. According to an old proverb, “The value of a thing is what it will bring.” Do you
agree? Explain. Should companies be allowed to engage in dynamic pricing? (LO 2)
4. If you owned your own business and had the information required to engage in
dynamic pricing, would you do so? Explain. (LO 2) (AACSB: Ethical
11-1. What competitive factors must the small firm consider when establishing
prices? (LO 1) (AACSB: Reflective thinking)
When all is taken into consideration, the factors that small business owners must consider
when determining price for goods and services includes:
Copyright © 2019 Pearson Education, Inc.
Chapter 11, Page 185
The company's competitive advantage
Economic conditions
Business location
Seasonal fluctuations
Psychological factors
Credit terms and purchase discounts
Customers' price sensitivity
Desired image
11-2. Describe the strategies a small business could use in setting the price of a new
1. Market Penetration: Set prices below competitors to gain market entry. This
11-3. What objectives should a company’s pricing strategy for a new product seek
1. Get the product accepted. The acceptable price range depends on the product’s
position:
11-4. Define the following pricing techniques: (LO 2) (AACSB: Reflective thinking)
Copyright © 2019 Pearson Education, Inc.
Chapter 11, Page 186
psychological impression of lower prices.
Price lining – 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.
Leader pricing – 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 their items
at regular prices.
Geographical pricing – prices vary according to the costs of shipping merchandise to
customers across a wide range of geographic regions. One type of geographic pricing is
zone pricing, which is a technique that involves setting different prices for customers
located in different territories because of different transportation costs. Another option is
delivered pricing, a technique in which a company charges all customers the same price
regardless of their locations and different transportation costs. The final option is F.O.B.
factory, in which a small company sells merchandise to customers on the condition that
they (the customers) pay all shipping costs.
Discounts – There are five variations of discounts:
o Discount markdowns are reductions from normal list prices.
11-5. Why do so many small businesses use the manufacturer’s suggested retail
11-6. What are the disadvantages of using the manufacturer’s suggested retail
11-7. What is a markup? (LO 3) (AACSB: Reflective thinking)
11-8. How is the markup for a product calculated? (LO 3) (AACSB: Reflective
thinking)
11-9. What is cost-plus pricing? (LO 3) (AACSB: Reflective thinking)
Cost-plus pricing is a pricing technique in which a manufacturer establishes a price that
11-10. Why do so many manufacturers using cost-plus pricing? (LO 3) (AACSB:
11-11.What are the disadvantages of using cost-plus pricing? (LO 3) (AACSB:
11-12. Explain the difference between full-absorption costing and direct costing.
(LO 3) (AACSB: Reflective thinking)
Absorption costing is the traditional method of product costing in which all manufacturing
11-13. How does absorption costing help a manufacturer determine a reasonable
11-14. What benefits does a small business get by offering customers credit? (LO 4)
(AACSB: Reflective thinking)
11-15. What costs does a business incur by selling on credit? (LO 4) (AACSB:
Reflective thinking)
Copyright © 2019 Pearson Education, Inc.
Chapter 11, Page 188
Typical Credit Transaction Works. An interchange fee is the fee banks collect from
retailers whenever customers use a credit or debit card to pay for a purchase. Some
entrepreneurs offer customers incentives to pay with cash in order to avoid the fees.
Part 5: Case Studies
There are no case studies associated with this chapter.
Part 6: Online Videos and Podcasts
These online videos may enhance class discussion and provide additional insight for the
chapter topics.
Developing a Pricing Strategy 7:09 minutes
http://www.youtube.com/watch?v=9tk820A0GF4
Pricing Strategies: One Dumb Mistake 5:10 minutes
http://www.youtube.com/watch?v=yiYvUqCpu-k
Is Your Product Too Expensive? 10:00 minutes
http://www.youtube.com/watch?v=isZZ8NZ7vuk
Here’s What I Learned About Selling High Priced Products 7:03 minutes
http://www.youtube.com/watch?v=cjCdf8n7hzo
Marketing & Advertising: How to Price Your Product 3:08 minutes
http://www.youtube.com/watch?v=4phxRH6vk-I
Discounting Is for Dummies 5:22 minutes
http://www.youtube.com/watch?v=CxD4w9eHgdk
Pricing Your Product 5:04 minutes
http://www.youtube.com/watch?v=9_2Hu1jQA_4
Roundtable Discussion: Structuring Profitable Products – Pricing 6:57 minutes
http://www.youtube.com/watch?v=RSAe_Fr9AJY
Future of Payments (Mobile Wallets) 4:18 minutes
http://www.youtube.com/watch?v=dAywQ6spop4
Links to additional online resources are available on the companion Web site at
