978-0134741086 Chapter 11 Part 2

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

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:

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)

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)

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