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FAQ's on Pricing

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Marketing Management

FAQ¶s on Developing Pricing Strategies and Programs


Q1-What is the importance of using a formal pricing department to a company for which pricing is an important factor? Ans. In industries where pricing is a key factor (aerospace, railroads, oil companies), companies will often establish a pricing department to set or assist others in determining appropriate prices. This department reports to the marketing department, finance department, or top management. Others who exert an influence on pricing include sales manager, production manager, finance manager, and accountants. Q2- Why is price considered as ³product disfeature´ by a consumer but yet the main determinant of his purchase choice? Ans. purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be- not the marketer¶s stated price. Customers may have a lower price threshold above which prices are prohibitive and seen as not worth the money. Q3- Take an example to explain how ³reference prices´ used by consumers can be manipulated by a marketer .

Ans.- Example: A seller can situate its product among expensive competitors to imply that it belongs in the same class. Department stores will display women¶s apparel in separate departments differentiated by price; dresses found in the more expensive department are assumed to be of better quality. Marketer also encourage reference price thinking by stating a high manufacturer¶s suggested price, or by indicating that the product was priced much higher originally, or by pointing to a competitor¶s high price. Q4- Why is there such a huge price differential between the suggested retail prices quoted by manufacturers and the prices actually charged by retailers in the category of consumer electronics?

Ans.- The Manufacturer¶s suggested retail price often bears no relationship to what a retailer would charge for the same item. Compared with other consumer items , from clothing to cars to furniture to toothbrushes, the gap between the prices routinely quoted by manufacturer and retailer in consumer electronic is large. The high manufacturer¶s suggested retail price is a psychological tool, a reference price that makes people see they are getting something of value for less than top price.


e.g.- in 2007, for the GR-D370 model of a mini digital video camcorder, JVC suggests a retail price of $ 330.00, but Amazon .com was selling it through Ritz Camera merchant associate for $ 247.00 and eBay was selling a ³like new´ version at a ³buy it for now´ price $ 149.00 Q5-For which products can ³image pricing´ be used most effectively? Why? Ans. Image Pricing: Image pricing refers to pricing the same product on the basis of  different images. Most effective product would be a perfume manufacturer may put a perfume in a  bottle, name it and give it an image and may price it at 100 Rs per bottle; he may  put the same perfume in a different bottle, give it another name and image and may  price it at150 Rs. per bottle.

Q6- In which situations are odd-pricing or other pricing cues such as sales signs used most judiciously? Ans. They are more influential when consumers price knowledge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores. Q7- How are price bands useful to a marketer? Distinguish between price bands & price tiers? Ans. Price Brands are useful to marketer in ranking their brands, consumer rank  the brand of the product and this is the analysis of the marketer as to which are the areas where he has to work.

Price tiers is categorized into highest price, high price, high-medium price, medium-high price, medium price, medium-low-price, low price. This is the price range of the 5 star & 3 star hotels. And Consumer often rank brands according to these price tiers in a category.


Q8- Under which circumstances does a company use µsurvival¶ as a pricing objective? Ans. Companies pursue survival as their major objective if they are plagued with over capacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or  face extinction. Q9- What is the main problem encountered while using µmaximum current profit¶ as the pricing objective? Ans. Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the

 price that produces maximum current profits, cash flow, or rate of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions in reality, these are difficult to estimate. Q10- When should a company set low price when it intends to pursue the pricing objective of attaining µmaximum market share¶? Ans. Companies believe that a higher sales volume will lead to lower unit costs and higher long run profit. They set the lowest price, assuming the market is price sensitive. Texas Instruments practiced this market-penetration pricing for years. TI would build a large plant, set its price as low as possible win a large market share, experience falling costs, and cut its price further as costs fell. Q11- When does a consumer generally exhibit a high level of sensitivity to prices? Ans. Following are the situation when consumer exhibit:

1) Availability of substitute products and price competitions. 2) They are very frequent buyers. 3) They think the price they are paying is not justified. 4) When price plays a major role in obtaining, operating, serving of the  product.


5) When supply is more than demand. Q12- Which methods are available for estimating demand curves ? Explain any one of them in details with an example. Ans. Methods for estimating demand curve :

A) Surveys B) Price experiments C ) Statistical analysis Price Experiments ± it can vary the prices of different products in a store or  charge different prices for the same product in similar territories to see how the change affects sales.

e.g. ± Before- The drugstore was selling tooth-whitening chewing gum with all the other gum. After- By putting the whitening gum with the whitening toothpaste and strips,

the drugstore sold more whitening gum because it was in close proximity to other products that were often in the same basket. Q13- List some conditions when demand is generally found to be less elastic. Ans. Condition when demand is less elastic:-



availability of close substitute.

2) War type condition. 3)


product (food, cloth, shelter)

Q14- Why do manufacturers need to use µactivity-based cost¶ (ABC) accounting in place of µstandard cost accounting¶? Ans. 1) To estimate the real profitability of selling to different types of retailers or  customers. 2) ABC tries to identify the real costs associated with serving each customer. 3) It allocates indirect costs like clerical costs, office expenses, supplies to the activities that use them.


4) The key to effectively employing ABC is to define and judge ³activities´  properly. Q15- How should a company determine its price if its offer includes extra features not offered by the nearest competitor? Ans. if the firm¶s offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor¶s price. If the competitor¶s offer contains some features not offered  by the firm, the firm should subtract their value from its own price.  Now the firm can decide whether it can charge more, or less than the competitor. Q16- ³Markup pricing´, the most elementary price-setting method, is still useful in certain cases for some unique reasons. Specify any two of them? Ans. First-seller can determine costs much more easily than they can estimate demand. By tying the price to cost, sellers simplify the pricing task.

Second- where all firms in the industry use this pricing method, prices tend to  be similar and price competition is minimized. Q17- After having decided to use µperceived-value pricing¶ how can companies use their knowledge of different type of buyers , namely, µprice¶, µvalue¶ or loyal buyers? Ans. Customers appreciate the total value of a product or service offering is crucial. Yet even when a company claims that its offering delivers more total value, not all customers will respond positively. There is always a segment of   buyers who care only about the price .

The key to perceived-value pricing is to deliver more value than the competitor  and to demonstrate this to prospective buyers it needs to understand customer¶s decision-making process. Company can determine the value of its offering in several ways: managerial  judgments within the company, value of similar products, focus groups, surveys, experimentation, analysis of historical data, and conjoint analysis.


Q18- how can companies like Big Bazaar, South west Airlines etc. use value pricing? Ans. Value pricing is not a matter of simply setting lower prices; it is a matter  of reengineering the company¶s operations to become a low-cost producer  without sacrificing quality, to attract a large number of value-conscious customers.

An important type of value pricing is Everyday Low Pricing (EDLP), which takes place at retail level. A retailer that holds to an EDLP pricing policy charges a constant low price with little or no price promotion and special sales. Companies like Big Bazaar & south west Airlines uses by redesigned the way it developed, manufactured, distributed, priced, marketed, and sold products to deliver better value at every point in the supply chain. Q19- When is going-rate pricing a good method to use? Ans. Where costs are difficult to measure or competitive response is uncertain,

firms feel the going price is a good solution because it is thought to reflect the industry¶s collective wisdom. Q20- How would you distinguish between µascending¶ and µdescending¶ bids? Ans. 1) one seller and many buyers; whereas in descending many buyers and one seller.

2) seller puts up an item and the bidders raise the offer price until the top price is reached; whereas in Descending puts a high price and then slowly decreases the price until a bidder accepts the price. 3) each seller sees what last bid is and where to go higher; whereas in descending seller sees what last bid is and where to go lower.


Q21- The µselection of the final price¶ requires an analysis of several factors. Mention at least two major ones. Ans. Two major factors:

1) Impact of the other marketing Activities:- The final price must take into account the brand¶s quality and advertising relative to the competition. The  price is not as important as quality and other benefits in the market offering. 19% care about price, 65% customer support, 58% on time delivery, 49% shipping and handling. 2) Impact of price on other parties:- Marketer need to know the laws regulating  pricing. Seller must not collude with each other while fixing the price. Some industries such as petroleum still have govt. control in fixing prices. Other, such as telecom and insurance, are guided by their respective regulatory authorities. Deceptive pricing and price discrimination without specific reasons are illegal. Q22- Why do companies set a pricing structure rather than a single price? Ans. The price must be consistent with company pricing policies. Many

companies set up a pricing department to develop policies and establish or  approve decisions. The aim is to ensure that salespeople quote prices that are reasonable to customers and profitable to the company. Q23- List the main types of price discounts and allowances generally offered by most of the companies? Ans. the main types of price discounts and allowances:

1) Discount: A price reduction to buyers who pay bills promptly. 2) Quantity Discount: A price reduction to those who buy large volume. 3) Functional Discount: Trade discount offered by a manufacturer to tradechannel member if they will perform certain function, such as selling, storing, and recordkeeping. 4) Seasonal Discount: A price reduction to those who buy merchandise or  services out of season. Hotels, motels and Airlines are the example


5) Allowances: An extra payment designed to gain reseller in special programs. Trade-in allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs. Q24- What major µpromotional pricing¶ techniques are available to stimulate early purchase? Ans. Pricing techniques:

1) Loss-leader pricing. 2) Special-event pricing. 3) Cash rebates. 4) Low-interest financing. 5) Longer payment terms. 6) Warranties and service contracts. 7) Psychological discounting. Q25- Under what condition does price discrimination work the best? Ans. Certain Condition must exist for price discrimination to work the best:

1) The market must be segmentable and the segments must show different intensities of demand. 2) Members in the lower price segment must not be able to resell the product to the higher-price segment. 3) Competitors must not be able to undersell the firm in the higher price segment. 4) The cost of segmenting and policing the market must not exceed the extra revenue derived from price discrimination. 5) The practice must not breed customer resentment and ill will.


6) The particular form of price discrimination must not be illegal. Q26- What are the possible traps that a company may experience if it follows a µprice-cutting¶ strategy? Ans. A price-cutting strategy can lead to other possible traps:

1) Low-quality trap. 2) Fragile-market-share trap. 3) Shallow-pocket trap. 4) Price-war trap. Q27- What factors influence a company to increase the prices of it¶s products? Ans. Following Factors influences:

1) cost inflation ± rising costs unmatched by productivity gains squeeze profit margin and lead companies to regular rounds of price increase . 2) Over demand- when company cannot supply to its customers, it can raise its  prices, ration supplies to customers, or both. The price can be increase in the following ways: a) Delayed quotation pricing.  b) Escalator clauses. c) Unbundling. d) Reduction of discounts. Q28- When are competitors likely to react to a price change? Ans. The company must consider the product¶s stage in the life cycle, its importance in the company¶s portfolio, the competitor¶s intentions and resources, the market¶s price and quality sensitivity, the behavior of costs with volume, and the company¶s alternative opportunities.


Q29- How can market leaders respond to aggressive price-cutting by smaller companies trying to build their market share? Ans. Market leaders often face aggressive price cutting by smaller firms trying to  build market share. Using price, Fuji has attacked Kodak, Schick has attacked Gillette, and AMD attacked Intel. Brand leaders also faced lower priced privatelebel store brands. The brand leader can respond in several ways, ³Marketing Memo: How to flight Low-cost rivals´ highlights some possible responses. Q30- Should prices just reflect the cost involved in manufacturing a product or reflect the value that customers are willing to pay? Ans. Prices are often set to satisfy demand or to reflect the premium that consumers are willing to pay or a product or service. Some critics shudder at the

thought of Rs. 50 for a bottle of water, Rs. 4000 for a pair of running shoes, and Rs. 10,000 for concert tickets.

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