ADM 2320 Chapter 11: Marketing

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29 Oct 2017

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Coming up with the right price is never easy, but very important. Firms have to figure out what customers are willing to pay and what will the manufacturers will charge. Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. The sacrifice usually includes the money that must be paid to the seller, but also the value of time necessary to acquire the product, and also travel costs, taxes, and shipping costs. Consumers judge the benefits a product delivers against the sacrifice necessary to obtain it. The key to successful pricing is to match the product or service with the consumer"s value perceptions. Consumers don"t only want a product with a low price, they want a product with high value. Sometimes when a product is priced too low, the product might be seen as low quality, poor performance, or other negative attributes.

Related Questions

FlashX company sells hi-end video games to consumers via the internet, each at a price of $75. It buys each game at a cost of $40, and it incurs another $5 per unit in distribution expenses. If FlashX incurs fixed overhead expenses per year of $2.1 million how many units does it need to sell in order to break even?

70,000

65,000

52,500

28,000

QUESTION 6

Why do retailers use the âmarkup on priceâ method of pricing, rather than the âmarkup on costâ method?

		Because it costs less to use the âmarkup on priceâ method.
		So that the âmarkupâ and âmarkdownâ percentages can easily be compared.
		Because it is more profitable to use the âmarkup on priceâ method.
		All of the above.

2 points

QUESTION 7

What can a service marketer do to manage the issue of âperishability?â

Charge higher prices during periods of peak demand, and reduce prices during periods of low demand.

Make sure that ambient conditions (physical surroundings) are pleasant.

Use better packaging to make sure the product does not spoil.

All of the above.

To say that service offerings are âinseparableâ means that:

		A service offering cannot be seen or touched.
		A service offering is âproducedâ or âdeliveredâ in the presence of the customer.
		The quality of a service offering can vary from customer to customer.
		All of the above are true.

2 points

QUESTION 10

Which of the following factors should be considered when setting the price of a new product?

		The price of substitute products.
		The anticipated length of the product life cycle.
		The degree of differentiation between the new product and existing products on the market.
		All of the above.

2 points

QUESTION 11

Which of the following statements regarding packaging is true?

		A package should provide protection to the consumer and to the product.
		A package should attract consumers' attention
		A good package should explain the features of the product, and how to use it.
		All of the above are true.

2 points

QUESTION 12

The "demand based" method for determining the selling price takes into consideration the fact that:

		Lower prices lead to higher sales volumes.
		Higher sales volumes lead to lower unit costs of production.
		Different levels of price (and cost) lead to different levels of profit.
		All of the above.

2 points

QUESTION 13

The concept of the âexperience curveâ is a recognition that:

		For new innovations, production costs typically increase as more and more units are produced.
		For innovations, production costs typically are not affected by production volume.
		For new innovations, production costs typically decline as more and more units are produced.
		Marketing managers who have more experience are typically more effective at their jobs.

2 points

QUESTION 14

Factors that affect the rate of adoption of new, innovative products include:

		The level of compatibility with existing technology.
		The extent to which people can observe others using the product.
		The level of functional, social, and/or monetary risk associated with the product.
		All of the above.

2 points

QUESTION 15

Which of the following statements regarding "convenience products" is true?

		Consumers typically will not accept substitute brands.
		Consumers typically are willing to put forth a high level of shopping effort.
		These products should be distributed through a wide variety of retail stores.
		All of the above are true.

2 points

QUESTION 16

Which of the following statements regarding a âfamily brandingâ strategy is true?

		A family branding strategy allows a firm to capitalize on its previous successes.
		A failure of one product within the family brand can harm sales of the other brands in the family.
		Family branding is advantageous in that it allows consumers to identify the manufacturer much easier, thus helping consumer to better judge the quality of the product.
		All of the above are true.

2 points

QUESTION 17

Which of the following factors argue for a penetration pricing strategy?

		The market potential is large, and is expected to increase over the years.
		It is highly likely that competitors will soon enter the market.
		Higher levels of sales volume are likely to bring lower production costs per unit.
		All of the above.

2 points

QUESTION 18

Which of the following statements regarding packaging is true?

		The quantity of product offered in a package can affect whether some consumers try the product.
		Different markets segments oftentimes desire different size/quantity packages.
		Different types of retail stores oftentimes prefer to carry different size/quantity packages.
		All of the above are true.

2 points

QUESTION 19

To say that a service offering is âintangibleâ means that:

		The service offering is âproducedâ or âdeliveredâ in the presence of the customer.
		The quality of the service offering can vary from customer to customer..
		The service offering cannot be seen or touched.
		All of the above are true

lilacyellowjacket558

Cost-Based Pricing

Companies use various strategies to set price. Since cost is animportant determinant of supply and is known to the producer, manycompanies base price on cost. Still other companies use atarget-costing strategy, or strategies based on the initialconditions in the market.

A cost-based pricing approach starts with product cost and thendesired profit is added. Usually, there is some cost base and amarkup. The markup is a percentage applied to base cost; itincludes desired profit and any costs not included in the basecost. Companies that bid for jobs routinely base bid price oncost.

Example: Linder Company makes and sells vitaminsupplements. The following information from last year's accountingrecords showed:


Cost of Goods Sold	$254,000
Selling and administrativeexpense	86,360
Operating income	111,760

The markup percentage must include all costs that are not a partof cost of goods sold plus the desired profit. For Linder Company,the markup on COGS is found as follows:

Markup on COGS	= (Selling and administrativeexpenses + Operating income)/COGS
	= ($86,360 + $111,760)/$254,000 =0.78 or 78%

Now, if Linder Company produces a new product with manufacturingcost of $2 per unit, the unit price at this markup is:

Price = $2 + (0.78 Ã $2) = $2.00 +$1.56 = $3.56

A Company does not have to use Cost of Goods Sold as the basisof the markup. For example, a job-order firm might decide to usethe markup on prime costs (direct materials and direct labor) tocost jobs. Suppose that Carl's Custom Cabinetry wants to price jobsbased on prime costs plus a markup on prime cost. Last year'sincome statement revealed the following information:


Prime costs	$134,000
Overhead	73,700
Selling and administrativeexpense	38,860
Operating income	50,920

Markup on Prime Cost	= (Overhead + Selling andadministrative expenses + Operating income)/Prime cost
	= ($73,700 + $38,860 +$50,920)/$134,000 = 1.22 or 122%

Carl is pricing a new job with estimated direct materials of$4,300 and direct labor of $1,800. The estimated price is:

Price = ($4,300 + $1,800) + (1.22 Ã$6,100) = $6,100 + $7,442 = $13,542

Neither Linder Company nor Carl's Custom Cabinets must use theprice figured according to the markup. This is just a firstapproximation. Carl, for example, may want to set a lower price inhopes of getting more business from this particular customer.Linder Company may want to charge a higher price based on marketconsiderations.

Target Costing

Another approach to pricing a product or service is targetcosting. The target cost is based on the price (target price) thatcustomers are willing to pay. The Marketing Department determineswhat characteristics and price for a product are most acceptable toconsumers. Then, it is the job of the company's engineers to designand develop the product such that cost and profit can be covered bythat price. Japanese firms have been doing this for years; Americancompanies are beginning to use target costing. So first the targetprice is set. Then the desired profit is deducted, and theremaining amount is the target cost.

Target cost = Target price -Desired profit

Determining the target cost is relatively easy. Actuallydesigning and manufacturing a product that will achieve the targetcost and sell for the target price is more difficult. As a result,target costing is an iterative process as the firm works to refinethe proposed product to meet the cost and price targets.

Price Discrimination

Price discrimination refers to the charging of different pricesto different customers for essentially the same product. TheRobinson-Patman Act was passed in 1936 as a means of outlawingprice discrimination by manufacturers or suppliers; services andintangibles are not included under the act.

The Robinson-Patman Act does allow price discrimination undercertain specified conditions: (1) if the competitive situationdemands it and (2) if costs (including costs of manufacture, sale,or delivery) can justify the lower price. According to the secondcondition, a lower price offered to one customer must be justifiedby identifiable cost savings and the amount of the discount must beat least equaled by the amount of cost saved.

To compute a cost differential, the company creates classes ofcustomers based on the average costs of selling to those customers.Then all customers in each group are charged a cost-justifiableprice.

Example: Raul Company manufactures specializedelastic bandages used to reinforce athletes' wrists or ankles. Raulsells to a number of individual physical therapists and athletictrainers as well as to Medallion Gym, a national chain of physicalfitness facilities. The average manufacturing cost is $169 per case(a case contains 100 plastic-wrapped elastic bandages). RaulCompany sold 350,000 cases last year to the following two classesof customer.

	Price	Quantity
Medallion Gym	$235	175,000
Individual trainers and physicaltherapists	$241	175,000

Medallion Gym requires that the bandages be individuallypackaged in boxes with the Medallion name on the label. This boxand special labelling costs $0.34 per unit. Raul also pays allshipping costs, which amounted to $1,400,000 last year.

The individual trainers and physical therapists order in smalllots that require special picking and packing in the factory; thespecial handling adds $20 to the cost of each case sold. Salescommissions to the independent jobbers who sell Raul products tothe trainers and physical therapists average 10 percent of sales.Bad debts expense amounts to 1 percent of sales.

The cost per case for each customer category can be computed asfollows:

Medallion Gym:
Manufacturing cost per case	$169.00
Box and special labelling ($0.34 Ã100)	34.00
Shipping ($1,400,000/175,000cases)	8.00
Total cost per case	$211.00

Individual Trainers and PhysicalTherapists:
Manufacturing cost per case	$169.00
Special handling	20.00
Sales commission ($241 x 0.10)	24.10
Bad debts expense ($241 x0.01)	2.41
Total cost per case	$215.51

Profit and profit percentages are as follows:

	Medallion Gym	Trainers and Physical Therapists
Price per case	$235.00	$241.00
Less: cost per case	211.00	215.51
Profit per case	$24.00	$25.49
Profit percentage	10.21%	10.58%

The company will need to see if the profit percentages range areclose to one another; if so, there would be a cost justificationfor the price differential. If not, the company may need toconsider potential price discrimination and change its price forthe customer group that it considers to be "out of line."

For each of the following situations, determine whether or notthere is price discrimination according to the Robinson-PatmanAct.

1.	Dr. Jeffrey Lowman, M.D., chargesless to patients who he feels cannot afford his usual fee.- Selectyour answer -YesNoItem 1

2.	Damian Company manufacturesspecialty jams and jellies. Damian is located in Amarillo, Texas,and sells only to stores in the Amarillo area. Sometimes Damianoffers a price break to store owners whose children attend the sameschools as Damian's children. - Select your answer -YesNoItem2

3.	A national manufacturer of hairproducts charges a significantly lower price to large chain storesthan to smaller stores. The price differential is not supported bycost differences. - Select your answer -YesNo

redshark999

True of False

Bill is an aging snowboard instructor at a local ski resort. All winter, he takes over the counter pain medication to deal with his aching joints. Each summer, he moves home with his parents and takes a part time job making minimum wage. This summer, he got qualified for and enrolled into state government subsidized health insurance. Now he plans to undergo arthroscopic surgery by the end of the summer to repair his knee. Though this is an economically rational decision for Bill, it represents a welfare loss to society as a whole.

Catastrophic medical expenses are large, infrequent and unpredictable. Risk aversion explains why people buy insurance which covers such catastrophic events.

The primary funding source for the expenses of current Medicare beneficiaries is the fund current beneficiaries contributed to throughout their lifetime.

Many useful medical technologies become wasteful when they are expanded to include low-risk individuals.

A problem with Cost-Benefit Analysis is that

a) scientists observe peopleâs behavior to calculate how much individuals are willing to pay for a particular treatment.

b) opportunity cost is measured as the value of the next best alternative foregone.

c) the perspective of the one benefitting from the medical service must be included.

d) sometimes subtle distinctions in the alternatives considered as opportunity costs may overstate the benefits of a treatment.

e) the use of expected values employs the statistical law of large numbers and this is not acceptable for individual decision making analysis.

Which of the following is an example of adverse selection in the private health insurance market?

a) Consumers regularly engaging in bungee jumping but being able to hide it from their insurer, who developed premiums based on the average utilization rates of that large group in the past.

b) Consumers anticipating regular (twice a year) visits to the dentist for preventive care but being able to hide it from their insurer, who developed premiums based on the average utilization rates of that large group in the past.

c) Young and healthy consumers having access to multiple plans offered by the employer (from low-priced HMO and high-deductible plans to higher-priced PPO) and ultimately choosing the most comprehensive PPO plan.

d) Elderly people enrolling in Medicare.

e) Poor family enrolling their chronically ill children in Medicaid.

ADM 2320 Chapter 11: Marketing

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