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Marketing Final Exam

Is greater than supply skimming is an attainable

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Unformatted text preview: itors. As long as demand is greater than supply, skimming is an attainable strategy. PENETRATION PRICING. This method is at the opposite end of the spectrum from skimming. With this method, a firm charges a relatively low price, hoping to reach the mass market in the early stages of the product life cycle. The low price allows the product to penetrate a large portion of the market, resulting in large market share and lower production costs. This strategy is successful when (1) the market is price sensitive, (2) economies of mass production are feasible, and (3) the firm has substantial resources to sustain the short-run losses necessary to obtain penetration. STATUS QUO PRICING. With this method, price is set identical or close to that of the competition. This strategy may be used more often by small firms for survival or ease of use but ignores demand and cost. This strategy can be successful when (1) the firm is comparatively small and (2) the firm needs a safe route to long-term survival. PTS: 1 REF: 320-322 Communication KEY: CB&E Model Pricing OBJ: 20-1 TOP: AACSB MSC: BLOOMS Synthesis 4. List the three basic pricing methods. Name one advantage and one disadvantage associated with using each method. ANS: PRICE SKIMMING advantages include (1) quick recovery of product development or educational costs, (2) pricing flexibility that allows subsequent lowering of price, and (3) the ability to market prestige products successfully. Disadvantages include encouragement of competitive entry into the market. PENETRATION PRICING advantages include (1) a tendency to discourage competitive entry, (2) large market share due to high volume sold, and (3) lower production costs resulting from economies of scale. Disadvantages include (1) lower profits per unit, (2) higher volume required to reach the break-even point, (3) slow recovery of development costs, and (4) inability to later raise prices. STATUS QUO POLICIES have the advantage of simplicity. Their disadvantage is that the strategy may ignore demand or cost or both. PTS: 1 REF: 320-322 Communication KEY: CB&E Model Pricing OBJ: 20-1 TOP: AACSB MSC: BLOOMS Synthesis 5. Describe which pricing method (skimming, penetration, or status quo) would be most appropriate for each of the following products: (1) a new kind of automatic vacuum cleaner; (2) brightly colored wooden blocks to be used as a child’s toy; (3) a new, low-cost, no-calorie fat substitute; (4) a home computer; and (5) a designer perfume. Briefly justify your answers. ANS: VACUUM CLEANER. Skimming could be used because there are innovators and early adopters who would like to be “first” to own the product. It is likely that competition could also follow fairly quickly, further justifying a skimming policy. CHILD’S BLOCKS. Status quo pricing could be used because this type of toy is a mature product with many substitutes. Penetration pricing could be argued if one assumes the producer found manufacturing cost advantages. FAT S...
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