Chapter 6 Setting Prices and Implementing Revenue Management GENERAL CONTENT Multiple Choice Questions 1. The only function that brings operating revenues into the organization is. a. marketing b. management c. finance d. accounting e. information technology (a; Easy; p. 136) 2. recognizes that virtually all activities taking place within a firm directly or indirectly support the production, marketing, and delivery of goods and services. a. Break-even analysis b. Variable cost c. Fixed cost d. Activity-based costing e. Semi-fixed cost (d; Moderate; p. 139) 3. are services sold at less than full cost to attract customers, who will then be tempted to buy profitable service offerings from the same organization in the future. a. Benign followers b. Unit packages c. Loss leaders d. Cost providers e. Contracts (c; Easy; p. 140) 4. is defined as the sum of all the perceived benefits minus the sum of all the perceived costs of service. a. Net value b. Consumer surplus c. Gross value d. Moderate value e. Consumer demand (a; Moderate; p. 141) 6-1
5. Which of the following is NOT a broad expression of value? a. Value is low price. b. Value is whatever I want in a product. c. Value is the quality I get for the price I pay. d. Value is an expectation about a service outcome. e. Value is what I get for what I give. (d; Moderate; p. 141) 6. The difference between the price consumer s pay and the amount they would actually have been willing to pay to obtain the benefits is known as. a. net value b. gross value c. consumer surplus d. moderate value e. consumer demand (c; Moderate; p. 141) 7. Which of the following is an example of a physical cost? a. Mental effort b. Fatigue c. Feelings of inadequacy d. Social Embarrassment e. Perceived Risk (b; Moderate; p. 142) 8., also known as customized or personalized pricing, refers to the practice of price discrimination. a. Critical ratio pricing b. Dynamic pricing c. Collective pricing d. Fixed pricing e. Classical pricing (b; Easy; p. 143) 9. Which of the following intensifies price competition? a. Non-price-related costs of using competing alternatives are high. b. Wider distribution of competitor and or substitution offers. c. Personal relationships have been established. d. Switching costs are high. e. Customer need for time and location specificity. (b; Moderate; p. 145) 6-2
10. Which of the following reduces price competition? a. Increasing the number of competitors. b. Increasing the number of substituting offers. c. Wider distribution of competitor and/or substitution offers. d. High switching costs for consumers. e. Increasing surplus capacity in the industry. (d; Moderate; p. 145) True/False 11. Pricing is less complex in services than it is in manufacturing. (False; Easy; p. 139) 12. Customers will often pay more for services than they think they are worth. (False; Easy; p. 141) 13. Because quality is subjective, all customers have the expertise to assess the quality and value they receive. (False; Moderate; p. 141) 14. Business owners often fail to recognize the fixed costs that need to be recouped when providing service. (True; Moderate; p. 142) 15. Customers often incur significant financial costs in searching for, purchasing, and using a service, above and beyond the purchase price paid to the supplier. (True; Easy; p. 142) 16. Psychological costs relate to unpleasant sensations affecting any of the five senses. (False; Moderate; p. 142) 17. Shopbots help consumers combat dynamic pricing online. (True; Moderate; p. 143) 18. Shopbots collect price and product information from multiple electronic vendors and provide it to consumers. (True; Easy; p. 143) 19. Firms do not need to consider post-consumption costs, as they occur after the firm has already secured a purchase. (False; Moderate; p. 144) 20. Firms that are always reacting to competitors price changes run the risk of pricing higher than might really be necessary. (False; Moderate; p. 145) 6-3
Short Answer 21. What are the three foundations of the pricing tripod? Costs, Competition, Value to customer (Easy; p. 138) 22. What are the four distinct categories of non-monetary costs? Time costs, physical costs, psychological costs, and sensory costs. (Moderate; p. 144) 23. What are two examples of situations that increase price competition? Increasing number of competitors Increasing number of substituting offers Wider distribution of competitor and/or substitution of offers Increasing surplus capacity in the industry (Moderate; p. 145) 24. What is price customization? Charging different customers different prices for the same product. (Easy; p. 148) 25. What are two ways in which companies can improve customer perceptions and satisfaction regarding revenue management? Design price schedules and fences that are clear, logical, and fair Use high published prices and frame fences as discounts Communicate consumer benefits of revenue management Use bundling to hide discounts Take care of loyal customers Use service recovery to compensate for overbooking (Moderate; p. 154) 6-4
Essay 26. Discuss how service firms can minimize non-monetary purchase costs. Service firms have several options available for reducing the non-monetary costs associated with service purchases. Operations experts can assist in reducing the time required to complete purchases, delivery, and consumption. Psychological costs can be reduced by eliminating or redesigning unpleasant or inconvenient procedures, educating customers, and retraining staff to be friendlier and more helpful. Physical efforts can be reduced during either the search or delivery process. More attractive visual environments, reduced noise, more comfortable furniture and curtailing offensive smells can decrease sensory costs. (Challenging; p. 142) 27. Describe the concept of price elasticity and draw a graph comparing consumers with high and low elasticity. Price elasticity refers to the amount of impact price has on sales. Consumers are said to be price elastic if small changes in price result in large changes in sales. Consumers are said to be price inelastic if price has little effect on sales. Figure 6.8 depicts a comparison of these two groups. (Moderate; p. 147) APPLICATION CONTENT Multiple Choice Questions 28. Which company is an example of dynamic pricing in the Internet access business? a. AOL b. easyinternetcafe c. Vox1 d. Earthlink e. Barbados Internet Forums (b; Easy; p. 136) 29. Which of the following is NOT listed in the chapter as a firm that uses online reverse auctions? a. Priceline.com b. Hotwire.com c. ebay.com d. Lowestfare.com e. All of the above use online reverse auctions. (c; Moderate; p. 143) 6-5
30. The amount of seats reserved for each class of American Airlines passengers on a flight is referred to as a. a. field b. row c. column d. bucket e. gamble (d; Moderate; p. 147) 31. Which of the following is the best example of a service industry that utilizes price complexity? a. Fast food b. Education c. Cellular phone d. Moving/transportation e. Roofing (c; Moderate; p. 151) 32. Which of the following is the best example of a service firm that attracts customers with low base prices and then piles on additional fees. a. Rental cars b. Fast food c. Education d. Roofing e. Consulting (a; Moderate; p.152) True/False 33. Amazon.com is a good example of a firm that aggravated its customers with dynamic pricing. (True; Moderate; p. 143) 34. Tickets.com is a good example of a firm that successfully generated more revenue by implementing dynamic pricing. (True; Moderate; p. 143) 35. Airlines, hotels, and car rental firms are not very good at varying prices in response to the price sensitivity and needs of different market segments. (False; Moderate; p. 146) 36. Yield management computers can determine who is likely to not show up or take other flights. (True; Easy; p. 147) 6-6
37. Discounting to win new business is one of the best strategies for firms wishing to develop a loyal customer base. (False; Moderate; p. 157) Short Answer 39. Give an example of a tradeoff between monetary and non-monetary costs associated with patronizing a dental clinic. Paying a higher price for closer proximity or a shorter wait. (Easy; p. 142) 38. Name two e-tailers that utilize traditional auction models. ebay and Yahoo! (Moderate, p. 143) 40. Draw a graph of the relationship between price per seat on an airline and demand for seats. Label each price bucket. See Figure 6.9. (Challenging; p. 149) 42. Relate fairness perceptions to DVD rental late fees. Late fees for DVD rentals should not exceed the potentially lost revenue from rental fees during the late period if fairness perceptions are considered. (Challenging; p. 153) 41. Describe how rate fences should be used in a hair salon service. Rate fences may be perceived as less fair if they are framed as surcharges instead of discounts. A hair salon should thus set a higher weekend price and offer a discount for weekday service. (Moderate; p. 154) 6-7
Essay 43. Describe how airlines utilize revenue management to enhance profitability. Revenue management involves setting prices according to predicted demand levels among different market segments. Airlines utilize massive databases on past travel to forecast demand and attempt to allocate optimal capacity to the least price sensitive segments. For example, business travelers pay higher prices for booking flights closer to travel dates, whereas vacationers book in advance. Higher demand travel dates also garner higher prices. (Challenging; p. 146) 44. Give an example of a service firm that uses service recovery to compensate for overbooking and discuss how the firm compensates. A Westin beach resort frees up capacity by offering guests who are departing the next day the option of spending their last night a luxury hotel near the airport or in the city at no cost. Guests gain variety and experience luxury that delights. The hotel benefits by relieving needed capacity in exchange for a small cost. (Moderate; p. 155) 45. Discuss how a health club could strategically manage capacity via payment schedules. Member usage patterns seem to be closely related to payment schedules. Members seem to use the health club in the month immediately following payment and then steadily decline in usage until the next payment. Members with monthly payment plans use the facilities with greater frequency. This indicates that capacity could be reduced and profits maintained by charging annual fees that are due outside of peak months. (Moderate; p. 158) 6-8