Pricing is the most influential medium of communication that companies

Hello everyone,

I want to begin this post with sincere apologies for posting the solutions so late. I really do not know what else to say except we are extremely sorry for having missed posting the solution for this exercise. Sincere apologies again.


Here comes the solution.


Let's begin with Paragraph summary first.

Para 1

Pricing is the most influential medium of communication that companies can use with their customers. Prices send unequivocal messages about what the firm believes in, what it thinks of its customers, and how it wants to interact with them.

Summary

Pricing – means of communication with consumers, helps build perceptions.

Para 2

The traditional approach for fixing the price by ‘running the numbers’ only aims at maximizing short term profits. Using this mechanical and antagonistic approach solely may not be a sustainable long-term strategy since present day consumers disseminate information about a firm’s prices, exploiting social media platforms to publicize policies that they believe are unfair. And they don’t hesitate to abandon companies that cross the line. For example, when Bank of America announced in September 2011 that it would start charging a $5 monthly debit card fee, the public outcry was so intense that the bank soon rescinded the plan. But the damage was done and account closings increased significantly.

Summary

Traditional approach – short time focus, not sustainable long term as people may revolt using social media. Example given of the same.

Para 3

Pricing instead should be strategically used to create shared value for both the company as well as the customers. The key step towards such pricing would be to humanize the process by focusing on consumer relations and not solely on the transactions. Attempts should be made to innovatively design pricing models to facilitate a better consumer experience. Recognizing that many of its customers disliked shipping costs and long waits for delivery, Amazon introduced a service, which, for an annual fee, provides two-day shipping on all orders, thereby eliminating the pain of paying associated with each order. This pricing scheme not only rewards high-volume customers but, more strategically, it also helped Amazon change buying behavior by encouraging customers to do more of their shopping with the company.

Summary

Use strategic pricing to create shared value. Amazon example given.

Para 4

Promoting transparency and avoiding complicated pricing plans and obscure contractual terms is another vital practice. A firm that is transparent about the way it makes money fosters engagement and builds trust and goodwill among customers. Hidden costs and consumer traps may help for generating short term revenues but are disadvantageous on a long-term basis. Lastly, companies must closely understand and be able to influence the perceived standards of fairness of the price of their product or service.

Summary

Promoting transparency + simplifying pricing– another best practice. Benefits => engagement and trust.

Question 1

The passage is primarily concerned with:


Pre-thinnking: Promoting the best practices of setting up pricing.

Answer Choice Analysis

Choice A: Analyzing the various advantages and disadvantages of various pricing strategies. Out Of Scope - Only Advantages of one pricing strategy (strategic) while disadvantages of the other is discussed.


Choice B: Describing the various aspects of pricing process. Out Of Scope - Aspects of pricing process not discussed. Only a recommended pricing strategy is discussed.


Choice C: Explaining the importance of humanizing the process of price fixing. Partial Scope - The author goes much beyond to also talk about best practices.


Choice D: Identifying steps to adapt pricing strategy to changing trends. Correct Answer - This is what the author discusses.


Choice E: Discussing about the changing trends in consumer behavior with regards to unfair pricing. Partial Scope - The author does discuss this but this is not the central idea.

Question 2

By using the phrase ‘running the numbers’ the author is referring to what practice?


Pre-thinnking: 'running the number" means making calculations to find means to increase short term gains. (Derived from the analysis of the first two sentences of Para 2)

Answer Choice Analysis

Choice A: Running complex equations on a computer to generate a number to increase the price. Inconsistent - Does not include short term gains. Also the price may not necessarily be increased.



Choice B: Making calculations for optimizing long term profits. Opposite - This is opposite of that the author is trying to say.



Choice C: Making decisions solely based on calculations ignoring unquantifiable variables. Correct Answer - This is the correct answer per the passage.



Choice D: Using traditional methods for cost calculation and price arbitrage. Out Of Scope - Cost calculation and price arbitrage are not mentioned in the passage.



Choice E: Running simulations on statistical data to fix price. Out Of Scope - Cost calculation and price arbitrage are not mentioned in the passage.

Question 3

According to the passage, which of the following describes present day consumer most accurately?



Pre-thinnking: Open-ended Inference question. Arrive at the answer through Process of Elimination.



Choice A: Consumers sometimes use modern tools to criticize products and service that don’t live up to their promise. Inconsistent - There is no mention of consumers criticizing products and services.



Choice B: Consumers raise their voices against pricing that they feel is unjust. Correct Answer - This is mentioned in paragraph 2.



Choice C: They join hands together in protest whenever companies raise prices. Inconsistent - Consumers don’t do this always, only against price increases that they feel are unjust.



Choice D: They use social media to strongly oppose price any increases. Inconsistent - The passage only talks about unreasonable price increases.



Choice E: They sometimes threaten to stop using product. Out Of Scope - The author does not talk about this aspect.

Question 4

The author of the passage is LEAST likely to make which of the following recommendations to businessmen.




Pre-thinnking: Open-ended Detail question. Arrive at the answer through Process of Elimination.

Answer Choice Analysis

Choice A: Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction. Correct Answer - Author does not advice ignoring profit maximization.



Choice B: They should avoid hidden costs and simplify the terms of use of their service for better understanding. Incorrect - This point is mentioned in paragraph 4.



Choice C: Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing. Incorrect - This point is mentioned in last 2 paragraphs.



Choice D: They should use pricing as an effective means for communicating with customers. Incorrect - This point is mentioned in the first paragraph.



Choice E: They should try to position themselves so that they may be able to influence the perceived level of fairness of the price of their product. Incorrect - This point is mentioned in the last paragraph.



Once again, sincere apologies from team e-GMAT for posting the solution so late.

Hope this helps.
Thanks.