Pricing is the most influential medium of communication that companies

Question

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.

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2011 that it would start charging a $5 monthly debit card fee, the public outcry was so intense that the bank soon rescinded the plan.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.

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.

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.   1 
 1. The passage is primarily concerned with:

(A) Analyzing the various advantages and disadvantages of various pricing strategies.
(B) Describing the various aspects of pricing process
(C) Explaining the importance of humanizing the process of price fixing
(D) Identifying steps to adapt pricing strategy to changing trends. 
(E) Discussing about the changing trends in consumer behavior with regards to unfair pricing

2 
 2. By using the phrase ‘running the numbers’ the author is referring to what practice?

(A) Running complex equations on a computer to generate a number to fix the price.
(B) Making calculations for optimizing profits. 
(C) Making decisions solely based on calculations ignoring unquantifiable variables that may have a greater impact. 
(D) Using traditional methods for calculation and price fixing. 
(E) Running simulations on statistical data to fix price.

3 
 3. According to the passage, which of the following describes present day consumer most accurately?

(A) Consumers sometimes use modern tools to criticize products and service. 
(B) Consumers raise their voices against products or services which they feel are unjust. 
(C) They sometimes force companies to lower prices.
(D) They use social media to strongly oppose price increases.
(E) They sometimes threaten to stop using product.

4 
 4. The author of the passage is LEAST likely to make which of the following recommendations to Businessmen.

(A) Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction. 
(B) They should avoid hidden costs and simplify the terms of use of their service for better understanding. 
(C) Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing. 
(D) They should use pricing as an effective means for communicating with customers. 
(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.

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egmat · Accepted Answer

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.

georgepaul0071987 · Answer

Seems like an easy passage with easy questions , but the options ( especially in Q2 and Q4) are really similar .

I'm not really interested in see how many answers I got right/wrong but I'm more interested to see if my reasoning is correct . I would really appreciate it if the E-gmat team could explain all the options in each question !

1.The passage is primarily concerned with:

(a) Analyzing the various advantages and disadvantages of various pricing strategies.
 Only analyzes the advantages and disadvantages of one strategy ( in the second paragraph ) . In the other paragraphs only the advantages are mentioned .

(b) Describing the various aspects of pricing process
 Does'nt really describe "various aspects" of the pricing process . The passage mainly focuses on showing how price fixing should not merely be used to optimize short term profits.

(c) Explaining the importance of humanizing the process of price fixing
 I feel this is the main point . In the second paragraph , the author says what would happen if price fixing is not "humanized " and then the subsequent paragraphs show the benefits of humanizing the process of price fixing .

(d) Identifying steps to adapt pricing strategy to changing trends. 
 Yes this could be the answer , but I feel this depicts the logical structure more rather than fixating on the main point.

(e) Discussing about the changing trends in consumer behavior with regards to unfair pricing

Too specific . This is dealt with only in the second paragraph .

The next question was a bit difficult because nearly all the options seem correct , so I was a bit lost.

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

(a) Running complex equations on a computer to generate a number to fix the price.

Hmmm...does it necessarily have to be "Complex equations " ? I could just run "Simple equations " also right ? Probably not the correct option.

(b) Making calculations for optimizing profits. 
 
 This could be the answer but I'm not sure if you can generalize to say "optimize profits" , because profits could be either long term or short term .

(c) Making decisions solely based on calculations ignoring unquantifiable variables that may have a greater impact.

"Running numbers" actually refers to the act of "calculating " and not "Decision making".So this is incorrect.

(d) Using traditional methods for calculation and price fixing.

Seems like a typical GMAT "boring" inference answer . But maybe this answer choice is too boring

(e) Running simulations on statistical data to fix price.

I would pick this answer if this were a real world situation . I would probably pick this as the correct option here as well. 
 
 3.The author of the passage is LEAST likely to make which of the following recommendations to Businessmen.

(a) Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction.

I feel this is the correct option.

(b) They should avoid hidden costs and simplify the terms of use of their service for better understanding. \
 
 Mentioned in the last paragraph

(c) Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing.

Line 2 of paragraph 2 mentions that traditional methods must not solely be used . In paragraph 3 the author mentions that value creation should be used . So the author implies that both methods should be incorporated.
 
(d) They should use pricing as an effective means for communicating with customers.

Rephrase of the First Paragraph .
 
(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
 
 Mentioned in the last line of the passage.

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

(a) Consumers sometimes use modern tools to criticize products and service.

I don't think we can assume "social media" to be a modern tool . Social media could've been there in the past , but it's been used only now.

(b) Consumers raise their voices against products or services which they feel are unjust.

Can "unjust products or services " be equated to "unjust policies " ? Probably not.

(c) They sometimes force companies to lower prices.
 
 Very difficult to pick between (B) and (C) . But I think (C) is correct because there is actually one instance of a Company that lowered the price ( actually the company eliminated the price altogether ).

(d) They use social media to strongly oppose price increases.
 
 The passage says that they use social media to oppose policy that they feel are unjust . So these unjust policy need not imply price increase , it could be other things as well.

(e) They sometimes threaten to stop using product.

There's no mention of a "threat" , there is only a mention of them completely abandoning the company .

Carcass · Answer

The passage is primarily concerned with:
1. Analyzing the various advantages and disadvantages of various pricing strategies.  nothing is mentioned into the passage about vantages and disadvantages 
2. Describing the various aspects of pricing process  nope 
3. Explaining the importance of humanizing the process of price fixing  this is the correct answer 
4. Identifying steps to adapt pricing strategy to changing trends.  no trends 
5. Discussing about the changing trends in consumer behavior with regards to unfair pricing  nope

By using the phrase ‘running the numbers’ the author is referring to what practice?
1. Running complex equations on a computer to generate a number to fix the price.  no mentioned 
2. Making calculations for optimizing profits.  no mentioned 
3. Making decisions solely based on calculations ignoring unquantifiable variables that may have a greater impact. this is a consequence 
4. Using traditional methods for calculation and price fixing.  correct, is the technique per se 
5. Running simulations on statistical data to fix price.  nope

The author of the passage is LEAST likely to make which of the following recommendations to Businessmen. 
1. Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction.  in the right direction toward the customers 
2. They should avoid hidden costs and simplify the terms of use of their service for better understanding.  idem 
3. Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing.  the passage say that classic approach is incorrect and here the businessmen should use it ?? correct 
4. They should use pricing as an effective means for communicating with customers.  idem 
5. 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.  idem in the last sentence

According to the passage, which of the following describes present day consumer most accurately?
1. Consumers sometimes use modern tools to criticize products and service.  nope the passage says: disseminate information about a firm’s prices, exploiting social media platforms to publicize policies that they believe are unfair NOT sometimes 
2. Consumers raise their voices against products or services which they feel are unjust.  correct  
3. They sometimes force companies to lower prices.  nope 
4. They use social media to strongly oppose price increases.  nope 
5. They sometimes threaten to stop using product.  nope

mimishyu · Answer

1. The passage is primarily concerned with:

A) Analyzing the various advantages and disadvantages of various pricing strategies.
B) Describing the various aspects of pricing process
C) Explaining the importance of humanizing the process of price fixing

I’m really confused about this question at first, it’s really tricky 
from the beginning of para2’s sentence “The traditional approach for fixing the price by…”we know that para2 mainly talks about the disadvantage of traditional approach…
And in para3, it mentions that “The key step towards such pricing would be to humanize the process by focusing on consumer relations and not solely on the transactions” ,so here the author point to the importance of humanizing the process of price fixing….”,and the later part of para3 explain why it is important…

However, there’s trick in this answer, if you notice that in para4,the author point to another practice (Promoting transparency and avoiding complicated pricing plans and obscure contractual terms is another vital practice.)…

Thus, option(C) is just part of the whole concern…

if you really want to ask” what this passage primarily concerned with…”
We should better say “explain and emphasize the importance toward practices(to adapt pricing strategies to changing trends. )mention in para3&4”, so option (D) better fit to this question…

D) Identifying steps to adapt pricing strategy to changing trends. ….correct
(combine para3&4, these are whole passage’s main focus…)
E) Discussing about the changing trends in consumer behavior with regards to unfair pricing

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

A) Running complex equations on a computer to generate a number to fix the price.
B) Making calculations for optimizing profits.

This seems a probable answer
However, if we think deeply, its just the end goal to this practice
also,” maximize “doesn’t necessarily mean “optimize”

C) Making decisions solely based on calculations ignoring unquantifiable variables that may have a greater impact. ……correct

Its very strange that this can be the correct answer…
Somebody explain thus….
"Running numbers" actually refers to the act of "calculating " and not "Decision making"….
Also, as for the statement (ignoring unquantifiable variables that may have a greater impact) in option(C), shouldn’t this be the “problem” ,rather than a “base” to this practice….(it will ignore “unquantifiable variables that may have a greater impact” ???)

From sentence in para2..
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.

So it seems correct if we say ‘running the numbers’ is a practice which make decisions solely based on calculations ignoring unquantifiable variables that may have a greater impact. 
 
however, how can we say (B)&(D) isn’t correct…???

D) Using traditional methods for calculation and price fixing. 
E) Running simulations on statistical data to fix price.

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

A) Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction.

Somebody explain that “the author does not advice ignoring profit maximization.”
………….however

In para3
Attempts should be made to innovatively design pricing models to ” facilitate a better consumer experience”…
“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….

last sentence of para4 
Lastly, companies must closely understand and be able to influence the perceived standards of “fairness of the price” of their product or service.

From those sentences, we can infer that “to price for profit….” become less important than “to increase consumer satisfaction”(--or say ” to facilitate a better consumer experience”)
Or maybe “satisfaction” isn’t the same as “experience” and the word ‘satisfaction’ show up nowhere in the whole passage, thus can this option be the correct answer???

B) They should avoid hidden costs and simplify the terms of use of their service for better understanding. 
C) Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing. 
D) They should use pricing as an effective means for communicating with customers. 
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.

gullyboy09 · Answer

Hi  Bunuel ,  Sajjad1994

In Q4, option C - Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing.
Author already mentioned in the passage "Using this mechanical and antagonistic approach" for traditional way, how come author can recommend option C then, specifically the last part of the option?

guddo · Answer

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

The author’s main point is that  pricing should not be used only as a short-term profit tool, but as a strategic way to build trust, improve customer experience, create shared value, and shape perceptions of fairness . So the correct answer is the one the author would be least likely to recommend.

(A) Instead of using pricing for profits, businessmen should use pricing to increase consumer satisfaction.

This is the best answer. The author does not say pricing should be used instead of profits. The passage rejects using pricing solely for short-term profit, but it does not reject profit itself. In fact, the author supports shared value for both the company and the customer, not customer satisfaction alone.

(B) They should avoid hidden costs and simplify the terms of use of their service for better understanding.

The author would clearly recommend this. The passage directly supports transparency and avoiding obscure terms and hidden costs.

(C) Businessmen should look at value creation for the consumer too along with traditional strategies for price fixing.

The author would recommend this. The passage explicitly says pricing should create shared value for both the company and customers.

(D) They should use pricing as an effective means for communicating with customers.

The author would recommend this very strongly. The first paragraph says pricing is the most influential medium of communication with customers.

(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.

The author would recommend this too. The final sentence says companies must understand and be able to influence perceived standards of fairness.

Answer: (A)

Pricing is the most influential medium of communication that companies

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Pricing is the most influential medium of communication that companies

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615 to 715 in 15 Days (Ria's Strategies)

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