When an economy is characterized by high inflation, special pricing tactics are often necessary. One popular cost-oriented tactic is culling low-profit margin products from a product line
Explain why this tactic might backfire, and describe the other two cost-oriented tactics that can be used instead.
What will be an ideal response?
ANSWER: Culling low-profit margin products from a product line may backfire because (1) a high volume of sales on an item with a low profit margin may still make the item highly profitable; (2) a loss of economies of scale may occur as certain products in a product line are eliminated, lowering the margins on other items? and (3) a change in the price-quality image of the entire product line may occur as a result of the elimination of a product. Instead of culling these products, two other cost-oriented tactics may be used: delayed-quotation pricing and escalator pricing.Delayed-quotation pricing: In this tactic, a price is not set on a product until the item is either finished or delivered. This is a popular tactic used by builders of nuclear power plants, ships, and airports.Escalator pricing: In this tactic, the final selling price reflects cost increases incurred between the time an order is placed and delivery is made. This tactic is often used for complex products that take a long time to produce.
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