Question

In class, we considered the way in which value-pricing is used by firms like McDonald's to provide more value to consumers. In general, this one useful approach to get consumers' attention for our product. However, as discussed, a practical problem can arise if: a. The COSTS for ingredients may rise, so that the firm cannot produce a profit at the value-priced amount. b. COMPETITION can charge us with illegal price competition. c. Consumer groups accuse us of caring more about profits than about our consumers' health. d. Managers cannot calculate the value price in the store e. as a practical matter, we pointed out that value-pricing always reduces our profits.

Answer 1

A) The COSTS for ingredients may rise, so that the firm cannot produce a profit at the value-priced amount.

Step-by-step explanation:

Value pricing strategies usually work because consumers always like good offers and what better offer than a cheap price. But for any company to be able to sell at very low prices, the inputs they use including labor, materials and capital must be cheap also. That is the reason why McDonald's pays a low salary and they have to buy the cheapest possible ingredients.

If the price of any of their inputs increases significantly, then they will start losing money if they keep their prices low. If we want to pay $1 for a hamburger, then we cannot expect it to be made with the best ingredients available or by the best paid chefs in the world.