Since Victoria knows about elasticity, she calculated price elasticity of demand to test the price sensitivity of her buyers. For a price above $10, the quantity demanded will fall significantly, which will affect the profit calculation. This means that the bakery will be able to sell an expected quantity of 55,000 units as long as the price is below $10. Please note the importance of the assumption that demand is insensitive to price up to $10 per unit. We set the profit equal to the target of $100,000 and use total revenue and total cost in order to solve for the price. After that, penetration pricing is used to capture broader segments of the population. The initial high price helps attract price-insensitive consumers, which allows for covering initial research and development costs. In some cases penetration pricing follows skimming pricing. Of course, the firm pays attention to controlling the costs, as cost matters when calculating profit. Economies of scale allow firms to lower their costs as they produce and sell large amounts of goods.Ī firm applying penetration pricing may maintain the initial low price, or lower the price even further hoping that higher sales volume would generate higher profit. Unit total costs fall dramatically as sales volume increases.High price might attract competition as it signals profitability. A low initial price discourages entry by competitors.It is better to go in with a lower price. This means that high price would significantly lower sales and revenue. Many segments of the market are price sensitive.Penetration pricing is an effective strategy when the following are true: The firm sets the price low initially to appeal to the mass market. Penetration pricing is the opposite of skimming pricing. The relationship between price and quality might help increase sales. Customers interpret the high price as signifying high quality.Lowering the price has only a minor effect on increasing the sales volume and reducing the unit costs.It acts like an invitation to potential rivals. High price signals to the potential competitors that there is the possibility of profit in this market. The high initial price will not attract competitors.There are enough early buyers who are willing to buy the product immediately at the high initial price. Skimming pricing is an effective strategy when the following are true: Some agencies are selling tickets priced at $200,000 - $250,000 per person. Retrieved from Example: Space tourism is attracting early buyers. As these customers' demand is satisfied, the firm might lower the price to attract another, perhaps more price-sensitive segment. The idea with skimming pricing is to take advantage of these price-insensitive buyers with the high price. Especially new or innovative products attract early buyers who believe that trying the product/service before the majority of the market is a privilege. Price is set to the highest initial price level that customers who really desire the product/service are willing to pay. Demand represents customers’ willingness to pay, which comes from customers' tastes, evaluations of the product, interests, preferences, etc.ĭemand orientation involves the following pricing methods: Demand-Oriented Approachesĭemand-oriented pricing focuses on the customer side such as expected customer tastes and preferences more heavily than other factors. Let us examine each one of these four orientations in details. Module 3-Week 12: Advertising, Sales Promotions, Public Relations, and Green Washingįour Orientations in Selecting an Approximate Price Level. 1) demand-oriented approaches, 2) cost-oriented approaches, 3) profit-oriented approaches, and 4) competition-oriented approaches.Module 3-Week 11: Developing Promotional Mix.Module 3-Week 10: Marketing Channels and Supply Chains.Module 2-Week 7: New Product Development, Product Life Cycle, and Branding.Module 2-Week 6: Target Market Selection.Module 1-Week 1: Introduction to Marketing.Course Description and Learning Outcomes.
0 Comments
Leave a Reply. |