Question

Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all-natural products they'd like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly.

Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences.

1. You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration price, and advise them whether they should charge a skimming price or a penetration price, with supportive reasoning for and against each pricing alternative.
2. Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
3. What advice would you give to Alba and Gavigan to help them make more profit in the long term?

Answer 1

Solution

Assumption : The products they are selling on their platform are of their own brand and are not that of already established brands.

a.I believe they can opt for a skimming price strategy because of the following reasons:

(i) The products they are selling are of their own branding so we can say they can be treated as unique.Ex: Eventhough different restaurants prepare the same dish,they price it differently.

(ii) Since these are celebrity people their personal brand adds on to the brand value of the product.So due to this exclusiveness,they can price the products at a higher price reflecting the exclusiveness of their product.Only the consumers who are not price sensitive will buy the product in the beginning.

(iii) The profit margin for the products will be high which will satisy their motive of maximizing economic profits.

(iv) By analyzing the sales for sometime they can get to know the actual value offered by the product.Initially after the product launch,there will be euphoria,but afterwards it settles.Then the sales will pickup only if the value offered by the product (in terms of quality/uniquesness/ etc.,) justfies it's pricing.Then they can plan for appropriate pricing strategy.

(v) Since they want to expand quickly they need funds,which is poossible through generating higher profit margins by this strategy.

I believe they should not opt for Penetration strategy in the beginning as their product is unique (brand),their motive is cashing the uniqueness and not through competiting with other brands.

b.No,they might not in the very initial stages as their sales might not be sufficient in comparision to the high initial costs.Yes by taking appropriate decisions they can definitely generate economic profits in the long-term.

c.They should go for skimming strategy firstly and after assessing the market and sales,they should come to decisions like about how much price they should be reducing,future marketing spends etc.They can reduce the price depending upon the customer segment they are willing and able to cater to.