Question

A new product has per-unit variable costs of $15 and an estimated value to the customer of $45 per unit. Products in this category have been selling at around $35 per unit. Describe the three basic initial-pricing strategies, and give the approximate price for this product that would be suggested by each of these three strategies. For each price, explain your reasoning.

Answer 1

The three basic initial pricing strategies are:

1. Price skimming – Under this strategy, the product is charged at the highest possible price that a customer is likely to pay. This strategy is commonly used when the product is first launched. According to this strategy, the product can be charged at $43. The price is below the estimated value to the customer, higher than the competition and recovers the product’s costs.

   

2. Competitive pricing – This strategy is used when the product is established in the market and more players enter the market leading to increased competition. The product is then priced based on competitive pressures. According to this strategy, the product can be priced at $33. This is lower than the competition, but sufficiently high to recover the costs.

3. Penetration pricing – Penetration strategy uses a low price point to entice customers. The strategy is used to penetrate the market quickly and attract customers away from competitors. According to this strategy, the product can be priced at $25. This is significantly lower than what competitors are offering, but high enough to recover the costs.