Question

The typical supermarket has 30,000 different products on sale at any given time. The manager of that supermarket must determine not only what mix of products to have on hand but where to locate those products and what price to set on each one at any specific time. Usually, the price is based on a markup on the cost of the item, and the only reason the price is altered is that costs change. When you reserve a hotel room, you find that there are several different prices offered for that same room, depending on whether you work for the government, are a member of AARP or some other organization, are staying more than one night, and so on. Why doesn’t the hotel just offer a single price? These examples illustrate just a few of the many problems confronting businesses in their relations with customers. Companies do not seem to know much about their customers. For instance, companies often base prices on the anecdotal evidence of a few vocal salespeople or product managers. Even Mercedes-Benz, when it was about to launch one of its A-class models in the German market, initially proposed a price tag of DM29,500, based on little more than the belief that DM30,000 was a psychologically important barrier. Consultants point out that price has a disproportionate effect on the bottom line, far more than greater volume or cuts in fixed and variable costs. Assuming that volumes stay constant, a 1 percent price increase produces between an 8 percent and 11 percent improvement in operating profits.

So does this mean that most businesses should raise their prices? Explain your answer.

Are these businesses leaving money on the table—that is, not generating the greatest revenue they could by knowing the customer better?” Explain your answer.

Answer 1

even though 1 percent increse in price produces between 8 -11 percent improvement in operating business but with increase in price there is decrease in demand as price and quantity demanded has an inverse relationship. so this does not mean that most businesses should raise their prices. a business should charge a price where quantity demanded is enough to maintain a steady profit. just by incresing price of its product a business cannot earn profit. profit can be earned by keeping quantity demanded constant by cost cutting and cost reduction techniques.

yes these businesses are leaving money on the table i.e. not generating the greatest revenue they could by knowing the customer better. a product is bought by a customer so a product should be designed by keeping in mind the target customers. even the product are customized then business can reach out to a much larger customer base thus expanding its horizon and profitabilty. consumer research has become an important feild of study for every businesses, and those doing proper market research are at an advantage. afterall through consumer satisfaction only a business can survive in the long run and maintain steady revenue and profit.