Question

Most calculators come with a book of instructions. Unfortunately, if you misplace the book, you’re left to your own devices in figuring out how to use the calculator. Wouldn’t it be easier if the calculator had a built-in “help” function similar to the one on your computer? You could just punch the “Help” key on your keypad and call up the relevant instructions on your display screen. You just invented a calculator with this feature, and you’re ready to roll it out. First, however, you have to make some pricing decisions: When you introduce the product, should you use skimming or penetration pricing? Which of the following pricing methods should you use in the long term: cost-based pricing, demand-based pricing, target costing, or prestige pricing? Prepare a report describing both your introductory and your long-term alternatives. Then explain and justify your choice of the methods that you’ll use.

Answer 1

Solution

When you introduce a product it is better to use a skimming pricing strategy because the firm can maximise it's short-term profits.

Reason - Since it is given that the product is newly introduced in the market (i.e., with the " help " button) which means there is no competition presently.So,since it is a new feature,the consumers who are willing to pay more will buy the products even if the price is high.So,through this strategy,the company can recover it's capital cost soon.As soon as the competitors come out with the same product,the firm can reduce it's prices to prevent it's loss of market share and also to capture market share of it's competitors.

In the long-term,I feel that I should use demand-based pricing because using this method,the price is set based on customer's demand at different price points and arrived at an acceptable price.

Since cost-based pricing is based on the cost of manufacturing the product it may not be reliable because the cost of raw materials cannot be estimated with precision as the same depends on a number of factors.

Prestige pricing - If your product has some quality that is unique and say patented then you can opt for prestige pricing - meaning always charging your product higher than market in order to reflect about your product's superior quality in the market.

Target Costing - Using this approach,the target cost is set by subtracting the desired profit margin from the competitive market price.The cost that the company can bear to produce the product.There might be a situation in which the firm can only desire for a nominal profit margin in the competitive space.

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