Question

Hi can you please answer to the question accurately what it says?

1. Compare and contrast 2 organizations that face elastic demand and inelastic demand (according to your point of view). Choose companies in different industries. Think on what pricing strategy should be used and prove your point of view

Answer 1

For the purpose of this analysis, we can classify the industries into two industries - the FMCG (fast moving consumer goods industry) and the luxury goods industry (like expensive cars and other electronic goods industries).

The FMGC goods include all the goods that have a very shirt shelf-life, like our groceries. These goods are produced and sold by multiple companies in the market, and are priced almost the same by all these companies.The reason for that is these products have a very competitive market, and many substitutes with respect to the brands. Hence, these products also tend to be very elastic with respect to their prices because consumers are not particular about which brand they buy, since these products do not differ too much in quality and features across brands. Hence, a slight increase in price of these products from one brand will lead customers to switch to a different brand.

On the other hand, luxury goods like electronic items and expensive cars thrive on brand loyalty, and every individual company or brand selling such products have patented technology which greatly differentiates their product from that of its competitors. Hence, an increase in the price of one particular brand will not see a massive switch of customers loyal to that brand to different brands. These products have unique features and brand value which does not reflect the characteristics of a perfectly competitive market, and hence these products have very low price elasticity of demand.

There are different pricing strategies at the disposal of a firm, but the choice of the appropriate pricing strategy depends on the nature of the product. In this regard, these industries can employ the following pricing strategies -

FMCG Industry: This industry must use the competitive pricing, that is, in order to survive in the market and sell their product, they have to charge the price that their competition charges. This way, they will stay in the competition and they can generate sales. This is important as these products have very close substitutes to each other and hence very high price elasticity of demand.

Luxury goods: These goods must use the value-based pricing strategy. This is basically the pricing strategy that involves charging the price according to the value that the customers believe the product is worth. For instance, based on the brand, customers believe that BMW is an expensive car, and hence BMW can charge a higher price according to what the customers feel is the value of the car. These goods can be priced this way with little regard to their competitors' price, because there are no close substitutes of these goods, and also because the higher price of these goods is partially the reason why the good is valued in the first place.