Question

Suppose that you have been hired by a high-tech, consumer electronics firm to provide an economic analysis of how to price this new product in such a way that maximizes the company's profits.
In today's technologically driven world, there are some people who enjoy becoming the first adopters of a new product. Most people, however, seem to hold back to see the development of the product before they jump in.
Are there any strategies that the firm can take so that they can fully use the knowledge of the relative elasticities? Is there any way that we can use market separation on the two markets and increase revenues?
What sort of pricing strategies do firms have to follow in case of lagged demand and network effects?

Answer 1

The various strategies that can be used in order to ensure that the new product is priced to create profits can be the following:

1) price skimming :

If the company has exploited the first mover advantage and there is no current replica of product and the use , performance of the product is different and unique from the similar product than the strategy that can be implemented will be the "price skimming"

In this strategy high prices for the products are set to take advantage of the innovation and unique features of the products, thus earn high revenue to exploit the opportunity of not having any identical or substitute product currently. This strategy however enables the company to attract huge customers thus resulting in short term high profits. When the competitors will start to make similar products then prices can be decreased to make the customer stick.

2) Penetration pricing:

Now if the new technological savvy product has substitutes or identical products giving customers the almost same purpose or performance than the company should go Market Penetration strategy. This strategy is implemented to grasp a large amount of market and attract huge customers. It incorporates setting relatively low price than the competitor to attract the custimers at the sane time not compromising with the product quality. The price is set so as not to incurr losses , and earn normal profits considerably lower than co.petitors . This decrease in the prices will rest in switching of new customers from their old companies and moreover will build customer loyalty and commitment. However this strategy yields profits in long run.

3) psychology pricing:

This a new emerging concept which was first incorporated by BATA.

Here the pricing of a product is done in such a manner that the pricing makes customers believe that the product is less expensive than others while for the company the pricing creates not such impact on the earnings compared to its customers.

The best example in this regard can be while the competitors are selling product at 5000 , your pricing should be 4997 which influences the setup of customers to see that the product is falling in the 4's range while the competitors is in 5's range. So no matter how trivial the difference is , it plays with psychological urge to save money thus help to attract customers by a small difference in amount.

4) Premium pricing :

As mentioned above the consumer electronics firm is technological savvy which means that the company sells unique products , advanced and improved whenever new product emerges. Also meaning that there is an initial life cycle stage of product going on , so the company can effectively use premium pricing. It is the strategy where in higher prices are set by the company introducing a new product more improved or advanced than the previous one or the one currently with the competitors so that opportunity is exploited and profits earned

5) Economy pricing:

This a strategy where in the low prices as compared to the competitors are charged although resulting in no decreased losses in short run while increasing the scope for profits by attracting customers in the long run.

This is done through decreasing the cost incurred on the production of the good. As mentioned that the company is technological and advanced then the new innovative methods and advanced processes can be used to decrease the cost per output through identifying efficient means to reduce wastes and encourage efficient utilization of resources.

Thus acting as a two edged sword it on one hand decreases the price by keeling it economical to invite huge customers , resulting in increased customer base while on the other hand the decreased price causes no decline in the profits due to dexline on cist incurred which offsets the decrease in price.

This strategy thus can prove really profitable for the company in the long run as well as in the short run as long as the costs are controlled.

6) Bundle pricing :

This is another strategy where prices in case of bulk purchases in the form of bundle would be set low as compared to the individual purchases to encourage customers to purchase more to avail the discount and thus save money. This strategy is most effective in case there us less demand for the products or the stock is unsold for long time. But in case of a new product it increases the sales by a considerable amount and thus resulting in huge production decreasing cost per output through using the whole capacity in producing marginal products, eventually increasing profits for company in the firm of increased returns.

In case of lagged demand market Penetration or bundle pricing as explained above can work better than others as it will attract the customers to purchase due to low price resulting in savings and in case of network effects psychological pricing might suit.

Thankyou

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