Question

Ice cream has always been your favorite food. You practically lived on it while writing a master’s thesis on sustainable farms. Now you’ve found a business opportunity to marry your two passions: Opening a specialty ice cream shop that aims to delight people’s taste buds while raising their awareness of socially responsible agriculture.

The shop will source milk from local dairies, fruit from community farms, and exotic mix-in ingredients like rare herbs and edible flowers. You had no trouble raising money from like-minded investors.

Although your financial advisor Paul advised you to find a low-rent space for the first couple of years, you splurged on a location in the heart of your city’s vibrant arts district. You believe that people visiting the area’s galleries and museums will buy your product to enhance their experience. At the same time, you are keenly aware that many nearby purveyors offer gelato, frozen Greek yogurt, and other substitutes. You learned enough in your marketing courses to know that you must set prices strategically in order to compete.

At least you and Paul agree on pricing objectives. To satisfy your investors in the short term, the business must attain sufficient sales volume to cover costs and demonstrate profitability. To grow in the long term, you need market share. But neither of you is sure whether the best way to achieve those objectives is penetration pricing or competitive pricing.

If you choose the first option, you’d set price lower than other neighborhood sellers. This would have the advantage of encouraging trial and boosting sales volume among price-sensitive consumers. You could also have the flexibility to charge more if demand escalates, or less if it lags. But if competitors decide to undercut your prices, a price war could ensue—risking your ability to cover costs and weakening the business overall.

If you choose competitive pricing, you’d match the prices of other ice cream sellers and focus marketing efforts on building preference for your unique product and philosophy—features that are readily apparent to buyers and hard to imitate. This approach could create brand loyalty and a stable market share, because competitors could not easily lure your customers away. But price would still be a key marketing-mix component even if you go this route; a price that’s too high might alienate some consumers, while a price that’s too low would undermine your profits.

What is the best way to achieve your pricing objectives?

Penetration pricing

OR

Competitive pricing

Answer 1

The best way to achieve your pricing objectives is “competitive pricing”.

Your business is that of a “specialty” ice cream shop which will be making use of socially responsible agriculture. As such this can be made the USP (unique selling proposition) of your business and this can also be nurtured as your business’s competitive advantage. Use of competitive pricing will ensure that you are not making losses and are able to recover the costs. This is because use of penetration pricing comes with the risk of a price war and this can lead to losses and making the business financially unviable.

Competitive pricing can be used to leverage the growth of the business in a systematic and tangible manner. In the long term you can use your competitive advantage of good products and use of socially responsible agriculture to create a string niche for your business and the products being offered by you. This niche will be sustainable in the future as it will reduce the competitive force being faced by you in the market. This, in turn, might even give you the opportunity to start charging a premium price for your offerings in future.