Question

Suppose we only have two consumer segments in the market. You are a marketer trying to decide the price for your product. The detailed information about the two segments are below, WTP stands for the maximum willingness to pay. Segment 1 Segment 2 Size 10 customers 20 customers WTP $3.00 $1.50 Usage 1 per customer 1 per customer Suppose the average cost per unit is $1. Please answer the following questions:

If the price is set as $3, which segment can you acquire? What will be your profit?

If the price is set as $1.5, which segment can you acquire?

What will be your profit?

If the objective is to have highest profit, how would you price?

If the objective is have highest market share, how would you price?

Is there anyway to price your product so we can get both, high market share and high profit?

Answer 1

Information as per the question is given below.

Average Cost per Unit = $1.00

CASE 1

Price is set at $3.00

With this price point, the customers of only Segment 1 could be acquired. For Segment 2 customer, this price is higher than what they are willing to pay for the product.

Profit per unit = (Price - Average Cost)

= $3 - $1 = $2

Total Profit = (Segment Size * Profit Per Unit * Usage per Customer)

= $(10 * 2 * 1) = $ 20

CASE 2

Price is set at $1.50

With this price point, the customers of both Segment 1 and Segment 2 could be acquired. For Segment 1 customer, this price is lower than what they are willing to pay for the product and for Segment 2, this price is equal to what they are willing to pay for the product.

Profit per unit = (Price - Average Cost)

For Segment 1 Sales

Profit per unt= $1.50 - $1.00 = $0.50

For Segment 2 Sales

Profit Per Unit = $1.50 - $1.00 = $0.50

Total Profit = (Segment 1 Size * Profit Per Unit * Usage per Customer) + (Segment 2 Size * Profit Per Unit * Usage per Customer)

= (10 * 0.5 * 1) + (20*0.5*1) = $ 15

Objective to have Highest Profit

If the objective is to have the highest profits then the product should be priced as per the Skimming Pricing Policy.

Here in this case if the product is priced with $3 then the profit per unit, as well as Total Profit, is higher. This is termed as Skimming Pricing Policy. For example, Apple prices its product as per the Skimming Pricing Policy, where the profit per unit is very high resulting in high Total Profits for the company.

Objective to have the Highest Market Share

If the objective is to have the highest market share then the product pricing should be done as per the Penetration Pricing Policy.

Here in this case, if the product is priced at $1.5 then it is able to acquire both the customer segments 1 & 2. However, the profits per unit, as well as the total profit is reduced. Usually, a new entrant in the market, try to focus on getting as much market share as possible and prices their product as per the Penetration pricing policy.

A firm usually aims for the high market share in the market as with the increasing volume of purchases the profits go high along with it. However, becoming a high profitability firm requires sacrificing the leadership position in the market share. Firms try to become high market share and high profitability firm by offering a range of variants of the product for different segments.

In this case, the product price at $1.5 is the price which gives the highest market share however, the moment price is increased from $1.5 to have more profits, it loses its leadership in the market share.