Question

Long Answer Question:

Snappy Tom has developed a new range of cat food, “SnappyLuxe for Kittens” which from

its original market testing and research results, is likely to be very popular among owners of

pedigree and purebred kittens. The firm’s main objective is to make as much profit in the

short term as possible from this new product range, given that a) the product might be a

short-term fad, and b) demand for the product may be relatively inelastic to start with.

Is Snappy Tom likely to use skimming or penetration pricing to initially price this new

product? Why? Explain the advantages and disadvantages of this strategy. Then select

and fully explain (including advantages and disadvantages) two other methods the

company could use to price this new toy range.

Answer 1

Ans) Penetration is the process in which firm uses low price of new product in the market, initially low price of the new product as launched by Tom. It is basically done for attracting consumers from different firms. Its advantage is that firm can launch new product acquiring new consumers from other firms, as this will increase their profit and consumer start liking this product because of cheaper then other. The disadvantage is that any firm can launch any product without proper testing or sampling of the product in the market. In that situation the consumer surplus will be less as they will be exploited. The second disadvantage is that the cost of the product will not cover in long run as the launch of new product in the market it takes time to attract new consumer for the product and in the mean time firm have to bear loss if the consumer are not attracted at much rate, as firm already launching it at below equilibrium price or the low price then other firms in the market.

The other methods the company could use to price is that after advertising of the product, i.e sale promotion of the product , the firm can set target of revenue which firm have to cover after sale, sale maximization of the product in this situation firm can offer low price then if firms aim to profit maximization and can earn revenue as well as can attract more consumer then profit maximization motive of the firm. The another method the firm can use is that firm can offer new product at discount with the old product for sampling as by this the consumer will buy old product and will get new product with them by this they can test the new product according to their need and can buy this new product separately if they needed or liked that product. And by the discounting offer more consumer will start buying this product. The disadvantages of both the method is that :

In sale maximization if the price of the product will rise then the producer have to bear this increase in price as he can't pass this increase to the consumer if he will do this then he will loss his consumer so he have to decide the price which are above cost and have space of revenue from this new product. The disadvantage of discount offer is that firm have to bear the cost as it is offering at low price in initial phase, profit can only be earned if the demand of the product increase.