BUS 640 Week 5 Assignment
Week 5 Assignment
BUS 640 Managerial Economics
Ashford University
January 2014
Week 5 Assignment
Problem 1:
Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all-natural products they would like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. They are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Their primary goal of business is to maximize economic profits, although they want to do business honestly.
a.) The pricing strategy for a new product should be developed so that the desired impact on the market is achieved while the emergence of competition is discouraged. Two basic strategies that may be used in pricing a new product are skimming pricing and penetration pricing. As the business adviser for Alba and Gavigan, I recommend a price skimming strategy for pricing merchandise. Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. Penetration pricing requires extensive planning to properly execute a penetration-pricing strategy, the company first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced product (Monger, 2012). Both steps are expensive, so penetration-pricing strategies might not work well for small businesses. In addition, if your company’s forecasts for consumer demand are off, you could end up with a large stockpile of unwanted products. Penetration pricing also do not allow you to take advantage of an eager market of customers with money to spend and a willingness to do so. Skimming pricing is the strategy of establishing a high initial price for a product with a view to “skimming the cream off
BUS 640 Managerial Economics
Ashford University
January 2014
Week 5 Assignment
Problem 1:
Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all-natural products they would like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. They are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Their primary goal of business is to maximize economic profits, although they want to do business honestly.
a.) The pricing strategy for a new product should be developed so that the desired impact on the market is achieved while the emergence of competition is discouraged. Two basic strategies that may be used in pricing a new product are skimming pricing and penetration pricing. As the business adviser for Alba and Gavigan, I recommend a price skimming strategy for pricing merchandise. Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. Penetration pricing requires extensive planning to properly execute a penetration-pricing strategy, the company first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced product (Monger, 2012). Both steps are expensive, so penetration-pricing strategies might not work well for small businesses. In addition, if your company’s forecasts for consumer demand are off, you could end up with a large stockpile of unwanted products. Penetration pricing also do not allow you to take advantage of an eager market of customers with money to spend and a willingness to do so. Skimming pricing is the strategy of establishing a high initial price for a product with a view to “skimming the cream off
References: Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education. Monger, B. (2012). Pricing Strategies and Policies. Retrieved 1/9/2014 from http://smartamarketing.wordpress.com/2012/04/05/pricing-strategies-and-policies/ Narver, J. & Slater, S. (1990). The effect of a market orientation on business profitability. Journal of Marketing, 54, 4. 20-35