(d) Penetration Pricing
With penetration pricing a low price would initially be charged for the guest bed. The rationale for this is that the lower price will attract high sales volumes, which compensate the company for the low margins. High sales volumes also enable market share to be won, this could see the guest bed becoming a market leader. The situations which favour penetration pricing are as follows:
·High elastic demand for the guest bed, i.e. the lower the price the higher the demand. Research would be needed to ascertain if the demand would be affected by the price (as it is for the single bed).
·If significant economies of scale could be achieved by Sweetdreams, then higher sales volumes would result in sizeable cost reductions. We do not know whether this would occur here.
·If Sweetdreams was trying to discourage new entrants into the market. In this case, new entrants cannot enter the market because of the patent.
·If Sweetdreams wished to shorten the initial period of the guest bed’s life cycle so as to enter the growth and maturity stages quickly. We have no evidence to suggest this is the case here.
Market skimming
With market skimming a high initial price would be charged for the guest bed. The rationale for this is that Sweetdreams can take advantage of the unique nature of this product, thus maximising sales revenue from customers who are prepared to pay to have this new technology first. The situations which favour market skimming are as follows:
·The product is new and different, this is the case here.
·The product has a short lifecycle and high development costs have been incurred. We do not have information about development costs, but they are likely to have been high.
·High prices attract competition, so there need to be barriers to entry. The patent will deter competitors from the market.
·The strength and sensitivity of the demand are unknown.
Conclusion
Given the revolutionary nature of the product and the patent on it, it seems that price skimming would be the most suitable strategy. |
