competition - ProFile 2 UNIT 7 Competition A major issue in...

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Unformatted text preview: ProFile 2 UNIT 7 Competition A major issue in achieving competitiveness faced by companies is deciding how to price their goods, particularly new products. Clearly, they will need to recover all the investment which has been made to develop the product and to equip their manufacturing facilities. But as well as doing this, unless they have cornered the market with a completely new product, they will need to get the price right to be competitive. early adopters, will help the company recover its development costs early on. Each unit sold makes an important contribution towards covering the initial costs. There are two main dangers of this approach. Firstly, customers, even potential early adopters, may refuse to pay such an elevated price. Secondly, competitors may imitate the product and grab a large slice of the market by selling their similar product at a lower price. ESTABLISHING A PRICE The total cost of a product is made up of its variable costs, e.g. raw materials, and the contribution it makes to fixed costs, e.g. rent. Ideally, the developers hope to sell enough goods to recover quickly their development and set-up costs. This may be an unrealistic expectation as customers may not be prepared to pay a sufficiently high price for the product. As we know, there is usually a direct relationship between the price something costs and the demand for it. The stronger this relationship, the more elastic demand is. Businesses should remember that customers are totally uninterested in a company’s costs – all that concerns them is the benefits a product provides. Customers have to believe that the price is a reasonable reflection of these benefits. This may mean that firms cannot set the price as high as they would like, and will have to wait a number of years before they have sold sufficient units to recoup their original investment. Each unit sold will make a contribution to the fixed and set-up costs. Once a product has sold enough units, it will eventually move past the break-even point and start to make a profit for the business. SKIMMING However, with a new and innovative product a business may be able to adopt a skimming policy, which allows it to recover its initial costs quickly. The company sets the price high knowing that some customers are prepared to pay a high premium to get the product. These customers, See the ProFile Student’s site: www.oup.com/elt/profile PRICING FOR MARKET PENETR ATION Once the market has been skimmed, companies reduce the price to encourage greater sales and go for market penetration. Of course, they have to make sure that they have the manufacturing capacity available to satisfy the increased demand. If they are able to produce the product in sufficient numbers, they will gain economies of scale, as each unit sold makes a lower contribution to the fixed costs. However, early adopters who paid a high premium to obtain the earliest examples of the product may be angry if the price drops too far, too quickly. This means they will be reluctant to purchase any future innovation straightaway because they will be expecting that the price will soon go down. PRICING FOR EXPORT Firms may decide to adopt an aggressive pricing policy to help them sell their goods in overseas markets. The assumption here is that all original costs and overheads have already been absorbed by the initial production. Therefore, the price of any further units only needs to cover the variable costs and make a reasonable profit. This is an effective way of quickly obtaining market share in an overseas market and hurting your foreign competitors. Two dangers of this approach are that your firm could be accused of dumping, or leave itself vulnerable to the working of the so-called grey market. Photocopiable © Oxford University Press ...
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This note was uploaded on 12/12/2010 for the course RBS BCN taught by Professor Dekoe during the Spring '10 term at Rotterdam Business School.

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