Describe a skimming price and a penetration price
Skimming and penetration pricing are two strategies for the creation of better profits. These strategies are employed by the businesses releasing new products and requiring promotion of the appearing goods. Penetration pricing is based on the offering of lower prices for the new products in order to attract buyers and create customer base.
The main disadvantage of penetration price is that its gradual growth over time might lead to the loss of customers. Skimming pricing is a strategy consisting of three phases. Each phase has different product price, the first price is the highest and then it gradually goes down. This strategy is suitable for well known brands and relies on the chase after fashionable products.
If the brand is not developed enough, this strategy will fail. Alba and Gavigan are a celebrity couple, so their product would be the focus of customers’ attention right away, although skimming price may not work because the product is not a fashion attribute, it is about the health and welfare of babies, so the customers would be focused on choosing brands they trust over the ones that are fashionable.
Offering a penetration price and then gradually raising it may distract some customers, yet since the product really is of good quality, this threat can be avoided if The Honest Company manages to win many loyal clients. This way, the couple is recommended to go with the penetration price; this will create reputation and help win the trust of customers.
It is important to remember that the price should not be very low, but accessible; otherwise, the customers may start to doubt the quality of products. Since Alba and Gavigan are oriented at the creation of honest business and maintaining long term profits, penetration price is the way to go. The celebrity status of the business owners will serve as a very good promotion tool for The Honest Company.
This way, the company should expect high sales right away, and after the customers start to appreciate the products, loyalty developing strategies can be applied to keep and even maximize the size of The Honest Company’s customer base. Besides, this strategy fits into the company image anticipated by Alba and Gavigan. Their business provides good quality all-natural products for babies for a fair price.
This strategy will secure their business from losing clients in the long term. Finally, to keep increasing their profits over time, the business owners may start to increase the price for their goods gradually. Baby food and hygiene market is the field where the customers care about the quality of the products the most.
This is why once a company earns a reputation of a fair and reliable business their customer base size will become steady or even win more buyers ready to pay higher price for better quality products.
What price would you bid if you must win the project?
As the owner of a small building company willing to bid on a government contract for the building of a pedestrian walkway in a national park during the coming winter and having to compete with three other bidders I have made some calculations.
First of all, I tried to estimate the approximate lowest bidding barrier for each of the bidders based on my competitor intelligence; this way, the first bidder has the lowest bidding price of $397980, as their incremental costs exceed those of my company by 10%, the second bidder’s lowest bidding price would be $435200, and the third bidder’s barrier is $484000, the lowest bidding price of my company is $428800, yet since my capacity utilization is moderate, the company would not assign the lowest price possible and neither would my first and second competitors.
The first bidder has the highest capacity utilization rate, so they are likely to bid the highest amount possible, which is for them approximately $442200 (incremental cost plus 50%), this way to win the project my company has to bid higher than $428800 and lower than $442200.
The difference between the bid of my company and the first bidder has to be significant because the first decision maker is the buyer’s relative, so my final bidding price would estimate $435000. Since it is a government contract that assumes no extra costs, the buyer is likely to have very low risk tolerance and $7200 difference would be enough to break the family ties.
To maximize my expected value from the contribution to this project I would assign a higher price of $455600 (incremental costs plus 70%) because my capacity utilization is moderate. With this price I would still have a good chance to win the project because the first bidder is a small and inefficient plant and they do not like winter contracts.
The bidder number three is rather expensive, besides, the decision maker there is looking for a promotion and plain government contract is hardly a way towards that for a creative competitor from a large and efficient plant. Finally, the second bidder seems to have the same prices as my company, yet they do not appreciate messy and inconvenient jobs and their decision maker is looking for a new job, which serves as a strong de-motivating factor concerning the success of winning this project.