Free «Pricing Strategy» Essay Sample

Introduction

Swing and Steady both operate in a widget industry. Their cost structures are different because swing is a machine intensive entity that relies on machines for most of its operations and therefore incurs less direct cost. Steady is a labor intensive entity that basis its operations on man power and incurs more direct cost, but less fixed cost (Gregson, 2008, 33-45). Both of them want to enter a market segment that is not currently served by them and can potentially increase their sales volume.

Identification of the Pricing Challenges

Swing and study both wan to enhance their profitability level. They want to enter in new market segment to enhance their sale level and profitability.  Both companies have their own limitations with their pricing strategies (Gregson, 2008, 33-45). For better understanding, each requirement with their suggested solution is mentioned below separately.

Alternatives Considered and Suggested Solution

Requirement A

If either company could operate in the new market by charging lower price to new customers only then the profit earned by them is calculated as under

Swing (Table 1.1)

Steady (Table 1.2)

As can be seen from the calculations above, both the companies provide a positive contribution from the additional sales which will contribute to cover the fixed costs per month and therefore increase profitability because fixed costs accrue evenly irrespective of the increase or decrease of the number of units produced (Gregson, 2008, 33-45). Therefore it is recommended that both the companies should take this opportunity to enter into this market if they are successful to create a separate segment of the market and charge lower prices to additional customers.

Requirement B

 If we assume that both the companies are not able to segment the market and they have to charge equal to all the customers

Swing (Table 2.1)

Steady (Table 2.2)

If the companies are not able to create a separate market and have to charge same prices to all the customers then for swing it is feasible to enter into the market as profit and loss analysis of swing shows profit for both levels of increases. But for steady it is not recommended as the analysis shows a loss. Only in case, steady enters into the market alone and gets a 40% increase in sales only then it can come out with a profit (Gregson, 2008, 33-45).

The answer to part (b) differs from part (a) because; in part (b) we assume that the both companies are not able to segment the market and have to charge same prices to all the customers and we have made all the calculations on this assumption. While in part (a) recommendations were based on the assumption that companies have created a market segment and charge lower prices to additional customers.

Requirement C

Based on the calculations and analysis made above and the condition that no company is successful in creating a market segment, it is recommended that swing must continue towards entering the new market by decreasing the prices. For steady a loss of 2000 is calculated, based on the data provided even if the sales increase by 20%. So it is not recommended for steady to enter the market by decreasing the prices.

Requirement D

Steady’s decision to cut the price was right to survive in the market because if it did not cut the prices it could have lost its 60% share which means 3000units (5000*60%) and this steady could not afford (Gregson, 2008, 33-45). Even if it is currently making a loss after reduction of price, this price reduction has maintained it in the market and it has a chance to make it back in the race. If steady tries to reduce the variable cost, then it can turn the loss into profit and this cost reduction can also help to enter in the new market.