Question

Bert's company is about to release a new electronics product. The electronics product is estimated to have a short life cycle before it is replaced by an upgraded one. The company would like to recover the capital spent to produce the product. It therefore decides to charge the highest possible price for the product upon release. Bert's firm recognizes this might provide an advantage to competitors who may release the product at a lower price, but it believes customers will feel that the higher price signals higher quality. Refer to Scenario 20.1. What type of pricing objective has Bert's firm adopted?

Answer 1

Bert's firm has adopted a pricing objective known as price skimming.

Price skimming is a strategy where a company sets a high initial price for a new product when it enters the market. This approach allows the company to target early adopters and customers who are willing to pay a premium for the novelty or perceived higher quality of the product.

By charging the highest possible price initially, the company aims to recover the capital spent on product development and capitalize on the relatively inelastic demand of these early customers.

Over time, as the product matures and faces competition, the firm may gradually lower the price to attract a broader customer base. Price skimming is particularly useful for products with short life cycles or when a company wants to maximize its initial return on investment.

Answer 2

The correct answer is: profit.

Step-by-step explanation:

The first thing the company does is decide where it wants to position its market offer. The clearer the objectives of the company, the easier it will be to set the price: A company can search for any of five main objectives when setting its prices:

• Survival
• Maximum current utilities
• Maximum market share
• Maximum capture of the upper market segment
• Leadership in product quality