B.COM, SOLVED ASSIGNMENT - 2017-18, AMK-01: MARKETING, (IGNOU)

                                  Application Oriented Course

                                        AMK-01: MARKETING

                                       ASSIGNMENT- 2017-18

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course. Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide. This assignment is valid for two admission cycles (July 2017 and January 2018). The validity is given below:

1. Those who are enrolled in July 2017, it is valid up to June 2018.

2. Those who are enrolled in January 2018, It is valid up to December 2018.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-end Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-end Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

                                                          TUTOR MARKED ASSIGNMENT

                                                         Course Code: AMK – 01

                                                         Course Title: Marketing

                                        Assignment Code: AMK – 01/TMA/2017-18

                                                          Coverage: All Blocks

                                                         Maximum Marks: 100

Attempt all the questions.

1. Differentiate between the following:

(a) Selling and marketing

(b) Marketing mix and promotion mix                                                                                   (10+10)

2. Comment very briefly on the following statements:

(a) Product line refers all the products offered by a particular seller.

(b) Promotional allowance is a discount given by the manufacturer to the consumer.

(c) Exclusive distribution policy is suitable for the distribution of bread.

(d) There is no sponsor in the case of publicity.                                                                          (4x5)

3. “Marketing mix strategies should be different at various stages in the Product Life Cycle (PLC)”. Do you agree with this statement? Give reasons.                                                          (20)

4. (a) How you differentiate advertisement from publicity?

    (b) “Advertising is wasteful”. Comment.                                                                             (10+10)

5. (a) Explain the two pricing approaches for pricing a new product.

    (b) ABC Pharma India is the first Pharma Company to develop a vaccine for AIDS.

          For pricing this vaccine, which of the above two approaches you suggest to the

          Company? Give reasons in support of your suggestion.                                              (10+10)

                                                                       ANSWERS

1. Differentiate between the following:

(a) Selling and marketing

(b) Marketing mix and promotion mix                                                                                      (10+10)

Ans: (a) Selling and Marketing

Basis of Differentiation	Marketing	Selling
Concept	It is a strategy based on a mix of activities that are aimed at increasing the sales.	It is the strategy of meeting the needs in an opportunistic, individual method, driven by human interaction.
Focus	It targets the construction of a brand identity, needs of the consumers and how to reach to the consumers. It starts with the buyers and focuses constantly on the buyer’s needs.	It is the final act of buying goods or products by the consumers through a point sale. It starts with the seller and is focused with the seller’s needs.
Efforts	It makes an effort such that the customers actually want to buy the products in their own interest.	The company makes the product first and then figures a way to sell and make profit
Business	A customer satisfying process.	Actual sales of goods
Cost	The consumers determine the price; the price determines the cost.	Cost determines the price.
Motive	Customer satisfaction is the primary motive.	Sales are the primary motives.
Orientation	External market orientation.	Internal production orientation.
Perspective	It takes an outside-in perspective.	It takes an inside-out perspective.
Concept	It is a broad, composite and worldwide concept.	It is a narrow concept related to buyer, seller and production.
Strategy	It has a ‘pull’ strategy.	It has a ‘push’ strategy.
Beginning	It begins much before production of goods and services.	It comes after production and ends with delivery and collection of payment
Scope	It has a wider connotation and includes many research activities.	It is a part of marketing
Concern	It concerns with customer satisfaction.	It concerns with value satisfaction.
Structure	It is an organizational structure.	It is a functional structure.
Job	The main job is to find the right products for the customers.	The main job is to find the customers for the products
Mindset	The mindset is “Satisfy the customers”.	The mindset is “Hook the customers”.

Ans:      (b) Marketing mix and promotion mix

Marketing Mix	Promotion Mix
Marketing mix helps to determine how to satisfy the customers	Promotional mix focuses on direct customers interaction
Marketing mix is a planned mix of activities which includes product, place, price and promotion	Promotional mix is the coordination of marketing activities which includes publicity, sales promotion, advertising, direct marketing and personal selling
It is a combination of elements that will use to market the product	It is a coordination of activities that will perform to directly interact with the customers
It creates value in the product	It increases the volume of sales
The marketing mix has four elements which allow to control the product; they are product, price, place and promotion	The promotional mix’s goal is to inform, persuade and remind the customer about the product or service
Each element is analyzed so that a business firm can achieve success in the marketplace	Public relations are firms communicating with their customers, employees and stockholders. It is important that a business have a solid reputation with customers.
The product is analyzed for its ability to perform better than the competition. For example, quality and safety can be used as a benefit. Price includes decisions the business firm would make to price his product competitively. Place includes the distribution decision -- for example, how to reach the customers in a particular geographic location. Promotion decisions are strategies that the business firm will use to get more customers, such as coupons and sales.	Sales promotion includes inducements with the purpose of encouraging customers to buy, such as cents off coupons. Merchandising is used in the store to stimulate sales. Examples include displays, signs and posters.

2. Comment very briefly on the following statements: 

(a) Product line refers all the products offered by a particular seller.

(b) Promotional allowance is a discount given by the manufacturer to the consumer.

(c) Exclusive distribution policy is suitable for the distribution of bread.

(d) There is no sponsor in the case of publicity.                                                                          (4x5)

Ans:   (a) Product line refers all the products offered by a particular seller.

             In marketing, product line offers several related products for sale individually. Unlike product bundling, where several products are combined into one group, which is then offered for sale as a unit, product line involves offering the products for sale separately. A line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of subcategories a category has. Line consistency refers to how closely relate the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line. In comparison to product bundling, which is a strategy of offering more than one product for promotion as one combined item to create differentiation and greater value, product lining consists of selling different related products individually. The products in the product line can come in various sizes, colours, qualities, or prices. For instance, the variety of coffees that are offered at a café is one of its product lines and it could consist of flat white, cappuccinos, short black, lattes, mochas, etc. Alternatively, product line of juices and pastries can also be found at a café. The benefits from having a successful product line are the brand identification from customers which result in customer loyalty and multiple purchases. It increases the likelihood of customers purchasing new products from the company that have just been added into the product line due to the previous satisfying purchases.

Ans:  (b) Promotional allowance is a discount given by the manufacturer to the consumer
      Promotional allowances are reductions in the price of products that suppliers offer trade partners to carry out additional promotional activity in support of suppliers' products. The Internal Revenue Service includes promotional allowances in the general category of vendor allowances along with other trade allowances. Vendor allowances are a normal part of a company's marketing activities, but they are of keen interest to the IRS for tax purposes and the Federal Trade Commission for fair trade purposes. Marketers generally agree that strong trade partner support at the retail store level is vital in establishing the critical link between shoppers and products at the time buying decisions are made. To encourage such support, suppliers routinely offer promotional allowances to their trade partners to conduct a variety of promotional activities on their behalf. The Federal Trade Commission provides a list of such activities that it recognizes, which it cautions is not exhaustive. These activities include cooperative advertising, in-store demonstrations and displays, catalogs, contests and special packaging or package sizes.

Ans:  (c) Exclusive distribution policy is suitable for the distribution of bread.

           Exclusive distribution is an agreement between a distributor and a manufacturer that the manufacturer will not sell the product to anyone else and will sell it only to the exclusive distributor. At the same time, even the exclusive distributor has to enter the agreement that he will only sell the products of the manufacturers exclusively and will not sell those of the competition. This ways, the market is an open ground for the manufacturer and the distributor and they have complete control on the distribution of the product.

Advantages of Exclusive distribution policy:

Focus – Exclusive distribution helps in keeping the focus simple for the firm. The brand need not worry of losing its own distributor to the competitor. The brand has a trustworthy alliance and hence it is more focused on winning over competition rather than deciding on its distribution base.

Control – Because the exclusive distributor is himself dependent on the company, the company is very much in control. Besides distribution, the company can concentrate on marketing and advertising activities to increase the pull of the brand.

Availability – A key characteristic of Exclusive distributors is that they are financially capable of stocking huge amount of inventory. As a result, material is easily reachable to retailers and wholesalers and thereby distribution is increased.

Financial advantages for company – The brand’s cash crunch is averted as distributor is expected to have good cash in hand and is expected to carry the inventory and provide payments. As a result, the risk is mainly on distributor rather than the company and company’s finances are safe. This is off course if the distributor they have chosen is ethical and financially stable.

Penetration becomes easier for the company – Because the company does not need to cover its own back and does not need to spend manpower in finding, convincing and maintaining the distribution channel, the company can completely concentrate on building the brand and doing promotional activities so that its penetration in the market becomes much better.

Localisation – One of the major advantages of exclusive distribution is localization. If a company is entering a foreign country, there are many things which the company won’t know. At such time, entering a exclusivity agreement with a local distributor who is trustworthy is excellent for the firm because the local distributor will have relations with existing retailers and wholesalers. As a result, he can cement the brand in his market.

       After observing the above advantages it can be said that Exclusive distribution policy is suitable for the distribution of bread as the manufacturer gets immense benefits through the distributor.

Ans:  (d) There is no sponsor in the case of publicity. 

      Sponsorship is disliked by some business firms in the case of publicity due to the following reasons:

(1) It requires an exorbitant amount of budget

             There is a perceived notion that a lot of money has to be spent on sponsorships, especially for large-scale events. However, there are many types of sponsorships, and we don’t necessarily have to overspend our budget. Some examples are service, prize, venue, and cash sponsorships.   

(2) It is difficult to calculate return on investment (ROI)

               If we are spending our marketing budget on sponsorship, we are going to need a ROI to justify that. While it can be difficult to pin down the numbers, we can take these important metrics into account amount of media publicity, lead generation and immediate sales generated during the event. A survey on brand awareness and change in brand perceptions can also be conducted to further evaluate the investment. 

(3) You do not wish to be involved in philanthropy

              Sponsorships tend to be confused with philanthropy. However, there is a difference between the two, even in the case of sponsoring a non-profit organization. When we engage in philanthropy, we are giving without expecting any marketing opportunities and return on investment. Sponsorship, on the hand, guarantees publicity for our brand in exchange for our aid, and in the case of sponsoring a non-profit cause, we may also see an improvement in our brand image.

 3. “Marketing mix strategies should be different at various stages in the Product Life Cycle (PLC)”. Do you agree with this statement? Give reasons.                                                             (20)

Ans:   The Product Life Cycle contains four distinct stages. For the four stages introduction, growth, maturity and decline, we can identify specific product life cycle strategies. These are based on the characteristics of each PLC stage. Which product life cycle strategies should be applied in each stage is crucial to know in order to manage the PLC properly. We will now go into these four PLC stages in detail to identify characteristics of the stages and product life cycle strategies for each.

Introduction stage –

          The introduction stage is the stage in which a new product is first distributed and made available for purchase, after having been developed in the product development stage. Therefore, the introduction stage starts when the product is first launched. But introduction can take a lot of time, and sales growth tends to be rather slow. Nowadays successful products such as frozen foods and HDTVs lingered for many years before entering a stage of more rapid growth. Furthermore, profits in the introduction stage are negative or low due to the low sales on the one hand and high-distribution and promotion expenses on the other hand. Obviously, much money is needed to attract distributors and build their stocks. Also, promotion spending is quite high to inform consumers of the new product and get them to try it. In the introduction stage, the focus is on selling to those buyers who are the most ready to buy (innovators). Concerning the product life cycle strategies we can identify the proper launch strategy: the company must choose a launch strategy that is consistent with the intended product positioning. Without doubt, this initial strategy can be considered to be the first step in a grander marketing plan for the product’s entire life cycle.
            The main objective should be to create product awareness and trial. To be more precise, since the market is normally not ready for product improvements or refinements at this stage, the company produces basic versions of the product. Cost-plus pricing should be used to recover the costs incurred. Selective distribution in the beginning helps to focus efforts on the most important distributors. Advertising should aim at building product awareness among innovators and early adopters. To entice trial, heavy sales promotion is necessary. Following these product life cycle strategies for the first PLC stage, the company and the new product are ready for the next stages.

Growth stage –

           The growth stage is the stage in which the product’s sales start climbing quickly. The reason is that early adopters will continue to buy, and later buyers will start following their lead, in particular if they hear favourable word of mouth. This rise in sales also attracts more competitors that enter the market. Since these will introduce new product features, competition is fierce and the market will expand. As a consequence of the increase in competitors, there is an increase in the number of distribution outlets and sales are augmented due to the fact that resellers build inventories. Since promotion costs are now spread over a larger volume and because of the decrease in unit manufacturing costs, profits increase during the growth stage.
           The main objective in the growth stage is to maximise the market share. Several product life cycle strategies for the growth stage can be used to sustain rapid market growth as long as possible. Product quality should be improved and new product features and models added. The firm can also enter new market segments and new distribution channels with the product. Prices remain where they are or decrease to penetrate the market. The company should keep the promotion spending at the same or an even higher level. Now, there is more than one main goal: educating the market is still important, but meeting the competition is likewise important. At the same time, some advertising must be shifted from building product awareness to building product conviction and purchase. The growth stage is a good example to demonstrate how product life cycle strategies are interrelated. In the growth stage, the firm must choose between a high market share and high current profits. By spending a lot of money on product improvements promotion and distribution, the firm can reach a dominant position. However, for that it needs to give up maximum current profits, hoping to make them up in the next stage.

Maturity stage –

           The maturity stage is the stage in which the product’s sales growth slows down or levels off after reaching a peak. This will happen at some point, since the market becomes saturated. Generally, the maturity stage lasts longer than the two preceding stages. Consequently, it poses strong challenges to marketing management and needs a careful selection of product life cycle strategies. Most products on the market are, indeed, in the maturity stage. The slowdown in sales growth is due to many producers with many products to sell. Likewise, this overcapacity results in greater competition. Since competitors start to mark down prices, increase their advertising and sales promotions and increase their product development budgets to find better versions of the product, a drop in profit occurs. Also, some of the weaker competitors drop out, eventually leaving only well-established competitors in the industry.
           The company’s main objective should be to maximise profit while defending the market share. To reach this objective, several product life cycle strategies are available. Although many products in the maturity stage seem to remain unchanged for long periods, most successful ones are actually adapted constantly to meet changing consumer needs. The reason is that the company cannot just ride along with or defend the mature product – a good offence is the best defence. Therefore, the firm should consider modifying the market, product and marketing mix. Modifying the market means trying to increase consumption by finding new users and new market segments for the product. Also, usage among present customers can be increased. Modifying the product refers to changing characteristics such as quality, features, style or packaging to attract new users and inspire more usage. And finally, modifying the marketing mix involves improving sales by changing one or more marketing mix elements. For instance, prices could be cut to attract new users or competitors’ customers. The firm could also launch a better advertising campaign or rely on aggressive sales promotion.

Decline stage –

            Finally, product life cycle strategies for the decline stage must be chosen. The decline stage is the stage in which the product’s sales decline. This happens to most product forms and brands at a certain moment. The decline can either be slow, such as in the case of postage stamps, or rapid, as has been the case with VHS tapes. Sales may plummet to zero, or they may drop to a low level where they continue for many years. Reasons for the decline in sales can be of various natures. For instance, technological advances, shifts in consumer tastes and increased competition can play a key role. As sales and profits decline, some competitors will withdraw from the market. Also for the decline stage, careful selection of product life cycle strategies is required. The reason is that carrying a weak product can be very costly to the firm, not just in profit terms. There are also many hidden costs. For instance, a weak product may take up too much of management’s time. It requires advertising and sales-force efforts that could better be used for other, more profitable products in other stages. Most important may be the fact that carrying a weak product delays the search for replacements and creates a lopsided product mix. It also hurts current profits and weakens the company’s foothold on the future. Therefore, proper product life cycle strategies are critical. The company needs to pay more attention to its aging products to identify products in the decline stage early. Then, the firm must take a decision: maintain, harvest or drop the declining product.
             The main objective in the decline stage should be to reduce expenditure and “milk” the brand. General strategies for the decline stage include cutting prices, choosing a selective distribution by phasing out unprofitable outlets and reduce advertising as well as sales promotion to the level needed to retain only the most loyal customers. If management decides to maintain the product or brand, repositioning or reinvigorating it may be an option. The purpose behind these options is to move the product back into the growth stage of the PLC. If management decides to harvest the product, costs need to be reduced and only the last sales need to be harvested. However, this can only increase the company’s profits in the short-term. Dropping the product from the product line may involve selling it to another firm or simply liquidate it at salvage value. In the following, all characteristics of the four product life cycle stages discussed are listed. For each, product life cycle strategies with regard to product, price, and distribution, advertising and sales promotion are identified. Choosing the right product life cycle strategies is crucial for the company’s success in the long-term.

4. (a) How you differentiate advertisement from publicity?

    (b) “Advertising is wasteful”. Comment.                                                                             

                                                                                                                                                  (10+10)

Ans:    (a) How you differentiate advertisement from publicity?

ADVERTISEMENT	PUBLICITY
1. Advertising is paid form of ideas, goods and services	1. Publicity is not paid by the sponsor
2. Advertising comes from an identified sponsor	2. Publicity comes from a neutral and impartial source.
3. Advertising is controllable by the organisation	3. Publicity is not controllable because it comes from a neutral source.
4. Advertising is less credible in comparison to publicity	4. Publicity is more credible because it comes from an impartial source.
5. Advertising is what we or our organisation says and promotes about us or our organisation	5. But publicity is what others say for us or our organisation
6. In advertising same content is repeated by the sponsor	6. In publicity it is not generally possible.
7. Advertising always carries a positive message about our organisation because it is the content we pay for	7. But publicity can be positive or negative because it comes from an impartial source.
8. In advertising we have full chance to show our creativity	8. In publicity creativity is limited because it comes from non paid source.
9. Advertising is targeted to the particular audiences by the sponsor	9. In publicity it is not focused.
10. Most of the times in advertising social responsibility is ignored	10. In publicity special focus is given on social responsibility.

Ans:    (b) “Advertising is wasteful”. Comment. 

   1. Advertising leads to higher prices:
                Many hold the view that advertising leads to higher prices of goods. Advertising involves considerable expenditure. If that, expenditure is avoided, the cost of goods may be reduced and the consumer can get the product at a cheaper price. If the money spent on advertising is used for improving the quality of the product, consumers may get a better product for the same price.  

2. Advertising leads to monopoly:

             It is well known that large business firms establish brand image through advertising. Consumers develop brand loyalty. Then it becomes difficult for new producers to enter the market. In other words, advertising enables the existing large producers to block new competitors from entering the market. Thus, advertising acts as a barrier to entry and thereby leads to monopoly. Moreover, increased advertising often results in increased sales. Due to this possibility, established firms spend more and more on advertising and increase their sales. In this process they earn larger profits which enable them to spend even more on advertising. Thus, new entrants who do not have large financial resources find it difficult to compete with such established firms.

3. Advertising results in inefficient resource allocation:

          Advertisements are intended not so much for the benefit of consumers. They are mainly directed to influence the consumer demand to fit whatever has been produced. In other words, advertisements are aimed mainly to change the tastes of people so that they will buy whatever is manufactured. This leads to distortion in consumption expenditure and increases the producers’ market power. Thus, advertising indirectly determines what people should consume. In this process productive resources i.e., land, labour and capital, may not be used in the best interest of the society.

4. Advertising causes undesirable social effects:

            There are certain other criticisms about the social effects and cultural impact of advertising.

a) Objectionable appeals like sex, horror, etc., are used in advertisements to attract the customers’ attention.

b) Consumers are exposed to hundreds and thousands of product appeals which they may not be able to buy and enjoy. This may create frustration and disappointment in many cases.

c) Advertising is used for promoting objectionable and harmful goods like cigarettes, liquors, etc.

d) It influences the values and life styles of people in society. Often it is used to
promote products that satisfy the materialistic requirements of consumers
Advertising is, thus, accused of promoting materialistic values in the society.

e) Advertisements occasionally portray certain things objectionable to some sections of the society creating tensions between different groups of people.

5. Advertising may act against the freedom of press:

              Mass media earn huge income from advertisements. If the media are dependent on income from advertisements sponsored by a few large business firms, it may be difficult to disseminate information in public interest when it is unfavourable to those big business firms. Big sponsoring firms can threaten the media owners by refusing their advertisements and dictate what media have to do. Thus, the financial dependence of media on advertisements may act against the freedom of press.

6. Advertising encourages unnecessary competition:

              There is a distinction between informative advertising and competitive advertising. Informative advertising is that which passes on the useful information about a product or service to the customers. Such advertising is desirable. On the other hand, the competitive advertising is primarily meant to shift demand from one brand to another brand. In this case the advertisement has not created any additional demand. Therefore, such advertising is undesirable. In some cases, even the product features mentioned in the advertisement do not compare with the product when inspected. This type of misleading advertising is all the more undesirable.

5. (a) Explain the two pricing approaches for pricing a new product.

    (b) ABC Pharma India is the first Pharma Company to develop a vaccine for AIDS.

          For pricing this vaccine, which of the above two approaches you suggest to the

          Company? Give reasons in support of your suggestion.                                          (10+10)

Ans:  5 - (a) Explain the two pricing approaches for pricing a new product.  

                 Pricing strategies tend to change as a product goes through its product life cycle. One stage is particularly challenging: the introductory stage. This is called New Product Pricing. When companies bring out a new product, they face the challenge of setting prices for the very first time. Two new product pricing strategies are available :( 1) Price-Skimming and (2) Market-Penetration Pricing.

(1) Price-Skimming:

                    The first new product pricing strategies is called price-skimming. It is also referred to as market-skimming pricing. Price-skimming (or market-skimming) calls for setting a high price for a new product to skim maximum revenues layer by layer from those segments willing to pay the high price. This means that the company lowers the price stepwise to skim maximum profit from each segment. As a result of this new product pricing strategy, the company makes fewer but more profitable sales. Many companies inventing new products set high initial prices in order to skim revenues layer by layer from the market. An example for a company using this new product pricing strategy is Apple. When it introduced the first iPhone, its initial price was rather high for a phone. The phones were, consequently, only purchased by customers who really wanted the new gadget and could afford to pay a high price for it. After this segment had been skimmed for six months, Apple dropped the price considerably to attract new buyers. Within a year, prices were dropped again. This way, the company skimmed off the maximum amount of revenue from the various segments of the market.
                   However, this new product pricing strategy does not work in all cases. Price-skimming makes sense only under certain conditions. The product’s quality and image must support the high initial price, and enough buyers must want the product at that price. Also, the costs of producing smaller must not be so high that they overshadow the advantage of charging more. And finally, competitors should not be in sight – if they are able to enter the market easily and undercut the high price, price-skimming does not work.

(2) Market-Penetration Pricing:
               The opposite new product pricing strategy of price skimming is market-penetration pricing. Instead of setting a high initial price to skim off each segment, market-penetration pricing refers to setting a low price for a new product to penetrate the market quickly and deeply. Thereby, a large number of buyers and a large market share are won, but at the expense of profitability. The high sales volume leads to falling costs, which allows companies to cut their prices even further.
              Market-penetration pricing is also applied by many companies. An example is the giant Swedish furniture retailer IKEA. By introducing products at very low prices, a large number of buyers are attracted, making IKEA the biggest furniture retailer worldwide. Although the low prices make each sale less profitable, the high volume results in lower costs and allows IKEA to maintain a healthy profit margin.
In order for this new product pricing strategy to work, several conditions must be met. The market must be highly price sensitive so that a low price generates more market growth and attracts a large number of buyers. Also, production and distribution costs must decrease as sales volume increases. In other words, economies of scale must be possible. And finally, the low price must ensure that competition is kept out of the market, and the company using penetration pricing must maintain its low-price position. Otherwise, the price advantage will only be of a temporary nature.

 5 - (b) ABC Pharma India is the first Pharma Company to develop a vaccine for AIDS. For pricing this vaccine, which of the above two approaches you suggest to the Company? Give reasons in support of your suggestion.   

 Ans:  Penetration Pricing

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. Here in this case if ABC Pharma India is an existing company with new product it might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the AIDS Vaccine’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote this vaccine for such a small profit will avoid the market, freeing the company to maximize brand recognition and goodwill.

Effects of Penetration Pricing

Penetration pricing requires extensive planning, according to the book “The Future of Business: The Essentials,” by Lawrence J. Gitman and Carl McDaniel. To properly execute a penetration-pricing strategy, the vaccine manufacturer first must gear up for mass production and then launch a sizable advertising campaign to publicize its new low-priced vaccine. Both steps are expensive, so penetration-pricing strategies might not work well for small businesses. Also, if the company’s forecasts for consumer demand are off, it could end up with a large stockpile of unwanted products.

Price Skimming

A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, in this case, the company might launch the new vaccine with an initial high price, capitalizing on some people’s willingness to pay a premium for purchasing this vaccine. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers.

Effects of Price Skimming

Price skimming offers four major advantages, according to “The Future of Business: The Essentials.” It can offer insight into what consumers are willing to pay. It can create an aura of prestige around the product. If the initial price is too high, the company can lower it easily. Finally, late adopters might be pleased to get the prestigious product at a bargain price, which creates goodwill for the company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage.