Impact Of Price On Profit Essay

Submitted By kei1212
Words: 864
Pages: 4

Impact of price on profit

Identifying consumer preferences and develop appropriate pricing strategies is very critical for the success in retail sector (Sreelata & Gupta, 2013). Price is one of the most flexible marketing mixes and manipulating price can often create competitive advantage. In the first round, an initial price of $38 was set for the backpack. A penetration strategy was used by offering the customers a very low price for the backpack in order to immediately capture the mass market and ultimately realing them into buying it. As this is a new brand of backpack, introducing a low price would be effective in gaining greater acceptance in the market and eventually an increase in pricing can be done to allow for a healthy profit to be achieved without putting off too many customers. In addition to promotion, low pricing is done in hopes of creating and attracting better awareness for the product to the consumers. Consequently, these are the reasons penetration strategy was used in the first round.

The price proved to be effective in gaining sales; evident in round 1 where 389 units of backpacks were sold. However the initial price failed to gain profit, as Marn, Roegner & Zawada (2004) pointed out, “a fixation on volume usually sacrifices profitability and may ignite a price war.” They also stated that, “companies habitually charge less than they could for new offerings. It is a terrible habit (Marn et. al, 2003).” which rings true to this case as a low price was used during the introduction stage of product. Furthermore, it is true as a net profit of -$13,221.59 was acquired, meaning a huge loss was made and no profits were gained. It was not enough to recover production cost, especially as an immense amount of a media spending of $7,000 was spent in the first round.

The price set signals to the customer the value and quality that the product contains relative to competing products (Shankar, 2012). The customers pointed out that it was ‘a good bargain’, indicating that faulty pricing was done as product was considered to be too cheap and in result sacrifices potential for profibilaty. Marlene (2013, p.30) explained that consumers could refuse to perceive a product with good quality if it has the lowest or one of the lowest prices. Referring back to the initial strategy— penetration strategy pricing, an increase in price is now done in hopes of increasing the potential for profit. So in hopes of gaining profit and rising the customer’s perception of the product, the price was raised by $12, making the backpack retailed to $50. Customer thought the pricing was right, and during round 4 a significant profit was acquired from this price. A net profit of $1389.5 was able to be collected from this price which meant that the strategy of increasing the price worked for the benefit of the company.

During round 5, there was a significant increase in profit due to price change. In order to further improve profit, an odd pricing which refers to price ending in an odd number or to price just under a round number of $49 is done to the product. According to Naipaul (2002), odd pricing tends to appeal to price conscious consumers. Hence this strategy was used to appeal to price conscious consumers which would be the parents of the target audience who are school children. Parents tend to be very price conscious, and “in general, consumers recognize that they are being manipulated to a degree by marketers and entrepreneurs, so these potential customers…