What factors influence the pricing decisions for a product such as Glitzz? Analyze these factors and comment on the range of prices that can be set for Glitzz. Factors influencing the pricing decisions for Glitzz include the firm’s objectives, customer factors, and competitive factors. Constraints such as costs also play an important role in influencing pricing decision. Together, they narrow the range of price reasonable for Glitzz. The target profit of the firm is an important factor affecting Glitzz’s pricing decision.
As Glitzz is a start-up company introducing a new product to the market, Glitzz do not have to emphasize on a target return objective or a maximizing current profit objective, but the pricing Glitzz sets should be one that helps manage long-run profits. This means that Glitzz should not aim for immediate profit, but instead opt to achieve a higher market share by developing quality product and distributing them at a relatively low price. The firm will then expect to make greater profits later because of its increased market share. However, as most start-up firms face tight cash flow, the pricing for Glitzz has to be high enough to ensure that profit covers the cost sufficiently for the firm to remain in business.
The price of Glitzz is also constrained by the type of market which it competes in, which is a monopolistic competition. As there are many private or global brands of jewelry cleaners which Glitzz has to compete with, both price competition and nonprice competition exist. Hence, one of the important pricing decision factors is the competitors’ prices. Glitzz must know what specific prices its present competitors are charging now and the prices of local brand Glitzz should be lower than that of global brands. Competitors’ pricing also affects pricing decision.
One of Glitzz’s competitors is Connoisseurs and is priced between S$14.00 to S$16.90 at retailers. Brilliant Restorer is another competitor product sold in large departmental chains such as Tangs. A third competitive product is Powervescent, sold in tablet form priced at $6.97 for six tablets. However, Powervescent is not as strong a threat as not only is it at the early stage of operation, Glitzz has a competitive advantage over Powervescent in terms of convenience of product usage. Therefore, a reasonable price for Glitzz from the above analysis is that one above the price of Powervescent but slightly lower than that of Connoisseurs and Brilliant Restorer.
However, the firm’s product positioning strategy for Glitzz also influences pricing decision. The firm may choose to position their product as a value-for-money and affordable good, or as a desired expensive but high-quality good. Since Glitzz is a jewelry cleaner, we categorize it as an unsought consumer product. This is because not only do most consumers not find the need to own a jewelry cleaner, some consumers are unaware of the existence of such a product.
As an unsought consumer product, the purchase behaviors of consumers include very infrequent purchases and little comparison shopping done. Therefore, this reduces the significance of competitor’s prices as a factor influencing pricing decisions as it may not generate as much sales even when Glitzz’s price is lower than that of its competitors. Hence, the firm may choose to position Gltizz as an expensive but quality good since a low pricing may not be very advantageous.
Instead, sales will be more dependent on the aggressiveness of advertising campaign since awareness is essential for unsought products. This leads to our next factor which is crucial to pricing decisions, which is the cost of producing and marketing the product. In the long run, a firm’s price must cover all the costs of producing and marketing the product.
As fixed cost is the sum of expenses of the firm which do not change with the quantity product sold, the fixed costs for Glitzz is the $5,000 paid to the consultant plus other fixed costs spent on advertising the product, warehouse rent for storage, or payment of lump sum rental through promotion booths. This is estimated to be an additional $8,000 when we assume that salaries for Lee Jr. and Albert are $0 and that they did not hire any other employees.
The unit variable cost is the stated estimated cost of content and packaging of $5.00 plus other distribution costs, such as distribution margin for retailers. We estimate the additional unit variable costs including the distribution margin to be $6.50. Another pricing constraint influencing the pricing decision is the demand for the product. From the results of the survey carried by the NUS Business School students, it appears that very few consumers were willing to pay more than $20.00 for Glitzz. Therefore, Glitzz should price their product below $20.00 to ensure there is adequate demand for the product when launched.
Also, the price of Glitzz must definitely be above the cost of one unit to generate profit. This cost includes the fixed cost of $5,000 paid to the consultant and $8,000 on marketing campaign, giving rise to an average fixed cost of $13,000 / 20,000 = $0.65. The estimated unit variable cost is $5.00 + $6.50 = $11.50. Hence, the price of Glitzz must be above its average total cost of $11.50 + $0.65 = $12.15. There are two suitable pricing approaches Glitzz can choose to further approximate their price level.
The first approach is through above-the-market pricing, whereby Glitzz expects their consumers to use price as a measure of the quality of an item, and that demand for the product will fall if it is lowered beyond a certain price. If Glitzz chooses this approach, they are recommended to price their product equal to or only slightly below $20.00, which is the price surveys have revealed consumers are unwilling to purchase Glitzz if it exceeds that value.
The second approach is through below-market pricing, whereby Glitzz will deliberately set their product price 8-10% below that of a global competitor so as to promote a value image and attract price-sensitive consumers. If Glitzz chooses this approach, they are recommended to price their product slightly below that of global brand Connoisseurs $16.90, at an approximate price of $14-$16.
