MKT 301 Pricing Skimming or Penetration
You are hired as a product manager at a camping product company that has developed a new lightweight, collapsible drinking cup for backpackers. You are considering two alternative prices for the product – $15.00 (higher than market average) or $7.50 (lower than market average). Research has estimated that at the $15.00 price the first year market will be 200,000 units, plus or minus 20%. At the $7.50 price the first year market is estimated at 600,000 units, plus or minus 30%. In either case, manufacturing costs (variable costs) will be $5.00 per unit and fixed costs for plant and equipment will be $100 thousand. Since the product will simply be added to the company’s line, other expenses, such as advertising costs, will be minimal. You estimate $25 thousand at either volume level.
You are trying to decide whether to use a price skimming or penetration strategy. Because you have heard that a major competitor is working on a similar unit, you are afraid that you will have very little lead time – a month or two at the most. You have filed for a patent on the product but are not sure that it is patentable. At the same time, you have to introduce the product immediately to be in the market in time for the backpacking season.
MKT 301 Pricing Skimming or Penetration Questions:
1. What are your projected sales and profits at the skimming and penetration prices?
2. What are your break-even points for the skimming and penetration prices?
3. What decision do you make, skimming or penetration? Why?
4. What are your assumptions and considerations that led you to this decision?
5. What additional information would you like to know to make a more informed decision?
Break-even = Fixed Cost/Contribution Margin
Contribution Margin = Selling Price – Variable Unit Cost
1. Please email your report to by 10:00 am, May 1st(Friday), using a similar format as this memo.
2. Your report should answer all five questions clearly, AND include a comprehensive break-even analysis in a separate excel/word document (i.e., upper and lower bounds of estimation are considered).
Your essay will be graded based on the following rubric:
|Category||Unacceptable (0-1)||Needs Improvement (2-3)||Good (4)||Excellent (5)||Total Possible Points|
|Organization (x3)||There is no apparent organization to the essay. It shows some coherence but ideas lack unity.||There is some level of organization though digressions, ambiguities, irrelevance are too many. Transition evident but not used throughout essay.||Essay is coherent and logically organized with transitions used between ideas and paragraphs to create coherence. Overall unity of ideas is present.||Essay shows high degree of attention to logic and reasoning of points. Unity clearly leads the reader to the conclusion and stirs thought regarding the topic.||15|
|Content (x3)||Essay lacks evidence of critical thinking. Uses superficial, simplistic, or irrelevant reasons and unjustifiable claims. Makes illogical, inconsistent inference.||Essay is primarily opinion without valid support. Little critical thinking is evident. Follows existing evidence to obtain conclusions.||Ideas are logical and reasoned, but demonstrate lesser degree of originality. Follows evidence and reason lead to obtain justifiable, logical conclusion.||Writer develops logical and reasoned independent ideas that go beyond predictable outcomes or the conclusions of researched materials. Follows where evidence and reason lead in order to obtain defensible, thoughtful, logical conclusions or solutions.||15|
|Grammar & Mechanics(x2)||Sentences are unclear and many grammatical errors in structure make essay virtually unreadable. Spelling, punctuation, capitalization, and vocabulary usage contain major flaws that impede readability.||Most spelling, punctuation, and grammar correct allowing reader to progress through essay. Some errors remain.||Essay has few spelling, punctuation, and grammatical errors allowing reader to follow ideas clearly. Very few fragments or run-ons.||Essay is free of distracting spelling, punctuation, and grammatical errors; absent of fragments, comma splices, and run-ons.||5|
MKT 301 Pricing Skimming or Penetration