Now listen to part of a lecture in a business class.
(female) Today we'll talk about how companies determine the initial prices for their products. Uh, by that I mean when they first introduce the products in the market. There're different approaches and today we'll discuss two of them. They're quite different, each with their own advantages.
One approach, or strategy, sets the initial price of the product high followed by a lower price at a later stage. Why? Well, when introducing a new product, companies want to build a high quality image for it. Products that cost more are believed to be of higher quality. So, during the early stages of the product life cycle, companies can make very high profits from consumer's willing to pay more for a high quality product, and although consumers know that price will eventually do down, they're also willing to pay more to get the product sooner. This approach works very well with, oh, innovative high-tech products, for example. Now just think about when video recorders or video cameras or even cell phones first came out. They were very expensive. But then they became much more accessible.??
Another very common strategy sets the initial price low. Now this happens when the market is already saturatedwith the product and the strategy is to undercut its competitors. Say, there’s a newly starting computer maker trying to gain market share. So what did they do? Well, they offered a computer at an affordable price, lower than existing brands. By doing this, the company appeals to new consumers who weren’t probably even interested in getting a computer. And, well, of course, to existing consumers who might now be tempted to switch brands. Now how does this company make profits with its low-priced computers? Well, one thing that’s often done is to encourage their customers to buy accessories also manufactured by them, like printers or software, for example.
Using the points and examples from the lecture, explain the two pricing strategies described by the professor.
There're two types of strategies companies use to set initial price for their product. The first one is to set the initial price high in order to create a high-end image for its product and lower it later. Because the products of high price are often assumed to be of high quality, the company can profit from the people who are willing to pay the high price despite the awareness that it'll come down later. Another strategy is to set the initial price low to undercut competitors, and this strategy is usually adopted in the market that is saturated with the products. For example, a computer company may sell its computers at an affordable price to attract customers who don't have plans for a computer or to persuade those with one to switch brand. Even with the low price, the company still manages to make profit by encouraging its customers to buy the accessories from the same company. (161 words)
