Price Skimming: A Pricing Strategy for Max Profit - Essay Sample

Introduction

The pricing strategy is the method used by companies to find a competitive price for the products and services they offer. The prices are set as per the value of the products, the prices of the competitors, the cost of production and the targets of the company, among other factors. The overall pricing strategy to use is price skimming, which involves charging at a price that helps the company to collect as much money before there is the competition that leads to the lowering of the prices. The strategy involves setting a high initial price and then lowering it over time. It helps the company to take advantage of the low competition when the market is not saturated (Toptal & Cetinkaya 553). The choice is informed by the fact that there is low competition in the market and that the products and services offered are unique and have not been offered by many other companies before. However, it is illegal in many countries to have price discrimination. Therefore, the company has to ensure that the strategy complies with the legal framework. The pricing objectives are direct and simple; the first one is to make high profits for the business within a short period. The second one is to enable the company to pay for the real estate spaces and buy the kitchen items required to start more branches. The last one is to introduce the company into the market.

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Price Comparison to Competition

The price set using the above strategy can help the business achieve its goals in the current market and enable it to open new branches. The comparison shows that the price will meet the current competition and will help the business sustain its operations with time. One of the main challenges that face new business is that they do not have the required resources to expand their operations. New businesses also have many chances of failure because there is little known about the market. However, it is important to ensure that the prices are within the current level of competition and that the company does not lose consumers as a result of high prices and does not make losses as a result of low prices. The skimming price set will be in line with the level of competition in the market and it will lower when competition increases. There is a high rate of new similar businesses opening in the area and the management should be ready to handle that competition. The price should also match the differentiation of the products and services, to the extent that consumers will be willing to spend on the products because of their unique performance. For example, the high initial price should match the kitchens and quality of food offered via virtual hotel services.

Connection to Differentiation/Positioning Strategy

The prices set will match the differentiation of the products and services offered and the way the company positions its operations in the market. The market positioning refers to the perception that consumers have about the products and services as co pared to the ones offered by the competing brands. It involves creating an identity of the brand in the minds of the consumers. It is a useful way of making consumers view the products and services in a certain way. One of the main objectives of positioning is to create an appealing image of the brand and communicate with the consumers about the strengths of the products and services. Positioning statements are created to make the brand known to the market. As the WeWork for culinary dreamers, the aim is to make the brand the first choice for the target consumers. The company will set the price in a way that it positions the business as a reliable, high-quality choice for the consumers. The convenience of the rent kitchens and the virtual food deliveries is a good way of ensuring that the price matches the differentiation offered. Efficiency and effectiveness will be used to convince the consumers that they will get value for their money.

Connection to Value

The monetary costs of a business determine the prices to be set because the price should help cover the expenses. When the selling price is low, the company may not cover the variable and fixed costs. It may also take a long time to break even. In the WeWork, the prices will be connected to the monetary costs of setting up the business and running it. For example, it will include the cost of acquiring the land where the kitchens are to be set up and the capital costs of buying the kitchen items required to start the business. Pricing will be different in the sections of the business. For example, the expenses in sanitation and the restaurants are different. Therefore, by the use of price skimming, the prices will be set differently among the different business sections, depending on the costs of production. The other connection between the prices and the monetary costs will be achieved through express analysis of the costs to determine the parts of the business that will charge higher than the others. The management will be required to use all cost-cutting strategies possible to reduce unnecessary costs. The energy efficiency will also be a key consideration because the restaurants will require adequate energy to cook.

Profit Margin and Breakeven

The profit margin of the company refers to the amount through which the sales revenue exceeds the costs of running the business. The margin will be increased in several ways. The first one is to set a high price using the skimming strategy. The other way will be through the narrowing of the focus of the business. In other words, the business will reduce its diversity and focus on one area that has the highest profits. For example, in the virtual food business, the company should have few items on the menu that can be produced easily and in high quality. A large number of items on the menu could be a challenge to the business because each time requires a special procedure to prepare. The high number of tasks could affect the quality of the products. The other strategy is to avoid too many discounts and increasing promotions. If there is poor planning of the discounting procedures, they could cost the company a lot of money. Promotions can be used to encourage people and to help shape the purchasing behavior (Pai, Chen, Yeh, & Metghalchi 415). The time to breakeven will also be reduced if there is a significant cut on wastes. For example, the employees should not be allowed to waste time and other resources during the working hours. The pricing strategy chosen can help reduce the time to breakeven because it involves making high profits in the early stages of the business.

Specific Pricing Tactics

Price skimming can be achieved through several tactics; the first one is the use of timely and calculated discounts to target the market. Discounts attract many consumers and make them loyal to the business. New consumers could be targeted using this method and later charged at a skimming price. The other one is through the use of incentives that motivate the consumers to make profits. Such incentives could be a reduction in the rental fee, use of new technology in sanitation activities that assure the customers of higher profits and monetary incentives to attract people to the business. The other one is through accurate and improved financing activities that can help the business achieve the goals of the company on time. When the company is financed accurately and on time, it is possible to achieve its goals and this way it can charge the consumers a high price. The other strategy is through cutting costs to reduce the rate at which the profits are consumed by the business. Once the company has gained a reliable market share, the skimming strategy will achieve its goals before competition increases.

Distribution/Supply Chain Strategy

Overall Supply Chain Strategy

The overall supply chain strategy involves planning on how the supply chain can be managed efficiently. It involves leveraging the core competencies of the organization and making use of them to make the business successful in achieving its targets. In this case, the first strategy is to ensure that all stakeholders are aware of the rules that govern the supply chain and what is required of them. For example, all employees should be trained on how to handle the consumers and ensure they are satisfied. The supply chain cannot be complete and effective if some of the stakeholders are not satisfied. The other strategy is to use Information Technology (IT) methods to manage the supply chain. Many new technologies can be used in supply chain management to make it efficient and reliable. Most of them allow the business owners to track the orders and deliver on time as well as make orders for the required raw material for the business (Hugos 133). The distribution of the products will be determined by the nature and packaging of that product, the market, the distance and the available resources and infrastructure among other factors. It is also necessary to ensure that all distribution channels are effective and to eliminate the possible risks that could increase the costs of the business. For example, all people handling the food business should be trained on how to ensure the food is safe and clean. The sanitation business should also hire people who can do a thorough job in their cleaning. Such measures will ensure the supply chain is reliable and effective. By the use of partnerships with companies like UberEats and GrubHub, the business will reach out to a large number of people in the market.

Channels and Intermediaries

The growth of the internet is rampant and its use in businesses is inevitable. The distribution channels that will suit the business will include the online platforms. The company can choose to use direct or indirect distribution channels. However, because of the diversity of the business and the wide range of products, the company can adopt both. For example in the virtual food business, it is effective to use the direct distribution channel that involves products moving from the company to the consumers without involving the middlemen. Food is a sensitive product and too much handling could affect its quality and the trust that the consumers have. The indirect distribution channels can be used in the acquisition of real estate and kitchenware as well as providing the kitchenware to the food truck vendors. The perishable products in the virtual business will require a reliable distribution network to prevent losses when food goes bad. Online distribution channels will include social networks, social media, blogs, and social bookmarks. Search engines and browser extensions will also help the business meet its distribution roles. The costs associated with the distribution channels and intermediaries will also be a major factor in the choice of the channels. The company will choose the ones that have low costs of operation and maintenance. The intermediaries that will be included in the business include wholesalers, retailers, and distributors. Partnership with Uber Eats or Grubhub or Postmates will also help meet the business targets effectively.

Connection to Differentiation/Positioning Strategy

The distribution and supply chain chosen above reflects the differentiation and positioning strategies of the company. One of the main challenges that are likely to affect the connection is the costs. For example, if the cost of one of the distribution channels is high, then it will be difficult to retain differentiation. The business aims at offering unique products and services to hoteliers, restaurateurs, and food truck vendors at an affordable price. One of the main challenges that affect the choice of the distribution channels is the combination of several options that can offer a business the required results (Pal & Mishra 33). Most of the businesses use...