cross elastic products
1. Assume you have a friend who
owns a company that manufactures mountain bikes. She considers you to be a
savvy marketer and needs your advice. She tells you that her company recently
reduced the price of her most popular bike by 10%. In response, sales boomed
and she added a second production shift to keep up with demand. At the same
time, profits dropped. She is confused by this result. What she wants you to
explain to her is how a price decrease that increases volume and sales can
result in a profit decrease. What do you tell her?
2. Coffee and doughnuts were both
price elastic and also cross elastic complements, with the margin on doughnuts
being much higher, how would you vary prices to increase overall profitability?
Can you think of other cross elastic products?
3. Your friend who owns the
mountain bike company was so impressed with your answer to her previous
question that she wants you to help her price a new product her company is
preparing to launch. The product is a mountain tricycle for adults. No
competitor offers a similar trike. She has obtained exclusive distribution
deals with several national sporting goods chains and WalMart. Which pricing
strategy do you recommend: skimming, competitive, or penetration? Why? What
factors and assumptions would influence your choice of new product price
strategies?
