Is Your Goal Volume or Profit? | Strategic Pricing Solutions

If a company is creating a new market or new market niche, it may be important to build critical mass early in the process.  Doing so might enable them to spread their infrastructure costs over a wider base of business.  In that case, it could make sense to use penetration pricing which offers low prices to stimulate demand quickly.  Amazon started this way, selling books at low prices but rapidly generating volume to lower the cost per transaction of their e-commerce systems.  They correctly bet that customers would welcome the ease and efficiency of ordering books online after trying it, and much lower prices would induce customers to try the service.  In this situation, attracting the critical mass of volume was much more important than profit.

Apple is an example of a company with a more complex answer to the question.  As they began to compete in the mobile phone market, their strategy was to win with a superior, premium product.  Although they could increase demand with lower prices, there was a very large segment of customers who would pay premium prices for their premium product, so the iPhone price was set relatively high.  Apple also recognized the variable cost to produce each phone was significant, and much like in the Example Demand & Profit Curve nearby, at some point lower prices would reduce overall profit.

Apple’s additional complexity came from apps and music.  The company recognized that as more people used apps on their iPhones, more developers would create new apps.  And, as they learned from iPods, people would use their phones as personal music players if they could get whatever music they wanted quickly and easily.  Apple recognized the apps and music helped create an entire ecosystem centered around their phone; and they set the prices of them low to attract more volume.

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Is Your Goal Volume or Profit?.