CAIE A-Level Business AS 3.3.4 Pricing Methods

[Maximum number: 8]

ML Computers (MLC)

MLC is a successful private limited company that has been trading for 20 years in country K. The company makes a range of laptop computers. It is the market leader in a highly competitive market.

MLC is developing a new touchscreen computer that will use the latest technology. Initially secondary market research was carried out, followed by primary market research. The market research data suggested a high potential demand for the new touchscreen computer.

The Marketing Manager is planning the launch of the new touchscreen computer using price skimming.

All computers are made in MLC's two factories in country K. Operations are capital intensive. New machinery is needed to manufacture the new touchscreen computer. Maria, the Managing Director, decided to use leasing for the new machinery.

MLC has 350 employees. One of its objectives is to reduce labour turnover to 8% by 2026.

Labour turnover rates currently vary across the two factories. The labour turnover for Factory A is currently 14%. Table 2.1 shows employee data for Factory B.

Table 2.1 Employee data for Factory B

Maria is the majority shareholder with 55% of shares. She is concerned about the future growth of the company. Over the next three years she plans to launch five new computers using the latest technology. At a recent board meeting Maria proposed that the company changes the ownership of the business to a public limited company.

Analyse one advantage and one disadvantage to MLC of using price skimming to launch the new touchscreen computer.

Figure for Answer to Question CAIE A-Level Business AS 3.3.4 Pricing Methods Questions question 1 — CAIE A-Level Business AS

Price skimming is a pricing strategy in which a firm charges a high initial price and then gradually lowers the price to attract more price-sensitive customers. The pricing strategy is usually used by a first mover who faces little to no competition.

2(c)

Responses may include:

AO1 Knowledge and understanding

Advantages:

- Quicker return on investment / cover development costs

- Supports higher profit margins when the computer is first offered for sale

- Can help develop a prestigious brand image / associate product with higher quality

- Can help the business target a specific market segment

Disadvantages:

- Relies on low competition in the market/unique product

- Customers may wait until the price reduces

- Customers who purchase the product at the higher price may feel 'conned' when/if the price reduces

- Reduced sales volumes (whilst the price is high) may offer an opportunity for competitors to enter the market

AO2 Application

- Market leader for laptops

- Produces a range of laptop computers

- Secondary and primary market research shows high potential demand for the new computer

- New computer will use the latest technology

- Private limited company

- Trading for 20 years

- Capital intensive

- Lease new machinery to make the new computer

- Objective to reduce labour turnover to 8% by 2026

- Maria is the majority shareholder / owns 55\% of shares

2(c)

AO3 Analysis
Advantages:
- Quicker return on investment / cover development costs;
make a profit more quickly - allows growth of the business.
- Supports higher profit margins when the computer is first offered for sale;
can be reinvested in the business - allows for
profit maximisation in the long term.
- Can help develop a prestigious brand image / associate product with higher quality;
leading to higher sales revenue -
increases profit.
- Can help the business target a specific market segment;
niche market can have a lower cost of customer acquisition -
increases profit margin.
Disadvantages:
- Relies on low competition in the market/unique product;
if competitors are cheaper then low sales - low profit margin.
- Customers may wait until the price reduces;
low initial sales - may lead to business failure.
- Customers who purchase the product at the higher price may feel 'conned' when/if the price reduces;
poor brand
image - low sales.
- Reduced sales volumes (whilst the price is high) may offer an opportunity for competitors to enter the market;
low sales
- leading to a reduced profit.
Accept all valid responses.

CAIE A-Level Business AS 3.3.4 Pricing Methods Questions question 1