Problem 1a:
Evaluates the three
recommendations
1
Problem Solving Assumptions
Monopolistic competition
Inelastic Demand
Product Differentiation
Single Product, Single Period
The Software in the introduction stage for the Company
The Software in the growth stage in the industry
Inflation Rate is held constant
Cost structure remains unchanged
2
Recommendation One
By Company Accountant
Markup Pricing Strategy use cost plus profit and
expenses not otherwise accounted for.
Lack of consumer market demand information and
demand elasticity.
Without consideration of the market positioning of the
product.
3
Recommendation One …
By Company Accountant
Suggested Price $105 may not be profit
maximizing.
No market environment scanning, limited
knowledge of the competitors in the market.
Risk of assumption of margin $100 being the
“Accepted Norm”. For Example, in case of price
competition or price discrimination.
Apply only if both AVC and elasticity are
constant
4
Recommendation Two
By Marketing Director
Software Trend influencing Price Setting.
Suggested Price depend on the Marketing strategy and
plan.
Use Profit-Oriented Pricing Objective to achieve profit
maximization.
Product Differentiation and feature oriented.
5
Recommendation Two …
By Marketing Director
Use Status Quo Pricing Objectives is either to meet
competitor’s price or maintain existing prices in case of
price competition.
Price include Marketing research and demand estimation
cost.
Price include promotion and advertising cost.
6
Recommendation Three
By Owner
Use Break-even analysis on the capital investment and
paid-back period, Break-Even Pricing.
Use Target Return on Investment, net profit divided by
total assets, to set the price.
Owner’s subjective objective: profit-maximizing Vs target
return on investment.
Capital opportunities cost may affect the product pricing.
7
Conclusion
Price Skimming Strategy is likely to be successful:
Inelastic demand.
Software is a superior product.
Legal Protection of software.
Technology Breakthrough.
Limited Production.
8
Problem 1b:
Suggest a Price
9
Problem 1c:
Outlines any factors that would lead to
the adjustment of the recommended
price, after its launch
10
Industrial Organization (I/O) Analysis
Basic Assumptions


The external environment is thought to be the primary
determinant of strategies firms selected to be successful.
Organizational decision makers are assumed to be rational and
committed to acting in the firm’s best interests; however, they
can choose
►► Profit maximization / Sales maximization
as Pricing Objective
Or shift from one to other in different stages of
Product Life Cycle
Then
Lead to Price Change
11
I/O Analysis ..
The External Environment
Study the external
environment and then
identify the strategy
Strategy Formulation
12
External Environment
Economic Segment

Inflation
Costs increase – e.g. wages, rent, etc;
►► Pressure to increase prices to recover anticipated
higher costs
However,
Whether competitors will not make similar increases or
not.
Sales will rapidly evaporate as a result of a price
increase.
13
Industry Environment Analysis
- Porter’s Five Forces Model
Potential
Entrants
Threat of New Entrants
Bargaining
Power of
Suppliers
Industry
Competitors
Bargaining Power of
Buyers
Suppliers
Buyers
Rivalry Among
Existing Firms
Threat of Substitute
Products/Services
Source: Competitive Strategy: Techniques for analyzing
Industries and Competitors, Michael Porter, 1980
Substitute
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Rivalry among existing competitors
Industry growth: rapid
Technology


the software for Chinese character inputting represents an
advancement in technology.
a sophisticated software for more accurate recognition of
human sound impose huge impact on the existing product.
►► Pressure for pushing down the price.
Change in the stage of Product Life Cycle

After the introductory stage, the firm come into the growth
stage in which the competition is keen and demand become
more elastic.
►► Adjusting Pricing Strategy
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Rivalry among existing competitors ..
Industry growth: rapid
Technology


the software for Chinese character inputting represents an
advancement in technology.
a sophisticated software for more accurate recognition of
human sound impose huge impact on the existing product.
►► Pressure for pushing down the price.
Change in the stage of Product Life Cycle

After the introductory stage, the firm come into the growth
stage in which the competition is keen and demand become
more elastic.
►► Adjusting Pricing Strategy
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Rivalry among existing competitors ..
Change in Competitors’ Market Share

When competitors recognize that they are losing market share,
they might initiate price war.
• The impact is dependent upon the uniqueness or the demand
elasticity of the product.
• If the product is similar to others’ offer, the price has to be
lowered.
• In case of unique product, the impact is limited.
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Rivalry among existing competitors ..
Fixed costs or storage costs: high
Switching cost: low – no extra cost on the installation
Exit barriers: High

High Rivalry among Existing Competitors

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Threat of New Entrants ..
“Limit Price”: defined as the highest price charged by
incumbent firm without inducing new entry.
To maximize short-run profit, the firm should charge a
higher price with lower output level.
Higher short-run profit at the expense of long-run wealth.
However, higher profit can attract potential rivals
entering the industry.
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Threat of New Entrants ..
Economics of Scale 

the development cost, distribution cost & advertisement will
decrease by the share of increasing output quantity.
Product Differentiation & Brand Loyalty 

have to make expensive and risky investment for others to
establish, habit of user is difficult to change
Capital Requirements, switching cost: high
Switching Costs for buyers

low
Access to distribution channels

Easy
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Threat of New Entrants …
Absolute cost advantage
- Proprietary technology

Depends: if it is patented: low threat; otherwise: high threat
- Access to input

May access in favorable terms, it depends
- Proprietary learning effect

Will keep cost down through ‘learning’  others can’t acquire
Government Policy

change in government policy in promoting Chinese after 1997
may increase the demand for the product  increase price
21
Threat of New Entrants …
If speedy entry take place and lower discounted rate,
limit pricing is preferable, and vice versa
Limit pricing at a lower level in the short-run can protect
the long-run profits over time.
22
Threat of Substitutes
The relative price & performance of substitute

less expensive and may offer more performance  high threat
Switching costs for customers

Low  high threat
Buyers’ propensity to substitute

High, if performance is not good, user may not buy it again even
new version is launched in the market.

High threat of substitute

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Power of Buyers
Price Discrimination



Charging the net prices in different markets.
The market can be divided into sub-markets.
The organizational customers
The students
No reselling between these 2 markets.
Price Sensitivity



Some brand Identity
The organizational customers should be less price sensitive
 charging a higher price.
The individual customers should be more price sensitive
 charging a lower price.
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Power of Buyers ...
Bargaining Leverage




Cultural change of more usage in Chinese. e.g. in ICQ also
↑Demand,  ↑price.
Low switching cost
Buyers are well informed through different media
Many substitute may be appear in the future

Power of buyer is high  high impact to the price

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Power of Suppliers
Switching Cost:

Easy to change CD-Rom Supplier
 Supplier power: low
Availability of substitute inputs:

Difficult to find other one to replace CD-Rom
 Supplier power: strong
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Conclusion
Any changes in general environment and the
abovementioned five factors can alter the attractiveness
of the market.
If the interaction of the five forces leads to a highly
competitive environments, price needs to be adjusted.
Furthermore, change of pricing objective will also lead to
adjust price.
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