Price Elasticity of Demand Analysis
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. This indicates if a product is easily replaceable by substitutes. ETC’s market research indicates that the new product has a price elasticity of demand of 3.4%, which means for every 1% of the price change, there will be a 3.4% change of demand. This is considered as “income elastic”, which means the price is very sensitive to the demand. In other words, the price of the new product has a dramatic effect on the demand. This also suggests that there are substitutes for the new product. (See appendix)
Other Impacts
As ETC is entering a new market, a price needs to be set, which can allow the product to stay in the market and operate efficiently, while generating sufficient profits in order to stay in the market and establish a high market share.
The price may need to be set, while taking into consideration that the competitors may produce a similar car in the future, or that the value of the car can reduce over time. Therefore, we may need to set a high, skimming price to generate revenue as soon as the product is launched on the market, in order to take advantage of its unique selling point and to portray the image of a high quality product. The selling price may be reduced later as demand begins to fall.
The electric town car company is a new, small company that may be competing with large, established companies, who may be able to afford to sell their products at a lower cost, and may already have significant customer/brand loyalty. These competitors may also be able to produce and sell the same type of product at a lower cost and so sell it at a lower cost, while still generating a significant profit. The company may also incur high start up costs, as well as high product launch costs.
The car is powered by electricity and this may mean that it is difficult to find a suitable point to charge the battery (e.g. petrol stations). Another problem associated with the car is the time taken to charge the battery, which is information, not provided in the case study. If this is a long, time consuming process, then this may cause inconvenience to the customer. Customers want a product that is quick and efficient and easy to maintain.
If outlets such as petrol stations do provide services, which enable customers to charge the battery of the car, then they may charge a high price. This may be due to the outlet having to incur costs to provide the service, and because there may be a limited number have outlets that provide the services.
The electric powered car may require specialist service and maintenance, which may result in high maintenance costs (e.g. customers may need to take the car to dealers for service).
The maximum speed of the car is 60 mph. Therefore, it may not be suitable for motorway or long distance travel.
If luggage space converts into two child seats, then it may be suitable for families. However, this will mean that there is less accommodation for travel. The child seats may not be suitable for continuous, long-term use. The car can carry a minimum of two passengers. However, we are not told the maximum number of people that can be seated in the car.
As the car is powered by electricity, then it is environmentally friendly as it produces less harmful emissions than cars that run on petrol or diesel. The car will also be cheaper to run, with half the fuel costs of its substitutes.
Advertising is an effective tool to sell a product, however, if ETC decides to increase the expense on advertising by at least £10M, this will increase the total cost of the new product, hence more expensive, and the selling price will have to increase.
Final Decision
The type of the vehicle that ETC is selling is powered by electricity, which is a brand new product in the car industry. For many new products, there are two recommended pricing policies, skimming pricing policy, where company sets the selling price as high as possible in the early stage, which the early-adopters and trend-setters market segment are targeted. Alternatively, a penetration pricing policy can be adopted, where the selling price is set as low as possible in order to gain market shares in a short period of time.
It is sensible to set the selling price of the new car at £5,000 per unit, even though the profit does not meet the required profit of £75M.
However, according to the SSAP, actual profit does not realise until the actual transaction is made. The figures are based on market research, which does not reflect the actual sales figures. Actual sales figures may be affected by many other factors, such as the fashion trends, or consumers’ attitudes towards the company.
Finally, as a new company, ETC should take this seriously, since pricing can also reflects the reputation of a company.
