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Pricing Strategies And Price Elasticity

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Question:

Discuss about the Pricing Strategies and Price Elasticity Of Minnesota Micromotors.
 
 

Answer:

Pricing Strategy Concept:

Pricing is a crucial factor influencing the sales of the commodity. Demand of the product is inversely related to the price. Hence, it becomes vital to understand and consider the pricing strategies while deciding the price. It takes into consideration the ability to pay, cost of inputs, market structure, level and strategies of competitors. There are various kinds of strategies to determine the price like penetration pricing, market skimming, premium pricing and bundle pricing.

Commonly applied Pricing Strategies in brief:

Penetration Pricing: The main focus of this strategy is to capture a large market segment by keeping the prices low, since the law of demand follows.

Market Skimming: The producer in this strategy benefits from the first mover advantage and chooses to keep high prices in the beginning to maximise its profits. Once the level of competition increases, the producers lower the product prices according to the competitors.

Premium Pricing: This is used when the producer provides a unique product or of high quality. It becomes important that people realise that the product is worth the high price.

Bundle Pricing: In the today’s world of internet shopping this is a very commonly used strategy of selling a bundle of products for low price then what is charged for the individual products. This helps not only clear up the inventories but also gives the buyers, a sense of greater value for what they are paying (Chron, 2018).

Price Elasticity of Demand:

Price elasticity of demand is the receptiveness of demand to alterations in the commodity price, only. It ranges from zero to infinity. The higher the elasticity, the greater is the sensitivity of the demand (Economics Online, 2018).

Application of Price Elasticity in Minnesota Micromotors:

The Motor Market’s revenues, approximately 70%, are from the bulk orders. The bulk orders give the customer the benefit of discounts. The market is broadly divided into four segments. Segment A requires customisation for power-to-size ratio of motor; therefore the price sensitivity cannot be very high. This customisation also imposes a need for quite a high amount of sales support. The Segment B is also requires specialisation in the context of thermal resistance of motor leading to requirement for sales representatives with high technical know-how. Thus, this market is also not quite sensitive towards the price. The segment C was the least price sensitive in bulk sale category. This required even more specialised products both in terms of power-to-size ratio as well as thermal resistance of the motor. The stringent technical standards also make the market price insensitive and customer service plays an important role. Therefore, its demand is not affected much by the change in the price of the commodity. Whereas in case of Segment D, the market is highly price sensitive. There are orders in bulk requiring very low or economical rates. The people who purchase from the distributers also show high price sensitivity with low level of customisation. The sales boost in case the price is lowered even by a small amount and contrariwise.

Price Discount and its effect on Customer Satisfaction and Competition:

The price discounts, in case of high price elasticity of demand, leads to higher sales. The discounts give people a higher value of their money and thus saved amount can be invested elsewhere. It attracts people to buy more, given high price elasticity. The customer satisfaction also increases in this case. The sections with low price elasticity are not affected much by the discounts since they require high level of customisation, which require higher price of the product (Marinescu et al., 2011).

The discounts increase the market share and people switch to the close substitutes, given high price elasticity. The competitors face this as a challenge to their market capture. The low level of customisation leads to price war among competitors.

Conclusion:

It can be concluded that higher the specialisation and customisation required in the Minnesota Micromotors firm, higher is the need for customer support service and lower is the price sensitivity. Discounts play a major role in increasing the sales where ever the price elasticity is high.

 

Bibliography

Chron, 2018. Different Types of Pricing Strategy. [Online] Available at: https://smallbusiness.chron.com/different-types-pricing-strategy-4688.html [Accessed 27 February 2018].

Economics Online, 2018. Price Elasticity of Demand. [Online] Available at: https://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html [Accessed 28 February 2018].

Marinescu, P., Mihai, N.S. & Toma, S., 2011. Pricing Strategy used as a tool for Building Customer Satisfaction in the Retail Store. [Online] Available at: https://core.ac.uk/download/pdf/6263401.pdf [Accessed 28 February 2018].

Simulations, O., 2014. The Orthopedic Motor Market: Minnesota Micromotors, Inc. and Brushless Motor Technology. [Online] Available at: file:///C:/Users/#4079/AppData/Local/Temp/Temp2_myZip_687174.zip/2019440_69929873_ONLINESIMULATION.MINNESOTAM.pdf [Accessed 28 February 2018].

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