Identifying appropriate price strategies for products and services is one of the most important decisions a company can make. How much should the company charge for the new product? There is no single infallible way to make this decision. There are, however, many guidelines. In DirecTV’s case logic and order of action will be the guides.
First, the positioning of service needs to be determined. The service is a luxury exclusive service and pricing it high will help imprint that style image into the consumers mind. Many people believe you get what you pay for. A market research team will verify this willingness to pay a high price and thus support the demand curve.
In the interest of being practical, variable and fixed costs need to be carefully calculated. A products price must cover cost plus yield a fair profit. In these figures, distribution and promotion decisions must be weighed. DirecTV should anticipate that the demand curve for a technological savy luxury electronic item will be inelastic.
Maximizing profit margin should be DirecTV’s goal and realizing that the higher price may drive some consumers out of the market. The high price will still signal high quality and again will feed into the luxury positioning. For new luxury products with a select target group of households with abundant disposable income a good practice to maximize profit margin with skim pricing. This is especially effective when demand is expected to be relatively inelastic. Our target market, technologically savy upper class with disposable income, does not tend to be price sensitive. The plan is to skim the cream off the top. As the product life cycle progresses, there will be likely be changes in the demand curve and cost. At this time, the pricing policy will be re-evaluated.
Although skimming is the basic component of the pricing strategy, there are additional approaches to pricing. Through psychological pricing, it is established that a high...