Business Finance Homework Help

Water quality and contamination of our drinking water is currently in the news especially with the recent episodes in Flint, Michigan. In addition the importance of having certain minerals in water is touted by various “health experts”.

A new venture wants to begin “mineral and supplement enhanced” bulk (large bottles) of spring water directly to offices, businesses, and consumer’s homes.

One of the firm’s three owners wants to use a Price Skimming strategy.  He said: “These consumers are not in a supermarket and cannot compare prices. We deliver spring water in bulk to your home at a good price, which compared to their normal small bottle purchase that sounds like a great deal. In addition, we provide extra value over their regular water. Therefore, I think we should charge $7.50 for our bottles. We can reduce prices later if we want”.

However, the second owner did not want to be so aggressive on price. According to her “I think that we should use Penetration Pricing.  Currently, the cheapest bottle on the market is $5, so let’s go out there with at a $4 price. At that price we will win a lot of customers. Then, later on, we can price the increase every six months or so – first to $5, then to $6, and finally to $7. That means that we’ll eventually have lots of customers all paying $7 per bottle.

The third owner wasn’t sure about either of the first two approaches. His view was: “I think that we should just follow the industry trend and use Mark-up Pricing. We know that the market is willing to pay between $5 and $6.50 per bottle. Let’s just mark-our product up a % based on our cost and keep it within that range.  Personally, I think it would be risky to price outside that range. We don’t know whether the market will pay more, and we also don’t know if our customers will be happy with a series of price increases.”

The other two disagreed arguing that their product offered extra value over the existing brands and simple mark-up pricing neither allowed them to make extra profits at the outset or capture market share.

QUESTIONS:

Based on the Stages of Establishing Prices that we discussed in Chapter 12, describe how you would advise the owners of this business to think more carefully about setting the price.

Please do not just list the steps. Rather, list each step and present your analysis for this particular product.

Be specific with your ideas and advice. What should the price be?