Suppose as a manager of a profitable department store you are confronted with a

Question

Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers: a high-end type that willing to pay a price of $ 25 for a pair of Levis Jeans and a low-end type customer that are willing to pay a price of $15 for the same pair of jeans. Your marginal costs are 13 per jeans. Your survey of your customers for jeans tells you that 60% of your customers are of the high end type and 40% are of the low end type.

A) if you decided to price high, what would be your expected profits per unit.

B) if you decided to price low, what would be your expected profit per unit.

C) which pricing will you choose, based on the expected pricing per unit.

Explanation / Answer

Here i have taken the number of jeans as hundred whereas it can be taken as 'x'(unknown) and the amount of profit can be calculated as follows

a] If the price is high i.e. 25$ then

supposing there are 100 jeans

so total cost incurred $ 1300

No of jeans sold = 60 by the high price

amount of money recieved = $ 1500

so amount of jeans left for buying = 40

total profit on jeans = 1500 - 1300 = 200

so profit per jeans = 2

now of we suppose that if the rest jeans can be sold at a price of 15 then the whole money would be a profit as all of them will be bought by the low price customers

so sale of 40 jeans would give 600 rupees

then the profit would rise upto $8 per unit

b] If we choose the low price end then expected sale is 100% so

amount recieved on sale = 1500

profit is = $2 which is fixed and will not increase as in previous case

c] High pricing should be preferred if the cost can be made flexible but making the price flexible might lead to the following problems

1] annoy the the high price customers when they will see that the same jeans is sold out at 15$ just after they brought it so that would lead to a decrease in customers

2] every time the shop[ will be either out of supply for customers or overflowing with products as the low price customers are never going to buy a jeans at $25.

ANS: Hence I would be choosing the low price rate i.e. $15

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