Jessica Alba, a famous actress, starts the baby and family products business, Th

Question

Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all-natural products they'd like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly. Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences. a You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration price, and advise them whether they should charge a skimming price or a penetration price, with supportive reasoning for and against each pricing alternative. b Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss. c What advice would you give to Alba and Gavigan to help them make more profit in the long term?

Explanation / Answer

a) Penetrating pricing is a price strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth.

Price skimming is a price strategy in which marketers sets a relatively high price for a product or service at first, then lowers the price over time.

I would advise Alba and Gavigan to follow Price Skimming strategy strategy because their range of products are entirely new to the market. They have to spend a lot on advertising campaign to create awareness of the product. The pricing has to accommodate these costs apart from other costs of production. The products have to move out of the shelves. A higher price may not be catchy as customer may not prefer new products for a higher price. But, to for the public to be aware of the products, they have to bombard advertisements which is no easy cost.

b. The company may not find economic profits initially for the high costs involved. In the long-run, when the product awareness is created, Alba and Gavigan need not spend much on ads which could eventually result in a surplus allowing for all costs. Ads can come at random to keep the tempo going, just to remind the customers about the Brand.

c. Alba and Gavigan should keep a close watch on the market for competitors. Free entry could impose pressure on the prices, forcing to reduce prices. Depending on circumstance, if situation warrants, can try Penetration Price strategy as a last resort to successfully stay in business. Having started with Price Skimming strategy, it would be better fo follow in order to make more profit in the long-run.

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