Question 1 : A business case (used to decide if a new enhancement should be adop

Question

Question 1 : A business case (used to decide if a new enhancement should be adopted for a product) should have the form of an income statement. Why?
Why is NPV developed on such a product?
What other measures should be present in a business case to decide Go/No Go decision on a new product feature?

Question 2 :
What are examples, other than from the book, of the following (Identify which of these your firm uses):
Captive Pricing Reference Pricing ELDP Wholesale Pricing Zone Pricing Price Discrimination Question 1 : A business case (used to decide if a new enhancement should be adopted for a product) should have the form of an income statement. Why?
Why is NPV developed on such a product?
What other measures should be present in a business case to decide Go/No Go decision on a new product feature?

Question 2 :
What are examples, other than from the book, of the following (Identify which of these your firm uses):
Captive Pricing Reference Pricing ELDP Wholesale Pricing Zone Pricing Price Discrimination Question 1 : A business case (used to decide if a new enhancement should be adopted for a product) should have the form of an income statement. Why?
Why is NPV developed on such a product?
What other measures should be present in a business case to decide Go/No Go decision on a new product feature?

Question 2 :
What are examples, other than from the book, of the following (Identify which of these your firm uses):
Captive Pricing Reference Pricing ELDP Wholesale Pricing Zone Pricing Price Discrimination

Explanation / Answer

Question 1:- A business case (used to decide if a new enhancement should be adopted for a product) should have the form of an income statement. Why?

Why is NPV developed on such a product?

What other measures should be present in a business case to decide Go/No Go decision on a new product feature?

A pro forma income statement is a useful tool for managing new product innovations because it provides a snapshot view of the results to be anticipated for the product (Trott, 2008). An income statement provides salient information to be used in decision making in a way and format that aids in analysis and creating awareness of the financial implications to be brought by the product innovation.

The pro forma income statement presents the management with various techniques of analyzing the potential of the new opportunity. It is of ultimate importance to assess the relationship between the market share and selling price especially with the temptation of setting high prices for new technologies (Trott, 2008). A higher price may not always promise higher revenues especially in a market that is greatly sensitive to price. A higher price may lead to a double and canceling impact on gross margins where the high price reduces sales volumes. Also, lower sales may relatively push up the cost structure since input expenses may vary with volume.

The gross profit margin is an important indicator of the long-term success of a new enhancement. It assures the management of the availability of funds from sales revenues to enable the firm to engage in aggressive marketing campaigns to spearhead the adoption of the new technology or advancement. As much as the operating expenses may take a significant portion of the initial investment in new product development, an income statement will enable the decision makers to set upper limits to control cost. It is advisable to budget such costs as a way of determining the feasibility of the endeavor. It is also advisable to add a proportion of the total costs as a contingency fund to cater for unexpected expenditures (Trott, 2008). Therefore, income statements are an unavoidable part of new product development.

The net present value (NPV) is used during the preparation of new business cases as a financial metric for justifying the development and launch of product improvements. The net present value refers to a forecast of the financial outcome of a new product initiative adjusted for the time value of money. It tells the decision makers whether the new product development will have economic benefits for the firm relative to the cost incurred (Trott, 2008). It can also provide a yardstick through which the management can compare the expected degree of various initiatives. The net present value illustrates the importance of discounting in that even though an initiative is projected to bring profits to the business, it is not necessarily a good investment.

Other measures of deciding on whether to proceed with a business case or not include the internal rate of return and the discounted payback period. The internal rate of return is very similar to the net present value. It refers to the total present value of future cash flows divided by the initial investment. For a sound investment, the internal rate of return should be greater than one. The discounted payback period refers to the period taken to recover the initial investment in the product development, discounted and adjusted for the time value of money (Trott, 2008).

Question 2 (What are examples, other than from the book, of the following (Identify which of these your firm uses):

Captive pricing refers to a pricing strategy where a business sells a base product for a price that is visibly lower than the actual value of the product, or for free, but where additional products are required to realize the full benefits of the base products. The firm may lose money when selling the base product, but will make enough revenues from the additional products to cover the difference. These additional products are called captive products (Grewal, & Levy, 2010). An example is wireless companies that make it extremely easy to buy or get a mobile phone through attractive contract plans. The wireless companies go to extra lengths to signing with particular phone manufacturers so that those manufacturers will only sell their phones through the wireless companies in specific markets. The base product is the inexpensive or free phone, and the captive product is accessories and airtime (Grewal, & Levy, 2010).

Reference pricing refers to the cost that consumers expect to pay or consider as reasonable for a given product. A marketing department will assess the reference prices for its products so that they correctly price their products and to achieve company marketing goals (Grewal, & Levy, 2010). An example is Nordstrom Rack, a discount or clearance store for Nordstrom. Their products are in perfect condition. Hence, they are not being sold because they are of poor quality. The company lists the original price against the discounted price that consumers have to pay. This is an excellent example of reference pricing because it informs the buyer directly of how much they are saving by buying the product.

Everyday low pricing (EDLP) is a pricing method used by retailers to provide low prices all the time without any special sales, discounts, or comparison shopping (Grewal, & Levy, 2010). An example of a firm using everyday low pricing is Walmart stores, the American retail giant.

Wholesale pricing refers to a strategy where a company discounts the prices of its product if a customer purchases in bulk. The company can set several discount levels depending on the number of products purchased. A wholesale pricing strategy is usually used by firms to encourage many sales. Even though the price is perceived low, this is compensated by enormous sales volumes (Grewal, & Levy, 2010). An example of wholesale pricing is from JD Closeouts that sells merchandise in truckloads, lots, and pallets. The products include laptops, computers, and other electronics. They are a favorite supplier for many eBay sellers who buy their electronics in bulk and at excellent low prices that afford them a markup on sales.

Zone pricing refers to a pricing technique where prices of products are set depending on the location where they will be offered to the final consumers. Firms that access overseas markets use zone pricing to cater for shipping costs. Ideally, many businesses draw concentric circles on a map where the circles represent the boundaries of the various price zones (Grewal, & Levy, 2010). An example of zone pricing occurs in the oil industry where oil from a certain location is sold at different prices depending on the distance between the port of origin and the port of delivery.

Price discrimination refers to a strategy where the same product is sold at different prices in different markets or to different groups of people in the same market (Grewal, & Levy, 2010). For example, in the airline industry, travel products are marketed at various prices for particular social segments. Prices fluctuate depending on the booking class and the time of travel.

As a junior administrative assistant in Walmart, my company practices everyday low pricing.

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