250 CHAPTER 9 PRICINGTHE PRODUCT
unitsatpricesfrom$1,500to$2,500, Cowingwasadamantthatnoneofthesesystemsgaveasbright
a pictureasUT's,Heestimatedthatabout10,000largescreensystemsweresoldin1996.
Cowingexpectedabout 50 %ofthesuggestedretail-sellingpricetogoforwholesalerandretailer
margins.HeexpectedthatUT'sdirectmanufacturing costswouldvarydepen dingonthevolume pro-
duced.Heexpecteddirectlaborco ststo fallathigher productionvolumesdueto theincreasedautoma-
tionoftheprocessandimprovedworkerskilJs.
Material costs wereexpectedtofalldueto lesswasteduetoautomation.Theequipmentcosts
necessarytoautomate theproductprocesswere$70,000toproduceinthe0-5,000unitrange;an
additional$50,000toproduceinthe5,001-10,000unitrange;andanadditional$40,000toproduce
inthe10,0 01 -20,000unitrange.Theusefullifeofthis equipmentwasputatfiveyears.Cowingwas
surethatproductioncostsweresubstantiallybelowthoseofcunentcompetitorsincludingSony.Such
was themagnitudeofUT's technological breakthrough.Cowingwasunwillingtoproduceover20,000
unitsa yearinthefir stfewyearsduetothelimitedcashresourcesofthecompanytosupportinven-
tories andsoon.
Cowingwantedtoestablisha positionintheconsumer marketforhis product.Hefeltthatthe
long-runpotentialwasgreatertherethallinthecommercialmarket.Withthisendinmind, hehired
a smalleconomicresearch-consultingfirmtoundertakea consumerstudytodeterminethelikelyreac-
tiontoalternativeretail prices forthesystem.TheseconSUltants tookextensive pricing historiesof
co mpetitiveproducts.They concludedthat,"UT'svideoscreensystemwouldbehighlyprice-elas-
ticacrossa rangeofpricesfrom$500[Q~:5,00 0 bOlhir.a primaryandsecondarydemandsense."
Theywent ontoestimatethepriceelasticityofdemandinthisrangetobebetween4.0and6.5.
Mr.Cowingwasconsideringa numberoralternativesugge stedretailprices."1canseeargu-
ments forpricing anywherefromaboveAdvent'~tosubstantiallybelowMunIz':;lowestprice, ' he
said.Adecisiononpricingwasneeded soon.Questions:
1.Shouldpenetrationpricingbe usedorwouldskimmingbebetter?- Whatshouldbethebasepriceforthenewproduct?
References
1.T homas Nagle,"Pricing asCreaLivel'v~arkering,"BusinessHorizons,
July-August 19 :::3,pp.14-19.
2.Robel1A.Robicheaux,"HowImportantisPricinginCompetitive
S trategy?" ProceedingsoftheSouthernl:1arketingA ssociation
1975 , pp. 55-5 7
3.BernardF.Whalen," StrategicMixofOdd,EvenPlicesCanLeadto
Retai l Profits,"MarketingNews,March 1976 ,p.24.- PeterCoy,''ThePowerofSmartMarketing," BusinessWeek,April
10,2000,pp.160-162.