Economics question?

Question

I need help with this case study question:

Samson Electronics is the lastest entrant into the low-end digital camera market. Although its market share after its first year was less than 1%, the company is optimistic about its opportunities for future growth. The current problem resided in its high unit costs. First-year production costs for its 4-megapixel camera averaged $150; well above the unit cost necessary to sell in a market in which low-end cameras tend to sell for around $150. Second-year production costs fell to $140. Although the lower unit costs allowed the firm to meet the market pricewise, its profit contributions were not sufficient to cover fixed costs. Because its product lacked brand awareness, corporate headquarters believed further market penetration required setting a price below the competition. However, with current production costs hovering around $140, the managers wondered if it would be wise to charge a price below $140. What would you recommend?

Answer 1

This is an intersting case study. It's too bad there wasn't a little more information included.

Also, these situations are quite normal for a new venture into an existing market.

However, when I mentioned more information, I was refering to product placement, and there is no mention of this in the case study. In the accompanying advertising with this new camera, how does Samson Electronics think their camera should fit in the market?

The problem is that pricing is a function of public perception of the product, and not necessarily a function of cost. This is why pricing is set by the marketing departments and not the accounting deparment.

Back in the late 70's Ford Motor Company came out with a car called the Granada. In Ford's product placement, they, through their advertising, spoke of how it compared with Mercedes S class coupes, with respect to roominess, performance, trunk space, and other factors.

And for two years the car sold like crap!

The problem, as it was discoverd, was that it was priced similar to the economic 4-door coupes in the market. What was learned was that there was a huge disconnect on the part of the buying public with respect to the Granada. How could it be anything like a Mercedes when it was priced $20,000 cheaper!

Therefore, the solution was to raise the price by $15,000 and from there it became Ford's third best selling car for the next three years!

Now with respect to your case study, none of this kind of information is provided, other than it's somewhere in the opening line market for digital cameras.

Keeping in mind that pricing is a function of the public's perception of the product, in this case, an opening line digital camera, then it would stand to reason that all the talk about production costs is nothing more than noise to confuse you.

The whole idea is to gain market share, develop a following, increase sales, and then follow up with future entries into the market. Regardless of the fact that you have no idea what kind of Identity Samson Electronics is trying to develop.

For you to answer this question, here are the important points:

1. Samson Electronics only has 1% of the market share.
2. The Samson Electronics brand is woefully lacking "Brand Awreness"
3. The low-end camera market sells for around $150.
4. Should Samson Electronics sell this camera below $140.00?

Common sense will dictate that if your camera is priced too far below what the normal price range is for this particular market, people will perceive it as junk, and avoid it.

Along with this, if Samson Electronics can do an effective job with their advertising, it is possible be successfully sell this camera for slightly more than what standard price range is, if they give the buying public the right reasons.

However, this is also the low-end market. The reason it's the low-end market is because the cameras have less features, a less expensive component make up, and with a minimal amount of features, the public perception is that the cameras are pretty much the same.

How you might differentiate a camera like this would be to make it in different colours, maybe give it a unique shape, or some other non-performance affect that might catch the eye of the buyer.

But since you don't have this information, you can only go on the market information at your disposal.

I would not recomment selling the camer below $140.00.

Part of the reason is what I mentioned earlier regarding people's perception. Even though this is the low-end market, it can still be perceived as junk. People will think that there's a reason why it's priced that low. If the market rate is $150.00, and if they wanted to drop the price, they could drop it to somehting between $145.00 and $150.00, and not change people's perception. But dropping it ten dollars (or more) below the market rate is too much.

Another reason, They don't tell you what the camera sold for in the first year, but at even 1% market share, that's a hell of a lot of cameras, and this was with a brand new product and no market awareness.

They now have some cameras sold, and through word of mouth, and other means, they are beginning to develop brand awareness, market penetration, and an identity. In effect, they are gaining some momentum in the market, and this is not the time to be screwing around with factors in public perception.

What they should do (for now) is hold the course, keep the camera priced similarly to other cameras in the low-end market, and see if they can develop any trend analysis now that they have a year in the market. Then once they have some cold hard data in which to work with, then they can start making some moves.

Good Luck!

Answer 2

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