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.

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.

Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.

What advice would you give to Alba and Gavigan to help them make more profit in the long term?

Explanation / Answer

Ans 1. Price skimming is the price which a producer sets initially at a higher level so as to recover sunk costs and then it is gradually lowered as the product matures to capture the market.

Penetration pricing, on the other hand, is oposite to price skimming. In this pricing policy, a low price is set initially to capture a large segment of market which is then gradually increased.

As a business advisor, i would advice them to go for price penetration strategy because a large segment of the population will be attracted quickly with a low price. As it is mentioned that they will do thier business honestly, so there is every chance that they will not compromise on the quality of their products. So, a little price rise will not bother accustomed consumers much later on. The first motto of any new business must be to attract customers and low price is the best available option in this regard.

On the other hand, adopting price skimmig policy initialy will not work much in this case where price elasticity of the product is large and very close substitutes of the product are already available at cheaper rates.

Ans 2. Following penetration pricing policy, they are not likely to make economkic profits initially. But, in the long run, they will be maximizing their economic profits. Large sales along with high price will maximize their revenue and thus economic pofits. Having a good share of market will also help them to reap large economies of scale which will reduce their average cost of production, thus adding to their profits.

Ans 3. My first advice to Alba and Gavigan will be to stuck to their quality standards initially and then to further improve it (after making profits) by carrying out research and development activities as quality is prefered to anything else. My second avdive to them will be 'not to raise their price level much beyond the expectations of their accustomed customers.

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