In my engineering class we recently performed a lab in which we modeled the decision making process of P&G, specifically in how they decided how to market the Swiffer Wet Jet. In my group, we had specific knowledge of how the prototype would sell in certain test markets. According to our data, there was low price sensitivity in Canada and Belgium when the price was above roughly $30; in other words, if price increased a substantial amount, the number of units sold would hardly be affected.
I recognized that the Wet Jet had an inelastic demand in these markets. As a result, our data showed that we could set the starting price of the unit at about $50 dollars without losing a major amount of customers.
It was incredibly funny (or at least I thought) when a classmate in a different group disagreed with my group’s decision to start selling at this high price, arguing that as we increased price, we would lose customers and thus money. (Of course, WE all know this is not the case.) I was so tempted to go up to the board and draw for him a graph of inelastic demand, and how revenue would increase as price increased to a certain point. When he contradicted my group, even one of the guest P&G representatives laughed.
Even more satisfying was when I suggested that starting out at a high price could give us a huge cushion which could go into producing more factories and give us a head start when we would eventually lower our prices; at the end of the lab, one rep revealed what P&G actually started the price at: $50.
The reason? They knew that price sensitivity was low, and having such a high starting price would give them much more money to prepare for increased production in the future. Had they started out lower, it would have been that much less revenue they could have made by the time they had to drop their prices.
At the end of the class, I stayed to talk with some of the reps, and the one who led the lab asked for my name and gave me some suggestions on how to prepare a resume for their company.
Thank you Econ. (And Kyle, haha.)
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In my engineering lab hosted by P&G I was also in the Consumer and Market Knowledge group. So I went through just about the same process of discovering the inelasticity of demand for the Swiffer WetJet at prices over ~$30.
ReplyDeleteAnother thing we talked about with this scenario was that since the Swiffer WetJet was a new product to the household cleaning goods market and had no competitors that they could charge the $50 without having to worry about being underpriced by another company, yet.
This, combined with the inelasticity of demand above $30 was a surefire indication that P&G should charge $50 for the WetJet when first introducing it into the market.
Furthermore, like Brian said, starting with a high price gave them a little wiggle room with which they could advance quicker and make sure to be a step ahead of the competition when other companies start to try to catch up. Then they could lower their prices with less damage to the profit margin in the future. The cool thing is that this is exactly what has happened, which can be verified by the fact that the Swiffer WetJet can be found online for prices as cheap as about $20.