Question

In early \(2017,\) a headline in the Wall Street Journal read: "Pricey Virtual- Reality Headsets Slow to Catch On." Is it possible that Sony, Facebook, and the other firms producing virtual-reality headsets were better off keeping prices high when initially offering them for sale, even if the result was a smaller quantity sold? Briefly explain.

Short answer

Whether or not companies like Sony and Facebook were better off with higher initial prices for their virtual reality headsets boils down to their individual strategies and market analysis. While the high-price strategy could maximize early profits and target eager consumers, it may lead to selling fewer units and could have implications for the company's market share, especially in a competitive market. Therefore, each company would need to evaluate this strategy in the context of their own goals, product, and market conditions.

Step-by-step solution

- Analyzing the High Price Strategy

Keeping the price high is a common strategy used by companies when they launch a new, innovative product like a virtual-reality headset. This approach, also known as skimming strategy, allows the company to maximize their profits from the customers who are willing to pay a high price for the product, often early adopters and tech enthusiasts.

- Considering the Lower Quantity Sold

On the downside, higher prices usually mean that fewer units are sold, especially when the product is a luxury one, not a necessity. In some cases, selling fewer units but at a higher price can still yield profitable results if the profit margin per unit is considerably high.

- Understanding Other Factors

Further factors to consider include competitors' strategies, market size and potential, current economic conditions, and the company's market position. With other firms also producing virtual-reality headsets, a high-price strategy might result in losing market share to competitors if they offer similar products at lower prices. Additionally, higher-priced products might deter a broad market base, minimizing the firm's future prospects in the market.

- Final Assessment

Thus, it would depend on the specific circumstances, cost-benefit analysis, profit margins, and individual company strategies whether keeping prices high when initially offering them for sale would be beneficial despite selling a smaller quantity.

Key concepts

Skimming Strategy

In the context of pricing new products, a skimming strategy involves setting high initial prices to maximize profits from the segment of consumers who are less sensitive to price, known as early adopters. This approach capitalizes on the 'newness' of a product, like virtual-reality headsets, where the novelty and perceived innovation justify a premium price. It's important to recognize that this strategy can be effective only if the product is seen as substantially unique or superior to existing alternatives.

For educational technology companies and other businesses, implementing a skimming strategy has advantages and disadvantages. One of the main benefits is that high margins can be achieved on each unit sold, often offsetting the research and development costs associated with bringing a cutting-edge product to market. However, a potential drawback is that high prices may limit sales volume and market penetration. Businesses must evaluate if the initial high profit margins from the limited consumer base will outweigh the reduced volume of sales.

Price Elasticity of Demand

The price elasticity of demand measures how sensitive the quantity demanded of a product is to a change in its price. A product is said to be elastic if a small change in price leads to a significant change in the quantity demanded. Conversely, a product is inelastic when variations in price do not significantly affect the demand.

In the skimming strategy, companies take advantage of early adopters who often exhibit inelastic demand for the latest technology, meaning their purchasing decision is not significantly deterred by higher prices. Understanding price elasticity is crucial for businesses as it influences pricing decisions and can help predict consumer behavior. For instance, if virtual-reality headsets are priced too high, and the demand is elastic, sales may suffer more significantly than anticipated. Companies need to be aware of the elasticity of their products to avoid missteps in pricing that could cause revenue to fall below expectations.

Market Positioning

Market positioning refers to the process of establishing and maintaining a distinctive place in the market for a company’s product or brand. This concept goes beyond mere price settings; it encompasses the perceptions, value propositions, and communication strategies used to set a product apart from competitors.

For high-tech products like virtual-reality headsets, market positioning could revolve around being the most innovative, feature-rich, or having the best user experience. A strong positioning can justify higher prices, especially if the target market views the product as superior or boasts qualities that are highly desired. Companies must carefully craft their positioning to resonate with their intended audience—tech-savvy consumers and early adopters—who place great value on being at the forefront of technology. Effective positioning supports a skimming strategy as it builds a product's premium image, which is seen as worthwhile by consumers despite a higher cost.

Early Adopters

Early adopters are a subset of consumers who are eager to purchase and use new and innovative products before the majority of the market. They are characterized by their willingness to take risks and their interest in being among the first to experience and own the latest technologies.

Understanding early adopters is crucial for companies utilizing a skimming strategy. These consumers are less price-sensitive and more driven by the prestige and excitement associated with being pioneers in product usage. They also play a vital role in generating buzz and word-of-mouth marketing, which can be invaluable for a product’s wider acceptance in the mainstream market. Therefore, capturing the early adopter market can be a strategic move for companies, as their feedback and endorsement can lay the groundwork for broader market adoption in successive product lifecycle stages.