Now listen to part of a lecture in a business class.

(female)
Today we’ll talk about how companies determine the initial prices for their products. Uh, by that I mean when they first introduce the products in the market. There’re different approaches and today we’ll discuss two of them. They’re quite different, each with their own advantages.

One approach, or strategy, sets the initial price of the product high followed by a lower price at a later stage. Why? Well, when introducing a new product, companies want to build a high quality image for it. Products that cost more are believed to be of higher quality. So, during the early stages of the product life cycle, companies can make very high profits from consumer’s willing to pay more for a high quality product, and although consumers know that price will eventually do down, they’re also willing to pay more to get the product sooner. This approach works very well with, oh, innovative high-tech products, for example. Now just think about when video recorders or video cameras or even cell phones first came out. They were very expensive. But then they became much more accessible.

Another very common strategy sets the initial price low . Now this happens when the market is already saturates with the product and the strategy is to undercut its competitors. Say, there’s a newly starting computer maker trying to gain market share. So what did they do? Well, they offered a computer at an affordable price, lower than existing brands. By doing this, the company appeals to new consumers who weren’t probably even interested in getting a computer. And, well, of course, to existing
consumers who might now be tempted to switch brands. Now how does this company make profits with its low-priced computers? Well, one thing that’s often done is to encourage their customers to buy accessories also manufactured by them, like printers or software, for example.