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Pricing Questions #1
Car prices to rise in China?
1. Increasing cost usually lead manufacturers to raise prices to consumers because the profit margin of the product will decrease. This means the business will make less money per unit of product sold, thus lessening the interest of investors and shareholders. It can also cause difficulties in cash flow if the business is unprepared and already have problems in liquidity, as now they will receive inadequate amount of cash to generate the business. Usually only by raising the price the business can make same amount of profit if the number of sales remain the same. 2. In this case, car manufacturers are reluctant to raise prices mainly due to the fierce market competition in China. Because the average income of Chinese people is increasing and more people can afford buying a car, China’s car market is still unsaturated and has a lot of space to grow. Hence, most car manufacturers choose to keep their products’ prices low in order to acquire a big share in the market. If they raise the prices at this time, the customers are likely turn to find a substitute as because cars are regarded as luxuries for most Chinese people, therefore price elastic. If the business loses current and potential customers, the sales might drop drastically and bring even less profit to the business. 3. Car manufacturers such as BMW and Mercedes might still sell cars profitably in a competitive market primarily because of their brand name. BMW and Mercedes’ unique selling point lies in their image of being not only a tool for traveling, but also a symbol and asset that can show its owners social status. For these high class products, the customer are less sensitive towards the price shifts because they are prepared and willing to pay more for the recognition of others. In fact, the luxury class cars of these companies might actually enjoy a profit boost with almost no sales volume loss, because the buyers will actually value the...
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