Question

When GM introduced Saturn, it priced its sedan $1000 less than the comparable models in the market to penetrate the market. After a yearlong sluggish sale of its new line, the "gold bar," the Dial Corporation undertook an aggressive campaign to promote the gold bar as a luxury soap and actually raised its price. In view of the theory of demand discuss the wisdom (or lack thereof) of these two pricing strategies.

Answer 1

When GM introduced Saturn, a sedan car, it had many competitors who were offering a similar car at a certain price. To establish its new car in the market, the best pricing strategy would have been to charge a lower price that its comparable models, otherwise people would prefer the same old models with a known name. This is exactly what GM did. It realized that if it charges a high price, it will not be able to survive in the market, and therefore, the best alternative was to charge a lower price which would help GM to penetrate the market. But since a coin has two sides, GM had to pay the price of this pricing strategy in the form of the reduced revenue.

On the other hand, when Dial Corporation could not extract much profit from the market, for over a year, it realized that the best way to make up for the lost profit would be to attract the audience in a different way. It launched a luxury soap which was charged a much higher price than its substitutes. However, a soap has an elastic demand and Dial Corporation should realize that this decision can prove to be extremely fatal for its future as earlier, it had a sluggish sale but at least something was being sold. Charging a high price could act in an opposite way and could make people choose the alternatives instead of the gold bar. Therefore, the pricing strategy could show a lack of wisdom.