Price Discrimination for Solar Powered Motorcycles at Hervey Davidson Inc.

PriceDiscrimination for Solar Powered Motorcycles at Hervey Davidson Inc.

Cost-basedpricing is a simple and a straightforward method of finding the priceof a product. The method can either use total costs of making aproduct plus a profit margin or variable costs plus a profit margin.The use of total cost is more advantageous than variable cost if acompany incurs significant fixed cost while manufacturing the product(Drury, 2013). The solar powered motorcycles are estimated to cost16,000 USD. This is made of 69% variable costs and 31% fixed costs.

Thesale of a product at different prices to various markets is calledprice discrimination. Harvey Davidson Inc. may decide to use thisstrategy to maximize profits. Companies that engage in themanufacture of transportation equipment make a profit margin of 11%(BizStats ,2017).The company will decide on the minimum price tocharge which in this case will be 17,760 USD ( 16,000 USD plus 11%margin).

Thetable below shows the different prices the company can charge to thenew product and the effect it has on profits and revenue.

Fromthe table, it can clearly be seen that pricing the new motorcycles atdifferent prices will lead to improved profit margins. The moremotorcycles sold to high-end and middle-end customers the higher theprofit margin. Charging different prices increases the revenue madeby the company. If all the 350 units were sold at 11% margin, thecompany would have made USD 6,216 thousand in revenue which is 4%lower than the income made if different prices were charged. However,for many products, demand has an inverse relationship with change inprice. Thus it may be a challenge for Harvey Davidson Inc. to sellmany motorcycles to the high-end customers.

Customersegmentation will have several advantages to Harvey Davidson Inc.Some of the financial benefits will be increased revenue and profitmargins. Improved financial performance of the company will lead toincrease in share price thus increasing the shareholders` wealth. Thecompany will also gain non-financial benefits. The company willstrengthen its brand in all the markets. A strong brand will enablethe company to beat the competition and deter new entrants.Stakeholders` confidence is boosted by a robust brand leading tosolid stakeholders support.

Themain financial disadvantage of price discrimination is that lowvolume sales will be made to the high-end customers. The volume soldto high-end customers should be high enough to cover any extra costsassociated with the sale.Motorcycles made for high-end customersshould have a few more additional features to justify the premiumprice. Better after sales services could be offered to high-endclients. After sales services are costs to the company and they arefinancially viable if the targeted sales volume is achieved. The mainnon-financial detriment of price discrimination is that someconsumers, especially the low-end customers, may feel less valued bythe company and therefore decide to switch to competitors. This willhave a negative impact on Harvey Davidson’s Brand.

Pricediscrimination will involve additional relevant costs. One of thesecosts is increased marketing expense. As the company will betargeting different consumers, there will be a need for marketingstrategy for every target market. This will be more expense that justhaving one marketing strategy targeting all the consumers in theabsence of price discrimination. The company will also have toconsider the cost of additional services given to high-end customers.For example, the cost of better after sale services needs to beconsidered when pricing the products of high-end customers.

Inconclusion, price discrimination will be financially beneficial toHervey Davidson Inc. However, financial benefits will only beachieved if a balance is maintained between the cost of additionalfeatures in motorcycles for the high-end customers and the pricecharged. It is important for the company to meet it sales volumetarget in all the three customer segments to achieve maximum profitmargins.

References

DRURY,C. M. (2013).&nbspManagementand cost accounting.Springer.

FreeOther transportation equipment and railroad rolling stock SectorCorporation Financial Reports by BizStats. (2017).&nbspBizstats.com.Retrieved 1 April 2017, fromhttp://www.bizstats.com/corporation-industry-financials/manufacturing-31/transportation-equipment-manufacturing-336/other-transportation-equipment-and-railroad-rolling-stock-336995/show