Adios Junk Mail Case Summary
Pricing Assignment #1 Mihir Bhojwani 61110636 – Sec. A
Question 1
As shown in the Excel Worksheet (Question #1), the best course of action following a competitors price decrease is to not change prices. I reduction in price by 10% leads to a subsequent reduction in Margins by 25%, but this is only offset by an increase in sales of 20%. As a result, holding prices constant sees a Total Margin of 32,000,000 which is preferable to the 30,000,000 Total Margin that a price reduction would see.
Question 2
Adios Junk Mail is currently charging $15 per year with a variable cost of $10. This gives the product a margin of 33%. We are assuming that there are no fixed costs.
It is in Adios Junk Mail’s interest thus to prioritize higher price …show more content…
over higher volume, as long as demand is inelastic.
Elasticity has been calculated in Column J of the Excel Sheet for all price points and from this we gain the following insights: * At some very low prices Price elasticity of demand is a positive number: as price increases demand also increases (or at least stays the same). This is true from $13-$15, $19-$20, $24-$25 and $28. Furthermore, elasticity at low prices are generally very low. From the data we see that up to $30 the prices can be increased without total margins coming down at any single price increment. The ideal price we can deduce will at least be $30. * Multiples of $5 tend to see very high elasticity figures. This implies that consumers have psychological barriers to certain prices and the likely optimal price will have to be just before hitting such a Price. For better understanding we have added Column K in the excel spreadsheet elasticity at $5 increments between each of the relevant price points. Column K shows us that the first time elasticity goes above being unit elastic (where the adverse impact on demand exceeds that positive impact of a price increase) is at the $50 price point.
Examples of Impact of Price Increase:
To better illustrate the importance of raising prices at AJM we can use the example of the current $15 price where demand is derived at 5,989 customers for a total margin of $29,946.
A price increase of $2 would see demand fall to 5,913 customers but total margin would rise to $41,389. A price decrease of $2, however, would see a fall in demand to 5,673 customers and total margins fall to $17,019.
Even using a better example of $30 as a base we would see total margins rise by $5,475 if we raise the price to $32, but fall by $3,969 if we reduce price to $28.
Plotting a demand curve (please refer to demand curve worksheet in excel spreadsheet), confirms the insights gained from above. The curve can be split into three segments: 1) Upto $29 where the curve is slightly upward sloping, 2) From $30 to $49 where the curve is downward sloping (though in strict steps at $5 intervals), 3) $51 and above where the curve is relatively flat.
Significantly, the $5 psychologically barrier is very clearly illustrated at almost all points, particularly in between the three segments that we have mentioned above. The most significant point on the graph is the dramatic fall in demand when price is raised above $49.
Recommendation
1:
From our analysis we have learnt that the ideal price would be at least $30, below $50 and $1 below a multiple of $5. This leaves us with four options: $34, $39, $44 and $49. The price elasticity at $5 increments shows us that all these price points have an elasticity of less than -1, but the $54 price point has a elasticity of -6.42. Based on this, the data table provided and the graphical evidence we can conclude that the single best optimal price AJM can choose is $49.
Recommendation 2: Differentiation
If, however, AJM could find a way to differentiate its product then it could keep this $49 price point, but put together a product with additional features and charge a premium. From the third segment of the demand curve ($50 upwards) we see an extremely flat demand curve, indicating very low price elasticity.
If we look at the Price Elasticity of Demand at $5 increments (Column K) we see that unit elasticity is crossed at the $75 price point. If the premium offering of AJM’s product was offered at $74 it would derive a demand of 1,297 customers and generate a total margin of $82,978. Demand for the regular product at $49 would fall by the corresponding amount and leave a total margin of $121,784. This would be an overall gain of $32,413.
Question 1
As shown in the Excel Worksheet (Question #1), the best course of action following a competitors price decrease is to not change prices. I reduction in price by 10% leads to a subsequent reduction in Margins by 25%, but this is only offset by an increase in sales of 20%. As a result, holding prices constant sees a Total Margin of 32,000,000 which is preferable to the 30,000,000 Total Margin that a price reduction would see.
Question 2
Adios Junk Mail is currently charging $15 per year with a variable cost of $10. This gives the product a margin of 33%. We are assuming that there are no fixed costs.
It is in Adios Junk Mail’s interest thus to prioritize higher price …show more content…
over higher volume, as long as demand is inelastic.
Elasticity has been calculated in Column J of the Excel Sheet for all price points and from this we gain the following insights: * At some very low prices Price elasticity of demand is a positive number: as price increases demand also increases (or at least stays the same). This is true from $13-$15, $19-$20, $24-$25 and $28. Furthermore, elasticity at low prices are generally very low. From the data we see that up to $30 the prices can be increased without total margins coming down at any single price increment. The ideal price we can deduce will at least be $30. * Multiples of $5 tend to see very high elasticity figures. This implies that consumers have psychological barriers to certain prices and the likely optimal price will have to be just before hitting such a Price. For better understanding we have added Column K in the excel spreadsheet elasticity at $5 increments between each of the relevant price points. Column K shows us that the first time elasticity goes above being unit elastic (where the adverse impact on demand exceeds that positive impact of a price increase) is at the $50 price point.
Examples of Impact of Price Increase:
To better illustrate the importance of raising prices at AJM we can use the example of the current $15 price where demand is derived at 5,989 customers for a total margin of $29,946.
A price increase of $2 would see demand fall to 5,913 customers but total margin would rise to $41,389. A price decrease of $2, however, would see a fall in demand to 5,673 customers and total margins fall to $17,019.
Even using a better example of $30 as a base we would see total margins rise by $5,475 if we raise the price to $32, but fall by $3,969 if we reduce price to $28.
Plotting a demand curve (please refer to demand curve worksheet in excel spreadsheet), confirms the insights gained from above. The curve can be split into three segments: 1) Upto $29 where the curve is slightly upward sloping, 2) From $30 to $49 where the curve is downward sloping (though in strict steps at $5 intervals), 3) $51 and above where the curve is relatively flat.
Significantly, the $5 psychologically barrier is very clearly illustrated at almost all points, particularly in between the three segments that we have mentioned above. The most significant point on the graph is the dramatic fall in demand when price is raised above $49.
Recommendation
1:
From our analysis we have learnt that the ideal price would be at least $30, below $50 and $1 below a multiple of $5. This leaves us with four options: $34, $39, $44 and $49. The price elasticity at $5 increments shows us that all these price points have an elasticity of less than -1, but the $54 price point has a elasticity of -6.42. Based on this, the data table provided and the graphical evidence we can conclude that the single best optimal price AJM can choose is $49.
Recommendation 2: Differentiation
If, however, AJM could find a way to differentiate its product then it could keep this $49 price point, but put together a product with additional features and charge a premium. From the third segment of the demand curve ($50 upwards) we see an extremely flat demand curve, indicating very low price elasticity.
If we look at the Price Elasticity of Demand at $5 increments (Column K) we see that unit elasticity is crossed at the $75 price point. If the premium offering of AJM’s product was offered at $74 it would derive a demand of 1,297 customers and generate a total margin of $82,978. Demand for the regular product at $49 would fall by the corresponding amount and leave a total margin of $121,784. This would be an overall gain of $32,413.