1. The retailer ValueX is considering a 33 % drop in the price it charges for its blenders. Each blender is currently priced at $54. The retailer pays $29 per blender from the manufacturer.
(a) What is the initial contribution margin for ValueX?
(b) What is the break-even change in sales of the blenders that must be achieved for the drop in price of the blenders to improve ValueX's profit?
(c) Suppose instead a pricing expert suggests that the price of the blenders be increased to $59. What is the break-even change in sales of the blenders that would leave the retailer in a more profitable position?
(d) Suppose ValueX knows that the elasticity of demand at its current price point of $54 is 50%. Which strategy (the 33% drop or increase to $59) should ValueX adopt?
2. Genetics Inc. creates products that improve the process of genetic testing. D-Test is one of Genetics Inc.'s products. To improve its profit, Genetics Inc. wants to learn what D-Test is really worth to customers. Researchers in the field of genetic testing consider the product G-Sync as the best alternative to D-Test. G-Sync sells for $200 per test kit. In comparing D-Test to G-Sync, Genetics Inc. discovered the following four drivers of differentiation (positive and negative) between the two products:
(a) Higher Value per Test for Customers: D-Test provides a higher quality DNA structure than GSync. The DNA structures are used by pharmaceutical companies who are its customers to manufacture commercial drugs. In general, the pharmaceutical companies expect to earn lifetime revenue of $40,000 for a drug. The lifetime cost of marketing and promoting a typical drug is about $30,000. It usually takes 500 tests in a year using G-Sync's test kit to develop a successful drug. On the other hand, it takes only 300 tests in a year using D-Test's test kit. [Hint: The value of using the test kits for the customer comes from the profit they make from selling the drugs]
(b) Labor Cost Saving: D-Test's test kit also produces more efficient laboratory staff work. Customers save 5 hours of processing labor compared to using G-Sync. Laboratory personnel receive an average of $20 per hour.
(c) Saving from Lower Failure rate: The analysis of the DNA sample by the laboratories usually involves a critical stage where the DNA may degrade and 3 weeks of research time may be lost since the work has to be repeated. G-Sync's product leads to such DNA degradation 15% of the time while D-Test's superior product leads to DNA degradation only 10% of the time. Laboratory personnel work only 5 days a week for 10 hours a day.
(d) Higher Shipping Cost: Genetics Inc. is located in Switzerland whereas G-Sync's parent company is located in USA and is closer to the US pharmaceutical customers. As a result, customers have to pay higher shipping costs to obtain D-Test, about $30 per test kit, whereas G-Sync is delivered to customers at a shipping charge of $10 per test kit.
Calculate the total economic value of the D-Test test kit.
3. HC Computers Inc. is revamping its most popular line of desktop computers and is in the process of deciding the price of the desktop computer. Respondents were provided a description of the computers and provided information about all the pros and cons of the computer. They were then presented prices of $500, $1000 and $1200 and asked to indicate their purchase intention on a 7- point scale, from "Definitely Not Buy" to "Definitely Would Buy". The results are shown below:
|
|
$500
|
Stated Price
$1000
|
$1200
|
|
1. Definitely Would Buy
|
40%
|
20%
|
15%
|
|
2. Almost Surely Would buy
|
20%
|
13%
|
10%
|
|
3. Probably Would Buy
|
11%
|
15%
|
20%
|
|
4. Undecided
|
2%
|
8%
|
5%
|
|
5. Probably Not Buy
|
10%
|
16%
|
25%
|
|
5. Almost Surely Not Buy
|
8%
|
7%
|
5%
|
|
7. Definitely Not Buy
|
9%
|
21%
|
20%
|
(a) Using a conservative approach to identify potential buyers of the computer, draw the estimated price response or demand curve for HC's desktop computer. Clearly mark the different prices and corresponding demands on the figure.
(b) Assuming that the original price for the computer was $900 and HC's original market share was 40%, calculate the elasticity of demand for each of the alternative proposed price points.
Choosing which of the three prices will generate the highest increase in revenue for HC?
4. The Chicago Residences Hotel (a hotel that wishes to target budget-conscious families) is considering revamping its hotel rooms and amenities and seeks information about which features matter most to its guests. A survey discloses that three features are important for the guests: Wi-fi availability, Kidfriendly activities and the Price. A researcher collects the following rank order information regarding the perceived value of the different attributes of the hotel, where 1 is most preferred and 8 is least preferred.
Wi-fi Availability: Free Wi-fi OR Daily charge on Wi-fi.
Kid-friendly Activities: Playroom present inside hotel OR No Playroom inside hotel
|
|
|
|
|
|
|
Price
|
|
|
Kid-Friendly Activities
|
Kid-Friendly Activities
|
|
Wi-fi
Availability
|
Daily charge on Wi-fi
Playroom
present
$120
|
Daily charge on Wi-fi
Playroom
absent
$120
|
Daily charge on Wi-fi
Playroom
present
$200
|
Daily charge on Wi-fi
Playroom
absent
$200
|
|
Rank = 2
|
Rank = 6
|
Rank = 4
|
Rank = 8
|
|
Free Wi-fi Playroom present
$120
|
Free Wi-fi Playroom absent
$120
|
Free Wi-fi Playroom present
$200
|
Free Wi-fi Playroom absent
$200
|
|
Rank = 1
|
Rank = 5 Rank = 3
|
Rank = 7
|
(a) Score the hotel offerings from 0 to 7, with 0 being the lowest-utility hotel offering and 7 being the highest-utility hotel offering.
(b) Calculate the part-worth utility of each of the attributes at their different levels.
(c) Calculate the relative importance of each of these attributes.
(d) Can you make some marketing suggestions to the hotel regarding what they should offer to their targeted customers?