You have recently joined Orange Inc, a listed company in Clearwater, Florida that produces luxury yachts. Orange has organized production and sales of the yachts in two segments: the ‘lower’ segment, where the average yacht is sold for $1 million, and the ‘upper’ segment, where a typical yacht is sold for $12 million. Orange’s pricing policy differs for the two segments. Yachts in the ‘lower’ segment are sold at a modest profit margin, while margins in the ‘upper’ segments are much higher. The rationale for this pricing strategy is to have higher levels of production so that the fixed costs are spread over a larger base, thus reducing the cost. In addition, the target customers for the ‘upper’ segment are deemed less price sensitive. Orange’s customers are typically wealthy individuals (end-users) or agents, which assist their customers in the purchase and interior design of the yachts. In the last fiscal year (2011), half the sales in the ‘upper’ segment were to end-users, while the other 50% of the customers were agents. For the ‘lower’ segment, the clients were mostly agents.
Main deck of a demo yacht
As a result of the housing and credit crisis, sales growth and profitability have slowed down. This is largely attributed to a sales drop in the most profitable ‘upper’ segment (sales in the ‘lower’ segment remained stable). Mr. Orange, the initial founder and currently president of the Board of Directors, believes that a crisis is simply an opportunity in disguise and has demanded top management to come up with credible plans to grab ‘this opportunity’ to grow profits. Previous occasions where Mr. Orange turned sour have always resulted in the replacement of senior management. As a new hire to the controller department, you are invited by the CFO to discuss firm performance, and participate in discussions to explore possible alternatives to improve performance. Pricing strategy
a. Comment on Orange’s pricing...