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…
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
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…
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