Bussiness Proposal Eco561

Topics: Price elasticity of demand, Marketing, Supply and demand Pages: 5 (1724 words) Published: August 26, 2013
Business Proposal
August 1, 2012

Business Proposal
Kmart and Sears, have been using a product used in many retail industries, a shopper loyalty card; this is a concept that has been in the industry for decades however it is new to this organization. This proposal will present the market structure for this program, price elasticity demand for the product, profit-maximizing quantity, price and non-price strategies, and production costs. Define the current global economic conditions and their effect on the local macroeconomic indicators. Define the local economies current stage in the business cycle. Describe how the current market conditions will affect the planning or operating decisions involving the product.

Market Structure
The market structure in this instance could fall into one of two types, oligopoly or monopoly (McConnell, Brue, & Flynn, 2009). The rationale behind oligopoly is that several large retailers currently provide this service and control the availability, use, and other aspects of the programs (McConnell, Brue, & Flynn, 2009). The rationale behind monopoly is that the program is limited to each organization (McConnell, Brue, & Flynn, 2009). For example the program used at my organization is call the Shop Your Way Rewards program, it is only available at Kmart and Sears, it cannot be used at other retailers and is exclusively controlled by Sears Holding Inc. Ultimately The market structure is a combination of a monopoly and oligopoly.

Price Elasticity of Demand
Price elasticity of demand has little effect on this product as the product is a free program provided by the organization. Despite this fact price elasticity does have an effect on the use of the program in that the customers can earn points on purchases and in turn spend those points on other merchandise. In this instance, as prices rise or fall within the store the use of the product increases or decreases as a result. If for instance a products price rises at the store level, the number of points earned during purchases using the product increases as well. Likewise as the prices increase it requires customers to have more points available to make purchases. Though the rewards card is a free program an increase in product prices would translate to an increase in demand for the rewards card.

In looking at the determinants of price elasticity of demand, substitutability is first. The only way to substitute this product would be to shop at a competitor using the rewards program there such as a Kroger Plus card. Another substitute would be to use coupons instead of the card; however the rewards obtained from using the card would outweigh the coupons and also enhance them. The next determinant is proportion of income, again this would tie into the selling price of products and how the rewards program would offset any increases in price therefore increasing the amount of funds available to purchase products. Next is the luxury versus necessity determinant, the rewards card applies to both and is neutral in this area as it can be used for either luxuries or necessities. The last determinant is time, as more consumers become familiar with this product the demand will increase as the benefits are realized.

Profit-Maximizing Quantity
This program essentially gives the customer a percentage of his or her purchase price back in the form of points that can be redeemed during a transaction just like cash. The program also generates coupons based on purchase levels and membership levels for additional dollars or percentages off purchases. Through data analysis, the company has determined that customers enrolled in the program average three additional shopping trips per month than non-members, the data also reveals that members purchase on average...
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