MINI-CASE
Coller Inc.is an American firm that manufactures flat panel LCD computer monitors.The firm has a 5% share of a 2 million unit market.The firm's marketing department calculates that its acquisition cost is $13 million and retention costs is $5 million.The market for flat panel LCD computer monitors is in the late growth stage of the product life cycle,and Coller currently sells its product for $2,000 and experiences variable costs per unit of $1,600.
-Mini-Case Question.As the market for this product matures,Coller may need to rethink its pricing in order to optimize profits as the market growth slows.If the objective is to optimize profits,is it a good idea for Coller Inc.to decrease the price by 10% in an attempt to increase market share to 6%?

Question

Quizplus · Accepted Answer

The decrease in price by 10% will result in a decrease in revenue per unit sold from $400 to $360. As a result, Coller will need to sell additional units to compensate for the decrease in revenue. Increasing market share from 5% to 6% would require a sales volume increase of 40,000 units (2 million * 1% * 10). However, the cost to acquire each additional customer is $2,000 ($13 million / 6,500 customers). Thus, the cost to acquire 40,000 new customers would be $80 million. Even if Coller were able to acquire these customers for free, the gross profit from selling the additional units at $360 per unit would be $8 million ($40 * 40,000 units). The gross profit lost from the price decrease on the additional 40,000 units sold to existing customers would be $6.4 million (40,000 units * $160). In total, gross profit would decrease by $16.4 million ($8 million - $6.4 million), making the choice to decrease price by 10% a poor decision.

MINI-CASE Coller Inc.is an American Firm That Manufactures Flat Panel LCD