Within any industry the fiscal or economic goals are to increase revenue; determine the fixed and variable costs for the business; and determine how to maximize profit. In order to reach those goals an organization needs to establish the pricing structure, product differentiation, and how to minimize the costs for the product. In this proposal will layout the strategies to reach those goals in order to make a more economic successful organization.
A sound prediction made by the organization is, in the very near future, society will be moving exclusively to digital. Books, news, magazines, TV shows, and movies the boom in digitalization will be grand and swift. Seeing a market for a unique form of digitalizing books and magazines the organization created a technology that allows for the printed word to be converted into a file that can be read digitally or listened to with a realistic sounding synthetic voice. The organization patented the technology and is currently competing against other organizations that offer similar services. The main competitor lies in an organization known as books on cd. This places the organization in monopolistic competition, which is, “characterized by a relatively large number of sellers producing differentiated products.” (McConnell, Brue, & & Flynn, 2009, p. 177) Currently, the organization is run out of a small venue, and many of the employees are still gainfully employed with other organizations. The organization has identified that assistance is required but is unsure of how or where to employ the required assistance. The organization would also like to identify the appropriate price to be selling their product at.
Currently, the organization is charging $10 for older titles whose copyrights have lapsed and $15 for titles that have royalty fees. Furthermore, the organization is selling twice as many new titles as older titles. One strategy for the organization is to lower the fee for the older titles to $8, since there are no royalty fees for to pay, and increase the price for books that are in high demand, to $16. If the organization was to sell 1,000 older titles at the new pricing the total revenue (TR=PxQ) would be $8,000, and if the organization were to sell 2,000 of the newer titles the total revenue would be $32,000. (McConnell, Brue, & & Flynn, 2009, p. 116) With this change in prices, the organization could expect to sell more of the older books at the lower cost, which would increase revenue over time. It also could experience very little change in sales of newer books with the small $1 increase in price, especially considering the demand. By monitoring the consumers response to the changes in price (known as price elasticity), the organization can see how consumers are responding to the changes in pricing and adjust accordingly. (McConnell, Brue, & & Flynn, 2009, p. 114)
One market that the organization could benefit from is online. While the organization has already started building a low cost website which describes and offers the product for purchase; the full potential for this type of product is not being reached. The organization should create an online store, perhaps on a site such as EBay. A basic EBay store costs $15.95 a month to operate and a percentage fee based on the amount of sales made each month. (Fees For EBay Stores, 2013) Using technology to sell the product makes the most sense and can be done for a relatively low cost. However, there are costs the organization needs to consider before putting the product in more locations for customers to purchase it. If the demand increases, the organization may consider hiring additional help. One way to keep the labor costs down is to hire college students as interns to help with the translations and assisting customers. Often students look for low paying or unpaid internships that can help earn college credit. Additional costs the organization needs to plan for are fixed costs, such as the cost of the equipment, utilities, the said EBay store, and website fees. He will also need to consider the variable costs such as licensing fees, the cost of employees, and any outsourcing fees if elected to go that route.
In order to determine how many titles the organization should transform (products to offer), it could compare total revenue and total cost; or, compare the marginal revenue and marginal cost. (McConnell, Brue, & & Flynn, 2009, p. 180) Focusing on the first method of total revenue and total cost. Using the numbers mentioned above, the organization’s total revenue for the older titles if they were to lower the prices to $8, TR= $8,000. Couple this with the idea that the transformation of the older titles should be minimal to nothing because of the fact that it will be done internally.
It would be important to estimate the cost of creating the files at $3 a book since the organization is currently using very low cost venue and the organization is consuming the utilities that match that. For the same 1,000 books we used to figure total revenue, TC=$3,000. The organization will be establishing a total profit of $5,000. The second and final option is to analyze marginal revenue and marginal cost. This process is done by comparing the amount each additional unit of output is costing and adding it to the total revenue and total cost. Unfortunately, this information was not made available for this proposal.
Barriers to Entry
Barriers to entry are factors that prohibit firms from entering an industry. (McConnell, Brue, & & Flynn, 2009, p. 202) In regards to this industry, the organization could definitely build some barriers to keep other companies from intruding in the industry. Being that that the patent of the intellectual property has been established that alone should set a barrier. In order to build more and stronger barriers, the organization needs to effectively market the product, establish branding, and distinguish the product from similar firms. The research that the organization has conducted on the market shows that digital listening has attracted a similar audience to those who are downloading music to digital devices. Understanding that shows a large demand for the product.
For a firm with a product that can be used internationally and traded online there is very little adjustment needed when strategizing between exporting the goods and selling them domestically. Especially when considering that the shipping is none existent because all the products are digital. Usually there is a specialty factor that goes into importing and exporting. With this product that isn’t really an issue. There is however one main issue that needs to be considered with international trading for this firm. That one issue is exchange rates. What should the organization charge for each title? This has a simple solution. Since the product is being sold online the exchange rate can be programed into the store software. The pricing doesn’t need to be changed at all. With the eBay vendor account they exchange for you automatically. This issue is solely a programing issue.
Credit Markets and Current Economic Condition
Once again as a small startup company the credit markets would have very little effect on the organization. While the organization does have a select few investors there is no actual trading of bonds, stocks or any other credit market items. The only relevance of the credit markets play on this organization as it stands is with similar organizations. The organization can make judgments of supply and demand based on the strength of organizations such as books on cd and amazon. With these numbers the organization can adjust their prices as well. With a long standing recession affecting the global economy every organization must watch their costs both variable and fixed even more closely. This organization would be no exception.
One strategy this organization can take to lower their variable cost of electricity is by going green. Simply by purchasing energy saving equipment the organization can save money both with tax rebates and on power costs. The other strategy that would be affective is making this an account based system. With the free account would come a feeling of loyalty and draw more interest with a free book. This will bring in new patrons and increase the demand on the product while getting the word out of the organization.
In conclusion, the organization a strong patented intellectual property with a market of demand. In order to gain momentum, the organization needs to determine a pricing strategy that is competitive, yet profitable. The organization needs to continue to increase the demand for the product by entering more markets. The organization, while in its infancy, needs to also keep the cost of business low, but not ignore the necessities of the industry. The organization needs to keep up with market trends and find a strong barrier of entry once established. The organization would need to be aware of the costs of international trading. Finally, the organization would need to understand the relevance of the credit markets while strategizing for the current economic condition.
Fees For Ebay Stores. (2013). Retrieved February 24th, 2013, from Ebay Website: http://pages.ebay.com/help/sell/storefees.html
McConnell, C. R., Brue, S.L., & Flynn, S.M. (2009). Economics: Principles, problems, and policies (18th ed.). New York: McGraw Hill/Irwin.