Price differentiations & brand development

Question

I think it is quite risky to cut all the products which gross profit margin is lower than 10%, since low prices have attracted a lot of customers. Why don't we use a price differentiation strategy on "free shipping costs"? For example, if the total consumption is higher than 30 euros, we offer a free shipping, thus this will make people try to buy more, otherwise an additional shipping cost could be charged in order to compensate us. I know this may lose some customers as well since there is a huge competition outside, but i think since the bottom line could really be set around 30 euros (to at least prevent the loss), it will not reduce a lot of competitiveness of Onlinestar.

Another problem is, if it is possible to develop the brand up to aim for semi-premium? Because Online star is gaining the most profits from the products(>70 euros), i think the company should focus more on expensive buyers.

Answer 1

Hi there,

You're not wrong. But you're also not right ;)

Never forget the OBJECTIVE.

While you are right about the risk to cutting low margin products, in this case you can only include it as a risk. It's a good risk to include, but you can't let it detract from the case.

Why?

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The case prompt states:

"The financial ratios have deteriorated in recent years. In particular, gross profit margin decreased significantly. Combined with a significant increase in shipping costs, this led to a negative result for the first time in the recently ended fiscal year and a resulting strained financial situation. Against the background of expected stagnating sales for the current financial year, short-term action is required.

The board of Onlinestar asks you for an analysis of the reasons for the negative result as well as a derived recommendation for action"

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Your recommendation to offer free shipping cuts into margins. Your resistance to cut low-margin products means you will continue to have the same short-term issues with financial ratios. Your resistance to semi-premium is incorrect because we need that attractive margin.

So, you're right, but you're wrong because you forgot what the objective was