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

Answer 2

Hi Felix, in table 1 you can find the revenue of 590M and in diagram 1 the split by segment is given, stating 15% f... (read entire answer)

Hi Felix, in table 1 you can find the revenue of 590M and in diagram 1 the split by segment is given, stating 15% for <€5. €590M *0,15 = €88,5M Best, John

Answer 3

Hi Navid, I agree. Even if you could not reduce labor expenses and other operating expenses, you would still close... (read entire answer)

Hi Navid, I agree. Even if you could not reduce labor expenses and other operating expenses, you would still close the business as the price just covers the cost of raw materi... (read entire answer)

Answer 4

Since the profit margin keeps constant over years, I doubt the client did not have a proactive plan for supplier mana... (read entire answer)

Since the profit margin keeps constant over years, I doubt the client did not have a proactive plan for supplier management. What they are selling can likely be found from many... (read entire answer)