Question on market size

In-flight Broadband
New answer on Feb 29, 2020
2 Answers
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Anonymous A asked on Feb 29, 2020

The potential market size for this case is determined by calculating the revenue per flight based on the price elasticity diagram. It's said that because the potential per flight is the highest at $15, the market size is $15 * 99m (potential users) * 20% (users that will buy at $15) = $297m. However, if we price it at $15 shouldn't we be able to grab the willigness to pay of those that would pay more than $15? Meaning our potential market size would be 99m (potential users) * (20% (WtP = $15) + 10% (WtP = $20) + 5% (WtP = $25)) * $15 = $520m.

Did I misunderstood something or is there a mistake in the solution?

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Luca
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replied on Feb 29, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello,

Everytime that you see an exhibit like this, you have to consider only the percentage related to you price. In other words, it's like people that would pay more than 15$ are already included in your 20%.
Does it make sense?
Best,
Luca

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Nicholas on Feb 29, 2020

Hi Luca, thanks for the quick answer. But I still disagree. Simon Kucher & Partners has a similar case on their website with the same type of exhibit. For the exhibit they have an additional note that states: "Common Traps: Not realizing that a lower price captures the customers with a higher willingness-to-pay".

Luca on Feb 29, 2020

Send me the exhibit, I'm sure it is different from this.

Clara
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replied on Feb 29, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I think it´s a fair point to be adressed with the interviewer, since indeed we might capture some clients with higher willigness to pay. However, taking it for granted and including them is too much, since you cannot be sure either.

Think, for instance, making an extreme case, that then Zara could "asume" that they can absorbe all the market from higher-price brands, when in reality they don´t, since the value proposition of the higher-priced segment is other.

Cheers,

Clara

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Luca gave the best answer

Luca

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