16.7k
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Problem Definition

The client, OnlineGo, is a European Internet Service Provider (ISP) that is contemplating entering the North American market. Currently, they hold a dominant position in the European market with two streams of income; a subscription fee and taking a percentage of all e-commerce transactions done by subscribers. After studying the North American market, OnlineGo has concluded that the market is very divided and it is the perfect time to enter. You have been asked to calculate some figures to determine the potential profitability of entering the North American market.

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16.7k
Times solved
Intermediate
Difficulty
Do you have questions on this case? Ask our community!

Exhibits

Industry Information

  • 10 million subscribers
  • $20/month subscription fee
  • $1,800/year of online spending at 3% commission
  • Fixed costs - $1 billion
  • Variable cost - $110/year per subscriber

1. Calculate the annual net income in North America, given the current model and all assumptions. What is the annual gross mark-up, measured as a percentage?

2. OnlineGo found that a new entrant is charging $10 per month to gain market share. Can our client do the same?

3. What is the elasticity of demand for this market?

4. Due to high market elasticity, OnlineGo will charge less than $10/month. What would the amount of online purchases have to be made by each customer to maintain the same level of profit as at $20/month?

5. How much would each subscriber have to buy to allow the firm to break even?

6. How many subscribers would OnlineGo need to gain in order to break even?

7. How can the fixed costs of investment be reduced?

8. Is there any reason to continue with an investment even if it will lose money?

9. How would you summarize the situation and what are your recommendations?