Strategic Pricing Proposal for Local Cable Company- Competing in a Dynamic Market Environment

Strategic Pricing Proposal for Local Cable Company- Competing in a Dynamic Market Environment

Price Objectives

The price objective for the local cable company is survival, given the stiff competition from cable companies like AT&T U-verse and Dish Network. Setting the company’s price involves selecting various strategic price points to take advantage of the serviced-based cable market relative to the competition. The argument is that both the local cable company and its rivals offer similar services with the same attributes. Essentially, the three firms offer high-speed internet bundles, cable content, and telephone services, implying that customers have many substitutes for the services. This situation further means that prices of the various cable networks and content services have reached a level of equilibrium, and charging a higher price is a recipe for revenue loss. The price needs to be set below that of competitors to attract new customers. The method aims at increasing the company’s customer base and, ultimately, the traffic for the cable service. Setting the price in this manner will cater to some variable costs and fixed costs, eventually helping the business to move its stagnant inventory.

The demand for the Cable Service

The household-level demand for cable and pay-cable networks is highly elastic. Typically, a change in the price of the cable network and content services often results in a substantial change in the quantity demanded. According to Kotler and Keller (2016), households usually make a rational economic choice for available cable services if the perceived value of such services is higher or equal to the prices being charged. The high price elasticity of demand for high internet speed services validates selling the services at a loss leader. This trend suggests that the company’s target customers are price-sensitive because of the stiff competition and the high number of substitutes (Bloch & Harry, 2014). Setting a lower price for bundled services than the market leaders is an avenue for the local cable firm to gain a wide market share quickly and dominate the industry standards in the long run. In this regard, the company can successfully render its cable network and content services at a price lower than competitors to attract customers to the complementary services that generate a profit.

Estimation of the Cost Elements and How it Will Influence the Price of the Service

The price below that of the industry participants correlates with the production costs, along with the expected subscribers. Notably, the local cable company has a high content cost since it offers diverse voice, broadband, and video services. This particular cost is similar to the firm’s fixed costs. While the content costs account for the company’s sizeable portion of operating costs, its additional infrastructure investment is responsible for a large portion of its cable services costs. As such, as the volume of services increases, variable costs increase (Kotler & Keller, 2016). However, with the economies of scale in the firm’s additional investments, ramping up its production of the cable network and content services to meet the expected high demand will increase the variable costs at a rate below the profits generated from the services. This state of affairs suggests that the new price will cover the cost of producing and distributing basic cable services. The economies of scale resulting from increased production and distribution of cable services suggest that the new price for the services still places the company in a better position to expand its market growth.

Proposed Competitive Price Analysis

Initiating the price cut-off for cable services may elicit different reactions from consumers and competitors. Initially, consumers may question the quality of services offered b the local company if its implements the lower-than-competitor price strategy (Mohammed & Murova, 2019). In effect, this perception may influence consumers’ purchasing behavior. Studies support this conception by contending that consumers tend to decrease their choice of less popular brands in the face of price reduction (Mohammed & Murova, 2019). the only exception to this regard will be the loyal consumers, who will not switch brands due to the unit decrease in the price of the firm’s cable services. Even so, consumers will gradually resort to the local company’s services after careful value for the money judgment and getting the necessary information about the less-priced cable service. Mohammed and Murova (2019) support this school of thought and argue that a decrease in price for a given brand increases the likelihood that consumers will purchase that brand and decreases the probability that customers will purchase competitive brands. Eventually, the local firm will make large margins on the price inelastic segment by lowering the price of its service.

Similarly, competitors are also likely to worry about the reduction in price and respond differently. In one way, companies such as AT&T U-verse and Dish Network might worry about the quality of the local company’s cable services. On the other hand, rival firms might interpret the price cut as a strategy to grab a large market share, increase the demand for cable services, or boost current sales by attracting more customers. Consequently, competitors may follow suit in reducing their prices or accept the small price gap to avoid a race to the bottom. The company is banking on the latter assumption to attract more customers and consequently more profits.

Price Method

Based on the forbearing, target-return pricing suits the local company. The idea is to return a targeted rate of return on investment while attracting a wide market share. Since the company expects a high return in the long term, it implies that the business must not be profitable in the short term since the overarching goal is to woo more customers to the firm’s brand.

Target-price = unit cost + (desired return * invested capita)/ unit sale

Suppose the company has set its variables as follows:

Unit cost = $25

Desired return = 25%

Invested capital = $ 850,000

Unit sales = $34,000

Target return-price = $25 + (25*$850,000)/$34,000 = $650

This model assumes that the local company will achieve the predicted sales volume to reach the target return on investment.

 References

Kotler, P., & Keller, K. (2016). Marketing management (15th ed.). Pearson Education Limited.

Mohammed, R., & Murova, O. (2019). The effect of price reduction on consumer’s buying behavior in the U.S. differentiated yogurt market. Applied Economics and Finance, 6(2), 32. https://doi.org/10.11114/

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Pricing Strategies: Assume you are the marketing manager for a local cable company. You have some direct competitors, including AT&T U-verse and the Dish Network. Using the six steps outlined in your textbook for setting a pricing policy, prepare a report for your Vice President on your suggested pricing strategy for your service.

Be sure to include the following in your report:

Determine your price objective with your justification.
Determine the demand for your service and how this influences your pricing strategy.
Estimate your cost elements and analyze how this will influence the price of your service.
Propose a competitive price analysis.
Select your pricing method and determine your final price along with your justification.
Be sure to properly cite your sources using APA; include your references and in-text citations. Comment on the postings of your classmates. Do you agree with their position? Why or why not