Describe how the current market conditions will affect the planning or operating decisions involving the product. Market Structure The market structure in this instance could fall into one of two types, oligopoly or monopoly (McConnell, Bruce, & Flynn, 2009). The rationale behind oligopoly is that several large retailers currently provide this service and control the availability, use, and other aspects of the programs (McConnell, Bruce, & Flynn, 2009).
The rationale behind monopoly is that the program is limited to each organization (McConnell, Bruce, & Flynn, 2009).
For example the program used at my organization is call the Shop Your Way Rewards program, it is only available at Smart and Sears, it cannot be used at other retailers and is exclusively controlled by Sears Holding Inc. Ultimately The market structure is a combination of a monopoly and oligopoly. Price Elasticity of Demand Price elasticity of demand has little effect on this product as the product is a free program provided by the organization. Despite this fact price elasticity does have an effect on the use of the program in that the customers can earn points on purchases and in turn spend those points on other researched.
In this instance, as prices rise or fall within the store the use of the product increases or decreases as a result. If for instance a products price rises at the store level, the number of points earned during purchases using the product increases as well. Likewise as the prices increase it requires customers to have more points available to make purchases. Though the rewards card is a free program an increase in product prices would translate to an increase in demand for the rewards card.
In looking at the determinants of price elasticity of demand, substitutability is first. The only way to substitute this product would be to shop at a competitor using the rewards program there such as a Kroger Plus card. Another substitute would be to use coupons instead of the card; however enhance them. The next determinant is proportion of income, again this would tie into the selling price of products and how the rewards program would offset any increases in price therefore increasing the amount of funds available to purchase products.
Next is the luxury versus necessity determinant, the rewards card applies to both and is neutral in this area as it can be used for either luxuries or necessities. The last determinant is time, as more consumers become familiar with this product the demand will increase as the benefits are realized. Profit-Maximizing Quantity This program essentially gives the customer a percentage of his or her purchase price back in the form of points that can be redeemed during a transaction Just like cash.
The program also generates coupons based on purchase levels and membership levels for additional dollars or percentages off purchases. Through data analysis, the company has determined that customers enrolled in the program average three additional shopping trips per onto than non-members, the data also reveals that members purchase on average $13 more per transaction than non-members. Points are earned one point at a time based on one percent of every $1 . An example of this would be a purchase of $100 would translate to gaining 10 points.
Every 10 points equal one penny, 1,000 points equals $1, 10,000 points equals $10, and so forth. By increasing the frequency of customers return trips along with the average dollar amount of those purchases the company is essentially paying for the program by enrolling new members. As membership increases so do sales and in turn profits. Price and Non-price Strategies Because the program is free, no price is placed upon the product. A non-price strategy is currently underway in which the benefits of membership are expressed by checkout operators during the customer checkout experience.
The company has also set enrollment and usage goals for each location within the company as well. Through the increase in verbal communication with every customer the company will realize the goals set and will be able to increase the goals as they are met. Production Costs The production costs associated with this product are the production of plastic cards for consumers to carry for purposes of using the program and redeeming points. This has been reduced over the last year and a half of the programs existence by encouraging customers to use their mobile phone number to access the account.
The company also has an internally produced website specific to the program that allows customers to update information and review purchases and current point amounts. This required only a small outlay in web design as the hardware and software was already in place to support the aerogram. The company also is reducing costs on receipts as part of the program is to allow customers to receive electronic receipts via e-mail instead of printed paper receipts. The costs of the program also include the points issued to customers. These costs are offset by the increases in purchases.
The following is a hypothetical cost break started the program by mass producing credit card-sized plastic rewards cards along with multicolumn, trip-fold brochures. The company’s initial investment was $1 million for the printing, distribution, and advertisement of this program. The initial program an for 12 months prior to the first cost reduction initiative. The program had recurring costs of $100,000 per month to continue production and distribution of materials. This initiative was to eliminate the plastic card and eliminate the need for informational brochures.
This was accomplished through the use of customer phone numbers and email addresses as identifiers instead of physical cards. The next reduction was made through the implementation of a website where the information regarding the product could be accessed by customers. This resulted in a net reduction of costs by $75,000 per month. The costs associated with points accumulated and spent by customers is variable and changes month to month, the amount has been steadily increasing since the program’s inception and will continue to do so.
To curb expenses associated with this part of the program the suggestion is to limit the number of points that can be redeemed in any transaction as well as place an expiration date on accumulated points. This will prevent customers from saving up a large number of points and eroding profit margin. Current Global Economic Conditions and the Local Macro Economy The current global economic conditions eave led to increases production costs of products sold by Smart and Sears as a result these increased costs have been passed on to consumers in the form of price increases on the products.
The rewards program will offer consumers a way to offset these increased costs by earning rewards points that will allow them to reduce the total amount of their purchase. The program will also issue member-only coupons to these consumers which will further reduce his or her costs. By doing this the company will see an increase in brand loyalty and revenues. Recent economic trends in the United States include new growth in the housing market, as consumers arches homes and contractors build new homes the demand for products offered by both Smart and Sears will increase and as a result the demand for the rewards program will increase as well.
The company is seeking a 75% penetration rate across all avenues of the business, including brick and mortar stores and online outlets. Local Economies Current Stage in the Business Cycle The local economy is currently in an expansion period as businesses are slowly starting to rebound from the recession. This is evident by the increase in home sales and the resulting increase in mortgage rates, along with the decrease in unemployment. As a result the demand for the product will increase as people begin to have more disposable income and seek out purchases for both luxury items, such as televisions and necessity items such as food.
The product uniquely will set Smart and Sears apart from the competition in fighting for this increase in disposable income by allowing customers to access a virtually limitless amount of products through Internet shopping sites and affiliate marketplaces set up on those sites. The current market conditions for Smart and Sears are still in a period of struggle as individuals are still recovering from the recession. As individuals recover the company must fight to regain market share from new competitors such as Dollar General, Family Dollar, and Dollar Tree.
These three companies capitalized on the recession by offering low price products that undercut many big box retailers such as Smart, Target, and Wall-Mart. As the economy recovers it will be important for Smart and Sears to pursue actively the consumers lost to these competitors and a way to do that is with the rewards program. Conclusion The program provides a unique experience for customers as the points are redeemable on virtually any product carried either in tore or online.
The program also generates sales and profit with a low amount of investment from the company. Customers will have generated roughly three to four times the amount of profit needed to cover the issuance of the points to each customer. Management should have a solid understanding of how effective and beneficial this program is and how the continued success of the program directly translates to the success of each business unit. Reference McConnell, C. R. , Bruce, S. L. , & Flynn, S. M. (2009). Economics. Unknown, NY: McGraw-Hill Company.