21-Speed Gizmos, Inc. is a manufacturer of electronic bicycle components. It is faced with the challenge of coming up with the price by which to offer a new product. It considers the product itself and available data on cost and demand in introducing the appropriate pricing.
Anirudh Dhebar
Harvard Business School (594024-PDF-ENG)
Aug 12, 1993 (Revision: Jun 17, 1994)
Case questions answered:
- Background
- Problems and Issues
- Analysis to support your finding of the company’s problems and issues
- Recommendations
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21-Speed Gizmos, Inc. Case Answers
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I would price DCS at $99.95. First, a lower price would mean a further increase in demand from the 20% rate of growth that 21-speed Gizmos would experience for the next two years. Second, a threat of competitive entry would mean that they would all be competing for a lower price in order to induce customers to buy their product.
These two arguments would favor the decision to lower the price to either Alternative B ($99.95) or Alternative C (74.95). Further examination would reveal that the company would sacrifice its profitability if it chose the latter pricing.
Provided that 21-Speed Gizmos would choose Alternative B over Alternative A (124.95), they would be sacrificing a loss of contribution margin from its demand of $437,500 (Difference in CM x Demand of A).
However, this loss is offset by the contribution margin derived from the new customers, which is $504,250 (Difference in Deman x CM of B) with a favorable variance of 66,750.
On the other hand, if 21-Speed Gizmos chooses Alternative C over Alternative A, it would be sacrificing a loss of contribution margin from its demand of 875,000.
But, in comparison to switching to Alternative B, this does not completely offset the loss because of a contribution margin derived from new customers of only 685,200, which gives an unfavorable variance of 189,800.
Adding a radio option to the DCS would be a profitable idea.
First, he should consider the perceived customer value of the product so he can price the upgraded and premium version reliably and accurately without sacrificing the economical choice of buying the DCS.
Second, he should consider the demand for this product, how it would affect the demand for DCS, and the overall tendency to discontinue the old model.
I believe the radio option is an additional feature for the convenience of the customers, and the customer’s demand would not change with its premium pricing. This means that DCS-II would create a surplus for DCS because of its perceived obsolescence and would require 21-Speed Gizmo to sell it at a discount of 74.95 to diminish and maintain the production of the old model.
Since pricing is not the only determining factor for the product’s demand, it would be useful to analyze the effect of marketing on the business operation.
It is therefore suggested that they would identify and separate marketing expenses from administrative expenses and measure marketing profitability through the application of different marketing metrics such as Marketing ROS and Marketing ROI.
Furthermore, it would also be helpful for the managers to identify the market demand of the DCS and what their market share for this product is.
Additional File:
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