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Taylor Smith owns a small clothing company, Cuteness for You, that offers an online subscription and personal shopping service targeted at busy families with children aged newborn to five years old. Currently, Taylor has one level of subscription service, the standard service. For $100 a month, the standard service provides its customers a monthly delivery of 10 clothing items carefully chosen to match the child's size, gender, and emerging style. The online clothing subscription market is fairly new but is growing rapidly and thus Taylor is considering extending the product line to increase its market share and profits.
Taylor is debating whether to add a premium subscription service featuring profitable high-markup items for $125 per month, a basic subscription service that contains lower-markup popular items priced at $75 per month, or possibly both. Taylor knows that the new product lines provide an opportunity to attract more customers and possibly increase revenues and profit, but recognizes that new product lines, especially ones priced below the $100 standard service, might steal sales from the standard line through cannibalization.
To evaluate the options, Taylor creates a spreadsheet containing the key marketing metrics including estimated firm sales revenue and units, firm profit, and industry sales revenue. Based on industry research, he estimates that basic subscriptions would cannibalize standard sales at four times the rate at which premium subscriptions would.
The goal of this activity is to understand the potential impact that a product line extension has on a firm's revenue, profit, and market share. Keep in mind that:
Market share = Firm's sales revenue / Total industry sales revenue (including the firm's)
Refer to the formulas above and the spreadsheet below to help answer the questions that follow. The spreadsheet fields highlighted in yellow can be changed in order to determine possible outcomes. You can find the initial values in the corresponding blue cells in columns F to I. Start by entering the initial values into columns B to E. Then review the questions below and adjust the values in columns B to E to determine the correct answers.
5. Talyor decides that he wants to evaluate a more conservative outcome for scenario 1 and estimates that the sales from the premium service will only be 1550 subscriptions. Which of the following statements most accurately describes the outcome?
a. Adding a premium subscription service does not cannibalize sales from the standard subscription service.
b. There is no difference in the outcomes with or without the new premium subscription service.
c. The revenue increase from the premium subscription service is insignificant.
d. The drop in market share does not support the addition of the premium subscription service
e. The increase in market share does not support the addition of the premium subscription service
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