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?

Principles Of Marketing
17th Edition
ISBN:9780134492513
Author:Kotler, Philip, Armstrong, Gary (gary M.)
Publisher:Kotler, Philip, Armstrong, Gary (gary M.)
Chapter1: Marketing: Creating Customer Value And Engagement
Section: Chapter Questions
Problem 1.1DQ
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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

Initial Value: Strategy 1:
New Product Premium
Service
$
$
69
69
$
GA
GA
G
69
8000
1500
H
Initial Value:
Strategy 2: New Product
-Basic Service
100 $
125
800,000
187,500
$
$
$
987,500 $
400,000 $
140,625
$
540,625.00 $
9,987,500.00 $
9.89%
6000
7000
100
I
Initial Value:
Strategy 3: New Products
-Premium + Basic
Service
$
$
75 $
600,000 $
$
525,000 $
1,125,000 $
300,000 $
$
157,500 $
457,500.00 $
10,125,000.00 $
11.11%
+A
5000
1500
5000
100
125
75
500,000
187,500
375,000
1,062,500
250,000
140,625
112,500
503,125.00
10,062,500.00
10.56%
Transcribed Image Text:Initial Value: Strategy 1: New Product Premium Service $ $ 69 69 $ GA GA G 69 8000 1500 H Initial Value: Strategy 2: New Product -Basic Service 100 $ 125 800,000 187,500 $ $ $ 987,500 $ 400,000 $ 140,625 $ 540,625.00 $ 9,987,500.00 $ 9.89% 6000 7000 100 I Initial Value: Strategy 3: New Products -Premium + Basic Service $ $ 75 $ 600,000 $ $ 525,000 $ 1,125,000 $ 300,000 $ $ 157,500 $ 457,500.00 $ 10,125,000.00 $ 11.11% +A 5000 1500 5000 100 125 75 500,000 187,500 375,000 1,062,500 250,000 140,625 112,500 503,125.00 10,062,500.00 10.56%
1
0
2 Standard service sales (units)
3
Premium service sales (units)
4
Basic service sales (units)
5 Price standard subscription
A
6
Price - premium subscription
7
Price - basic subscription
8
Sales revenue - standard
9 Sales revenue - premium
10
Sales revenue - basic
11 Firm's total revenue
12 Profit - standard
13 Profit - premium
14 Profit - basic
15 Firm's total profit
16
Total industry revenue
17 Firm's market share
10
Standard Service
$
$
B
$
$
10
100 $
$
1,000
1,000
500
E
Strategy 1: New Product Strategy 2: New Product Strategy 3: New Products
Premium Service
-Basic Service
-Premium + Basic
Service
0.01%
$
$
$
$
$
$
500.00 $
$ 9,001,000.00 $
с
8
100 $
125
800
0
$
$
$
800
$
400 $
0
$
400.00 $
9,000,800.00 $
0.01%
D
6
100
75
600
0
600
300
$
$
$
$
$
$
$
$
0 $
300.00 $
9,000,600.00 $
0.01%
5
$
100
125
75
500 $
0
0
500 $
250 $
0
0
Initial Value:
Standard Service
F
250.00 $
9,000,500.00 $
0.01%
10000
100 $
$
Initial Value: Strategy 1:
New Product -Premium
Service
1,000,000 $
$
1,000,000 $
500,000 $
$
500,000.00 $
10,000,000.00 $
10.00%
G
8000
1500
100
125
800,000
187,500
987,500
400,000
140,625
540,625.00
9,987,500.00
9.89%
Transcribed Image Text:1 0 2 Standard service sales (units) 3 Premium service sales (units) 4 Basic service sales (units) 5 Price standard subscription A 6 Price - premium subscription 7 Price - basic subscription 8 Sales revenue - standard 9 Sales revenue - premium 10 Sales revenue - basic 11 Firm's total revenue 12 Profit - standard 13 Profit - premium 14 Profit - basic 15 Firm's total profit 16 Total industry revenue 17 Firm's market share 10 Standard Service $ $ B $ $ 10 100 $ $ 1,000 1,000 500 E Strategy 1: New Product Strategy 2: New Product Strategy 3: New Products Premium Service -Basic Service -Premium + Basic Service 0.01% $ $ $ $ $ $ 500.00 $ $ 9,001,000.00 $ с 8 100 $ 125 800 0 $ $ $ 800 $ 400 $ 0 $ 400.00 $ 9,000,800.00 $ 0.01% D 6 100 75 600 0 600 300 $ $ $ $ $ $ $ $ 0 $ 300.00 $ 9,000,600.00 $ 0.01% 5 $ 100 125 75 500 $ 0 0 500 $ 250 $ 0 0 Initial Value: Standard Service F 250.00 $ 9,000,500.00 $ 0.01% 10000 100 $ $ Initial Value: Strategy 1: New Product -Premium Service 1,000,000 $ $ 1,000,000 $ 500,000 $ $ 500,000.00 $ 10,000,000.00 $ 10.00% G 8000 1500 100 125 800,000 187,500 987,500 400,000 140,625 540,625.00 9,987,500.00 9.89%
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