Pricing strategy and profit maximization for Will Bury's digital books
Will Bury has a new way of digitising books, and wants to maximize profits from his existing business. The paper presents some amendments to previous proposal, giving advice on the way in which profits may be maximized. The advice given includes recommendations for pricing, as well as advice to support increasing sales through differentiation and the development of loyalty in the customer base.
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Business
Amended Will Bury Proposal
Current Position
Current Sales
Elasticity of Demand
Elasticity of Demand for the Digital Books
Books in Copyright
Books out of Copyright
Cost Structure
Influences in Demand
Will Bury has developed technology which effectively digitizes books; allowing the book to be listened to as an audiophile or read in a digital format, believing that this format will take over from their the current paper-based books and CD audio books. Will has started to sell the books online and his technical expertise has helped create a system which may provide a good income for him in the future, but his business acumen appears to be lacking in his ability to determine a suitable pricing strategy for the different books.
When maximizing profits the company will seek to maximize the revenues that are received at the same time as minimizing the costs. The aim of this paper is to assess the way that Will Bury may maximize his profits. The first consideration is to look at the way in which pricing should be determined and then look at other potential strategies which may help increase revenue.
2.
Current Position
Before any strategy can be determined it is necessary to look at the current position, to ensure that the strategy recommended will have a solid foundation and is based on the existing position of the firm. The level of sales and elasticity of demand needs to be considered with reference pricing strategies, however, it is also necessary to look at the cost structure which will increase the understanding of the firm and the potential strategies which may be suitable.
2.1
Elasticity of Demand
For most goods in the market it is known that when the price increases demand will decrease and when the price decreases demand will increase (Baye, 2007). This is the reason why when a company wishes to sell off surplus goods they will have a sale and reduce prices, or when goods are very popular and there are insufficient stocks companies know that they can increase the price and still so the products (Baye, 2007). However, while the majority of goods will see an increase in demand when prices decrease, the rate at which demand changes of will vary, and some products may see a faster increase than others (Baye, 2007). Additionally, in a few cases a decreasing price may undermine the value of the product, and may result in a decrease in sales, this is known as a Giffen good (Baye, 2007).
Elasticity is a way of measuring the impact that a change in price will have on the demand for a product, and the revenues which are generated. If Will wants to maximize revenues, he can use the concept of elasticity in order to determine how prices for both the out of copyright and new books should be price.
The calculation of elasticity is relatively simple, if there is some historical data available indicating sales following a price change. Elasticity can be calculated by dividing the percentage change in the demand by the percentage change in the price (Baye, 2007). For example, if there is a 50% decrease in demand following a 50% increase in price the calculation will be -50/50 = -1. In elasticity calculations is it is usual to drop the negative indicator (Baye, 2007). This means that for every 1% increase in price there will be 1% decrease in demand, and conversely for every 1% decrease in price there will be a 1% increase in demand. If this is applied to the sale of movies where he found that when prices decreased from $80 to $20 sales increased by 600% a sample plasticity calculation can be undertaken. In this case plasticity is calculated by dividing 600 by -75, which gives an elasticity of -8, or 8 because the minus indicator is dropped. This means that it was possible to calculate the change in prices, and that for every 1% decrease in prices there would be an 8% increase in sales. Where the increase in demand is greater proportionately than the decrease in price, there will be an overall increase in revenue, where the elasticity is less than one the proportional change in demand will be less than proportional change in the price.
With the case of the films, it was clear that the company was better decreasing prices in order to increase sales. However, the digitized books are a different matter, they are different product, and at the current time they are benefiting from the competitive advantage of diversification, as the technology is patented and Will does not believe that it can
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