Projection Of Costs And Revenues For A Startup Bed And Breakfast Establishment Case Study

Length: 5 pages Sources: 8 Type: Case Study Paper: #48371148 Related Topics: Fixed Costs, Capital Expenditure, Market Share, San Diego Published October 21, 2022
Excerpt from Case Study :

The Case of Luxury Vibes Bed & Breakfast

1. What are your two to three pricing objectives for the new product?

Pricing objectives are the goals that guide a producer in determining the selling price of their product or service (Dransfield, 2005). According to Dransfield (2005), pricing objectives often reflect the companys strategic, financial, and marketing goals, as well as customer expectations. Each pricing objective attracts a specific pricing strategy. With the background information provided about Luxury Vibes Bed and Breakfast, the managers could focus on realizing three objectives. The two objectives to be realized in the short run, the first year of operation, are: a) to build or gain market share, and b) to survive by at least breaking even. In the long-run, when the establishment has built a sizeable market share, the pricing objective will be to maximize profits.

To realize the objective of gaining market share, Luxury Vibes will use a combination of penetration pricing and skimming (Rao, 2009). Penetration pricing involves offering a low initial price (usually lower than the competition) as a means to attract price-sensitive customers and get a foothold in the market (Dransfield, 2005). It is preferred in cases where a company is launching a new product in a competitive market (Dransfield, 2005). The rationale is that the low price helps to attract new customers and as more people interact with the product, the company starts to build a reputation, on which it can then ride to charge more (Rao, 2009). Given that San Diego already has a large number of bed and breakfast establishments; it may be plausible for Luxury Vibes to use penetration pricing to win customers who already have a wide array to choose from. The initial price offered will be one that allows the B&B to at least break even so as to survive in the short run (Rekettye & Liu, 2018). The company could use penetration pricing for first-time customers and skimming for return customers in the short run (Rekettye & Liu, 2018).

Skimming involves charging a high initial price as a means to yield high returns from customers willing to pay the premium (Dransfield, 2005). The establishment is committed to providing a superior, family-feel experience with the extravagance of a five-star hotel. The key features include a one-of-a-kind spa, exquisite rooms, magnificent buffets, an infinity-edge swimming pool, and jeeps and jet skis for rent. Return customers who experience the establishments exquisite family-feel five-star experience unavailable in other B&Bs will be comfortable paying a higher price in their subsequent visits. The establishment could apply penetration pricing for all first-time visitors in the first year of operation, then fully adopt skimming in the second year because then, it will have established a niche in the market and built brand loyalty and customers will be more willing to pay a price higher than that offered by the competition. Skimming in the long-run will help in realizing the long-term objective of profit maximization.

2. What is your expected final price for this new product? Show how you arrived at this

Breakeven analysis provides a valuable framework for determining a products sales price. The break-even point in sales ($) is the…based on the projected selling price. For this reason, this text recommends that the establishment combines penetration pricing with skimming to increase yields generated from quality-sensitive return customers (Weil & Maher, 2005). The fixed costs are expected to reduce by $80,000 in year 2 as the variable costs increase due to increases in market share.

4. Using a spreadsheet, project your expected revenue for 1 year 1st year by month, 2nd and 3rd years by quarter

Luxury Vibes projects that its market share will increase by 20 percent annually beginning from year 2 of operations. The projected increase in market share is represented by the 20 percent increment in the projected number of vacationers visiting the establishment every quarter in the spreadsheet. In addition to the projected increase in market share, the managers expect a further increase in quarterly sales revenues resulting from the replacement of penetration pricing with skimming at the start of year 2. The managers thus project that the number of vacationers visiting Luxury Vibes will increase from 4,650 in year 1 to 5,580 in year 2, and 6.696 in year 3. In year 1, the managers project that the establishment will receive a minimum of 90 visitors in each of the 5 months of winter, and 600 visitors in each of the 5 months of spring and summer, at the initial penetration price of $1,866. Quarter 1 sales revenues are projected to increase by 54 percent from $1.5 million in year 1 to $2.246 million in year 3, and quarter 2 and 3 revenues from $3.4 million to $5.2 million…

Sources Used in Documents:

References


Dransfield, R. (2005). Applied Business. Oxford, UK: Heinemann.


Glasgow, F. (2012). Small Business Finance All-in-One for Dummies. New York, NY: John Wiley & Sons.


Indeed Editorial Team (2021). How to Find the Selling Price Per Unit. Indeed. Retrieved from https://www.indeed.com/career-advice/career-development/how-to-calculate-selling-price-per-unit


Park Hotels and Resorts (2020). 2020 Annual Report. Retrieved from https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_PK_2020.pdf


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