Chapter 18 – Product & Price
Voyage Cars (VC)
VC manufactures cars. Currently it sells two models. The Genie is a small car with two doors. It
was very popular with young consumers as it is suitable for a ‘first’ vehicle. However, sales of
the Genie have recently started to fall in this increasingly competitive market segment. It is
sold at a contribution (or marginal cost) price. It has a small engine and is only available in a
limited range of colours. It has been on the market for five years. VC’s Marketing Director
thinks that the price elasticity for the Genie is quite high.
The Lynx is a fast sports car. It is much more expensive and is targeted at the young careerminded consumer who wants to impress his or her friends. It uses a lot of fuel. It has been on
the market for two years and was part of VC’s objective to take the company ‘up-market’. In
three months’ time, VC is launching a new model called the EcoStar. It has an electric motor
operated from advanced VC-developed batteries. These batteries mean that the EcoStar can
travel much further on one ‘charge’ than other electric cars on the market. Market analysts
believe that it will take competitors at least four years before they can launch similarly
advanced car models. VC forecasts that the total cost of production of the EcoStar in its first
year will be $250 million based on a planned output level of 20,000 cars. VC plans to add a
profit mark up of 100% to help pay for the costs of development and the huge promotion
campaign planned for its launch.
1
a. Define ‘contribution cost price’. [2] Is the difference between total sales and total
variable cost, also defined as the cost of producing one more unit or serving one more customer.
b. Briefly explain the term ‘price elasticity of demand’. [3] the responsiveness of consumers due
to a change in the price of a product. When PED<1, the product is inelastic; when PED>1, the
product is elastic.
2
a. Calculate the price for EcoStar based on the full-costing method and the company’s
profit mark-up. [3] 250000000/20000=$12500 12500*2=$25000
b. Outline one disadvantage of this pricing method. [3] Full cost pricing ignores the price
elasticity of the product. For example, VC may be launching EcoStar at a price too high
that consumers will be discouraged from buying or too low, which makes losses to the
business. To sum up, VC either ends up pricing too low and giving away potential profits
or pricing too high and achieving reduced sales.
3
Analyze how marketing decisions for the EcoStar might change when it enters the
maturity stage of its lifecycle. [8]
The product life cycle is the length of time from a product first being introduced to consumers
until it is removed from the market. It's broken down into four stages introduction, growth,
maturity and decline. When a product reach maturity, advertising the product's unique selling
point will be what the readers do. The act is like a reminder to the consumer that this product
exists and is better than the others. For VC, EcoStar can be the USP to remind customers that
it's charged by batteries and of better quality than other electronic-powered cars. Sales
promotion takes place also during the maturity stage. In this case, VC can have a %discount on
the car or give free complimentary products. The aim is to increase brand loyalty and attract
the last round of customers before the decline of the product.
However, additional costs are added to the business by presenting sales promotions. Creating
USP causes investment and development, which also brings a drawback to the company.
4. Discuss two extension strategies that VC could adopt for the Genie model. [11] (See the
student response below)
Improve this answer
This is a student’s answer to Q4
Extension strategies are decisions taken by a business to try to extend the life cycle of a
product. [K] They are introduced towards the end of the ‘maturity stage’ of the life cycle
or very early on in the ‘decline’ stage. [K]
VC could make the Genie available in new exciting colors [K] which would appeal to young
consumers, such as students. Just making it available in limited range of boring colors is
certain to be a cause of falling sales, especially as this is a competitive market segment.
[Ap/A]
VC could use market research amongst university students to find out what color cars
they really prefer. This information could then be used to decide on the new colors for
the Genie. This may increase the lifecycle from maturity to growth or decline to maturity.
[Ap/A]
VC could also fit a larger engine and adapt the product more to its ‘up-market’ objective.
[K/Ap] This model would then fit in better to the VC product portfolio, especially with the
Lynx sports car. The car would appeal to a wider range of potential consumers who
wanted more than just a ‘cheap to run’ car. These two strategies would extend the life
of the Genie model and reverse the recent decline in sales. [A]
However, all these strategies have costs. Increasing the color, interviewing & doing
research, and developing a more prominent engine can all need budgets.
There may also be a risk that building a more powerful engine and a more attractive
color won't move the stage of Genie in the lifecycle.
In conclusion, although extension strategies have helped many businesses improve their
profits and marketing programs, they have generated opportunity costs. They may also
create interest and motivation in the market for increased competition.
However, all these strategies have costs. Increasing the colour, interviewing & doing
research, and developing a more prominent engine can all need budgets.
There may also be a risk that building a more powerful engine and a more attractive
colour won't move the stage of Genie in the lifecycle.
In conclusion, although extension strategies have helped many businesses improve their
profits and marketing programs, they have generated opportunity costs. They may also
create interest and motivation in the market for increased competition.
Your challenge
See whether you can improve on this answer – it seems to lack the very important ‘skill’ of
evaluation.