Response to the Vice President of Marketing Regarding the Profitability of Time Warner
First, Time Warner aims at acquiring a market share of 65% in the Kansas market area. In so doing, it intends to provide a full line of services, which will comprise broadband Internet, cables, and phone services. To affect this, the company has invested almost $500 million in improving the infrastructure of the market area as a marketing strategy aimed at increasing its market share. This $ 500 million may be considered as a sunk cost, and besides, the company will be incurring extra operational costs such as maintenance fee and the monthly cost of programming. It is forecasted that the maintenance cost will be $7.60, and the programming cost will be $32.50 per month (Baye, 2006).
The first measure in ascertaining the profitability of Time Warner Company is to evaluate its competitive environment. The company faces stiff competition from its principal competitor, Everest, which offers similar products as those of Time Warner in the same market segment at a monthly price of $84.95. With regards to this, Time Warner must devise a pricing strategy for its products, which will ideally differentiate its terms from those of Everest. In determining the best pricing strategy, the company has calculated its average total cost and the lowest price they should adopt in order to realize some profit. It established that its average fixed cost per month is $ 10.85 while the average variable cost stood at $40.10 (Mills, 2002). Following this, Time Warner found that it would be profitable at a price above $50.95, which is below at the competitor’s current price.
This implies that profitability is nonexistent at any price that is below $50.95, however, time Warner can accept any price between $40.91 and $50.95 especially during the hard times since this would cater for all variable costs and some of its fixed costs. It is important to note that in case the company’s pricing falls below $40.10, it should consider closing down, as this would imply that it is losing more than it is making or rather making losses. Sure, this would have profound impacts on the company in the long run.
Ideally, a company should evaluate its variable costs and the expected returns while making a decision of whether to shut down or remain in the market. In essence, it should consider closing down in case its pricing is lower than the operational cost and stay in the market in case their prices supersede their operational cost. This is because if a company pricing is lower than its operational cost, the direct implication is that it is losing resources any time a unit of product is produced (Smith, 2012). Although it might seem to work in the short run, it would obviously have profound consequences in the long term, and thus no business should decide to remain in the market while making losses unless it has other objectives rather than the profit motive. This is the exact case of Time Warner Company. Time Warner should only remain in the market only if its price is above $40.10 (the total of operational cost) and shut down in case the price falls below this limit. However, it should strive for maintaining the price above $50.95.
References
Baye, M. R. (2006). Managerial economics and business strategy. Boston: McGraw-Hill.
Mills, G. (2002). Retail pricing strategies and market power. Melbourne: University Press.
Smith, T. J. (2012). Pricing strategy: Setting price levels, managing price discounts, & establishing price structures. Mason, Oh: South-Western Cengage Learning.
