An extensive research was recently conducted on Umbri Inc.’s profits, demands and costs versus its competitor Tiki Inc. From the research, it is suggested that Umbri should set its price at $32.02. Using this price, it should expect to produce a monthly output of 1,349,293 Units and realize monthly total revenue of $43,204,361. Umbri should expect to incur a total cost of $20,761,681 on a monthly basis from the sales made. This price per umbrella should also generate a monthly profit of $22,442,681.27 for Umbri.
Umbri’s major competitor, Tiki Inc, has a significant effect on its demand, market share and profits. Since these two share a market, Umbri has to apply effective strategies in order to maximize its profits. The prices set by Tiki have a large impact on the influx of clients to Umbri. For instance, if Tiki lowered its prices, customers would obviously rush for its umbrellas hence diminishing the profit margins for Umbri. Therefore, it is imperative that Umbri keep its prices as low as possible so as to maintain its influx of customers and possibly maximize its profits. Since the price elasticity for Umbri is very elastic, the profits realized would still be good if it were to set its prices lower than the average price; which was actually $8.00 more that the price charged by Tiki per umbrella.
All the revenues, profits estimates and costs for Umbri are dependent on the assumption that Tiki sets its prices at $27.00 per umbrella and Umbri sets its prices at $32.02. The old pricing strategy set by Umbri was $8 more than Tiki’s price while the new price set by Umbri is $5.02 more than Tiki’s price. These new prices set by Umbri increase the demand for Umbri umbrellas because they are normal goods and on the other hand lower the demand for Tiki umbrellas. This is because Tiki umbrellas are mere substitute goods for Umbri umbrellas and would be greatly affected by the decrease of price in Umbri umbrellas. The old prices that were initially set by Umbri did not favor the attainment of maximum profits because it deflects its umbrella demands towards Tiki umbrellas.
For every $1 increase in Umbri’s price, it is estimated that its monthly output will reduce by 93,727 units. This is an indication that in the olden price that increased by $3, the company would sell 281,181 less units every month. This translates to an average profit of $13,345,480 which is way lower than that generated by the selling price of $32.10. The figures shown above indicate that the company has been losing over $9,097,201 every month by using the old price of $35.00 per umbrella. The study found that these losses were as a result of the high price that deflected customers to Tiki umbrellas which served as an alternative.
If the average estimated household income of $51,350 were to increase and Tiki still charged its umbrellas at $27.00, the demand for Umbri umbrellas would tremendously increase. This would translate to a reduced demand for Tiki umbrellas. On the other hand, if this household income were to decrease, the demand for Umbri umbrellas would most definitely decrease since customers would opt to buy the cheaper Tiki umbrellas which are substitute goods. Still, if Tiki Inc. were to lower its price per umbrella to a price lower than $27.00 and Umbri maintains its price, it is obvious that this would reduce the demand for Umbri umbrellas.
