Pricing and Market Segmentation
Both Swing Manufacturing and Steady Manufacturing operate in
the widget industry, but with radically different cost structures. Swing is a
capital-intensive, automated manufacturer, while Steady is a labor-intensive
“job-shop.” Monthly operating data are as follows:
Swing Manufacturing Steady
Manufacturing
Sales 5,000 units 5,000 units
Price $10.00 $10.00
Variable $2.50 $5.50
Fixed Cost $35,000/month $20,000/month
Full Cost $9.50 $9.50
Current Profit $2,500/month $2,500/month
Swing and Steady both currently have equal (50%) market
share. Each is evaluating opportunities to enhance profits. One opportunity
involves selling to a low-value, but potentially high-volume, market segment
not currently served by either company. The potential increase in sales for
either company entering that market alone would be at least 40% (2000 units).
If they both entered, the potential sales increase would be at least 20% for
each of them. Unfortunately, reaching that market would require pricing at
$8.50, 15% below current levels.
(a) If either company could segment the market at no cost
for pricing (that is, charge the 15% lower price only to this new segment
without undermining the prices charged to current customers), how much
additional profitability could each company earn by achieving a 40% increase in
sales? Would you recommend that either or both companies pursue this
opportunity?
(b) In reality, neither Swing nor Steady can effectively
segment this market (each must charge one price to everyone). Calculate the
break-even sales changes for this opportunity for each company. Also, calculate
the changes in profit for a 40% increase in sales. Briefly explain why this
answer differs from your answer in part (a).
(c) Which competitor is better positioned to take advantage
of this opportunity? Assuming that neither company can segment the market, what
advice would you give to Swing and to Steady regarding this opportunity?
