Memo 1
Price sensitivity can be described as the degree or level to which the behaviors of consumers of a particular product are affected by changes in price of the product ( Goldsmith, Flynn & Kim, 2010). With regards to Time Warner, price sensitivity can be described as the degree to which changes in price of the Epix Movie Channels package affect the number of customers who subscribe for the additional package. Products that are highly sensitive to price changes are referred to as being price elastic while those less sensitive are said to be price inelastic.
The subscription levels calculated by the marketing department for various price points reveal a product that is relatively price sensitive, although the reaction to price increases do not follow a common trend. For example, as expected the highest number of subscribers was assumed to be at the price of $5 and while the highest price used in the calculation was $15, it was not the price point with the lowest number of subscribers as this position was taken by the $13.50 price point which had 2615 subscribers as opposed to 3051 for the $15 price point. This may imply that there may be other factors other than price that affect consumer demand for the package.
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Given the calculations by the marketing department, a drop in price from the current $9.50 would result in an increase in revenue due to more subscribers. However, this will only occur to a particular level after which the revenues do not change significantly. Moreover, the lower price points are also affected by higher licensing costs thus lower profits despite high revenues. The marketing department’s calculations imply that a drop in price to $9 would be the most ideal with the highest revenues generated at this price point i.e. $177,840. If the expenses are factored in, this price point would yield the second highest profit margins of $74,420 only exceeded by the $11.50 price point which would yield a profit of $78,220. The $9 price point would be favorable over the $11.50 one as it would yield a higher number of subscribers and more revenue with the lower profit margin not being very significant.
Memo 2
Porter’s five forces can be used to analyze the long term profitability of an industry as it helps to determine the company’s chances of success given the prevailing market conditions. These five forces include the current competition between existing players, threat posed by new entrants to the market, suppliers’ bargaining power, consumers’ bargaining power, and the threat of alternative or substitute products ( Pringle & Huisman, 2011).
An analysis of Time Warner using Porter’s ‘Five forces’ shows the company being in an industry that is rapidly changing and in need of players ready to adapt to a new normal. With regards to current competitors, the industry is full of other players offering related packages for client. The more the players in the industry, the higher their likelihood of going the extra mile to attract and retain customers. This strategy usually results in measures that lead to low profit margins for companies thus less competition for the company ( Pringle & Huisman, 2011). . New entrants to the cable industry pose a different kind of challenge as they usually offer newer technology products and services such as is being witnessed in the cable industry. Existing cable companies are gradually losing their market share to newer internet companies which seem to be attracting more subscribers.
Another of Porter’s forces is the existing bargaining power among suppliers. Being a service, and that it is hard for suppliers to agree on base rates due to the variety of packages offered, it is safe to say that players in the cable industry have low bargaining power putting them at the mercy of consumers and primary suppliers. Consumers’ bargaining power can also influence profitability in an industry with consumers with a high bargaining power able to negotiate or influence the reduction of prices thus low profit levels ( Bruijl, 2018). Consumers in the cable industry are continuously being exposed to new products and packages providing them with viable choices thus increasing their bargaining power. If this situation persists, the profitability levels will go down as people are provided with choices and they are able to make an informed decision. In summary, the cable industry is one that is bound to undergo major changes in the next few years due to continuing technological advancement thus more work needs to be done by companies to adapt to the times and ensure long-term profitability.
Memo 3
Recessions usually result in periods of reduced consumption by households with many of them often downgrading the types of services subscribed to in a bid to save some money and cushion themselves from the prevailing harsh economic times. For Time Warner, the impact of harsh economic times was already being felt with a notable percentage of clients downgrading their packages from the $80 Favored TV package to the $40 Basic TV package. A sustained recession that leads to a 2% of average household incomes will result in greatly reduced subscriptions for the costlier $80 package. This would result in a situation where the number of total subscribers has barely changed but revenues have gone down due to the downgrading into the cheaper package. This revenue reduction will automatically result in reduced profits for the company.
References
Bruijl, G. (2018). The Relevance of Porter's Five Forces in Today's Innovative and Changing Business Environment. SSRN Electronic Journal. 10.2139/ssrn.3192207.
Goldsmith, R. & Flynn, L. & Kim, D. (2010). Status Consumption and Price Sensitivity. Journal of Marketing Theory and Practice. 18. 323-338. 10.2307/25764772.
Pringle, J. & Huisman J. (2011). Understanding Universities in Ontario, Canada: An Industry Analysis Using Porter's Five Forces Framework. Canadian Journal of Higher Education , v41 n3 p36-58
