Pricing and costing optimization project

In the first year, the management of AAA was not satisfied with the profitability of the company although we have better service than our competitor BBB. In order to maximize the customer satisfaction and profitability, we will have following 2-step approach for the second and the third year.

  • Strategies in second year: capture market share, lower the break-even point, balance the profit and customer satisfaction
  1. Focus on the segment 3

According to the conjoint analysis in first year, the threshold prices in segment 3 and 4 are much higher. But segment 3 has larger market size which brings more subscriptions and transfer higher revenue to AAA. In order to gain more market share and revenue, we will focus only on segment 3 for the following 2 years and will convert more customers of segment 3 from BBB by promoting our premium product, increasing the data updating interval (2 months instead of 4 months) which is highly valued by segment 3 (will add extra EUR110, 000 in Data Search & Editing) and adding more people to provide better services.

 

  1. Cut the conversion activity

According the cost calculation, conversion costs which are the main concern of the small companies (segment 1 and segment 2), however, are the highest among the sales activities. Customers in our focused group Segment 3 (bigger companies) which, on the other hand, place lower level of importance on conversion cost. While some other activities such as data search and edit are necessary, we regard conversion activity as an “Accessory and non-constrained activity” which can’t bring much value to our profitability.  Therefore, we will cut conversion activity for the second year in order to reduce the costs and improve our profitability. As a result, the customers in segment 1 and 2 who were serviced with conversion activity in the 1st year would possibly cancel the contracts in the following years. We will subtract these customers from the total number. There will be still a good amount of remaining customers (2,840), with which we can still achieve a good margin.

 

  1. Limit the management consultancy activity only to segment 3

The cost of consultancy for segment 4 in particular is very high due to the cost attributed to long consultancy hours. Even if we set the price of segment 4 at EUR1, 900 (the threshold price) to serve the old customers, the profit of segment 4 will still be negative. Plus consultancy is not very important for both segment 1 and 2 according to previous research. Therefore, we will limit our product that we will provide for segment 1, 2 and 4.  We will use consultancy activity only for segment 3 with only 1 working force, which is sufficient because consultancy is also not highly required by the segment 3. We estimate as a result, although the number of customers from segment 4 will be lower in the following years, the cost will be greatly reduced.

 

  1. Increase the labor force in after-sales assistance and limit this activity only to segment 3

After cutting cost for conversion, we will also cut the working force for conversion and consultancy activity so that we can have budget to hire more people to conduct after sales assistance. We will cut the 2 people in conversion and 2 people in consultancy (assuming their contracts will end very soon). Then we can hire 4 more people in after sales assistance instead which will add production capacity to 12,800 hours, allowing us to serve 3,200 customers in customer 3.  As long as the number of customers doesn’t exceed 3,200, we can provide service for 100% of the customers in segment 3. At the same time, we will limit after sales assistance only to customer segment 3. It would also be possible that the customers who used such activity in segment 1, 2, and 4 would cancel their contracts. We will also subtract these customers from the total number.

 

  1. Moderate price policy

Take into account the cost of converting current BBB customers, the sales price for the second year should not be very aggressive because we want to capture more market share and compete with our competitor BBB. But we will differentiate our price for different customers because of different services we will provide. We will keep the current price (EUR1, 100) for the old customers in the segment 1, 2, and 4. On the other hand, due to the fact that the customers in segment 3 are more willing to pay for good service and we have competitive advantages regarding updating interval and sufficient work forces to carry out after sales assistance, we believe we can have more market share if we charge the same price as BBB (EUR 1,200 for BBB) does for the segment 3.  With this price, we expect to achieve operating profit of EUR1.27 million in the 2rd year.

 

  • Strategies in the third year: more profitable and more customer satisfaction
  1. Recruit more customers and hire more people to keep them happy

In the 3rd year, we will continue our effort to recruit more customers in segment 3. Meanwhile, after starting making profit in the 2rd year, we can afford more labor cost in after sales assistance. Our plan is to occupy the most of the market share in the segment 3 and to have 4,400 customers which require 11 working force with a total of 17,600 hours of production capacity. So we will hire 3 more people in after sales assistance. The cost will be recalculated in consideration of the adjustment of the labor cost as shown in the income statement (EUR1, 150,000). We assume that with this effort we will be able to serve almost 100% of the customers in segment 3 in the 3rd year.

 

  1. Further increase the sales price

If we successfully acquire the most market share in the segment 3 and our customers in the segment 3 are satisfied with our product and service and they are less price sensitive, it could be the time to charge them with higher price in the third year which will surely be lower than threshold price (EUR 1,813). Our target price is to achieve EUR 1,400 in segment 3 in the third year.

 

With such price and optimized service provided for our targeting group, we believe we can maximize our profit and customer satisfaction. We expect to achieve the final operating profit of EUR3.1 million in the third year as shown in the income statement.

 

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My Grade Report from SDA Bocconi

I have two exchange experience in SDA Bocconi, one is in Oct 2014, another one is in Jul 2016.
I really treasured and enjoyed these two periods when I could cooperate with Senior Executives. And I am really proud of myself always achieving A in this prestigious business school.

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Master thesis-The Transition of European Digital Economy towards a True Digital Single Market-Introduction

1. Introduction
A strong economy needs a robust and vibrant digital economy. Yet the European digital economy is mired in low growth for years, caused by fragmented market, underinvestment and lack of innovation. This thesis will identify the importance of digital economy and provides a clear policy framework that tackles these problems and creates a true European digital single market, which will benefit consumer, strengthen the industry and bring long-lasting prosperity to the whole society.
1.1 Objectives
Today, the digital economy has become a worldwide phenomenon which is affecting the whole macro-economy. A strong digital economy leads to increased productivity, high economic growth and enhanced ability of existing industries to create more jobs. However, Europe is lagging behind the United States and some Asian countries in developing its digital economy and its market is fragmented. In order to unlock opportunities and improve its competitiveness, the Commission set the digital single market as one of the seven pillars of the Europe 2020 Strategy in 2011(cf. EU 2012, p.28) and as the EU’s second priority in 2014. Since then, a lot of proposals regarding how to better develop the European digital market has been submitted. The objective of this paper is to summarize and evaluate some most critical issues by analyzing the current situation, evaluating proposals and give author’s own recommendations within existing framework and with a focus on the market-oriented policy and regulation which can strengthen the competitiveness of the European digital economy and transform it into a true internal market.
1.2 Framework, Outline and Stakeholders
The following session will illustrate overall framework of the thesis, the outline of each chapter, and the related stakeholders in achieving digital single market.
1
1.2.1 Framework of the Thesis
With the objective mentioned above, this thesis provides a framework which includes four key categories: how to consolidate the fragmented market, increase the Information and Communications Technology (ICT) investment, balance the competition, and encourage innovation. These four categories are inter-related (See Figure 1.1). Consolidated market and single market approach can drive both investment and competition. Both investment and proper competition will stimulate digital innovation.
Figure 1-1: Framework of the Thesis
Source: Own illustration
1.2.2 Outline of the Thesis
More details of each chapter are outlined below:
• Chapter 2. The importance of the digital single market
In Chapter 2, the author explains the importance of a digital single market for the EU. Huge potential can be exploited in a digital single market by achieving efficiency gains and improving the productivity across industries with the use of the ICT.
• Chapter 3. Current State of the Digital Economy
The Chapter 3 of the thesis discusses the current state and existing challenges of the European digital economy. Since the problems have already seriously impeded the development of the digital economy, the author calls for urgent solutions and their implementations in order to keep pace with the global competition.
• Chapter 4. Evaluations and Recommendations
The Chapter 4 is the main chapter of this thesis. Further discussions regarding the main causes of existing problems are presented. Some debatable topics are also exploited and author’s evaluations and recommendations are provided. The recommendations do not cover all sides of the matters but instead focus on a market-oriented approach that calls for a consolidated market, balance of investment and competition, and promotion of innovation, all of which, from author’s point of view, are crucial for fostering a true European digital single market.
• Chapter 5. Conclusion
The Chapter 5, the main recommendations and suggestions are summarized as a final conclusion of this thesis.

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