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The economic analysis section plays a significant role in a business proposal. The product under current study is smartphones. Thus, the market of smartphones will be analyzed in relation to the market structure, the elasticity of demand for the good, etc.
The market of smartphones is emerging and developing. The market structure may be characterized as a monopolistic competition for a number of reasons. First of all, there are many different types of smartphones in the market. Every company tries to position its products as unique. Moreover, non-price competition plays a significant role in the market under consideration. It is necessary to identify elasticity of the product. If the quantity demanded is significantly dependent on the price of the product, then the market demand is elastic. If the quantity demanded is insignificantly dependent on the price of the product, then the market demand is inelastic. In order to determine the price elasticity of any product, it is necessary to use the following formula (Ag Decision Maker, 2007).
(1)
Using hypothetical data, it is possible to determine the price elasticity of demand for smartphones of a given company. P1 = $300; P2 = $200; Q1 = 1,500; Q2 = 2,000.
= 0.714 (2)
Thus, the demand for smartphones is inelastic as the coefficient of elasticity is less than 1. The pricing strategy will be largely dependent on the calculated elasticity. If the market demand was elastic, then it would be reasonable to lower prices in order to maximize the companys revenue. However, the actual market demand is inelastic. It means that it is reasonable to increase prices in order to maximize financial results.
If the company decides to increase its prices, it will lead to lower quantity demanded by consumers, i.e. fewer smartphones will be bought in the market. Thus, the companys marginal cost is supposed to decrease as fewer smartphones will be produced. Therefore, the companys marginal revenue will increase as a result of higher market price. In this way, the amount of the profit earned by the company will also increase. In order to maximize its profits, the company should select such volume of production that will establish the following relationship: MR (marginal revenue) = MC (marginal cost) (Econ 600, n.d.).
Thus, the final pricing strategy includes the increase of prices, the decrease of quantity demanded, and the subsequent increase in marginal revenue and decrease in marginal cost. As a consequence, the maximization rule MR = MC will allow receiving higher total profits than before.
As the market of smartphones is the market of monopolistic competition, it is reasonable to use non-pricing strategies, as well. Non-pricing strategy may affect the market demand for smartphones and contributes to the shift of the demand curve. If the market demand increases, it will lead to higher market prices and higher total profits. However, in order to reach this aim, it is necessary to realize efficient marketing measures. In particular, retail strategies should be modified (Clay, Krishnan, Wolff, & Fernandes, 2002). It is necessary that consumers will be able and willing to distinguish the products of the given company from similar products of the same industry. It seems that additional and more original advertising may be introduced. Moreover, advertising may be helpful even during the recessions and periods of post-crisis instability (Rutkowski, n.d.). It is also necessary to continually increase the quality of the companys smartphones as higher quality may lead to higher demand and prices. It should be stressed that higher quality should be achieved from the point of view of consumers rather than the companys technicians. When the company increases the quality of its products, it is reasonable to provide sales promotion of the companys smartphones. Moreover, additional cost attributing to sales promotion should be equal to the expected marginal revenue product.
Brand management may also have some positive financial results. It seems that brand management is particular efficient in the long run. Therefore, it is reasonable to use sales promotion for the short term improvements and brand management for long-term financial results. Moreover, using non-price competition is often more beneficial as it does not affect the price structure of the industry. The companys competitors typically may respond to a non-price competition only through introducing their own non-price strategies.
The implementation of the new strategy will change the relationship between fixed and variable cost within the company. In fact, the total amount of fixed costs is independent of the level of production. It is present even if a company does not produce goods. The amount of variable costs is proportionally dependent on the level of production (Rural Womens Network, n.d.). If a company does not produce anything, its variable costs will be absent. The total amount of cost is supposed to be unchanged as the decrease of cost as a result of lower quantity demanded will be counterbalanced by higher cost of marketing, brand promotion and other methods of non-price competition. However, it seems that the percentage of the companys fixed cost will diminish, because all new cost associated with the new strategy will be variable ones. At the same time, the companys operation will be more flexible as it is easier to regulate the volume of variable cost. It may enable introducing other business strategies in the near future.
Thus, the complex business strategy should include both price and non-price competition. The final business purposes of the implemented strategy are the highest possible satisfaction of the demand for smartphones (for customers) and the maximum amount of total profit (for the company).