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Wonder Company Simulation

Institution Affiliation

Date

Introduction

The Wonder Company currently has three brands of tablets in the market. The three brands are W1, W2, and W3 (Forio Simulate, 2018). The different brands cater to different customers' needs and market segments. W1 tablets cater to customers who are not worried about the devices’ performance. W2 cater to customers who are keen on performance but not price while W3 tablets cater to customers who are keen on performance and price. There are similar competing products from other manufacturers in the market. Competitive pricing is crucial to increase the Wonder Company’s market share and competitive advantage. Pricing strategies help firms set prices that are appealing to their target market segment (Nagle & Müller, 2017). Innovation in the case of products which customers are keen on performance is crucial. Investment in research and development (R&D) helps innovate on new ways of improving a product (Prajogo, 2016). The Wonder Company will utilize pricing strategies and innovation to boost sales and profitability.

Decisions Made in 2013 and Performance Analysis

At the beginning of 2013, I lowered the price of W1 from $285 to $260 and R&D allocation from 30 percent to 20 percent. The decision to lower the brand’s price was informed by the fact that the product was priced higher than similar competing products and that could discourage customers from buying the product. Investment in R&D was minimized as customers in the segment were not keen on performance. Profitability of W1 grew from 17 percent in 2012, to 29 percent in 2013. The actual profit figures for 2013 are $178,976,788. No change in price or R&D investment was made for W2 and W3. Facts needed to determine whether there was a need for change were not complete. The overall profitability of the Wonder Company also grew from 17 percent to 27 percent in 2013.

Table 1

The Wonder Company’s 2013 Income Statement

Note. From Forio Simulate, 2018.

The change of W1’s price slightly improved the product’s performance. W1’s performance in 2012 was rated 1.0 while 2013’s rating was 1.03. W2’s performance improved significantly as the product was rated 1.02 in 2012 and the ratings for 2013 were 1.46. W3’s performance declined. However, the volume of sales for W3 improved slightly. W1 registered more sales compared to the two other brands. Part of the reason why more W1 units were sold is that the product has been in the market for more time compared to W2 and W2 and has been in the growth phase for quite some time. W2 is still in the growth phase, and many potential customers have not purchased the product. Pricing and enhancement in performance will be used to boost the W1’s and W2’s performance in 2014. Observations will also be made on whether the reduction in W1’s price will have a significant impact in performance in 2014.

Figure 1: 2013 Sales for All Products (Forio Simulate, 2018).

Decisions Made in 2014 and Performance Analysis

At the beginning of 2014, I set the price of W2 and W3 at $420 and $170 respectively. The reason for reducing W2 price is that the product was priced higher compared to similar tablets. There was the need to set a competitive price for the product. W3’s price was reduced to boost the product’s sales. R&D investment for W2 and W3 products was also increased to 45 percent and 35 percent respectively. Customers are keen on the performance of both products and hence the increase in R&D funding for W1 and W2. The overall profitability of the firm grew from 27 percent in 2013 to 30 percent in 2014. The profitability of W1 grew to 33 percent. W2’s profitability grew from 30 to 31 percent while that of W3 grew from -77 to -25 percent. The profitability of all products is growing.

Figure 2: Change in Profitability Graph (Forio Simulate, 2018).

Regarding market performance, the number of W2 tablets sold almost equaled those of W1. The number of W2 units sold was 3,215,221 while the number of W1 units sold was 3,232,585. The number of W3 units sold was 284,220. The performance of W2 improved while that of W1 and W3 declined. The decline in W1's performance is significant because the product has reached the shakeout phase in its lifecycle. Market saturation for W1 is 58 percent. The increase in market saturation has resulted in a decline in the volume of new sales. W2’s market saturation grew from 16 percent in 2013 to 36 percent in 2014. W3's market performance is weak compared to that competing product despite the reduction in the product’s price and increased investment in R&D. W3’s market saturation rose to 3 percent from 2 percent.

Figure 3: Sales Trend for All Products (Forio Simulate, 2018).

Decisions Made in 2015 and Performance Analysis

In 2015, W1, W2, and W3 were sold at $260, $420, and $170 respectively. Investment in R&D for W1, W2, and W3 was 20 percent, 45, percent, and 35 percent respectively. The overall profitability of the Wonder Company declined from 30 percent in 2014 to 22 percent in 2015. The decline in profitability was because W1 and W2 were in the shakeout phase of the product lifecycle. Many potential customers had purchased both products resulting in the reduction in new sales. W1’s profitability fell from 33 percent in 2014 to -10 in 2015. A loss of $15,241,351 was recorded for W1. W2’s profitability declined from 31 percent in 2014 to 29 percent in 2015. W3 first generated profit for the company in 2015. The profit earned from the sale of the product was $4,338,045. More work still needs to be done to improve W3’s profitability.

Figure 4: W1, W2, and W3 Profitability from 2012-2015 (Forio Simulate, 2018).

The sales volume for W1 significantly declined from 3,232,585 units in 2014 to 586,897 in 2015. The product’s performance fell from 0.99 in 2014 to 0.95 in 2015. W1 reached 100 percent market saturation in 2015. New sales had significantly declined. Most of the W1 sales made in 2015 were from repeat sales (555,418 repeat sales). The market saturation for W2 is currently at 80 percent, and the volume of sales made for W2 is declining. The product that is yet to reach full market saturation is W3. The product has only covered four percent of its available market base. Work needs to be done to ensure that the W3 tablets are sold to many customers to improve the company’s profitability.

Table 2

W1’s Market Report as at 31st December 2015

Note. From Forio Simulate, 2018.

Decisions Made in 2016 and Performance Analysis

At the beginning of 2016, I discontinued W1 brand as it had reached 100 percent market saturation. The product was incurring losses and thus diminished the company’s total profitability. I reduced W2’s R&D funding from 45 percent to 15 percent. The reason for the significant reduction in R&D funding is that the product was close to reaching 100 percent market saturation and there was no need to continue improving it when its market was about to decline significantly. I lowered W3’s price to $110 and R&D funding to 30 percent. The reason for lowering W3’s price was to attract more customers. The lowering of W3’s R&D funding was aimed at reducing the cost incurred in manufacturing the brand given that its price had been significantly reduced.

The company’s overall profitability grew from 22 percent to 24 percent. W2’s profitability declined from 29 percent to 24 percent. W3’s profitability grew significantly from six percent in 2015 to 25 percent in 2016. W3’s sales grew from 436,853 in 2015 to 1,939,442 in 2016. The significant reduction in the product’s price helped attract more customers. The improvement in its performance, however, was slight. W3’s market saturation rose from four percent in 2015 to 6 percent in 2016. The remaining potential customers for the product are 16,725,294. W2 reached 100 percent market saturation in 2016. No sales were made to new customers. However, 1,029,842 repeat sales were made — customers who had previously bought the product like it. Despite full market saturation, W2’s performance grew from 1.77 in 2015 to 1.89 in 2016. The cumulative profit earned from the sale of the three products from 2013-2016 is 1,506,532,093.

Figure 5: Sales Trend for the Four Years (Forio Simulate, 2018).

Comparison with Joe Thomas’s Performance

Overall, Joe Thomas did better than me regarding maximization of profit for the Wonder Company. Although Joe did not worry much about the pricing of the firm’s competitors and did not bother to change the prices of the different products over the four years, his decisions earned the company a cumulative profit of $1,650,231,103. My decisions earned the Wonder Company a cumulative profit of $1,506,532,093. In 2013 and 2014, my decisions had resulted in higher cumulative profits for the company compared to Joe’s decisions. In 2014, for instance, the cumulative profit that had arisen due to my decisions was $1,108,729,701 while the cumulative profit that arose due to Joe’s decisions was $957,109,922. If I had made more effective decisions at the beginning of 2015, I could have out-earned Joe. Lowering of prices for competitiveness had a positive impact on sales but did not help in profit maximization. Many customers bought the firm's products, but profitability diminished.

The main reason why I did worse compared to John is that I had limited information regarding the market. I did not know the best prices to set for W1, W2, and W3 and I had to rely on intuition when lowering the prices to improve competitiveness. I also did not have adequate knowledge of the percentage of R&D funding that was adequate to support the improvement of the three tablet brands. Such decisions were also made by intuition. Adequate information and knowledge are crucial to making effective decisions (Arnett & Wittmann, 2014). A second reason why I did not perform well compared to Joe is that I underestimated how fast W1 would reach 100 percent market saturation. The product reached full market saturation in 2015, and the volume of repeat sales was small. Had I considered such a possibility at the beginning of the year I could have reduced R&D investment on the product to minimize the total cost of manufacturing and selling the product? Minimization of cost could have helped maximize profit or minimize loss.

Conclusion

My job was to make decisions regarding the pricing of products, R&D allocation, and whether to discontinue a product or not. Through pricing and R&D allocation, I was able to maximize the firm’s profits in 2013 and 2014. However, my decisions did not help in maximizing profit in 2015 and 2016. That resulted in Joe performing better than me. Two key reasons why I performed worse compared to Joe are lack of adequate information regarding the market and failure to foresee how fast W1 would reach 100 percent market saturation. With adequate information about the market, I could have performed much better compared to Joe and maximize the Wonder Company’s profit.

References

Arnett, D. B., & Wittmann, C. M. (2014). Improving marketing success: The role of tacit knowledge exchange between sales and marketing. Journal of Business Research, 67(3), 324-331.