Understanding Undercutting of prices
Monday, February 25, 2008
Undercutting is defined as offering to sell at lower prices than or to work for lower wages than (a competitor) or as required officially. Undercutting, hence, is done at the cost of one's profit.
Lets talk maths now, generally FMCG products have about 10% of retailer margin and about 5% of stockist/wholesaler margin (direct supply from company). Now there will be some schemes from time to time which increase this margin by some points, generally 1-2%, lets take 1.5% here. Now there are targets set for these stockists and wholesalers, if they perform full quarter, they will get more percentage as reward. Say this target completion margin is 0.75%. So the final margin of stockist is :| Wholesaler Scheme | 1.50% |
| Extra Margin if target completed | 0.75% |
| Wholesaler/stockist margin | 5.00% |
| -------- | |
| 7.25% | |
| -------- |
- The good/service is a homogeneous commodity and customers are extremely price-sensitive. If one vendor undercuts another, they will capture all or a very large portion of the market (where "very large" means "as much as they can handle").
- Beginning from an equilibrium, one competitor will initiate a round of undercutting by pricing below the equilibrium. Because of (1), competitors will respond immediately, the same day if possible, with a match or a slight undercut.
- Undercutting will continue until they bid the price down to the wholesale cost.
- One competitor will then restore prices. Everyone will follow as quickly as possible, and the cycle repeats.
Because of (1), smaller competitors have a greater incentive to initiate cutting. Larger competitors will generally be the initiator of restorations. The cycle is asymmetric because restorations happen nearly simultaneously, but undercutting is generally slower. Competitive gasoline markets with a high degree of independent or small retailers typically demonstrate Edgeworth cycling, while markets dominated by majors (vertically integrated firms) will tend toward sticky pricing.
Labels: Concept, Marketing Practices, Salesho
posted by Jas @ 9:00 PM,
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Is Rupert really interested in Yahoo?
Friday, February 15, 2008
The author has questioned the potential News Corp and Yahoo deal on three points. First, he says, because Yahoo and News Corp. would have to convince Yahoo shareholders that the abstract deal is worth more than the cold hard cash Microsoft is offering. Convincing Yahoo shareholders to embrace a MySpace deal would be difficult enough, because it would assume that MySpace is worth billions of dollars. According to The Wall Street Journal, News Corp. would likely push for a valuation between $6 billion and $10 billion. But then for a harsh fact that much of MySpace’s revenue comes from its $900 million advertising deal with Google , in which the online giant has agreed to pay about $20 million per month until mid-2010. So far, that deal doesn’t seem to be working out so well for Google. In its most recent conference call with analysts, Google blamed its disappointing performance in part on its inability to make the MySpace deal pay off as quickly as it would like. That makes it doubtful that MySpace is really worth billions today. And if investors don’t believe in the value of MySpace, they won’t believe that this deal makes Yahoo more valuable than the more than $40 billion in cash and stock Microsoft is offering.Second he points out, its’s not clear who would run the MyHoo combination. Third, because there’s a good chance that News Corp. is more interested in peeking at Yahoo’s secrets at the bargaining table than in actually stealing Microsoft’s prize. In business, everybody knows about Rupert's shrewdness.
Finally there’s the strong possibility that News Corp. doesn’t really want to do a Yahoo deal at all, and is only dangling the MySpace idea as a way to gain information.After all, as a media baron who has struck big deals with both Google and Microsoft, Rupert Murdoch stands to be affected quite a bit if there’s a power shift in online advertising. There’s arguably no better way to prepare for the changes than to get an up-close look at what Microsoft would get by purchasing Yahoo — and that’s perspective Murdoch would be likely to get if he at least pretends to be interested in taking a stake in Yahoo.
But then, its business after all; and all is fair in love and war!
posted by Jas @ 1:32 PM,
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Motorola - is climax coming?
Sunday, February 03, 2008
When a company announces that it is going to do away with one of its key business units it is definite to impact the stock price in exchange. And if the stock rises by something like over 10% then it surely rings a bell (and in case you haven't noticed, even the trade volume is high). It doesn’t take much of analysis to understand that Motorola had been doing badly in handset business. Its only ticket to cash registers was Razr, except for that one model, rest all just came and were lost in clutter. After grabbing world market share of 23% in 2006 on momentum led by its Razr phone, the company has lost nearly half that as rivals outpaced it with successful new products. So it was not surprising to see Motorola slip to number three spot behind market leader Nokia and now runner up Samsung.
I personally feel that Motorola has been too laidback, they are trying to catch the market based on some engineering innovations and aren’t really able to connect to the normal consumer who can give them volumes. Nokia relies on design innovations rather than engineering innovations in the electronic part. The ease of operation and sturdiness has been two main selling points of Nokia. If you have used Nokia once, you can use almost all Nokia phones as they are similar on usage, unlike other phones which are difficult to learn and the interface change with the handset.
Motorola has come up with another model W230. Looks like the handset was launched after a careful gap analysis of features and market need. With features like expandable memory upto 2GB,MP3 player,FM with recording, large phonebook memory and USB1.1 data connectivity, its loaded with features; I felt the handset was priced quite aggressively at Rs.3,400. The ad for the set is again a very typical of Moto phones with TG of middle class. It’s targeted at youth and boils down to the same word - Attitude. But it is actually a nice ad than the earlier one where father loses his head!
Labels: Brands, Business, Launch, TVC
posted by Jas @ 2:21 PM,
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Microsoft hostile bid on yahoo
Friday, February 01, 2008
"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers."
The deal, of course, rests on the two coming to a "merger agreement" and Microsoft having the time to conduct the required due diligence. Microsoft is ready to begin immediate discussions and have a draft merger agreement ready for consideration.
Well I am traveling right now, but the outcome should definitely bring me back for yet another post! Will appreciate posts on the brand value comparison of the two.
Labels: Brand Check, MnA, New Trends
posted by Jas @ 4:14 PM,
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