Mldwest Trophy Whitetalls Whitetails 130,000 .007 Number of readers .. Percent of readerS who buy advertised products each month Monthly spending per reader who buys advertised products Contribution margin ratio of advertisers ... 200,000 $120 40% $100 40%
Value-Based Pricing
The managers of Midwest Whitetails magazine (a magazine dedicated to deer hunters) want 10 establish a price for customers wishing to place a full-page advertisement in their magazine for one month. To help with the price setting decision, the managers intend to compute the economic value to the customer (EVC) of a full-page ad in their magazine. They have gathered the following data pertaining to Midwest Whitetails magazine as well as their primary competitor. Trophy Whitetails magazine:
Trophy Whitetails magazine charges $4,000 per month for a full-page ad. Midwest White tails’ managers believe they can charge more than $4,000 by quantifying the economic value to its customers of placing an ad in their magazine.
Although Midwest Whitetails has fewer readers than Trophy Whitetails (130,000 vs. 200,000), Midwest Whitetails attracts a segment of hunters that is more likely to buy advertisers’ products than the casual hunters that tend to subscribe to Trophy Whitetails. Therefore, a higher percentage of Midwest Whitetails subscribers buy advertised products (.007 vs. .005) and they spend more per person on advertised products ($120 vs. $100). The managers of Midwest Whitetails assume that advertisers in both magazines earn an average contribution margin ratio of 40% on all of their merchandise sales.
Required:
From a value-based pricing standpoint:
1. What is the reference value that Midwest Whitetails should consider when setting the price of a full-page ad in its magazine?
2. What is the differentiation value offered by a full-page ad placed in Midwest Whitetails magazine?
3. What is the economic value to the customer (EVC) of a full-page ad in Midwest Whitetails magazine?
4. What range of possible prices should Midwest Whitetails consider when setting a price for a full-page ad?
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