Chapter 20, Problem 4TIF

Profitability strategies

Somerset Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available:

Two managers, James Hamilton and Thomas Seymour, had the following discussion of ways to increase the profitability of this new offering:

James: I think we need to think of some way to increase our profitability. Do you have any ideas?

Thomas: Well, I think the best strategy would be to become aggressive on price.

James: How aggressive?

Thomas: If we drop the price to $60 per unit and maintain our advertising budget at $15,000,000, I think we will generate total sales of 2,000,000 units.

James: I think that’s the wrong way to go. You’re giving up too much on price. Instead, I think we need to follow an aggressive advertising strategy.

Thomas: How aggressive?

James: If we increase our advertising to a total of $25,000,000, we should be able to increase sales volume to 1,400,000 units without any change in price.

Thomas: I don’t think that’s reasonable. We’ll never cover the increased advertising costs.

Which strategy is best: Keep the price and advertising budget as set, follow the advice of Thomas Seymour, or follow the advice of James Hamilton?