International School of Kuala Lumpur. International Baccalaureate SL Business and Management. Internal Assessment

Transcription

1 International School of Kuala Lumpur International Baccalaureate SL Business and Management Internal Assessment Title: Is Changing The Product Mix With Different Prices per Product A Profitable Decision by Pegasus Racing Asia? Word count:,4 Candidate Name: Calvin Seibl IB Candidate Number:538-9

2 Introduction I chose this topic as it covers an area of interest and can be analyzed from many different viewpoints. Pegasus Racing Asia is a brand of Top Speed Racing Asia and it provides the Drive A Formula Car Experience to the people of Asia. Founded in, the business has brought people to their dream of driving a racecar on the Formula circuit, in Sepang, Malaysia. Pegasus Racing Asia is looking to increase profits in and have expanded their Product Mix with different prices per product. Pegasus Racing Asia initially had only one Drive a Formula Car Experience that was priced at SGD5. For they are introducing different packages. The Basic Experience costs SGD988, Premium costs SGD,968 and finally the Ultimate is priced at SGD3,988. In the past they have kept prices low in order to build a customer base, otherwise known as something similar to Penetration Pricing. In order to analyze whether or not widening their Product Mix with different prices per product will be profitable; I have attained financial data, a survey of twenty past clients as well as an interview with the CEO via . Findings & Analysis Looking over the documents there are several data points that are essential in answering the topic question. First of all, Document reveals the start-up cost of Pegasus Racing Asia. About SGD58, was needed to set-up the foundations of the company. This is an important calculation to know; as this is the first thing a new company wants a return on. The SGD58, is broken up into categories, showing us the cost of each individual category. The info that influences the pricing is the clothing cost, a value of about SGD,. Each time a client uses the clothing its value depreciates. This must be taken into account when judging the price of their product. With the former flat rate of SGD5 per person, along with the cost of running the event, it was not returning the initial cost quickly enough as Pegasus Racing Asia wished. Their plan is to have the full return by the end of their second year of operation. Having a bigger Product Mix with different prices for each product may increase the rate of return on this investment. The new Product Mix reaches out to a much wider audience. Pegasus Racing Asia s target market is expats living in Singapore and affluent people in the region. They estimate that only about, of these expats in Singapore have enough disposable income and interest in motorsport to purchase the Ultimate Experience. The introduction of the low cost Basic and mid-end compromise Premium Experiences vastly expands Pegasus Racing Asia s market reach. This can, potentially, mean more customers and therefore Pegasus racing Asia s costs can be more distributed among the participants. This increases the amount of revenue generated per customer, as seen in Document 3.

3 Document 3 shows us the cost of running an event. This does not include the initial cost. As you can see the amount Pegasus Racing Asia has to pay per event is about SGD6. This goes to everything from the track rental fee to unexpected costs. In order for Pegasus Racing Asia to be a profitable company they need to first, cover the cost of sales and then the initial investment. Only then will the company have made more cash than it paid, the definition of profit. So how can expanding the Product Mix with unique prices help Pegasus Racing Asia cover the cost of sales, in that sense of the word. This move can make the distribution of costs on clients a lot easier. If you have a wider distribution then the cash needed per customer, to break even on the cost of sale, is greatly lowered. This leaves more of the money customers pay to turn into profit. For example, if there are only ten customers per event, using the old price of SGD5, Pegasus will just barely break even. All the money that the customers pay goes back into covering Pegasus Racing Asia s cost of operation. However, if fourteen customers pay only SGD889 of the SGD5 they pay is need by Pegasus Racing Asia to cover these costs. This leaves about SGD6 per customer as cold hard cash. This is the scenario that Pegasus Racing Asia hopes to achieve. Just by widening their market reach with new products. This demonstrates how by changing their Product Mix a wider audience can be reached and how it can become profitable, with the old method of pricing. Document 4 demonstrates how each new product can generate revenue. Here we can see how each new product may generate extra revenue. We can also see how more events increases profit, even with the same number of participants. The ROI or Return on Investment increases every number of events so the loss on the ROI, which is shown on the table, reduces itself. With potentially more customers, due to the wider range of products, more events will be needed in order to keep the events from overcrowding and reducing the track time of the customers. This is another sign that this move by Pegasus Racing Asia seems to have been a sensible one. Document 5, the survey, can reinforce this claim. A survey of twenty past customers of Pegasus Racing Asia was conducted and the results seem to be in favour of their new product models. When asked whether they were interested in purchasing another Drive A Formula Car Experience, 85% replied Yes. Also, when asked whether if they had shared about their experience to friends or relatives, a full % said they had. So even without changing anything, Pegasus Racing Asia s customer retention and customer base is growing. Only 5% of the people surveyed believed that the new Product Mix hindered them from purchases another product. If Pegasus Racing Asia had any doubts whether or not the customers would accept this change, they could be laid to rest, as 95% of people surveyed believed in it.

4 Conclusion After looking at all of the data collected in the five documents it can be easily said that Yes, this can be a profitable move by Pegasus Racing Asia. All of my interpretation of the documents seems to point into this direction. Widening the Product Mix, exposing yourself to a much larger market, being able to distribute your costs across your customers and thus creating more usable revenue per customer that turns into profit is what, according to my documents, Pegasus Racing Asia is attempting to achieve. Whether or not it will be as successful as it seems depends on many things. Racing Cars are unpredictable machines, how do we know how accurate the calculations for the cost of the cars is? Are damages to the cars included in the calculation? These are all very relevant questions that one could ask, just about this small part of the business. Questions that Pegasus Racing Asia must have thoroughly checked and checked again before making such a radical decision to change their entire Product Mix. Overall, it seems like this move was a logical one for Pegasus Racing Asia, the customers are behind it and the numbers look promising, but as with everything in business it is impossible to have a concise answer as there are so many factors that were unexplored in my documents. Evaluation I believe my documents are relevant to answering my topic, but there are some gaps in them that need to be filled in order to explore this question is greater depth. For example, my financial data was not as conclusive as I would have needed it to be. They fail to mention how much profit or loss Pegasus Racing Asia is making. This would have been useful in figuring out, for example, how quickly this new Product Mix could turn profitable. I was also at fault in some of my documents. The survey of previous customers, Document 5, was only to twenty people. This number could be too small, as it does not show a broad enough viewpoint on each question. Also, if only such a small number of people are considered, a bias is very likely to exist that could interfere with their response. For example, if their flight was delayed they might not have had such a good time at the event the following morning. In order to fix this, another survey could be conducted, this time to every single previous customer, showing us the entire customers base s thoughts.

5 Bibliography Hoang, Paul. Business & Management. [Melton, Vic.]: IBID, 7. Print. Pegasus Racing Asia. Web. Feb.. <

6 Appendix Document : Initial Investment by Pegasus Racing Asia Date Published: Dec Source: CEO of Pegasus Racing Asia Document : Copy of Questionnaire Sent to CEO via Date Published: February 6, Source: Myself Document 3: Cost per Customer Distributed Over Number of Events Date Published: Dec Source: CEO of Pegasus Racing Asia Document 4: Projected Revenue Generated by New Product Mix Date Published: Jul Source: CEO of Pegasus Racing Asia Document 5: Results of Survey to Twenty Previous Customers Date Published: Feb 5, Source: Myself

7 Results of Survey to Twenty Previous Customers =Very Bad, =Below Average, 3=Average, 4=Good, 5=Great How would you rate your Drive a Formula Car Experience? How would you rate the service you received during your Drive a Formula Car Experience? How would you rate the value of your experience against the cost? Would you want to have another Drive a Formula Car Experience? Yes 7 No 3 Have you told relatives/friends about your experience? Yes No Has the new pricing method deterred your interest in purchasing another experience? Yes No 9

8 Copy of Questionnaire sent to CEO via In how long do you plan to get a return on your start up costs? >> Within the first years of operation. What was the price you initially charged? >> We had one product (5 hours event) and charged.5 SGD per participant. How did you come to this number? >> We know that a Formula BMW Racing Team charges 5. SGD for one day of testing and they struggle to find Drivers paying this amount. Therefore we positioned our pricing at 5% of their pricing. Who is your target market? >> Expats in Singapore and affluent people in the region. Data show there are nearly million foreigners in Singapore. We estimated % of them have enough disposable income to pay for such a driving experience. Out of these. people, we estimate % has interest in motor-sport and wants to drive a racing car by him/herself. Why have you changed your product mix and prices? >> With a high fixed cost, we need a minimum number of participants to run an event without a financial loss. The introduction of a low cost experience, at. SGD, targets to significantly enlarge our market reach. The above-mentioned % of foreigners in Singapore have enough disposable income and interest to go for the High-End Experience at 4. SGD. The mid-end at. SGD is a compromise between both offers and addresses people with a high interest but not enough disposable income or people with having less interest but want to do at it least once in their life and are prepared to spend a reasonable amount of money on this. What are your biggest costs? >> The track fees. They can be as high as 8. SGD per day and are the same if we have or participants. Do you have any competitors in the region? >> As far as I am aware, we are the only company in this region offering such an experience.