Respond to at least two of your peers’ posts in a substantive manner. Provide information that they may have missed or may not have considered in regard to why variable-cost pricing can trick managers into setting prices so low that they hurt profits, or worse yet, cause net losses since it does not fully account for fixed costs. Do you agree with your peers’ findings? Why or why not?
References:
American AirlinesLinks to an external site.. (https://www.aa.com)
SamsungLinks to an external site.. (https://www.samsung.com/us/
Post 1:
American Airlines primarily provides air transportation services, offering flights for both passengers and cargo. Their prices vary, ranging from a few hundred to several thousand dollars based on factors like distance and class. The airline’s costs include salaries, aircraft fuel, maintenance, aircraft rent, landing fees, and advertising. Some of these, such as aircraft rent, are fixed, but many fluctuate based on the number of flights and passengers.
On the other hand, Samsung Electronics is renowned for its diverse product range, with a key product being their Samsung Galaxy smartphones. These devices are priced anywhere from a few hundred to over a thousand dollars, depending on the model. Producing such a smartphone incurs costs like materials, manufacturing, research, marketing, and licensing. Some of these costs, like research, remain fixed within a year, while others like materials change with production numbers.
Between the two, Samsung’s Galaxy phones likely have a higher markup on variable costs compared to American Airlines’ flight tickets. This is typical for consumer electronics, which often have steeper markups than service industries.
For U.S. investors interested in Samsung, direct stock purchase might seem challenging due to its primary listing on the Korea Exchange. However, they can invest through American Depository Receipts (ADRs), which represent Samsung’s shares and are traded on U.S. exchanges. Alternatively, investment can also be channeled through ETFs or mutual funds holding Samsung shares.
Post 2:
American Airlines offers various products, including travel for passengers, cargo, and others. They have recently merged with US Air, and the Group has begun to profit from the merger. They fly both regionally and globally, with nearly 6,700 flights per day to approximately 350 destinations, providing customers flexibility and convenience. Although its stocks are currently down, they continue to rise and fall, peeking in July 2023 at over $18.00.
The consumer’s product price varies depending on flight date, how far in advance tickets are purchased, global economic conditions, what day of the week the travel begins and ends, round trip or one way, third-party operations costs, and the destination.
The following items are required to produce and sell the travel tickets and impact the price of the tickets:
Aircraft fuel (Variable)
Sales, wages, benefits (Fixed & Variable)
Regional Expenses (Variable)
Maintenance, materials, repairs (Variable)
Rent and landing fees (Fixed & Variable)
Aircraft rent (Fixed)
Selling expenses (Variable)
Depreciation and amortization (Fixed)
I believe that the aircraft fuel has the most considerable markup on variable costs. Fuel cost fluctuation is subject to the same variables as automobile gas prices, including economy stability, availability, and seasonal travel.
Samsung products range from earbuds, computers, phones, TVs and Audio, and intelligent appliances. The products are available around the world and help the world stay connected.
Materials (Variable)
Wages and salaries – (Fixed & Variable)
Depreciation – (Fixed)
Utilities – (Variable)
Outsourcing – (Fixed)
Advertising – (Variable)
Taxes (Fixed)
I believe that the materials have the most significant markup on variable costs. Samsung has such a variety of products that need electronic components. Many of the parts are outsourced, causing prices to be variable.
Samsung shares are not readily available in the US. Americans wanting to invest in Samsung must use the Korea Exchange.
In the dynamic landscape of business, pricing strategies play a pivotal role in determining a company’s success. Among these strategies, variable-cost pricing has garnered attention for its ability to adapt to fluctuating market conditions and cost structures. However, a closer examination reveals that this seemingly flexible approach can trick managers into setting prices so low that they jeopardize profits and, in the worst-case scenario, lead to net losses. This essay delves into the intricacies of variable-cost pricing, drawing insights from two distinct industries – American Airlines and Samsung Electronics – to underscore the potential pitfalls and the necessity of comprehensive cost considerations.
American Airlines, a prominent player in the airline industry, provides an intriguing case study in the realm of variable-cost pricing. With a multifaceted cost structure, including fixed elements like aircraft rent and variable components like aircraft fuel, maintenance, and landing fees, the airline confronts the challenge of optimizing pricing to safeguard profitability. The allure of variable-cost pricing lies in its adaptability, allowing adjustments in response to market fluctuations and competition. However, this very adaptability can lead to a tunnel vision approach that disregards the weight of fixed costs.
The critical pitfall that variable-cost pricing entails is the propensity to overlook fixed costs, leading to prices that inadequately cover these essential expenses. As American Airlines navigates fluctuating fuel costs and economic shifts, there’s a risk of setting prices based solely on variable costs, inadvertently neglecting the foundation of fixed expenses. This scenario paints a worrisome picture – prices too low to absorb fixed costs can undermine profitability and even plunge into net losses. The allure of enticing customers with seemingly affordable fares can thus become a double-edged sword if not wielded with precision.
Moving from the skies to the realm of consumer electronics, Samsung Electronics exemplifies the intricacies of variable-cost pricing in a different context. The diverse range of products, from smartphones to TVs, amplifies the role of variable costs, particularly those tied to materials and outsourcing. The temptation to set prices based predominantly on these variable elements can ensnare managers into a similar pitfall as American Airlines – failing to fully account for fixed costs.
In the case of Samsung, the variable cost of materials stands out as a critical factor. The electronic components required for their products are subject to market fluctuations, influencing manufacturing costs. Additionally, the outsourcing of components introduces another layer of variability. While Samsung might benefit from economies of scale, especially in larger production volumes, the focus on variable costs might mask the impact of fixed costs such as research and development, which, if neglected, could eat into profitability.
Both American Airlines and Samsung’s examples underline the necessity of holistic cost considerations in pricing strategies. The fundamental lesson is that variable-cost pricing, while flexible and responsive, should not overshadow the importance of fixed costs. A balanced approach is required, one that takes into account the intricate interplay between both types of costs and the broader market dynamics.
A potential strategy to counter the pitfalls of variable-cost pricing is adopting a “cost-plus pricing” model, where a predetermined markup is added to the variable costs to ensure that fixed expenses are adequately covered. This approach forces managers to acknowledge the existence and impact of fixed costs while maintaining a competitive edge.
In conclusion, variable-cost pricing is a dynamic strategy that holds immense potential but must be wielded with caution. American Airlines and Samsung Electronics exemplify how overlooking fixed costs in pursuit of adaptability can lead to detrimental consequences. The essence of effective pricing lies in striking a harmonious balance between variable and fixed costs, enabling companies to navigate market fluctuations, achieve profitability, and avoid the trap of net losses. As businesses embrace this equilibrium, they secure not only their financial viability but also their strategic advantage in the competitive landscape.
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