Elasticity Is Important, Said The Aquarium Director

Elasticity Is Important Said The Director Of The Aquarium

Analyze the director of the aquarium's approach to pricing strategy and debt repayment considering the role of price elasticity of demand, competitive context, and overall business strategy. Discuss whether their assumptions and decisions are sound, and explore alternative approaches, incorporating external data from comparable aquariums in other cities.

Paper For Above instruction

The pricing strategy and debt management approach adopted by the aquarium’s director necessitate a comprehensive analysis rooted in economic principles and market realities. The director emphasizes the importance of elasticity but assumes a near-absolute demand insensitivity due to being the only aquarium within a 150-mile radius. While this perception may seem justified from a monopolistic standpoint, a deeper understanding of demand elasticity is crucial for informed decision-making, especially under financial constraints like substantial debt.

Initially, the director’s calculation of setting a $16 ticket price to cover debt payments is based on a simplistic evaluation. With a fixed debt of $21.6 million, a 20-year term, and fixed costs of $100,000 per month, the necessity to generate adequate revenue pressure to meet these obligations is clear. The current variable cost per customer is $4, and the standard markup of 300% results in a current price of $12, which yields a profit margin before considering fixed costs and debt servicing. The proposed increase to $16 towards covering debt appears a reasonable move in the absence of elasticity considerations, but it overlooks critical demand responses.

The core question revolves around the demand elasticity and the potential impact of price increases on visitor numbers. It is true that the aquarium's monopoly status offers some leverage; however, demand elasticity is rarely zero in practice. Travellers and local visitors often respond to price changes, especially when alternative leisure activities are available or if the perceived value diminishes with higher prices. Therefore, raising ticket prices from $12 to $16 could lead to a decline in attendance, which might offset gains from increased prices, ultimately jeopardizing revenue targets.

External data from comparable aquariums in similar metropolitan areas could shed light on this issue. For instance, studies show that demand elasticity for amusement and leisure attractions typically ranges between -0.5 and -1.0. An elasticity of -0.5 indicates that a 10% increase in price would lead to a 5% decrease in attendance, meaning revenue could still potentially be higher if demand is relatively inelastic. Conversely, an elasticity near -1.0 suggests that a 10% price hike could reduce attendance by approximately 10%, potentially decreasing total revenue.

Given that last month’s attendance was only 10,000 in a city with a population of 4 million, the attendance figures are relatively low, suggesting the payoff of the debt through visitor volume would require significant increases in visitation. The director’s assumption that 50% of the metropolitan population visiting once would pay off the debt immediately is optimistic, especially without knowing current visitation trends or the price sensitivity of potential visitors.

Strategically, the aquarium could explore multiple avenues beyond mere price adjustments. For example, diversifying revenue streams through special exhibitions, memberships, concessions, and merchandise could help subsidize costs and reduce pressure on ticket prices. Additionally, targeted marketing initiatives reinforcing the unique appeal and educational value of the aquarium might stimulate higher visitation rates without resorting to price hikes that might deter visitors.

Furthermore, considering the external environment, such as competitor aquariums or similar attractions in nearby cities, would guide optimal pricing. If comparable aquariums charge higher prices with acceptable visitor numbers, a moderate increase could be justified. If they rely heavily on secondary revenue sources, the aquarium could follow a similar model. Data from such comparable institutions suggests that demand responsiveness varies depending on factors like ticket pricing structure, overall visitor experience, and local disposable income levels.

In conclusion, while the director’s decision to increase prices to $16 is understandable from a debt coverage perspective, it fails to sufficiently account for demand elasticity, potential visitor decrease, and strategic diversification. An evidence-based approach incorporating external data and alternative revenue avenues would likely be more effective in ensuring financial stability without risking significant drops in attendance. The importance of elasticity in this context cannot be overstated; understanding the specific demand response to price changes is essential in crafting a sustainable revenue strategy for the aquarium.

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