Odense Bike Rental Considering Collaboration
Odense Bike Rental Has Been Considering Collaborating With A Hc Ande
Odense Bike Rental has been considering collaborating with a H.C. Andersen expert, and together do guided H.C Andersen cycling tours around Odense for groups of 5-10 tourists. The idea is that the guided tours are sold as group tours (5-10 people) at a fixed price. By looking at similar guided tours in other cities, the following relationship between price and sales has been found, for a group tour (5-10 tourists). Price Sales volume The variable unit costs are 250 kr. per guided tour of 5 to 10 tourists. During talks with the H.C. Andersen expert, it is decided that there can be sold up to 18 guided tours over the summer.
3.1: Calculate the optimal price and sales.
A hotel has contacted Odense Bicycle Rental, and offered to buy X-number of group tours (5-10 tourists) at a set price of 500 kr. As the hotel provides lunch for the tourists, the variable unit costs will only be 175 kr.
3.2: Explain whether this offer is attractive and if it will affect the previous pricing.
Paper For Above instruction
Introduction
The strategic decision-making process for Odense Bike Rental involves optimizing pricing strategies for guided H.C. Andersen cycling tours, taking into account demand relationships, cost structures, and external offers. This analysis explores how to determine the optimal price and sales volume of tours, considering both the market demand and potential bulk sales by external clients, such as hotels. The goal is to identify the most profitable pricing point and evaluate the attractiveness of external offers, particularly those that influence pricing policies directly.
Market Context and Demand Relationship
The demand for guided tours around Odense hinges on the perceived value, price level, and external factors influencing tourist behavior. Based on comparable guided tours in other cities, a relationship between price and sales volume has been established. Typically, higher prices tend to reduce demand, while lower prices increase the number of tourists willing to participate. The relationship provides a basis for estimating profit-maximizing prices by analyzing the trade-offs between price levels and expected sales volumes.
Optimal Price and Sales Volume Calculation
Given that the variable cost per tour is 250 kr., the company must determine the price point that maximizes contribution margin (price minus variable cost) multiplied by the projected sales volume, constrained by a maximum of 18 tours over the summer. Using the demand relationship, the company can identify at which price the combined contribution margin and sales volume produce the highest profit.
Suppose the demand function is linear, reflecting typical inverse relationships between price and quantity. For example, if at a price of 600 kr., the sales volume drops to 5 tours, and at a price of 400 kr., sales increase to 18 tours, the company can find the optimal price by calculating the contribution margins across different points and selecting the highest.
Mathematically, the profit for each candidate price (P) can be calculated as:
Profit = (P - Variable cost) × Sales volume(P)
where Sales volume(P) is derived from the demand relationship. The optimal price maximizes this profit function within the sales constraints.
External Offer from Hotel and Its Implications
The hotel offers to buy a certain number of tours at a fixed price of 500 kr., and because the hotel supplies lunch, the variable cost reduces to 175 kr. For this offer to be attractive, Odense Bike Rental must evaluate whether the contribution margin from the hotel's purchase exceeds or complements their existing profit opportunities.
The contribution per tour to the company’s profit in this scenario is:
Contribution Margin = Sale Price - Variable Cost = 500 kr. - 175 kr. = 325 kr.
If the hotel commits to purchasing a significant quantity, this could provide a steady revenue stream, possibly at a lower profit margin compared to optimized direct sales, but with reduced marketing and operational uncertainties. However, accepting this offer might influence the company's pricing strategies—particularly if it leads to price suppression or discounts for direct retail sales.
Furthermore, the company must consider whether fulfilling the hotel's order aligns with their capacity constraints and whether it could cannibalize higher-margin individual bookings. If the hotel purchase price is favorable and the capacity allows, it could be a profitable alternative or supplement to their existing sales approach.
Analysis and Recommendations
Calculating the precise optimal price requires detailed demand data, but assuming linear demand, setting the price at approximately 500-550 kr. could balance sales volume with profit maximization, considering the maximum of 18 tours. The inclusion of hotel bulk sales at 500 kr. per tour with reduced variable costs appears attractive, given the contribution margin of 325 kr. per tour.
Accepting large hotel orders at this price could lead to stable revenue streams, especially if the total expected number of tours sold (up to 18) is realizable. However, the company must monitor whether pursuing hotel bulk sales impacts their ability to sell at higher prices directly to tourists. Strategic pricing should preserve profitability, avoid over-dependence on bulk sales, and maintain market positioning.
In conclusion, Odense Bike Rental can leverage the hotel offer profitably provided the discounts do not undercut their direct sales’ profit margins. They should also consider flexible pricing strategies based on demand elasticity and capacity constraints, ensuring that wholesale deals complement rather than compromise their overall profitability.
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