Pricing Simulation Report
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During twelve months, starting in October, we were responsible for setting the pricing strategy of Universal Rental Car Company, as the district manager for the Florida region of Orlando. It was a big role as Florida was the company’s worst performing region and had two major problems: “Stock outs”, which used to occur during demand peaks, and “unsold inventory”, which occurred in demand valleys. Furthermore, we had to deal with the competitor in an intense price war, as the customers would only have two different options to rent a car and, of course, were intuitively very sensitive to prices. We were able to run this situation three different times and therefore were able to apply different pricing strategies. In the end of each run, our aim was to improve the financial results of the company, either in terms of cumulative profit, financial market share, cumulative unit sales, capacity utilization and final month’s profit. For this, we could only change the prices applied by the company in weekdays and on weekends. Another interesting input to this simulation was that there were two different kinds of customers: the ones who rented cars for business purposes and others who were spending vacations in Florida.
In every run, the price which was being practiced by Universal was 41$ and 34$, for the weekday and weekend respectively. On the other hand, the competitor wad charging a bit more in both periods (42$ during weekdays and 35$ during weekends) giving Universal a prior advantage. Bearing all this in mind, we basically could follow two different main strategies (more extreme) which are characterized by the aggressiveness of the price increases or decreases, and another one that should be in the middle of these two: Skim: setting a high price to capture the economic value of the product as customers may reveal insensitive to prices. Even though the sales volume normally decreases, the sale margins are high. Customers tend to differentiate a lot the attributes of the products. Penetration: decrease prices in order to capture a big portion of the customers and thus increase the market share. In this case, the margin is sacrificed at the expense of the sales volume. Neutral: the price is set so that most buyers can find it reasonable. This strategy normally consists in controlling price levels and adjust them with soft increases, decreases or stagnation. This strategy minimizes the role of price as a marketing tool and gives more importance and focus to others.
The first thing we wanted to discover was the price customers were willing to pay for renting a car. As for, we found that there were some unfilled orders because the demand was above the market supply for the rental car business. Thus, there were 556k cars that could be being rented at the price charges by the market. As a consequence, the capacity utilization of Universal was at 100%. At first, as we could change capacity in either way, we decided as an experimental to slightly increase price in the first month to turn the product “less accessible” but rapidly verified that the customers were not very sensitive to price as the demand kept on increasing. We rapidly defined our main strategy to be skimming.