Technological advancement has led to the development of online gaming. It is possible to interact and play online games together for people from different areas of the globe (Crawford, 2011). However, there is a restriction as the players must use the same platform to enable the multiplayer function. These games are developed in different platforms. However, it is impossible for gamers to compete while they are on different platforms. Consequently, a new software in the video game console industry referred to as All Play has been introduced. The purpose of this software is to enable cross-platform online gaming. Clients can purchase the software and pay subscription fees annually or monthly for various games they select.
Market Structure and Elasticity
The current video game console industry can be described as an oligopoly. The major players in the industry include Nintendo Wii U, Sony PlayStation, and Microsoft Xbox (Warmelink, 2014). The different consoles use the same factors while setting the process. Mostly, the storage capacity, games and the edition of the console determine the price. On average, games cost about $60 (Warmelink, 2014). The demand of the video games products is elastic, and clients are used to the average price of $60, while an increase may reduce the demand. A reduction in price will attract more clients. As the All Play software is a complementary in the industry, its demand is subject to industry’s elasticity. Therefore, an increase in the price of video games may result in a decrease in the demand of the All Play software.
Determination of Profit Maximizing Quantity
In order to determine the price maximizing quantity, the approach to be used will be total revenue minus total cost (TR-TC). The applied method relies on the fact that profit is whatever remains when the costs are subtracted from the generated revenue. The increase in sales of the software will result in increased revenues.
Use of Marginal Cost and Marginal Revenue in Profit Maximization
If the marginal revenue is more than the marginal cost, an increase in output will result in an increase in profits. The same concept will be applied in the business. For the business to maximize profit, there will be a need to produce a product in different variants. Therefore, there always will be an extra unit of the product. However, the extra unit will keep growing as there will be a constant need to create upgraded versions, which are compatible with new games. It ensures that even customers with older versions will find it necessary to buy new and upgraded versions.
There will be an original high production cost, but it will reduce on subsequent productions. The cost of production is expected to be about $1 million. Therefore, for the cost of production to be realized, the company will need to sell about 17,000 products at $59. However, after the initial cost, the cost per product reduces at it only requires the marketing and packaging cost, which is expected to be $10 per product. Therefore, after selling about 18,000 products, the company will begin registering profits.
Pricing, Marginal Cost, and Marginal Revenue
All Play pricing will remain constant throughout the year. There are various multiplayer games, and they get released during the month of November, prior to the beginning of the shopping season. The product strategy of marketing to be implemented involves promoting the software alongside the high demand games. The pricing shall be constant, at around $59, and expectations are that the sales of the games will positively influence the sales of All Play software. The price is determined by production cost and its subsequent upgrades. Additionally, the market demand is anticipated to be high; hence settling on the price. Although sales occur during the holiday shopping season, there are also blockbuster video games which are usually on sale throughout the year. Advertising will be used for the purpose of increasing the price. When the players are in between games, they will be in the lobby, and this time will be utilized as time for advertisements. The goal of the sales is to market the marginal amount with the lowest marginal costs and the highest marginal revenue.
Suggested Mix of Pricing and Non-Pricing Strategies
The business will employ various pricing strategies that recognize the fact that consumers consider most electronic items such as the games and players as luxuries. In recent times, the demand of electronics has been improving consistently between 2009 and 2013, growing by $27.1 billion. Increase in e-commerce is one of the factors promoting the demand (Wasag, 2013). In addition, there has been a growth in the demand of video games. The pricing approach employed by the company will be similar to Sony’s current approach. It involves taking advantage of the hardware products. Similarly, All Play can take advantage and collaborate with the producers of games and gaming devices. For instance, it can collaborate with Sony PlayStation, and ensure that when the customers purchase the devices. In addition, in order to ensure that the business picks, the initial price may be lower. Although the company may not be making profits, it is a good strategy to lure the customers. In addition, the company will focus on the customers’ needs and satisfaction.
Since the product is the first of its kind in the market, it is not necessary to have massive differentiation. However, in order to ensure that the clients remain satisfied, there will be frequent upgrades in relation to the needs of the customers. Moreover, it is necessary to conduct regular surveys on customer satisfaction, to ensure that the product that they receive satisfies their need. It will ensure that even if a competitor enters the market, they may not offer something new as all the needs of the customers are solved by the product. It is necessary to incorporate non-price strategies in order to ensure that the product remains relevant in the market. There will be third party advertising during the lobby, which takes about forty-five seconds, and it is expected to increase the revenues related to the software. The lobby is the time between matches for the compatible games. It is within the game.
In addition, there will be the use of free gifts, publicity in magazines, money-off coupons, and displays in stores. Moreover, there will be the advertisements in video games platforms, which will be focusing on the actual video games players. These approaches will play a significant role in ensuring that the product attracts clients. Furthermore, the company will focus on diversifying the products and taking advantage of the opportunities in the gaming industry. Marketing the product will also be part of the strategies to ensure that it has a wide customer base. As a result of its novelty in the market, there will be marketing through all available avenues. For instance, the primetime television and billboards will be used in marketing. In addition to these strategies, there will be advertising through other websites. For example, the company will focus on having pop-up adverts on Google search engine. It will ensure that its popularity reaches as many people as possible.
Barriers to Entry
The product will take into account various issues; especially, regarding the fact that it is new and one of its kind in the market. All Play will obtain the necessary trademarks, copyrights and patents. It is vital for the company to retain its status as a monopoly. It will enable the product to remain in the market and deter competitors from entering the market (Hendon, 2013). When the limits have matured on the intangible assets, there is a plan to obtain the exclusive right with the publishers of highly profitable games such as Call of Duty. Usually, there are very few highly profitable multiplayer games in the market, and if the product gets the exclusive rights with the game publishers and developers of these games, it will establish another barrier to entry.
Effect of Changes on Fixed and Variable Costs
The strategy of the company is to maximize the sales of the product. In order to ensure that the profits are maximized, the company should focus on outsourcing some of the services to guarantee that they save the overhead costs and reduce the variable costs. Since the software will be sold packed in compact discs, it is necessary that the company contracts out the compact discs producers. In addition, there should be an agreement with the company that makes the compact discs. As the compact discs will be purchased in bulk, the company will be able to reduce its fixed costs and the variable costs. In addition to releasing the software in compact discs, it will be released as a digital download. Another strategy of the company is focused more on the digital downloads after one year of production. It is expected that the digital downloads are less expensive to produce than those packaged in compact discs. The physical discs require additional costs associated with shipping and labor in disc production and packaging. Successful implementation of the strategy will minimize the fixed costs as there will be no need to purchase or produce the compact discs.