University Tees faces numerous risks, five of which are described here. First, University Tees relies on student representatives to promote the company and its products. If these students acquire poor reputations or are unable to gain favor among target customer groups, University Tees may experience decreased market share. Second, the company generates almost all of its sales from college students. Because student groups completely turn over roughly every four years, University Tees may have difficulty creating a steady brand image and maintaining long-term customer loyalty. Third, University Tees outsources t-shirt production. If the supplier cannot fulfill an order for unforeseen reasons, University Tees suffers the consequences in terms of lost customers and damage to its reputation. Fourth, University Tees operates in an environment that is extremely price sensitive and has low barriers to entry. If University Tees has increased pressure to reduce prices, it may not be able to generate sufficient profits. Finally, University Tees sells its products primarily to student groups that are often strapped for cash. If these student groups are unable to pay their bills, then University Tees may incur cash flow problems and may incur extra costs to collect its accounts receivable.
2. What key factors influence the prices that companies establish for their products and services?
The three key factors that influence pricing decisions are customers, competitors, and cost. Customers and competitors define the price ceiling—the highest possible price. A company’s costs define the price floor—the lowest acceptable price. The gap between the price ceiling and the price floor is known as the zone of possible agreement, or ZOPA (Shapiro, 1998). The teaching notes for this question focus on the price ceiling, also known as the customers’ willingness to pay. The role of costs in establishing the price floor will be addressed in question 6.
When a company’s products and services are largely undifferentiated from those offered by competitors, the customers’ ‘‘willingness to pay” is heavily influenced by competitor prices. Conversely, when a company’s products and services are clearly differentiated (either through tangible attributes or perception) from those offered by competitors, the customers ‘‘willingness to pay” is less influenced by competitor prices.
In the case of University Tees, the typical customers are student groups such as intramural sports teams, sororities and fraternities, theatre and band groups, and professional societies. These groups often place several t-shirt orders per year, and they usually have modest amounts of discretionary cash available for their t-shirt purchases. The customers have greater bargaining power than University Tees because t-shirts are essentially a commodity. Furthermore, customers can readily obtain price quotes from numerous competitors, and the costs of switching from one company to another are minimal. These realities enable customers to exert downward pressure on the price ceiling.
Since t-shirts are largely a commodity product, the competition is instrumental in helping University Tees define its price ceiling. If University Tees attempted to set prices above the competition, then it would struggle to win customer orders because customers could readily choose lower-priced options of comparable quality products. While University Tees offers competitive advantages over CCA and internet providers, it is unlikely that cash-strapped student groups would be willing to pay a premium for t-shirts purchased from University Tees. For example, if University Tees tried to charge one dollar per t-shirt higher than competitors on an order of 50 t-shirts, it is easy to envision a student group saying, ‘‘I’ll travel the one half mile to CCA to save 50 bucks!”.
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