1.
Tying as a Bundling Strategy
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Ginnie's Gym Refreshment Bar
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Hydration Power Drink
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Satisfying Smoothie
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Early
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7.00
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5.00
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Late
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6.00
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10.00
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Ginnie has observed that her signature item, the Satisfying Smoothie, is very popular with the late evening crowd at the gym, but it is not so popular with the early crowd. The early and late crowds have only slightly different preferences for her Hydration Power Drink. The gym has a very large clientele, and Ginnie can’t always tell who has the late-crowd preference and who has the early-crowd preference.
In her graduate MBA class, they have been studying tying as a bundling strategy. Ginnie asked her professor, “Would bundling work for my business?” Her professor said, “I think you told me that the marginal costs for you two products differ significantly, so first, I would recommend that you look at the contribution margin for each. Sometimes, low prices may be more profitable and sometimes high prices will be more profitable, especially when there are large differences in the price elasticities of demand. Second, think about the example of the Happy Meal. People are really there for the hamburger, and the company is leveraging that one item to sell other parts of the menu. What is your lead product, the item customers can’t get elsewhere?” The MC for Hydration Power Drink is $1.00. The MC for the smoothie is $4.00.
What is the contribution margin at each price for each product?
a) Hydration High Price contribution margin is
b) Hydration Low Price contribution margin is
c) Smoothie High Price contribution margin is
d) Smoothie Low Price contribution margin is
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