Question

Time Warner Cable Case Study, Memo #4 . Please see below especially the first two questions in bold

1] If we lower the price, do you think this is likely to lead to higher revenue?

2}how much potential revenue can we generate and how low should we go with our price?

Time Warner Cable Case Study, Memo #4 . As you are aware, we recently added the EPIX Movie Channels as part of a new tier of programming for our digital video subscribers. The EPIX channels are sold as an add on package for $9.75 per month, but we would like to potentially increase our contribution margin from our subscriber base. Currently we have 15,059 subscribers, generating monthly revenue of $146,823. In an earlier study, our marketing department generated data on sales quantities at various price levels. In addition, we have included the licensing cost as well as regional expenses. Please provide a recommendation of the profit-maximizing price, and the how much our profits will increase if we adjust price to the recommended level. Also please note whether this will impact our revenue. Build a regression and find the most significant model. Calculate elasticity. Find maximizing price level.

Data Set

Price Number of Subscribers (Thousands) Cost of License Fees (Thousands) Divisional Sales, General and Administrative Costs (Thousands) $5.00              29.974 $         134.883 $               14.50 $5.50              29.256 $         131.651 $               14.50 $6.00              17.822 $           80.199 $               14.50 $6.50              22.657 $         101.956 $               14.50 $7.00              19.897 $           89.537 $               14.50 $7.50              16.671 $           75.017 $               14.50 $8.00              20.492 $           92.213 $               14.50 $8.50              20.000 $           89.998 $               14.50 $9.00              19.760 $           88.920 $               14.50 $9.50              17.123 $           77.053 $               14.50 $10.00              12.644 $           56.896 $               14.50 $10.50              12.785 $           57.531 $               14.50 $11.00              12.216 $           54.974 $               14.50 $11.50              13.246 $           59.608 $               14.50 $12.00                8.637 $           38.867 $               14.50 $12.50              10.595 $           47.678 $               14.50 $13.00                5.857 $           26.357 $               14.50 $13.50                2.615 $           11.768 $               14.50 $14.00                2.739 $           12.326 $               14.50 $14.50                5.291 $           23.809 $               14.50 $15.00                3.051 $           13.730 $               14.50

Answer 1

To get profit maximizing price lets calculate profit at each level.

Profit = TR - TC

and TR = Price * number of subscriber

TC = Cost of license fee + general administrative and divisional cost

Price	No of subscribers	Cost of license fees	Divisoanl, general and adm costs	TR	TC	Profit
5	29.974	134.883	14.5	149.87	149.383	0.487
5.5	29.256	131.651	14.5	160.908	146.151	14.757
6	17.822	80.199	14.5	106.932	94.699	12.233
6.5	22.657	101.956	14.5	147.2705	116.456	30.8145
7	19.897	89.537	14.5	139.279	104.037	35.242
7.5	16.671	75.017	14.5	125.0325	89.517	35.5155
8	20.492	92.213	14.5	163.936	106.713	57.223
8.5	20	89.998	14.5	170	104.498	65.502
9	19.76	88.92	14.5	177.84	103.42	74.42
9.5	17.123	77.053	14.5	162.6685	91.553	71.1155
10	12.643	56.896	14.5	126.43	71.396	55.034
10.5	12.785	57.532	14.5	134.2425	72.032	62.2105
11	12.216	54.974	14.5	134.376	69.474	64.902
11.5	13.246	59.608	14.5	152.329	74.108	78.221
12	8.637	38.867	14.5	103.644	53.367	50.277
12.5	10.595	47.78	14.5	132.4375	62.28	70.1575
13	5.857	26.357	14.5	76.141	40.857	35.284
13.5	2.615	11.768	14.5	35.3025	26.268	9.0345
14	2.739	12.326	14.5	38.346	26.826	11.52
14.5	5.291	23.809	14.5	76.7195	38.309	38.4105
15	3.051	13.73	14.5	45.765	28.23	17.535

As you can see profit is maximized at Price of $11.5

Recommended price is $11.5. By adjusting price to this level, the profit will be $78221. And total revenue will be $152329.

Yes the revenue will increase as well.