Suppose the owner of Haywood Ceramics needs to raise prices to stay in business, but is...

Suppose the owner of Haywood Ceramics needs to raise prices to stay in business, but is concerned that raising prices would result in a death spiral. To avoid a decline in sales, the owner is considering sending letters to her customers explaining why the price increase is necessary. The letter would inform customers about the cost increases that necessitated the price increase, explain what the company is doing to keep costs as low as possible, and allow customers to place orders for a given time period at the current price.

Required

(a) Describe the death spiral in your own words.

(b) Explain why the owner cannot be sure how customers will respond to a price increase.

(c) Suppose the owner decides to send letters to her customers. From a customer’s point of view, discuss possible pros and cons of this strategy.

(d) Would you recommend that the owner send letters to her customers? Why?

Solutions

Expert Solution

a) The Haywood ceramics company will be having some losses in their business, that's why they have decided to raise the prices. The main problem is that increasing prices will lead the customers to step back from Haywood ceramics. For every business customers are the king. So customers should be treated well. In case when the customers feel the prices are high so they will stop buying the product and it will lead to decline in the profits of the company. The Haywood ceramics should increase the prices by making the customers feel like the price has not effected them. If the prices are suddenly increased and there will be a chance of losing customers. If the exact reason and other details are elaborated to the customers they will somehow stay in the business. But if Haywood ceramics really lose their customers it will really affect them and even it will lead them to a complete loss in the business.

b) Any customer will not like increasing prices. A company which is deciding to increase their product's price should be concerned about the after effects that occur after increasing the price. Nobody will like when the prices are increased , but the company should be capable of making the customers understand why the prices are increased and try to maintain their customers and should not loose them. For Haywood ceramics they have increased the prices because their costs have increased and they are also sending a letter to each and every customers explaining why the prices are increased , but it will not give a clear picture because there is 2 possibilities, either the customers will stop buying products from them or they will stay as their customers. So it is a great risk for the company to rise the prices. So it will be according each customers some can afford the increased price and some will th go find products with less price. So the company cannot clear conclusion, all will be based on possibilities.

c) Pros

1) The letter will help the customers to know why the prices are increaed for the product.

2) Some customers will have a feel that the company has somehow tried to explain why they increased the price , so it will make a good feel in some customers mind that the company is making price increase for a fair reason.

Cons

1) Some customers will be not be satisfied with letter even it shows the reason for the price increased, they will have a feeling to change to any other product with less price because they cannot afford the current increased price.

2) In some situations the letter will be received to some customers very late, so in that time they must have changed to any other product with less price.

d) No , I would recommend the company should use a much more interactive way to communicate with their customers. In case they send letters by defining their reason to increase the prices there is only possibilities, because the customers could even be their customers and also there is a possibility that they would find any other product with low price. So by sending letters the company cannot assure that they can maintain their customers. So if they make a more effective and interactive way to communicate with their customers they can define their reason much more effectively to the customers and the customers will also have an opportunity to ask questions to the company and the company can make their points more clearly to the customers. Because Increaing prices should not affect the customers, it is the company's ability to make their customers believe that increased price has not really affected them.

ekkarill92 answered 1 year ago

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