Question
High Plains PLC (HP)
High Plains PLC (HP) owns 600 budget hotels. It operates in a rapidly growing market and has a 60 % market share of the budget hotel market.
Recent secondary market research on the hotel industry revealed:
- guests of luxury hotels are brand loyal
- 80 % of guests of budget hotels respond positively to a price reduction
- the budget hotel market is growing rapidly
- detailed statistics and information on all hotel chains.
HP’s directors aim to increase occupancy rates in HP’s hotels from the current 65 % to 80 % by the end of 2024. Each of HP’s hotels has 400 rooms. People on business trips account for only 15 % of the hotels’ bookings.
HP is considering two options.
Option 1: Price discounts on 100 of the rooms in each of HP’s hotels
The discounts would undercut prices charged by its major competitor, Kampfort Inns (KI), by 10 %. HP would also offer a price match guarantee, which means that it would match any lower price charged by KI for any room.
Option 2: Upgrade 100 of the standard rooms in each of HP’s hotels
Upgraded rooms, called HP+, would have improved IT facilities, new décor, a coffee machine and a better shower. HP+ rooms would be $20 per night more expensive than standard rooms. Estimated upgrade costs are $1500 per room, and the upgrades would take two years to complete. The HP+ rooms are targeted both at the business traveller market segment and at customers willing to pay slightly more for an enhanced hotel experience.
a. Define the term market segment.[2]
b.Construct a Boston Consulting Group (BCG) matrix for HP, identifying the correct segments for HP’s standard rooms and its HP+ upgraded rooms if Option 2 is chosen.[4]
c.Explain one advantage and one disadvantage for HP of using secondary market research.[4]
d. Discuss whether HP should choose Option 1 or Option 2.
▶️Answer/Explanation
Ans:
a .A market segment is a sub-group or portion of a whole market who share similar characteristics.
For 2 marks candidates need to demonstrate that:
a market segment is a part / portion of a whole market
consumers in this segment share common characteristics.
Award [1] for a definition that shows some understanding of a market segment.
N.B. If a candidate writes a response similar to the following, award [1]: A market segment is a group of people who share one or more common characteristics.
b. 
Award [1] for a diagram that has either the correct axis labels OR the 4 correct segments labelled [1].
Award [2] for a diagram that is fully, correctly labelled [2].
Award [1] for either stating that HP rooms are a STAR or by placing this in the STAR segment the diagram drawn.
Award [1] for either stating that HP + rooms are a ? or a Problem Child or by placing this in the ? / Problem child segment in the diagram drawn.
c.
Application Advantage
- Get detailed stats on rival budget hotel chains.
- 80 % of budget hotel guests are price sensitive.
Application Disadvantage
- Some of data is not relevant e.g. data about 5-star hotels.
- Hotel market is rapidly growing so may be out of date very quickly.
Award [1] for identifying an advantage to HP from its use of secondary market research.
Award [1] for identifying a disadvantage to HP from its use of secondary market research.
In order to access the 3rd and 4th marks both answers must make use of the stimulus / be contextualised.
Mark as [2+2].
d.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
There is no “correct answer”.
Option 1
Pros
This is very simple to implement and can be done very quickly. There will be additional costs as this price change will need to be heavily advertised to create customer awareness. Above and below the line advertising can be used.
Advertisements on TV, in the press and on social media will need to be used but HP can also use its database of customers to send then direct mail. As most budget hotel customers are price sensitive then this is likely to increase demand It is likely that they will be able to raise occupancy rates above the 65 % rate and this can be achieved quickly.
Cons
How successful this option depends on how its main rival reacts. Kampfort may react by matching the price cuts that HP makes – if this happens then occupancy rates may only rise minimally – the price cuts may grow the market slightly. It could also lead to a price war – Kampfort Inns may even cut its prices below those of HP in which case HP occupancy rates may fall. However, it may have some impact on its profitability – occupancy rates must rise by more than 10 % if sales revenue is not to fall.
Option 2
Pros
The upgraded rooms are more likely to appeal to business guests and they account for 15 % of its target market. Secondary market research data shows that 20 % of budget hotel customers are not price sensitive and therefore the upgraded rooms may appeal to this market segment.
The upgraded rooms bring in more revenue per room per night as they are $20 per night more expensive than standard rooms – if they hit the target of 80 % occupancy then revenue per night would increase (80 × $20 × 600) = $960 000 per night.
The change differentiates HP from a major rival. This may allow HP to raise its status as it now offers a better “product” at all of its hotels compared to the offer of its rival.
Cons
This will have higher initial costs. Each upgraded room costs $1500, that is $150 000 per hotel. It has 600 hotels so the total cost would be $90 million. This is likely to be far greater than the promotion costs of option A.
There will also be lost revenue at each hotel whilst the 100 rooms are upgraded. This will impact both profits and occupancy rates. Occupancy rates will fall initially and as it will take 2 years for all the upgrades to be undertaken.
There is also the danger of brand cannibalisation – HP may find that occupancy rates stay the same, with more customers staying in the HP+ rooms rather than standard rooms – they would not achieve their target of 80 % occupancy rates BUT sales revenue would increase.
It is expected that candidates provide a conclusion with a substantiated judgment.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
If a candidate evaluates / addresses only one option, award a maximum of [5].
A balanced response is one that provides at least one argument for and one argument against each option.
Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in the answer.
Question
Sock Paradise (SP)
After conducting primary market research, Pam opened Sock Paradise (SP), which sells colourful socks. SP operates a retail stall in a large department store and sells online through its own website.
Table 2 shows selected financial data for SP for 2020 .
Table 2: Selected financial data for SP for $\mathbf{2 0 2 0}$
At the end of 2020 , the department store told Pam that it would increase rent by $\$ 14000$ per year starting on 1 January 2021 . Pam forecast total sales for 2021 as 18000 pairs of socks; other costs and prices were forecast to remain unchanged.
a. State two methods of primary market research.[2]
b.i. Using the selected financial data in Table 2, calculate for SP for 2020 :[2]
the break-even level of output (show all your working).
b.ii.Using the selected financial data in Table 2, calculate for SP for 2020 :[2]
the margin of safety (show all your working).
b.iiiUsing the selected financial data in Table 2, calculate for SP for 2020 :the net profit (show all your working). [2]
c. Explain how the impact of the increase in rent and the forecast increase in sales in 2021 could affect SP’s profitability.[2]
▶️Answer/Explanation
Ans:
a. Methods of primary market research include:
Focus groups
Observations
Interviews
Surveys/questionnaires
Accept any other correct form of market research. Award [1] for each method identified up to a maximum of [2].
b.i.
$9.00 minus $4.00 = $5.00 = contribution
= 12 000 units
12 000 units is the break-even level of output. Do NOT penalize if missing word, units.
Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
If a candidate uses a correct alternate method, accept. If a candidate only lists the answer but shows no workings, award [1].
If candidate calculates contribution but gives wrong break-even level of output award [1].
b.ii.
Labelling of figures is not required.
15 000 [total sales in units] − 12 000 [break-even level of output] = 3 000 units or pairs of socks.
3 000 units or pairs of socks is the margin of safety.
Award [1] for correct method and [1] for correct answer, for a maximum award of [2]. Apply OFR if candidate uses incorrect answer from b(i).
N.B. deduct one mark in b(i) and b(ii) for use of inappropriate units e.g. $
c.
Actual profit (year 2020)
$9.00 × 15 000 = $135 000 in sales revenue
$50 000 + $10 000 = $60 000 in fixed costs (FC)
$4.00 × 15 000 = $60 000 in variable costs (VC)
Net profit = $135 000 − $60 000 − $60 000 = $15 000
Alternative methods
Net profit = total contribution minus FC (15 000 × $5) − $60 000 = $15 000.
or
Net profit = MoS X contribution per unit = (18 000 − 15 000) × ($9 − $4) = 3 000 × $5 = $15 000
Award [1] for correct method and [1] for correct answer, for a maximum award of [2].
N.B. A break-even chart is not required to be drawn and will gain no marks if presented without the above calculations.
b.iii.
SP’s profitability will probably increase. The increase in rent will add $14 000 to fixed costs. However, if the forecast sales are accurate and prices and costs do not change, then Pam can expect an additional 3000 x $5 in sales revenue ($15 000).
N.B. The actual increase in profit is not required.
Award [1] if the candidates has shown some understanding that profitability is likely to increase. Award an additional mark if in their explanation, they demonstrate some application by using figures from the case study.
N.B. Award [1] if the candidate explains increasing profitability without referring to both rent and sales forecast increases.
N.B. If candidates interpret “profitability” to mean ratios then do not penalize. The explanation would be that profitability decreases from 11.1 % to 9.88 %. For full marks some reference to the figures is necessary.