Two Brands of Shoes at Two Different Prices in the Same Area - Research Paper Example

Two Brands of Shoes at Two Completely Different Prices in the Same Area INTRODUCTION Deichmann and Gucci are two completely different designer brand shoes that are subject to customer’s choice. Deichmann is cheaper compared to Gucci. In just a single look, one cannot be certain which among of these brands is mostly preferred over the other since there are many factors affecting customer’s choice of purchase. This paper evaluates the performance of these two designer brand shoes by looking at the total sales volume per month of the two shoe shops in Aachen town in Germany. Analysis using price elasticity of demand was employed. To find out for any substitution effect and relationship between these two designer shoes, analysis on the cross price elasticity of demand was implemented. This paper also discussed the result of survey conducted to respondents based on their opinion about the two commonly and widely accepted designer shoes products. Most of their answers were substantial to the analysis and in fact, they can further justify the result of cross price elasticity analysis and price elasticity analysis. Over the entire flow of this paper, it focuses to answer how two similar pairs of shoes from two different labels can be sold at two completely different prices in the same area. Answering this question requires analysis and most importantly, substantial methodology just prior to evaluation and analysis of information. The following is the discussion of methodology employed in this paper. METHODOLOGY This research employed sets of analysis on how Deichmann and Gucci, the two widely known brands of designer shoes be sold at two completely different prices in the same area. To find out for sufficient information in line with the analysis, the proponent was able to do the following process of data and information gathering. 1. Determination of the two shoe shops in Aachen Germany. 2. Gathering of information on the total sales volume per month with corresponding prevailing market price of Deichmann and Gucci from the two determined shops. 3. Distribution and gathering of questionnaires to respondents to find out for substantial information to back up the analysis. 4. Tabulation of information and computation using the following: a. Price elasticity b. Cross price elasticity c. Graphs d. Tables In computing for the price elasticity of demand and cross price elasticity, the Arc price elasticity of demand was employed to give more meaningful results on the data gathered by the proponent. RESULTS AND ANALYSIS The Respondents The proponent was able to survey 100 female respondents who were able to answer the questionnaire. These respondents are primary sources of information to back up the results obtained from price elasticity analyses. In Table 1, the proponent was able to show that 30% of the respondents have income of € 7,000 and over. About 70% of respondents have monthly income under € 7,000. Most of the respondents having income under € 7,000 will be willing to pay for Deichmann and only 8% of them are willing to buy Gucci. TABLE 1 Respondents’ capacity of shoes purchase according to their monthly income.   Income € 7,000 & over   Income under € 7,000 Will buy Gucci 18% 8% Will buy Deichmann 12% 62% Total ………….. 30%   70% TABLE 2 Respondents’ capacity of shoes purchase according to their age.   20 yrs old & below 21 yrs old - 30 yrs old 31 yrs old - 40 yrs old 41 yrs old & above Will buy Gucci 0% 3% 11% 12% Will buy Deichmann 4% 45% 13% 12% Total ………….. 4%   48%   24%   24% Consequently as observed in Table 1, 18% out of the 30% respondents with income € 7,000 & over will be willing to buy Gucci. This also suggests that despite having income of more than € 7,000, 12% of the respondents will still be willing to buy Deichmann. The proponent was also able to show in Table 2 that most of the respondents surveyed were of age ranging from 21 years old to 30 years old. The respondents having this range of age comprise 48%. It is also shown in Table 2 that these ranges of age have answered that they will be willing to pay for Deichmann. As presented in Table 1, most of those who are willing to purchase Deichmann are with monthly income under € 7,000. As presented further in Table 2, it shows that most of the respondents having income under € 7,000 monthly are of age within 21 years old to 30 years old. This further proves and as presented in Tables 1 and 2, respondents of age within 31 years old to 40 years old and 41 years old and above are most likely willing to purchase Gucci. This further suggests that respondents of age 31 years old to 40 years old and 41 years old and above have monthly income bracket of € 7,000 and above. It may also suggest that the choice of shoes have been somehow connected with age. As in the case presented in Table 2, those who are strongly willing to go for Gucci are under the age of 31 years old and above. However, it only happened that the respondents having higher monthly income bracket are in the age bracket ranging from 31 years old and above as shown in Table 1. Whether the choice of shoes is influenced by age or not still remains undetermined or unjustifiable. In fact, when asked which among Gucci and Deichmann is preferable, most of the respondents’ answers are in favor of Gucci. As presented in Graph 1, 57% of respondents will prefer Gucci over Deichmann. GRAPH 1 Respondents’ most preferred shoes. Perhaps, the closest reasons of respondents’ criteria of preference are their own taste and the consideration of trends in fashion. As presented in Graph 2, majority of the respondents believe that Gucci is closer to their taste. This taste of respondents somehow has strong relation with the fashion trend. As also presented in Graph 3, it is shown that most of the respondents believe that Gucci is more fashionable than Deichmann. GRAPH 2 Shoes closest to respondents’ taste. GRAPH 3 Shoes most fashionable according to respondents. It may turn out that Gucci has been receiving a good favor so far from the respondents. However, customers’ preference after all does not necessarily mean an indication of convertible purchase. In fact, when asked which among Gucci and Deichmann they are willing to pay, most customers answered the latter as what they can exactly afford to buy. This information is shown in Graph 4. This clearly suggests that as far as income is concerned, respondents are willing to give up their preference for affordability issue. GRAPH 4 Number of respondents willing to pay their shoes of choice. Price Elasticity of Demand The discussion so far focuses on some other factors affecting the capacity of respondents to purchase designer shoes. In this section, price issue will be in focus so as to come up with information that will measure the responsiveness of sales volume to price change in two shoe shops employed in this study. Price elasticity of demand is a specific measure of responsiveness of demand to the change in price (Hirschey & Pappas 1996, p. 185). Since the data gathered from the two shops can be measured over a given range of function over time, the best choice to analyze elasticity is to use the formula of arc elasticity. This formula does not measure elasticity at a given point of time but it considers the range of observation or function over time (Hirschey & Pappas 1996, p. 181). Another elasticity coefficient used in this study is the cross price elasticity. This coefficient measures the responsiveness of demand for the other product as the price of the other product changes (Hirschey & Pappas 1996, p. 199). The reason why this coefficient is employed in this study is so as to find out for any substitute relationship among Gucci and Deichmann. In this study, the sales volumes of shoes in the two shops were gathered together with the corresponding price per month. These two variables were carefully analyzed using the formula of price elasticity of demand. TABLE 3 Price elasticity of demand of Gucci in Shop 1 as measured by the elasticity coefficient. Month Total sales volume per month Price per unit per month Elasticity coefficient January 9 € 520 February 9 € 520 March 5 € 520 April 12 € 520 May 18 € 520 June 24 € 390 3.18 July 22 € 260 August 12 € 260 1.67 It is shown in Table 3 that the price elasticity of Gucci’s sales volume as measured by the elasticity coefficient is 3.18 when the price changes from € 520 in January to only € 390 in June. This simply means that a 1% change of Gucci’s price results in a 3.18% change in total sales volume per month in Shop 1. In this case, there is an elastic demand. According to Hirschey and Pappas (1996, p. 186), an elastic demand affects revenue for it lowers it when price increases and vice versa. The converse of this concept applies to inelastic demand. A special case for unitary elasticity applies when price and quantity of demand do not exactly change and especially the revenue is unchanged (Hirschey & Pappas 1996, p. 187). The above concepts will help someone understands that the revenue of Shop 1 decreases from the month of June to August. However, an elastic demand for Gucci was still remarkable. This means that price of Gucci leads to a more than proportionate change in quantity demanded. The same situation happened in Shop 2 as shown in Table 4 and exactly the same trend is remarkable. However, it can be noticed that Shop 1 has probably much more revenue than Shop 2 as measured by the elasticity coefficient. TABLE 4 Price elasticity of demand of Gucci in Shop 2 as measured by the elasticity coefficient. Month Total sales volume per month Price per unit per month Elasticity coefficient January 11 € 520 February 6 € 520 March 8 € 520 April 7 € 520 May 23 € 520 June 20 € 390 2.03 July 21 € 260 August 11 € 260 1.45 The results obtained in Tables 3 and 4 are supplemented by the following information. As shown in Graph 5, almost 70% of respondents will never buy Gucci if its price increases. This means that the demand for Gucci is very dependent on its price. The sensitivity of demand according to price is due to the fact that Gucci is expensive and only those who have higher income can afford. GRAPH 5 Number of respondents willing to buy Gucci if its price increases. TABLE 5 Price elasticity of demand of Deichmann in Shop 1 as measured by the elasticity coefficient. Month Total sales volume per month Price per unit per month Elasticity coefficient January 21 € 19.90 February 21 € 19.90 March 17 € 19.90 April 25 € 19.90 May 24 € 19.90 June 31 € 19.90 July 33 € 19.90 August 24 € 14.90 0.46 It is shown in Tables 5 and 6 that the elasticity coefficients between the sales volume of Deichmann and its price per unit per month fall under the category of inelastic demand. The trend was consistent in two shops. This means that the price change of Deichmann will never lead to more change in monthly sales volume for Deichmann in two different shops. TABLE 6 Price elasticity of demand of Deichmann in Shop 2 as measured by the elasticity coefficient. Month Total sales volume per month Price per unit per month Elasticity coeficient January 22 € 19.90 February 19 € 19.90 March 21 € 19.90 April 21 € 19.90 May 19 € 19.90 June 32 € 19.90 July 29 € 19.90 August 18 € 14.90 0.62 Cross Price Elasticity of Demand It is of interest to find out if the change of price in Deichmann will lead to significant change in monthly sales volume of Gucci in two shops. It is shown in the generated results that as measured by elasticity coefficient, the cross price elasticity of demand is inelastic. This simply implies that a price change in Deichmann leads to a less than proportionate change in the monthly sales volume of Gucci. This information is shown in Tables 7 and 8. TABLE 7 Cross price elasticity of demand of Gucci in Shop 1 as measured by the elasticity coefficient. Month Total sales volume of Gucci per month Deichmann’s price per unit per month Elasticity coefficient January 9 € 19.90 February 9 € 19.90 March 5 € 19.90 April 12 € 19.90 May 18 € 19.90 June 24 € 19.90 July 22 € 19.90 August 12 € 14.90 0.99 TABLE 8 Cross price elasticity of demand of Gucci in Shop 2 as measured by the elasticity coefficient. Month Total sales volume of Gucci per month Deichmann’s price per unit per month Elasticity coeficient January 11 € 19.90 February 6 € 19.90 March 8 € 19.90 April 7 € 19.90 May 23 € 19.90 June 20 € 19.90 July 21 € 19.90 August 11 € 14.90 0.0 As shown in Tables 7 and 8, both shops have consistent trend of having Deichmann’s price change to have less impact on their total monthly sales volume for Gucci. However, a different result was remarkable when Gucci’s price is to be changed. In Table 9, the change of Gucci’s price from € 520 to € 390 has significant 1.35% change in the total sales volume of Deichmann in Shop 1. In the same way, this price change has significant 1.29% change in the total sales volume of Deichmann in Shop 2. This is an interesting result. TABLE 9 Cross price elasticity of demand of Deichmann in Shop 1 as measured by the elasticity coefficient. Month Total sales volume of Deichmann per month Gucci’s price per unit per month Elasticity coefficient January 21 € 520 February 21 € 520 March 17 € 520 April 25 € 520 May 24 € 520 June 31 € 390 1.35 July 33 € 260 August 24 € 260 0.63 TABLE 10 Cross price elasticity of demand of Deichmann in Shop 2 as measured by the elasticity coefficient. Month Total sales volume of Deichmann per month Gucci’s price per unit per month Elasticity coeficient January 22 € 520 February 19 € 520 March 21 € 520 April 21 € 520 May 19 € 520 June 32 € 390 1.29 July 29 € 260 August 18 € 260 1.40 Somehow the change of Gucci’s price has consistent impact on the total sales volume of Deichmann in Shop 2 as measured by the elasticity coefficient. This information is clearly stated in Table 10. The results presented in Tables 9 and 10 can be supported by the fact that around 52% of the respondents would be willing to buy Deichmann if the price of Gucci increases. This information is stated in Graph 6. GRAPH 6 Respondents who will buy Deichmman if Gucci’s price increases. It came out in the survey that some respondents’ choice to buy shoes is affected by the following factors. 1. Shoe care products 2. Shoe repair charges 3. Plasters 4. Soles of shoes It also came out in the survey that respondents’ choice to buy Deichmann is not totally affected by the above mentioned factors. However, the above factors have strong impact on some respondents’ decision to purchase Gucci. As shown in Graph 7, 37% of respondents responded that they will not buy Gucci if the prices of shoe care products, shoe repair charges, plasters and soles of shoes will increase. On the other hand, as also presented in Graph 8, 25% of respondents are still willing to buy Deichmann in the event that the prices of other related items to shoes will increase. GRAPH 7 Respondents who will still buy Gucci despite the prices of other related products to shoes will increase. GRAPH 8 Respondents who will still buy Deichmann despite the prices of other related products to shoes will increase. So far, factors affecting respondents’ choice of shoes purchase have been discussed and analyzed. It all boils down to the capacity of respondents to pay for the pair of shoes of their choice. There is a strong relation between income and the capacity of purchase of respondents. One of the most interesting parts in this study is the analysis of demand for Gucci and Deichmann. It shows that more are to prefer to pay for Deichmann. However, it is also clear that Gucci is more fashionable according to respondents and without trying to consider its price, more respondents prefer to have this designer brand of shoes. Analyzing demand is one important step in consideration with the distribution and manufacturing of goods. The Income Effect Another way of explaining the sales volume of two different shoes from two different shops is through looking at consumers’ income. In economics, the income effect is pertaining to the effect of price change and consumers’ real income to the quantity of products demanded (McConnell & Brue 1993, p. 403). This means that as the price of Gucci or Deichmann increases, consumers will try to consider their budget or income and they certainly will end up buying the product they can afford. Substitution effect The reason why there is a significant impact of price change of Gucci to the sales volume of Deichmann in the two identified shops is because of the substitution effect. This is another concept in economics explaining that consumers are most likely to substitute cheaper products for other products which are more expensive (McConnell & Brue 1993, p. 403). Deichmann is cheaper and Gucci is the expensive one. In this case, there is a great chance that the greater demand will fall on Deichmann. Oligopoly Defined and Price Strategy Another interesting topic to look at in this paper is the concept of Oligopoly. The two shops of shoes are interdependent when it comes to pricing Gucci and Deichmann. In this case, a consumer will never to consider much about the price of the other store on a certain product of interest. It can be noticed that pricing has become a standard aspect of both shops. Certainly, there was a collusion of price between the two identified shoe shops in Aachen Germany. In this case, it will be harder for a shop to dominate over the other. The easiest way to stand a cut above the other is to employ the choice of pricing strategy. This is another way of saying on how to break oligopoly. According to Tom and Ruiz (1997), pricing strategy is one important aspect a retail store must make for it to be competitive and increase revenue. Gucci is very price sensitive at consumers’ end. However, according to survey, respondents are creating a certain trust on Gucci only then they have to put into consideration their income when deciding to buy a pair of shoes. However, as stated by income effect, consumers are most likely to go buying products they can afford. In this case, Gucci needs to lower a little bit its price to compete the demand for Deichmann. Perhaps, this sounds as good to be true. However, pricing Gucci as expensive is how it is being defined as brand of designer shoes. This brand is primarily preferred by respondents but they intend to defer purchase because of its higher price. It is clear that Gucci is bringing an impeccable quality standard for it has been the top preference of respondents without considering the price. This standard is highly defined by those who can afford to buy Gucci with its corresponding price. The mere reason why Gucci will never come to a point to exceed the sales volume of Deichmann is because customers are clearly looking for cheaper products though. According to the research conducted by Kanhasiri (2005), customers are looking for cheapest shoes and then come to choose the one with a better quality. This remains a challenge in the case of Deichmann for it has to remain to lower down its price yet still give an enduring quality. Conclusion This paper emphasizes that preference of a certain product does not mean to end up right away into purchase. Somehow, customers have to think the budget they have at hand. This proves the income effect. Since Deichmann is cheaper compared to Gucci, it turned out that it is a substitute product as measured by the elasticity coefficient of cross price elasticity of demand analysis. This further proves the concept that cheaper products are most likely become substitutes. However, customers are not only trying to limit their criteria on cheaper products. They would also try to look for the quality, their personal preference and taste and the latest trending of fashion in line with the decision to purchase a pair of designer shoes. This is highly evident when majority of the respondents preferred Gucci when unconsciously price was not considered at hand. It is somehow evident that when deciding to sell two similar pairs of shoes from two different labels at two completely different prices in the same area, one has to focus on both customers’ preferences and income. Focusing on customers’ preferences and income will at some point give competence to each produced product in the market. References McConnell, C. & Brue, S. 1993, Economics, 12th edn, McGraw-Hill, USA. Hirschey, M. & Pappas, J. 1996, Managerial Economics, 8th edn, Dryden Press, USA. Tom, G. & Ruiz, S. 1997, ‘Everyday low price or sale price’, Journal of Psychology, vol. 131. Kanhasiri, C. 2005, ‘Factors affecting the consumer’s decision on buying shoes’, Thesis, [Online] Available at: http://library.utcc.ac.th/onlinethesis/ onlinethesis/M0227906/M0227906.pdf Appendix A Questionnaire Dear Respondent, Greetings! I need to write an Extended Essay as a part of my IB-Diploma. My chosen topic is about the two similar pairs of shoes, Deichman and Gucci. In line with this, may I just ask a little of your time for my research by answering few questions below. Rest assured that the information you will write will not be disclosed since I will treat it with utmost confidentiality. I appreciate your time for this and look forward to your favorable response. Thank you! Name: (Optional) ______________ Monthly Income: ________ Age: _________ Profession: _____________ Gender: _________ 1. Which among of the two brands of shoes you prefer the most? a. Deichmann _____ b. Gucci _____ 2. Which among of the two brands of shoes is closest to your taste? a. Deichmann _____ b. Gucci _____ 3. Which among of the two brands of shoes you think is most fashionable? a. Deichmann _____ b. Gucci _____ 4. Which among of the two brands of shoes you are most likely willing to pay? a. Deichmann _____ b. Gucci _____ 5. If the price of Deichmann increases, will you still be willing to buy it? a. Yes _____ b. No _____ 6. If the price of Deichmann increases, will you be willing to buy Gucci? a. Yes _____ b. No _____ 7. On the other hand, if the price of Gucci increases will you still be willing to buy it? a. Yes _____ b. No _____ 8. If the price of Gucci increases, will you go buying for Deichmann instead? a. Yes _____ b. No _____ 9. Are there any things that if the prices will increase your choice to buy for shoes is affected? a. Yes _____ b. No _____ 10. If you answer “Yes” to question number 7, please write as many related products as you can that will definitely affect your buying decision for shoes. ______________________________________________________________________________________________________________________________________________________________________________________________________ 11. If the prices of these related products you listed in question number 8 will increase, will you still buy Gucci? a. Yes _____ b. No _____ 12. If the prices of these related products you listed in question number 8 will increase, will you still buy Deichmann? a. Yes _____ b. No _____ Once again, thank you very much! Read More