A Low-Priced Alternative Fashion Shoe and an Expensive Branded Item - Research Paper Example

Research Question: Can a cheap alternative fashion shoe compete with an expensive branded item? INTRODUCTION Deichmann and Gucci are two completely different designer brands of shoes that are subject to customers’ choice. Deichmann shoes are low-priced compared to Gucci. In just a single look, one cannot be certain which of these brands is preferred more by consumers, since there are many factors affecting customers’ choice of purchase. In this paper an evaluation will be undertaken whether a low-priced alternative fashion shoe can compete with an expensive branded item, by looking at the total sales volume per month of the two shoe shops in Aachen, Germany. Analysis using price elasticity of demand has been employed. In addition to it, to check for the presence of any substitution effect and the probable relationship between these two designer shoes, analysis on the cross price elasticity of demand has been implemented. This paper also discusses the result of a survey conducted with respondents to gain their opinion about the two commonly and widely accepted designer shoe products. Most of their answers were substantial to the analysis and in fact, they helped to further justify the result of cross price elasticity and price elasticity analysis. The focus of this paper is to answer how two similar pairs of shoes from two different labels can be sold at two completely different prices in the same area. Gucci Shoe Deichmann Shoe Just by looking at the pictures, one cannot differ from shoe to shoe. What is the difference to cause such diverse pricing? Answering this question requires analysis and most importantly, substantial methodology prior to evaluation and analysis of information. The following is the discussion of the methodology employed in this paper. METHODOLOGY This paper is research work to examine how Deichmann and Gucci, the two widely known brands of designer shoes can be sold at two completely different prices in the same area. To gather sufficient information in line with the analysis, the follow undertaking of data and information gathering was completed. 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 which support the analysis. 4. Tabulation of information and computation using the following: a. Price elasticity b. Cross price elasticity c. Graphs d. Tables In calculating 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. DATA AND ANALYSIS The Respondents A survey of 100 female respondents who were able to answer the questionnaire was undertaken. These respondents are primary sources of information in support of the results obtained from price elasticity analyses. Income 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 consider their budget or income and ultimately will end up buying the product they can afford. However, a major factor being held constant over here is the availability of credit in the economy, which is found to be low, accounts for a preference to buy the cheaper good despite the person earning a high income. In Table 1, 30% of the respondents have a monthly income of € 7,000 and over. About 70% of respondents have monthly income under € 7,000. Moreover, 62% 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% of the respondents in the sample (or rather, 60% of the people with income € 7,000 & over) are willing to buy Gucci. This also suggests that despite having income of more than € 7,000, the remaining 40% of the people belonging to the same income group are still willing to buy Deichmann. Table 2 classifies the sample units being surveyed according to their ages. It is found that 48% of the respondents surveyed were of aged between 21 and 30 years. As presented in Table 1, most of those who are willing to purchase Deichmann are the people earning below € 7,000 per month. As presented further in Table 2, it shows that 45% of the respondent intent to buy Deichmann, are aged between 21 years and 30 years, thus implying that people belonging to this age group have a high probability of earning below € 7,000 per month. The survey further finds that respondents aged above 31 years are most likely willing to purchase Gucci. Hence, it can be said in a similar way that people earning € 7,000 and above belong to the latter age group. Taste and Fashion It may also suggest that the choice of shoes is somehow connected with age. As in the case presented in Table 2, those who are strongly willing to go for Gucci are aged over 31 years. However, it might be true only for the respondents belonging to the higher income bracket. Whether the choice of shoes is influenced by age or not still remains undetermined or unjustifiable. In fact, when asked to name the more preferred brand, 57% of the respondents’ answers are in favor of Gucci, as has been presented in Graph 1. GRAPH 1 GRAPH 2 Most preferred shoes Shoes closest to taste GRAPH 3 GRAPH 4 Most fashionable shoe Number of respondents willing to pay for their shoes of choice. 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, 59% of the respondents believe that Gucci is closer to their taste. In fact, it cannot be ruled out that somehow their tastes are influenced by the prevailing fashion trends. As also presented in Graph 3, 69% of the respondents believe that Gucci is more fashionable than Deichmann. Though it might seem that Gucci is the more desired brand among people, but customer preference after all does not necessarily mean an indication of convertible purchase as willingness is only one half of demand. In fact, when asked which among Gucci and Deichmann they are willing to pay for, 75% of the customers answered the latter as what they can afford to buy. This information has been 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. Price Elasticity of Demand The discussion so far also throws some light on factors affecting the ability component for demand of respondents to purchase designer shoes. In this section, the issue of price will be in focus so as to come up with information that will measure the responsiveness of sales volume to price changes 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). Arc Elasticity 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). Cross Price Elasticity 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 has been employed in this study is to discover if any substitute relationship among Gucci and Deichmann exists. Price Elasticity of Demand 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 for price elasticity of demand, where the formula for the same is, Price Elasticity of demand = [(Y1 – Y0) / (P1 – P0)] / [P0 / Y0]. 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 May 18 € 520 June 24 € 390 -1.33333 July 22 € 260 0.25 August 12 € 260 ∞ 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 May 23 € 520 June 20 € 390 0.521739 July 21 € 260 -0.15 August 11 € 260 ∞ Table 3 shows the values for the Price elasticity of demand at various prices and sales volumes. For instance, when the price falls from € 520 in May to only € 390 in June, a 1% change of Gucci’s price, results to a 1.33% rise in total sales volume per month in Shop 1. This is a case for elastic demand. According to Hirschey and Pappas (1996, p. 186), an elastic demand affects revenue in a multiplicative way, since, it lowers it by a proportionally higher extent 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 changes by the same proportion so that ultimately, the revenue is unchanged (Hirschey & Pappas 1996, p. 187). The above statements imply that a fall in price of a good with an elastic demand should lead to an increase in revenue and vice-versa. This only strengthens the non-price factor of fashion. The above concepts clarifies that the revenue of Shop 1 rises from May to June, when theoretically it should increase, due to the Non-price factor of Fashion. This conclusion is rather remarkable given the comparatively high price of Gucci products and its having a large number of substitutes in the market. This means that change in the price of Gucci leads to a more than proportionate change in quantity demanded. However, the elasticity coefficients for Shop 2 are found to be lower than 1 but greater than 0, implying that a fall in price will lead to a fall in the demand for shoes in the shop. The results from the above two tables suggest that the demand for Gucci products are more dependent on non-price factors, since a fall in price is not corresponded with a rise in demand in both cases, as must be the case for a normal commodity. 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 May 24 € 19.90 June 31 € 19.90 ∞ July 33 € 19.90 ∞ August 24 € 14.90 1.085455 Cross Price Elasticity of Demand It is of interest to find out if the change of price in Deichmann will lead to a 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 elastic, where Cross price elasticity of demand is calculated as, [(Y1Gucci – Y0Gucci) / Y0Gucci] / [[(P1Diechmann– P0Diechmann) / P0Diechmann] 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 May 19 € 19.90 June 32 € 19.90 ∞ July 29 € 19.90 ∞ August 18 € 14.90 1.509655 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 May 18 € 19.90 June 24 € 19.90 ∞ July 22 € 19.90 ∞ August 12 € 14.90 1.809090909 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 May 23 € 19.90 June 20 € 19.90 ∞ July 21 € 19.90 ∞ August 11 € 14.90 1.895238 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 May 24 € 520 June 31 € 390 -1.16667 July 33 € 260 -0.19355 August 24 € 260 ∞ 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 May 19 € 520 June 32 € 390 -2.73684 July 29 € 260 0.28125 August 18 € 260 ∞ It is shown in Tables 5 and 6 that the price elasticity coefficients between of Deichmann fall under the category of elastic demand. The trend was consistent in two shops. This means that the price change of Deichmann will lead to a greater change in monthly sales volume for Deichmann in both the shops. As shown in Tables 7 and 8, both shops have consistent trend of the Deichmann’s price change having a high impact on the total monthly sales volume for Gucci. However, a different result was noted when Gucci’s price is to be changed. In Table 9, the fall of Gucci’s price from € 520 to € 390 has significant 1.16% rise in the total sales volume of Deichmann in Shop 1. In the same way, this price fall has significant 2.73% rise in the total sales volume of Deichmann in Shop 2. This is an interesting result since, with people desiring Gucci more than Deichmann, a fall in price of the former will be accompanied by a fall in the volume of sales of the latter, with both the products being normal in nature. However, the contradictory results can be explained by a number of non-price factors like market competition and economic conditions. Due to market competition, a fall in Gucci prices is concurrent to a fall in the prices of its rivals. But, given, the price of Diechmann, the result can be accounted to some external market condition, viz., recession, which compelled people to shift their preference from Gucci to Diechmann, despite the fact that the former had lowered its price. With both the brands dealing in normal commodities and substitutes of one another, a contradictory result as has been attained above, easily clarifies the fact that there is no such relation between the price of the products of one brand and the volume of sales of the other, and most of it can be accounted to non-price factors. 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. Related Products It came out in the survey that some respondents’ choice to buy shoes is affected by the following non-price factors. Shoe care products Shoe repair charges Plasters Soles of shoes The survey also revealed 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. 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. 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 increased. 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 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 considering its price, more respondents prefer to buy this designer brand of shoes. Analyzing demand is one important step in consideration with the distribution and manufacturing of goods. Substitution effect Again, with external factors remaining unchanged, there might be a significant impact of price change of one product on the sales volume of its substitute and this is known as 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). So, substitution effect says that if Deichmann is cheaper than Gucci, there is a good chance that the greater demand will fall on Deichmann. Diagram 1 Diagram 2 Diagram 3 Legend P=Product Q=Quantity D=Demand S=Supply Deichmann=Blue Gucci=Green Diagram 1 shows a general quantity with supply and demand. Diagram 2 could have Deichmann as the blue line and Gucci as the green line. Deichmann in Diagram 2 is more in demand due to lower prices. This raises Deichmann’s supply to meet the demand. Gucci’s demand and supply is reduced in this scenario. Diagram 3 illustrates how Gucci’s quantity is more than Deichmann’s due to the level of demand, if the numbers of sales were different. 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. A consumer always considers the price of the other store on a certain product of interest while taking the decision to buy. It can be noticed that pricing has become a standard aspect of both shops. Certainly, there was a similarity in 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 the consumers’ end. However, according to the survey, respondents hold a certain trust on Gucci irrespective of their income. However, as stated by income effect, consumers are most likely to buy products they can afford. In this case, Gucci needs to lower its price a little bit to compete with the demand for Deichmann. However, this sounds too good to be true. Gucci’s expensive pricing is part of its positioning as a 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 standard of quality for it has been the top preference of respondents when price is not considered. This standard is highly defined by those who can afford to buy Gucci with its corresponding price. Hence, 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. According to the research conducted by Kanhasiri (2005), customers first look for cheapest shoes and then decide to choose the one with a better quality. This remains a challenge in the case of Deichmann for it has to maintain a low price and still give an enduring quality, to satisfy its customers. Conclusion This paper emphasizes that preference of a certain product does not mean the purchase is made immediately. Customers have to consider 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 to be substitutes. However, customers are not only trying to limit their criteria on cheaper products. They would also look for the quality, their personal preference and taste and the latest fashion trend in line with the decision to purchase a pair of designer shoes. This is highly evident when majority of the respondents preferred Gucci when price was not a factor under consideration. It is 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 at some point gives an edge to each product in the market. Bibliography Arnold, R. A. (2008) Economics (9th Edition). USA: South-Western Cengage. Read More