STRAYER UNIVERSITY Managerial Economics 550 ASSIGNMENT 1 Making Decisions on Demand and Forecasting For Domino’s Pizza Vernessa Blackwell Professor Lundondo Mumeka January 24, 2013 Introduction A demand analysis is a very vital tool when a company is starting a new venture in a new market or when it needs to introduce a new product in the market. It would indeed be impossible to forecast the profitability of any business venture without analyzing the demand and the sensitivity of the industry and more so based on the location that the company would wish to venture in.
Many companies have failed to meet their goals after ignoring this vital component and commencing operations without the adequate information about the market and the industry. Since the sole purpose of any business organization is to provide products and services that add value to the lives of their customers and at the same time earn profit, it important to study the dynamics of the market and to formulate strategies that will help the company achieve its goals and objectives.
Domino Pizza, an internationally renowned establishment, cannot fail to conduct a demand analysis as it ventures out in Waldorf area. Failure of this venture would negatively affect the company`s image and would also be a huge financial loss as setting up operations requires a lot of capital to pay the contracted workforce, pay for advertising expenses ,pay rental fees and also buying the needed supplies. Domino`s has decided to venture out in Waldorf because the prospects look promising and the company hopes to entrench it presence in the area but only the demand analysis will reveal hether the company`s optimism is well founded or if should abandon this venture and choose another location. The variables that will be used to conduct the demand analysis include price, income, size of the population, competition and also the effect on advertising on demand (Mohaupt & Citizens Research Council of Michigan. , 1945). Domino`s will need to set the price of its products at a certain margin that will enable the company attain its profit margin and at the same time appeal to its target market.
Price determines the success or failure of a business venture because it directly affects demand. If Domino`s sets the price of its products too high, it will reduce the demand for its products especially if the customers feel that there are other places where they can get a better bargain. However, when it comes to food, the factor of quality also comes into play. Most people will be unwilling to purchase food that is of low quality just because the price is low. The company should therefore strive to achieve a balance between quality and fair pricing.
Being a reputable brand name, the company can also exploit its high standing amongst customers and set its price higher than those of the local Pizzerias because customers already associate the company with high quality thus they will be willing to pay more for their food (Detroit Free Press Co. , 2002). Domino`s managers also have to analyze the price and availability of substitutes for its products because they are what the customer will opt for when they do not purchase the company`s products.
The availability of many substitutes will lower the demand because customers are not dependent on only one product and have the freedom to explore other options, thus there is a deficit of potential customers when they choose to consume the substitutes. Price of these substitutes also pays an important role in demand because if the price differential is large, demand will be reduced. Income is another variable that will affect demand. The average income of the residents in the proposed location is a critical factor. It determines the market`s buying power and thus the amount of money that they are willing to spend on products and services.
When Domino`s decides to venture out in Waldorf, the pertinent question is: Does the city have a substantial number of potential clients who can afford Domino’s products? Low income population will be particularly sensitive to price and may be unwilling to buy if they feel that the price charged is too high (United States Bureau of the Census, 2002). A high income will make the market less sensitive to price because they have an increased buying power and may even be willing to pay more as long as they are guaranteed of good quality.
Advertising will disseminate very useful information to the potential customers. It will affect demand by creating an awareness and interest in the company`s products. It helps the company communicate potentially attractive attributes of its products that are superior to those of its customers. Domino`s needs to conduct extensive advertising before it opens its doors to the people of Waldorf. This will make the people anticipate the company`s commencement of operations and mentally influence their interest in its products and consequently influence their demand for Domino`s products.
The size of the population also has huge impact on demand. There has to be enough number of people for a business venture to be successful and attain good levels of profitability. A large population will avail to the company a sizable and diverse target market and will also enable the company to benefit from economies of scale. Apart from the size of the size of the population, it is also important for Domino’s to analyze the change in the population; is the population expected to increase or is it expected to diminish?
A big population is good for business but if it is projected to decrease with time, the company should foresee a risk in its future operations. Competition cannot be left out when conducting a demand analysis. A high level of completion is good from the customers` perspective because it regulates price and quality but from the perspective of the business enterprise, a high level of competition presents extra challenges. Domino`s will find other establishments in the area that have already established their market share and won the loyalty of their customers.
If there are many competitors, then the level of demand will because customers will enjoy abundant supply and will be under no pressure to buy more. Domino`s therefore needs to formulate a strategy to counter the competition and establish a large market share. For Domino Pizza to venture in Waldorf, Md it is wise for us to investigate the trend and the hotel market more so in ‘making and delivery of pizzas’. In this analysis, the data to be used has been collected of the last ten months from major fast foods in the area.
Independent factors include: Number of pizzas consumed each month, price of pizza at each month, associated costs such as advertising costs, household income, and demographic factors like population- we don’t expect the population to change much over the months. Other demographic factor such as the average age of the population doesn’t matter since pizzas are consumed by people of all ages. On performing a regression analysis of sales against all the other independent variables, it is found that 94. 5% of the sales of pizzas in each month show a linear relationship between the dependent and independent variables. This means that the independent variables contributed to about 94. 25%. when the data is fitted into a line of fit, Domino’s should expect a sale close to $ 0. 7 Million per month given the fact that it is a big company and hence will be able to enjoy the benefits that comes with economies of scale. By testing at 95% level of significance, it is worth to point out that the market is greatly influenced factors like quality of the pizzas and the implemented customer satisfaction elements.
These two factors are important in improving the coefficient of determination. For any fast food company to excel in the industry, quality, timeliness of delivery, and customer care are some of the factors that must be considered. Price in this is not a major sales determinant. The projections for the next four months are 654500, 750985, 701457, and 791254. This means that if we dwell on the assumption that all factors remain constant or change at the same rate, Domino Pizza will be able to make substantial sales in Waldorf. References
Economic map of Waldorf city and retail trading area by census tracts Average household income (Source: National Planning Data Corporation). Saint Mary’s, Calvert, Charles counties [1 map :]. Mohaupt, Rosina K. , & Citizens Research Council of Michigan. (1945). Social and economic rating of Maryland census tracts. Detroit: Detroit Bureau of Governmental Research. United States. Bureau of the Census. (2002). United States exports of domestic and foreign merchandise: commodity by country of destination. [Washington]: U. S. Dept. of Commerce, Bureau of the Census; for sale by the Supt. of Docs.