An on-line retailer that sells home and children’s items, such as children’s furniture, clothing, and toys, was seeking a way to reach a new audience and stop the declining sales and revenue trends it was suffering. A market research firm hired by the retailer identified a new but potentially risky market: lower-income single parents. The new market seemed attractive because of the large number of single parents, but most of these households were severely constrained in terms of their monetary resources. The research firm proposed that the retailer offer a generous credit policy that would allow consumers to purchase up to $500 worth of merchandise on credit without a credit check, provided they signed up for direct payment of their credit account from a checking account. Because these were high-risk consumers, the credit accounts would carry extremely high interest rates. The research firm believed that even with losses, enough accounts would be paid off to make the venture extremely profitable for the on-line retailer. Should the retailer pursue this new marketing strategy? Why or why not?

An on-line retailer that sells home and children’s items, such as children’s furniture, clothing, and toys, was seeking a way to reach a new audience and stop the declining sales and revenue trends it was suffering. A market research firm hired by the retailer identified a new but potentially risky market: lower-income single parents. The new market seemed attractive because of the large number of single parents, but most of these households were severely constrained in terms of their monetary resources.

The research firm proposed that the retailer offer a generous credit policy that would allow consumers to purchase up to $500 worth of merchandise on credit without a credit check, provided they signed up for direct payment of their credit account from a checking account. Because these were high-risk consumers, the credit accounts would carry extremely high interest rates. The research firm believed that even with losses, enough accounts would be paid off to make the venture extremely profitable for the on-line retailer.

Should the retailer pursue this new marketing strategy? Why or why not?

 

 

Answer:

The new strategy targets the low income single parent.

The number of possible consumers thus increases. the demand in the market is thus likely to increase.

However, since the target group is a low income group, the strategy involves making available the product on credit. The credit policy involves the high interest costs (high due to the high risk involved) and also the loss likely in case of default.

In this stuation, the retailer should not pursue the new marketing strategy because in the best scenario, even if the payment through credit comes through the cost in terms of the high interest cost to be suffered by the producer is bound to happen thus reducing the profit margin even if the revenue is realized.

In the worst situation, the consumer may default on the payment and the producer is likely to lose the revenue from the sale.

The risk associated with the new strategy seem to be greater than the benefits and thus the startegy should not be prusued.

Asked on February 13, 2018 in economics.
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