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Marketing and elasticity for an aquarium

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"Listen, elasticity is important," said the director of the aquarium, "but we borrowed $21.6 million (for 20 years, other fixed costs are $10,000 per month; total fixed costs per month are $100,000) to build the aquarium last year. We need to set a price of $16 to be able to pay our debt since variable costs are four dollars per person, and we use a standard markup of 300% of variable costs (current price is $12). I've already reduced my promotion budget to pay the debt. If last month's attendance is any indication (only 10,000 customers), we will have to raise prices and maybe eliminate promotion. We can estimate elasticity when the debt is paid, although I don't think it is important since we are the only aquarium within 150 miles. Furthermore, there are 4,000,000 people in the metropolitan area. If 50% of them visited the aquarium once (at $16 per person), we could pay off our debt immediately."

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The Solution explains the importance in knowing elasticity of market in making pricing decisions.

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See attached excel file for calculations.

I don't necessarily agree with the director's approach to coming up with the price to charge, however, it turns out he is correct ...

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Robert Reinhart, MBA
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  • MBA, Merage School of Business, Univ of Cal, Irvine
  • BA, Univ of Cal, Irvine
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