Demand refers to the willingness and ability of consumers to buy a product. It consists of the above two aspects which form its basis. The consumer must first express the desire for the product followed by the capability to acquire the commodity. This is in relation to the current economic situations in the market. The buyer evaluates his/her current financial status and then makes the decision to purchase the product. The determinants of demand for a given commodity include its price, the level of income, anticipation of future price changes, tastes and the preferences of the consumers and the price of related commodities including complements and substitutes (Krugman & Wells, 2005).
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The law of demand relates the demand of a commodity to its price. It states that the demand of a particular product increases with the fall in the price of this commodity whereas it decreases with the rise in the price of the commodity. This only applies if all the other factors that affect demand like the tastes and preferences of the consumers, income of the consumers and Government policy remain constant, that is, ceteris paribus. A normal demand curve always has a negative gradient. However, the curve can have a positive gradient in case of addictive goods, goods of ostentation and giffen goods.
The elasticity of demand is the responsiveness of the demand of a commodity to the change in any of the factors affecting it. Price elasticity is caused by the fluctuations in the price. It is the proportionate change in the quantity consumed after a given change in price. Other types of elasticity include income elasticity, cross elasticity and point elasticity.
The personal cellular service in Canada represents a relatively steady market. Despite the increases in the communication charges, the consumers still have the desire to acquire for such services. This is because the market is being controlled by only three firms, Rogers Communication, Bell Canada and Telus Corporation. The policies made by these companies force consumers to pay high prices for the communication services received. The long term contracts also lead to the guaranteed customer base for each of the companies (Perloff, 2008). Since communication is a very important aspect of the business, further increases in price will lead to minimal decreases in the demand for such products. A decrease in the communication charges will lead to a minimal increase in the demand for the services. This is an epiome of an inelastic demand curve since any changes in the price of this commodity leads to a less proportional change in the demand.
Koodo’s new low pricing policy will tend to increase the demand for its mobile technology. This is because the cell phones are portable easing the movement from one place to the other especially among the young generation of the population. The technology has for a long time been dominated by the oligopolists whose terms are a bit stringent.
Koodo plans to reduce the initial charges to as low as $15 which will allow the majority of the population especially the low income earners to access these services. There will be no charges for system activation and monthly system access maintenance. Since this is a competitor product, there will be a shift in the demand curve of the other non- mobile companies like Roger to the left representing a reduced demand for its telecommunication services. However, Koodo will experience an increased demand because its systems are easy to use and the prices are very attractive to the consumers. The Tab is also a unique feature that enables one to easily purchase mobile phones and thus enlarging the customer base. The demand curve for Koodo will shift to the right due to the increase in demand thus increasing the market equilibrium point.
Koodo will also be at a position to outdo its direct competitor Rogers assuming that Rogers will not respond immediately to Koodo’s actions of reduced prices. In the short run, the above scenario will best apply. In the long run, Rogers may decide to provide more competitive services which will reduce Koodo’s demand. Other new companies may also join the industry and offer better incentives to lure the consumers thus reducing Koodo’s market base (Krugman & Wells, 2005).
Koodo will however face several challenges in the attempt to keep the communication charges low. This company may end up suffering losses in case large companies enter the market and where the prices offered are lower than those of Koodo. This is due to the fact that Koodo will be forced to reduce its prices further. It is also considered a challenge if the competitor company offers more efficient services. Such losses will have an effect in reducing the net-worth of the business.
The company is also obliged to install a robust system to enable this new strategy to be implemented. It requires very sophisticated machinery, technology annd skilled labor which may, in the long run, be expensive. These costs may be further be exacerbated by the intense product promotion strategies which need to be done by Koodo to create awareness of the consumers on the reduced prices. Such will lower the profit margin of the business (O'Sullivan & Sheffrin, 2003).
With reduced profit, the shareholders will not be able to get the best return for their investment. These aspects include the earnings per share and the dividends per share. Koodo is likely to be adversely affected by the hard economic times during moments of economic recession. This leads to increased cost of the inputs required in the provision of its services predisposing to losses.
Koodo is also at risk of losing most of its customers in case it attempts to increase its prices above the initial. Such a decision can be triggered by the increase in the production costs. When the consumer loyalty is compromised by intense competition, Koodo will experience a reduction in the number of its consumers.
Reduced prices are best supported by large companies which enjoy production economies of scale. If Koodo is not large enough, it may face challenges in maintaining such prices. The management should also be able to come up with strategies to maintain customer brand loyalty. This is only possible with high level of creativity by high profile managers who may be too costly to hire (Perloff, 2008).
By Telus introducing Koodo as an independent brand, it may face several challenges. Immense advertisement costs may be used in creating consumer awareness of the new product. The consumers always tend to refrain from consuming a new product especially if its advantages are not yet known. If Telus introduces this new product as interrelated to it, the customers who are already loyal to it will tend to have trust in this new mobile technology. Because of its better incentives, other consumers will be attracted to the use of this new technology. The resources used by Telus can also be easily integrated into Koodo because the two are deemed to be one. As the manager, I would have retained the Telus brand name based on the above reasons. However, the change in name can also be justified in case the current company, Telus, has lost reputation from the public in Canada. This will give Koodo an upper hand in winning the public image and consumer loyalty. Koodo will thus offer effective customer service to attract public trust. This will enable it make immense sales.