Practise analysing sales revenue, revenue streams and the impact of business decisions on revenue using IB Business Management HL questions.
Cheap4U (C4U)
Cheap4U (C4U), a public limited company (plc), operates a successful low-price airline service. C4U offers a basic service targeting low-income families and students. It is positioned as offering the lowest price for a flight. Staff training for flights is on-the-job and C4U uses non-financial motivation such as job enlargement. C4U has recently experienced difficulty in recruiting enough flight staff. As a result, flight staff are overworked and there have been complaints by some passengers about poor service.
In 2013, C4U suffered its first loss in 11 years. C4U carried out a review and the following three issues were identified:
- given the staff shortages, C4U flights are often delayed or cancelled.
- some advertising for popular flights is considered to be unethical. For example, cheap one-way flights are promoted without stating that the return flight is twice as expensive.
- new low-price competitors are emerging, using newer and more fuel-efficient aircraft.
C4U is considering offering a new international flight service, Quality4U (Q4U). This service will only be offered at certain times. Q4U will target higher-income consumers by offering excellent aircraft facilities, free internet access and more comfortable seats. Four new fully equipped aircraft will need to be purchased. C4U's gearing ratio is rising at over 80 %. New sources of finance will be required.
C4U is also considering new methods of staff training for the new Q4U service:
- One new method of off-the-job training could be conducted by a hotel which is famous for its high quality of customer service. This new training method will increase C4U's costs at a time when its working capital is limited.
- Secondly, all flight staff will have to study for and pass an examination to meet international quality standards of customer service. C4U's senior management is insisting that staff study in their own free time. Flight staff have complained and have consulted their representatives about possible industrial action, as they feel that they are already overworked.
Explain how each of the three issues identified, could have impacted on C4U's revenue, leading to its first loss in 11 years.
The first issue might have irritated and frustrated customers who through word-of
mouth promotion and social media raised complaints, leading to a loss of goodwill. The delays and cancellation were perceived as poor customer service, it resulted in a fall in demand of existing customers as well as lower demand from new customers and hence revenue - informed through social media of the unreliability on the part of C 4 U.
The second issue is an ethical one. If the advertising is misleading and flight prices for return fares are deemed unfair, existing and new customers would have possibly transferred to competitors, leading to a fall in demand for C4U services and thus lower revenue for its flight services.
The third issue is the increase choice availability of substitutes / bargaining power of consumers. A larger number of competitors with higher efficiency levels are likely to result in customers being taken away from C 4 U, hence a fall in total revenue and profit.
Mark as 2+2+2 for each issue.
Award [1 mark] for application to C4U, award an additional [1 mark] for a developed explanation of how the fall in revenue / demand / sales could have occurred up to a maximum of [2 marks] per issue.
N.B. given the fact that this question is very easy, it is very important that the candidate actually explains how / why the total revenue falls / fall in demand / sales. It is also expected that for full marks, the candidates go beyond just copying the information from the stimulus.
Do not credit explanation of "increase in cost".