Will Bury Digital Books Business Proposal ECO/561 June 7, 2010 Will Bury Digital Books Business Proposal

This business proposal is created to provide recommendations to Will Bury (Bury) in an effort to increase revenue and the associated ideal production levels for Bury. Included will be associated recommendations to assist Bury in adjusting fixed and variable costs to maximize profit while identifying methods to reduce costs. This proposal will include the processes used in creating the recommendations and some economic concepts relative to the recommendations. Assumptions made about FGI and its values as a foundation for the recommendations will also be included. Will Bury Overview Will Bury is an enterprising inventor who, for the past few years, is operating out of his garage. Bury has a proprietary technology he has developed and patented, which takes the printed word for text materials and creates a file with the option of reading it digitally or listening to it with a realistic synthetic voice. Bury has free access to books no longer under copyright protection, and estimates that there will be royalty fees of $5 per title for copyrighted books. Obtaining the royalty licensing will greatly expand Burys catalog. Bury is currently shorthanded with many tasks required of him; such as scanning books into the patented digitizer and securing licensing rights to books (University of Phoenix, n.d.). This proposal will detail the actions that should be taken under current (and presumed) circumstances. Future actions will be identified to illustrate efficiencies, changes in pricing, and production levels. Will Bury Assumptions To prepare this proposal, certain marketing and function assumptions must be utilized. These assumptions are loosely based upon the Will Bury Scenario and are as follows: Bury is using patented product and has no competition in his market. Will Bury needs an assistant but will take 6 months to hire and train. For every $1 the older books drop in price, the demand increases by 25%. For every $1 increase in new book prices, sales increase by 10%, to $18, where sales decrease 25% per $1 increase. For every 100 new books (royalty books) supplied to purchase, sales increase by 10% Between two people, approximately 10 books can be brought to market daily, or 200 per month. The above identified assumptions are being used as currently understood research. Recommendation Process The recommendation process starts with identifying the companys market situation. Identifying the market then allows the pricing strategy to take place, maximizing revenue, and profits. Once the costs are known and separated into fixed and variable, charting can take place to graph marginal revenue and cost, average total variable, fixed and total costs . Bury can use the charting to identify optimum price and quantity information. As part of the business proposal, certain actions in which recommended, including hiring an assistant. Increasing Revenue In order for Bury to develop a successful pricing strategy, Bury must understand all of his production costs (which will be discussed later). Bury has just established a website to start sales. Currently, the expired copyright and older books are selling for $10 per book and the

newer licensed books sell for $15; having sold 1,000 and 2,000 books respectively (University of Phoenix, n.d.). The challenge with increasing revenue is to establish the pricing for each of the two types of books to maximize revenue. As Bury is operating with a patented product, he is effectively running as a monopoly until competition creates another digital converter (without infringing on his patent) or Burys patent term expires. As a monopoly, Bury has price-setting power, but cannot charge a price that the market cannot bear (tutor2u, n.d.). Diagram 1 illustrates monopoly profit revenue and cost curves, and indicates economic profit: [pic] To maximize profits, and increase revenue, Bury needs to establish the individual prices in which marginal costs = marginal revenue (McConnell, Brue & Flynn, 2009). It is clear that Burys customers will pay more for newer books (greater numbers sold at higher prices than the older books). Bury also knows that CD books are priced in the $20 range. Therefore, Bury can start considering raising the prices on the new books and see if it can hold the demand. At the same time Bury should not eclipse the $20 range as then he is moving into the CD book market, which is not his desire. He can also start lowering prices on the older books to see if that will increase demand changes. However, to use Diagram 1, above, Bury has to understand his costs, both variable and fixed; then use the cost and pricing information to establish his ideal production levels. At this time, it is recommended that Bury increase royalty books to $18 each and lower the price of the non-royalty books to $5. Diagram 2 in the production level section illustrates the maximization of revenue. Fixed and Variable Cost Adjustments It is recommended that Bury identify all of his fixed costs (costs that do not change with output) and variable costs (costs that change with the level of output) (McConnell, Brue & Flynn, 2009). Currently, Bury knows that there is a variable cost of $5 per book on copyright material for which he has licensing agreements and zero on the older books outside of copyright protection. Currently, this is the only cost he has quantified as he has not put a value on his time nor sought assistance. It is recommended that Bury hires an assistant $40,000 per year he can hire an assistant (includes taxes and benefits), purchase $14,000 in computer equipment, and also decides to pay $6,000 per year in advertising (to start), he will have $60,000 of fixed costs, or approximately $7,000 per month in fixed costs. His variable costs, for now, remain at $5 per new book. Ideal Production Levels Based upon the known assumptions at this point, raising the prices of royalty books to $18 generates the greatest revenue for this book-type. Conversely, lowering the royalty-free books to $5 returns the greatest revenue. Diagram 2 below lists the pricing calculation. [pic] These target prices will then require that future production is split between each type of book on an approximate 75% to 25% split between royalty books and royalty free books. Further study will have to be performed upon production levels and pricing as supply increases. Cost Reduction Methods The key to cost reductions are identifying the key areas of production and focus on alternatives to the current system. Currently, Bury is working with very low costs. With the addition of the assistant, Bury can perform more high-level research and development in the

hopes of creating new technology to decrease production times, possibly further enhancements to the product (new products, more differentiation), and create multiple language products. Outsourcing the production will create another variable cost, but possibly allow Bury to cut the assistant back to part-time, thereby lowering fixed costs and modestly increasing variable costs. This approach will be good in terms of increased production and lower per unit digital conversion costs. The more content available for the consumer, the more entrenched Bury can become in the market before the competition enters. Bury can also attempt to re-negotiate more favorable terms with the copyright holders. Bury is the new leader in the market and can attempt to use his power to reduce costs (McConnell, Brue & Flynn, 2009). Conclusion and Values Implementing this business proposal will assist Bury in moving to the next level of business operation and management. He will have address the fundamentals of creating pricing, identifying costs and production levels at the first main roll-out of the lower cost digital books market. Bury will have addressed the differences in demand and pricing between the two types of books (royalty and non-royalty) and can adjust production levels as costs are reduced, new technology becomes available and possible royalty reductions are implemented. This is an ongoing process. Undoubtedly, competition will enter the market. One of Burys main goals is to establish a loyal and solid market share and prepare himself for increased competition. Determining the businesses values of Burys business is difficult in such an early stage. Bury is a hard worker, wants to do what is right for the business and does not appear to want to cut corners in order to get the business successfully launched. He also appears to be honest in the development of the patented digitizer and providing a good product. References McConnell, C. .R., Brue, S. L., & Flynn, S. M. (2009). Economics. principles, problems, and policies (18th ed.). New York, NY: McGraw-Hill Company. tutor2u. (n.d.). Price and output under a pure monopoly: The monopolists demand cure constraints on monopoly. Retrieved from http://tutor2u.net/economics/content/topics/monopoly/monopoly_profits.htm University of Phoenix. (n.d.). Thomas money service scenario. Retrieved from University of Phoenix, ECO561 website.