Many new businesses intentionally operate in the red during their inaugural year, offering lower initial pricing while building a strong customer base.

QUESTION

Many new businesses intentionally operate in the red during their inaugural year, offering lower initial pricing while building a strong customer base. Examine the business model, performance, and pricing structure for an existing business that started operations within the last 24 months. Using contribution margin and variable costing, analyze their ability to break even. Will they survive in the long term?

Compose your research in a 3-4 page APA style analysis. Include your references. Include a cover page, and references.

ANSWER

Analyzing the Business Model, Performance, and Pricing Structure of a New Business: A Long-Term Survival Perspective

Introduction

Starting a new business is an exciting venture, but it comes with various challenges, particularly in achieving profitability and long-term sustainability. Many new businesses deliberately operate at a loss in their inaugural year, adopting a strategy of lower initial pricing to attract customers and build a strong customer base. In this essay, we will examine the business model, performance, and pricing structure of an existing business that commenced operations within the last 24 months. Using the concepts of contribution margin and variable costing, we will analyze their ability to break even and assess their prospects for long-term survival.

Business Model and Performance

To understand the viability of the business, it is crucial to evaluate its business model and performance indicators. The business model encompasses the strategies, value proposition, target market, and revenue streams. Additionally, performance indicators such as revenue growth, customer acquisition, and market penetration provide insights into the business’s progress.

Pricing Structure

The pricing structure plays a vital role in a new business’s success, especially when aiming to build a strong customer base. Offering lower initial pricing can attract customers, create brand awareness, and encourage repeat purchases. However, it is essential to assess the sustainability of this pricing strategy in the long term, as it impacts the business’s ability to generate profits and cover costs.

Contribution Margin and Variable Costing Analysis

To evaluate the business’s ability to break even and sustain profitability, the concepts of contribution margin and variable costing are valuable tools. Contribution margin represents the revenue remaining after deducting variable costs directly associated with the production or provision of goods and services. Variable costing isolates variable costs and highlights their impact on profitability.

By conducting a contribution margin analysis, we can determine if the business’s revenue generated from each sale is sufficient to cover its variable costs and contribute to fixed costs. If the contribution margin is positive, it indicates that the business has the potential to cover its variable and fixed costs, break even, and eventually achieve profitability. However, a negative contribution margin suggests that the business is incurring more costs than it generates revenue, which can lead to financial challenges and hinder its long-term survival.

Long-Term Survival Prospects

Based on the analysis of the business’s contribution margin and variable costing, we can assess its long-term survival prospects. If the business can consistently achieve a positive contribution margin and cover its costs, it indicates a healthier financial position and a greater likelihood of surviving in the long term. However, if the business struggles to maintain a positive contribution margin, it may face challenges in meeting its financial obligations, sustaining operations, and ultimately surviving in a competitive market.

Conclusion

Analyzing the business model, performance, pricing structure, and financial aspects of a new business that started operations within the last 24 months is crucial for understanding its ability to break even and survive in the long term. By employing contribution margin and variable costing analysis, we can assess the business’s profitability potential and its capacity to cover costs. While offering lower initial pricing can help build a strong customer base, it is essential to ensure that the business can achieve a positive contribution margin to sustain profitability. Through a comprehensive evaluation of these factors, stakeholders can make informed decisions and develop strategies to support the long-term success and viability of the new business.