Liza Davis Case Questions

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Sale period cost: This is considered as it is specifically indicated for the 60% discount price.

Shrinkage: This cost is considered as shoplifting, employee pilfering, and damage will be higher as more customers check the product for trials.

The operating margin at 60% discount is 1.3, which is still positive, and Liza Davis would like to sell as much as possible. In continuation, if the product is not sold in six months then it will be forced to liquidation which is more damaging as the operating margin further reduces to -$17.25. No cost is included in liquidation as a third party is responsible for removal of material from the retailer’s shop.

Based on the above information, it is obvious that the company has to perform remarkably well in order to increase profitability. Some of the steps Liza Davis can employ are:

- Effectively manage inventory before the discount period using ERP system

- Product Advertisement to improve full price sale

- Reduce inventory without upsetting full price customer

- Regarding the Liza Davis loyalty card, should the company use the card to incent or disincent the discount shopper? If so, how (what changes should be made to the loyalty program)?

Liza Davis should incentivize the discount shopper to sell as much product as possible, as any items un-sold after 60% price will be heavily penalized in the liquidation. The additional discount on of top of 60% discount will increase the temptation and buyers will be lured to purchase more to get bonus coupons of $25 dollars for every $500 spent. This strategy will help Liza to clear discount products quickly.

In our opinion Liza Davis should increase the amount for the bonus coupon to more than $25 dollar for the full price, and 25% price customers. This incentive will improve sales further as at full price and 25%, the price operating margin is higher.

Additionally, customers also earn point based on the operating margin. Once a customer accumulates 1000 and 5000 points, they earn additional discounts. In our option, this incentive is based on the amount spent so it is already proportionate to the spending, and no change is recommended.

- Calculate the “full” cost of a customer return. Is a more accurate calculation of the cost of a customer return useful to management? If so, how (what decisions would be improved with more accurate customer return cost data)?