MLE Price Increase
Requirement 2 or 3 - Assessing the implications of a price increase
MLE Price Increase
Exam Likelihood: High
The Advance Information (Exhibit 7) has 2 pages devoted to price increases. There are also constant mentions of a price increase in other exhibits as well.
We believe this is one of the most likely routes the examiner will take in this exam and that it fits best as an R2. However, don't dismiss it appearing in R3 or even R1 if a price increase has already occurred during the year.
Our Mock Exam 1 and Mock Exam 4 have different scenarios relating to a price increase. Both of these mocks are deliberately set as slightly harder than the real exam, so if you can pass these you know you are in a great position ahead of the examination. Even if you do not have time to sit an additional mock exam, you would benefit from sitting a Requirement on MLE Price Changes and ensuring you can answer this quickly enough and cover sufficient points to pass the Requirement.
It is highly likely the Examiner will ask you to assess a price increase and draw a conclusion as to whether to
- Increase the cover price to below £10.00.
- Increase the cover price to above £10.00.
- Leave the price as it is and focus on spending advertising in attracting more subscribers.
- Increase one format more than the other (therefore changing the editorial policy and as this now become much more strategic in its nature, we could see a price change make its way into R3).
BEFORE READING FURTHER AND CERTAINLY BEFORE SITTING THE EXAM, YOU MUST UNDERSTAND THE FOLLOWING:
a) The Difference between Cover Price and Effective Price
b) Be able to work out a potential WEIGHTED Average Effective Price e.g. different pricing for different formats would result in a different EP for each format and therefore the weighted average EP would need to be calculated
c) Understand the time lag relating to a price increase e.g. the full financial impact of an increase will not be felt until the end of year 2.
The Calculation & Assumptions
If you are reading this on a mobile phone, turn your device landscape to better view the table!
The Examiner has not provided you with a nice formula or example calculation to follow. You need to understand how the price rise works from the Advance Information and then apply the new information given to you in the exam.
Make sure with the calculation you know the difference between Subscribers and Circulation. If the examiner tells you on average there were 175,000 subscribers, you need to multiply this up by 12 months to get the annual circulation. We have seen a number of students forgetting this step OR alternatively being given a circulation figure and multiplying this up by 12 in error! Sense check your figures!!
The items in red are points we would expect to be Applying Judgement more than SPS, however, we cannot guess a marking key in advance SO MAKE SURE YOU TAILOR OUR POINTS TO FIT WITH THE EXAM!!!
| Contract Terms | What to watch for | Challenging the Assumption |
| Circulation | 1. Do you need to use circ. figures from R1 or is the examiner giving you new figures? 2. Know your split between Print / Online from R1 if needed 3. Percentage change in Circ. following price increase 4. Be able to work out the Volume change (Movement in circulation x 2020's EP) from the Price change if required (Movement in EP x New circulation figures). If the total revenue increases then the price impact > volume impact. |
a. Circulation based on 2020 figures -> Unknown how 2021 volume would have changed with no price impact. This is especially true if in R1 circulation has been rising or falling towards the year end. b. Circulation based on a forecast using the existing EP - Again you can challenge this start point in the same way as (a) but also what is the basis for the forecast circulation. c. Volume change - Likely to be given as a % figure. You can challenge this by comparing to the 2017 (2.7% decrease / recovered in year 2). An important consideration is the advertising spend. So if volume is expected to be 2% and advertising is £800k you should be challenging this e.g. stating "The volume change and advertising spend are both lower than 2017, suggesting either an increase in Advertising ROI or suggesting the assumption maybe over-estimated." The volume drop and the advertising budget are both less than 2021. |
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Cover Price There is a link between cover price and circulation. We have treated cover price separately and we will cover Effective Price separately too |
1. The £10.00 barrier - Is the new price below (£9.99) or above (£10.00 or more). 2. An increase to £9.99 for the cover price and it is similar to historic increases. 3. An increase to £10.00 or more (most likely £10.50 or £10.99) and then the increase is significantly more than historic. |
a. Comment on historic increase in 2014 & 2017 of £1.00 and proposed is similar or different. b. If different state, "The impact on circulation figures of a £xx increase is unknown and could have a larger impact than forecast" c. Comment on Public perception of an increase during COVID-19 pandemic and falling disposable incomes. |
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Effective Price If the examiner does not give you the EP, you must assume it has moved in line with the cover price change. If the cover price has increased by £2.00 assume EP has done the same and then QUERY THIS! |
1. The EP historically has increased by the same amount in £ value as the cover price increase. 2. Watch for different EPs between Print and Online. The Cover Price can increase and in theory larger discounts could result in no change to EPs. |
a. EP increase is in line with Cover Price increase and history. b. The % increase in EP is greater than the % increase in the cover price (with figures to highlight - you can work this out ahead of the exam at price points of £9.99 / £10.50 / £10.99 / £11.99 etc.) c. The higher the Cover Price could result in larger discounts needing to be offered (especially true if cover price is higher than £10.00) - You could also work out ahead of the exam the average discount that is applied to the Cover Price to get the EP. |
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Contributor costs & Production costs This is a lot less important as an assumption compared to circulation and price. In theory it should not fluctuate with volume. |
1. Examiner is silent on these costs as they shouldn't change with volume. You can still comment. 2. Examiner provides you with changes to contribution costs and / or production costs |
a. If contribution costs change, then question this as a price rise should have no impact. b. Production costs there is a small possibility (as these are stepped fixed costs) that a lower circulation volume could reduce these. |
| Marketing costs | 1. Check the logic between marketing spend and volume change (see above) 2. Consider if the marketing spend is skewed towards on a particular format (print v online) or customer type (corporate dual v individual subscriber). 3. Remember what has happened in R1 to changes in circulation and the reason for this |
a. Marketing spend is higher or lower than 2017 b. Marketing spend and circulation change is similar to 2017 and shows a similar ROI / Worse and a worsening ROI / Better and an improving ROI. c. Marketing is targeted to print, online circulation could fall further than anticipated, especially as online content is often available for free. |
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Distribution costs We are now at small figures in the discussion - even if these were ignored, it is unlikely to make a real difference to the calculation |
1. If examiner has not included a change in distribution then query these. 2. If included then do they look reasonable. |
a. Expect some savings as circulation falls as distribution costs are linked to circulation rather than revenue |
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Advertising revenue stream This points could be included within the Financial discussion rather than assumptions - however you would get the mark on the key. |
1. Watch out for circulation falling below 2m or being close to 2m as this is a critical level for advertisers. |
a. Advertising revenues could fall due to a fall in the circulation figures. b. Circulation figures are critical to advertisers - This could easily be a wider business issue c. Advertising revenues already under pressure due to general decline and COVID-19 |
Financial, Operational & Strategic Issues
You will also need to consider the Financial, Operational and Strategic issues.
This is where it becomes more difficult to provide a format to follow or points to consider as often these are points brought into the exhibit. Any points you use from this list, you need to ensure they are appropriate to the scenario set on the day of the exam and also you need to be trying to generate additional ideas too.
There are also few operational issues linked to a price increase as the operations shouldn't change too much.
However, some points to consider are:
| SPS | AJ | |
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Financial Impact on advertising revenues |
1. Circulation figures will impact AD revenue | a. 2million level important b. Link to R1 and performance of the stream c. Price rise helps to offset the decline in advertising revenues |
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Financial Cash flows |
1. Marketing costs timing - check if incurred in first 6 months following rise or longer period 2, Marketing costs and circulation decline greater than price increase benefits |
a. Likely initial cash outflow as experienced in 2017. Revenue increase £662k v marketing costs of £1m |
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Financial Timescales |
1. Review period of 2 years only | a. Price increase will continue to provide higher revenue per copy after the 2 years compared to no change in the price rise |
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Financial Costs |
1. Costs are increasing - production / distribution / contributors (check this to R1) | a. Price increase required to offset cost changes since 2017 and in the future b. High fixed cost base - helps to ensure costs are covered |
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Operational Management Time |
1. Likely management time to approve advertising | N/A |
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Operational Timing before price rise date |
1. Price increase to meet Christmas Bumper 2. Not much time to prepare marketing campaign (maybe AJ point) If the price change is proposed in January 2021 onwards, then you can state 1 Jan increase will miss the Xmas subscriptions as presents (AJ point - but less likely to be on the key) |
a. Annual subscriptions paid in advance highest at Christmas - immediate benefit following price change b. Cash flow advantage of capturing subscriptions paid annually in advance as Christmas presents - assists with overdraft |
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Strategic Price point and history |
1. Comment on the £10.00 price level as a strategic decision 2. Last price increase was 2017 (Possible Wider Business Issue) |
a. Subscriber base is "price inelastic" as MLE has loyal and relatively wealthy subscribers b. Quality of publication is key to subscribers more than price |
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Strategic Price differentials If proposing different cover price then you must mentioned this. We also think it is valid if the cover price is the same and Online subscribers are offered larger discounts |
1. Cover price differences are a change to current editorial policies |
a. Impact on dual subscribers is unknown b. Same content but available cheaper online could significant impact printed version c. Existing pricing strategy has worked well to date so any change will be risky |
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Strategic Competitors You must make sure this is tailored to the scenario especially if an example of a competitor is given |
1. Competitive market - prices cannot be too dissimilar to competitors | a. Price change had a large impact on XYZ Limited (Exam specific content) b. Price change could lead to subscribers looking at alternative magazines |
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Strategic Niche |
1. Print expected to perform well by attracting a niche market | a. Link to Beal Annual Conference |