The following appeared in a memorandum from the owner of Movies Galore, a chain of video rental stores.“In order to reverse the recent decline in our profits, we must reduce operating expenses at Movies Galore’s ten video rental stores. Since we are f

The owner of Movies Galore recommends that in order to reverse the recent decline in profits, the best move is to reduce operating expenses by closing at 6 PM instead of 9 PM and by reducing the stock by eliminating all movies released more than five years ago. This is based on the implementation in a store in Marston which was successful in reducing operating costs. The owner believes that raising the rental prices is not a viable way to increase profits since it would jeopardize their reputation for their low price rentals. While the recommendation might seem logical at first glance, there are certain questions that need to be answered in order to decide if it is going to produce the intended result.

Firstly, it is required to know whether there aren’t significant rentals in the time window between 6 PM and 9 PM. If it is ascertained that there are indeed very few customers visiting the stores and renting movies across all its stores then the move seems likely to work well. However, it is quite possible that in the previous month, the store at Marston didn’t receive many customers because the weather was harsh and cold which resulted in many people preferring not to venture outside late in the evening after returning from work and instead spend their time inside their homes. While this is one explanation of why the store managed to cut costs by not operating in the time window, it could also be a trend only in Marston. Perhaps the people in Marston work till late in the night do not have sufficient time to visit the store before 9 PM. The same may not hold in areas where the other stores are located. There might be significant number of people who would visit the stores in the time period mentioned and by not operating in those times, the company is only going to hurt its profits further.

There is also a need to know if people are not interested in renting and watching movies older than 5 years. If the people in general are interested in classics or are interested in maybe re-watching their favourite movies, there would be significant rentals concerning older movies. Then, eliminating such movies from the stock would lead to many customers being unhappy that they are no longer able to watch such movies and thus the company would lose out on all the money that it could have made by keeping the movies in stock. The plan would work as expected only if it can be known with guarantee that there aren’t enough people who still buy movies that were released more than five years ago.

Also, is the popularity of the company only because of the low prices? It may be the case that it doesn’t have any serious contenders and enjoys a monopoly in video rental service. The owner believes that they wouldn’t increasing their prices would hurt their reputation. But if the answer to the question is a no, it would seriously undermine his argument. If there do not have a competing company, then even if they do increase the prices by a small amount, the people would still continue to rent movies from them since they wouldn’t have a choice. Perhaps their popularity is because of the good quality of movies and a large collection, catering to the interests of a wide audience. In such a scenario, the decision to not increase the prices would be unwise since it has the potential to help it regain profits.

From the detailed analysis of the owner’s memorandum it can be seen that his recommendation cannot be taken for granted. Instead, it can be adopted to increase profits only if can be determined with certainty that there aren’t significant number of customers between 6 PM and 9 PM, if the people in general do not rent older movies and if the popularity of its stores is only because of their cheaper prices. If any of these prove unfavourable, then the move is not likely to result in improvement of the profit numbers.