Running head: FIX MY PHONE BUSINESS PROPOSAL 1

Fix My Phone Business Proposal

Terry Dashner

ECO/561

June 6, 2014

Dr. Edward Price

FIX MY PHONE BUSINESS PROPOSAL 2

Fix My Phone Business Proposal

I think it is fair to say that camels will slide through the “eye of a needle,” before people give

up their cell phones and other wireless technologies. Cell phones are ubiquitous, but they are not

resistant to damage. Because cell phones break, there is a need for cellular phone repair centers.

According to U.S. Bureau of Labor Statistics (Occupational Employee Statistics, 2014), predicts

that job growth in wireless communication technology will slow down below the average job

growth over the next couple of years: four percent until 2022. This slowdown in the wireless

communication technology field holds little significance for the cell phone repair business. For

example, with the development and marketing of new technologies growing slower than the

average job growth rate there is still a need to rebuild and repair the older wireless technologies,

such as the cell phone. In layman terms this means that without new wireless products coming to

market, existing wireless products will recycle through the market, needing repairs to increase

their longevity. Cellular phone repair centers will rise to the occasion to meet the growing

demand for repairs.

Identifying Market Structure

The cell phone repair industry has exploded over the past six years due to several factors: For

one, less expensive and more advanced cellular internet has added to the explosion. Secondly,

the growing popularity of smartphones, which are more prone to breakage and therefore more

likely in need of repairs has contributed to the advancement of the industry. Also, Smartphones

are very expensive compared to earlier cell phone models, which have driven consumers to

repair shops rather than replacing them; however, as the industry reaches market saturation and

the expense of replacement becomes more feasible, demand for repair services is expected to

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stall. According to leading experts, market saturation is very near in the United Kingdom (The

Guardian-The Observer, 2014), and Apple and Samsung are competing against Chinese products

that are becoming increasingly better in quality and less expensive than the market giants. Some

experts place the US Smartphone saturation point at 60% currently, growing about 10% a year.

Others are not as optimistic as the diagram below depicts.

Competition on the Rise

Apple's iPhone shipments increased by 23 percent over the same period last year, but the

company's share of the worldwide smartphone market still slipped as competition, particularly

from China, grew at a faster rate, according to a new industry report (Market Watch/Wall Street

Journal, 2014).

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The cell phone repair industry is chiefly divided into the following major groups: screen repairs,

water damage repairs, battery replacements, and other repair services. Many cell phone repair

companies offer online repair videos, but few customers choose to do self-repairs and elect the

walk-in services at repair centers. The key success for a cell phone repair center is providing a

quick repair service while the customer waits. The cell phone repair industry has exploded over

the past five years. Much of this growth has been on the back of the growth of Smartphones and

their fragile construction, which makes them prone to repairs. Smartphones have fragile LCD

(liquid crystal display) screens or touchscreens, and inaccessible batteries (with the iPhone being

one of the worst offenders) that make them more likely to need repair. Smartphones are

responsible for 55% of all mobile phone sales, as of the last quarter of 2013. The cell phone

repair industry is highly fragmented and small operators dominate the industry. In 2012, the top

four players accounted for less than 5% of industry revenue, indicating a low industry

concentration. There were a large number of small shops in the industry specializing in cell

phone repair services that operate independently to serve a small geographic region. Industry

concentration has remained relatively stable in the past five years as cell phone repair services

are generally owned by small, independent operators. In the past five years, the number of

industry establishments has increased an annualized 6.8% to 2,455 in 2012. The high growth in

the number of establishments is due to an increased demand for cell phone repair service.

Market Equilibration Process/ Supply and Demand

Assume that a cell phone repair company senses there is a demand for a cellular phone

franchise market. The cell phone repair company would invest in market research to replicate the

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exact cell phone repair center that their consumers demand. The company develops the

franchising concept and markets the franchise at $35,000 a unit. Franchisees who find the

franchise a good investment pay the full $35,000 and a number of the franchises are soon sold.

Because of the high price, however, sales gradually begin to drop off. Many potential franchisees

still want the franchise, but are unwilling or unable to pay $35,000 for one. Because the franchise

company, in this case “Fix My Phone Franchise Company,” loses money on unsold franchise

systems, it reduces the price to $25,000 in hopes of increasing sales. Consumers begin buying

again. The process continues until a price is reached that will both meet demand and maximize

the company’s profits. That price is known as the “market-clearing price.” When supply of Fix

My Phone Franchise Company units is balanced with demand, the market is said to have reached

equilibrium. At equilibrium, resources are used at their highest efficiency. Academic Economics

is largely the study on how market economies can best achieve equilibrium, which is why

economists spend a great deal of time analyzing the relationship between supply and demand.

The law of supply and demand explains why people behave in certain ways within a market

economy, and can even be used to predict behavior and, thereby, economic outcomes.

The mobile phone market, which is a compliment to the cell phone repair center concept is a

good example of the supply and demand concept. For example, it shows how improved

technology and increased supply can reduce price, even as demand rises. According to

Evalueserve, Nokia (Economics Help, 2012), one of the world’s largest mobile manufacturer,

recorded an approximately 39 per cent fall in its average selling price (ASP) between 2005 and

2009. The good news for users is that over the next five or ten years, the price of mobile phones

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is forecast to fall. This is primarily due to the increased competition and increased supply from

major producers. As markets reach saturation point, demand will increase at a slower rate (5% a

year until 2015).

Fix My Phone Company is in the process of meeting with franchise Attorney, Freddrick

Sticker. The company is finalizing the Franchise Disclosure Document, Franchisee/Franchiser

Contract Agreement, and the Employee Handbook and Operations Manual. The price tag for one

franchise unit is set at $40, 000 as a test price. As the market equilibrium process is worked out,

a fair and profitable price will become finalized.

Law of diminishing marginal returns

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Samsung, a manufacturer of Smartphones, produces a majority of its products; therefore, the

effect of law of diminishing returns is crucial. If Samsung decides to enhance its production

level, it must increase its inputs, which results in higher costs. Producing and supplying larger

amounts affects pricing, higher prices are needed. This brings up a market dilemma. Competition

in this market is cutthroat. It is not wise for the company to increase its costs. Furthermore, the

company has established a trustworthy client base and it is not good to take such a risk.

Technology development has substituted manpower with machines in many areas where many

functions are completed by pressing a button. Hereafter, if Samsung decides to employ

additional workers, the law of diminishing marginal returns will take place as inefficiencies and

the costs of each additional worker would result in the end price increase. Since additional

employees require extra money, such as unemployment costs, workers’ comp costs, and office

space—the law of diminishing marginal returns will occur even faster, decreasing returns

because the presence of similar levels of knowledge and talents do not add or improve the

output. Instead, it would be more preferable for the company to invest in machinery and

technology or even in new entrepreneurs who would help boost the production and returns. New

ideas to the company would result in new ways of producing, new ways of functioning, new

products and new customers.

Competition in the Industry: Oligopoly

Given the fact that the number of wireless communication technology companies or firms in

the market is few with a large number of customers makes the industry an oligopoly. The

barriers to enter the market are high, sometimes insurmountable, because strong, established, and

trustful companies are hard to overcome and also because the costs are prohibitive to starting a

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new company. Moreover, the pricing strategy is controlled by all the companies operating in the

established market. The companies have a moderate influence over market price, but they are not

a pure influence because of the similarity of the products offered. Nevertheless, the cell phone

repair industry is not a pure wireless communication technology industry. In other words, it does

not build Smartphone, it repairs them when they break; therefore, the cell phone repair industry

is more likely a pure competition market. A market that is characterized by a number of large

number of independent sellers of standardized products with free entry and exit where the seller

is a “price taker” is pure competition. Pure competition in a free market is rare where there is a

free flow of information between companies; therefore, FIX My Phone corporate and franchise

stores would not reflect a true pure competition company.

Identifying Price elasticity of the Services

One condition of pure competition is a product where all brands are perceived as being

exactly the same, such as Smartphones. Companies spend a lot of time and thought in how to

keep their product from being seen as a "commodity." There is a real need in the industry to

differentiate a company’s product. QT convenience stores headquartered in Tulsa, Oklahoma

sought to differentiate their gasoline from other convenience stores’ gasoline. They did an

extensive marketing campaign in the 1990s to guarantee the quality of their gasoline by

promising to repair any motor vehicle engine damaged by using the gasoline. The campaign was

so successful that local people to this very day claim that QT has better gasoline than other

convenience stores. Perdue differentiated its poultry by successfully convincing the consumer

that their chickens were fresher. Some examples of products that seem like "commodities" but

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have been differentiated by successful marketing are cigarettes, gasoline, toothbrushes, oranges,

potatoes, and aspirin. Fix My Phone want to differentiate its service and repairs above the other

repair centers in the market. In order to do this, marketing must successfully convince the

consumer that its services and repairs are of the highest standards. This is done through

guarantees, warranties, an adhering to the policy of “the customer is always right.” Fix My

Phone will differentiate its services. It will offer a six month warranty, provide a coupon for 20

percent off the next purchase, and promote its certified technicians through CIS certification.

Segmented (or Segmentation) Pricing:

Fix My Phone has two broad types of customers: one with inelastic demand and the other

with elastic demand. The customers with inelastic demand are the corporate customers. Just as

the business traveler is inelastic in pricing air fare, so the cell phone repair center’s corporate

customer is inelastic in his or her demand. They do not care if the price rises incrementally

because the business they work for foots the bill. They just need their phones to work to do their

jobs. An elastic customer in the cell phone repair center is personally responsible for the cost of

repairs and is very sensitive to any price hikes just like a non-business traveler is much more

elastic. If the price of a ticket to, say, Tulsa is too expensive, they change their travel plans and

go to Oklahoma City. What airlines do to address this elasticity of demand is charge different

prices depending on when a customer buys a ticket and whether or not his stay includes a Friday

or Saturday night. The same seat might cost one consumer twice as much as another consumer.

In fact, it is not unlikely that every customer on the plane has paid a different price for a seat.

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The rule of segmentation pricing states: Charge the inelastic consumer more and the elastic

customer less.

Demand determinants for repair centers

Economic demand or how much of an item one is willing to purchase depends on a number of

different factors. For example, people mostly care about how much an item costs when deciding

how much to purchase. They might also consider how much money they make when making

purchasing decisions. Economists break down the determinants of an individual's demand into

five categories:

Price

Income

Prices of Related Goods

Tastes

Expectations

Demand is then a function of these five categories.

Price, in many cases, is likely to be the most fundamental determinant of demand. It is often the

first thing a consumer looks at before purchasing a product. (See diagram)

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Economists categorize items as normal goods or inferior goods on exactly this basis. If the cell

phone repair service is a normal service (good), then the quantity demanded goes up when the

consumer’s income rises. The quantity demanded goes down when income decreases. If a repair

service is a discounted repair (as is, no warranty) then the quantity demanded goes down when

consumer income increases and goes up when income for a consumer decreases.

When deciding how much of a service they want to purchase (premium or basic), consumers take

into account the prices of both substitute repair services. Substitute services, or are services or

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goods that are used in place of one another. For example, the premium and basic repair services

are substitutes because a consumer tends to go with the basic when low on cash and for the “bells

and whistles” when income is not a problem.

Variable and fixed costs

All company costs can be broken down into two main categories: fixed costs and variable

costs. Fixed costs stay the same no matter what the output. In other words, fixed costs remain

constant throughout the relevant range. They are usually considered sunk costs for the relevant

range. Fixed costs often include rent, buildings, and machinery. On the other hand, variable costs

are costs that vary with output. Variable costs increase at a constant rate as they relate to labor

and capital. Variable costs may include wages, and materials used in output. Below is an

example of a firm's cost schedule and a graph of the fixed and variable costs. Notice that the

fixed cost curve is flat and the variable cost curve has a constant upward slope.

Macroeconomics Impact on Cellular Phone Repair Centers

The current global economic conditions and their effect on local macroeconomic

indicators for cell phone repair centers. 

Economic development is a part of the human evolution and dilemma. It is a single, narrow

measure of quality of life, but nevertheless an evaluation through measurement. The economy

may serve as a substitute for many other aspects of quality of life, which demonstrates a strong

correlation with other accepted measures of development such as literacy rate and life

expectancy. Cell phones in particular extend these benefits to the less fortunate in the world.

Wireless Intelligence reports that the first billion cell phones sold worldwide took 20 years, the

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second billion sold in 4 years, and the third in just 2 years (Corbett, 2008). This growth has been

largely concentrated in the developing world. According to the International

Telecommunications Union, 68% of the world's mobile subscriptions in 2006 were in developing

nations.

Table – Variable Definitions

Variable Name Definition

APC15 Proportion of population aged 15 and above

that has completed at least primary school.

Capital8008 Average annual investment in fixed capital as a percent of total GDP over 1980 – 2008.

GDPpc80 Level of real per capita GDP in 1980 (in constant 2000 U.S. dollars)

Mpen8008 Number of mobile phone subscriptions per 100 inhabitants averaged over 1980 – 2008.

Fpen80 Number of “fixed” telephone land-lines in 1980; used as measure of initial level of

Telecomm’s infrastructure.

The variables defined in the table are the primary and control variables. The dependent variable,

which is used in this case to measure the growth of average individual income, is the annual

percentage change in per capita GDP, averaged over 1980 – 2008. The final two variables are

those of most interest. The first is the average level of cell phone penetration over the period.

Cell phone penetration is the most accurate statistic available to measure the extent of mobile

phone use in a country. This is not an exact reflection of usage, though, as it is very common to

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share mobile phones in developing countries. There has been abundant research demonstrating

that information communication technologies (ICT) in sum have a significant positive effect on

economic growth. This information is imperative to understanding the predictive future of cell

phones worldwide and the repair centers that will follow. This indicator of local macroeconomics

is promising for the cellular phone repair industry. Again, with market saturation reaching its

peak in the UK and some other Eastern European nations, there will always be a need to

recirculate the used and refurbished phones. This calls for cellular phone repair centers

worldwide.

Current News worthy Nations: Serbia and Ukraine

Fixed telephone lines have 89% of households in Serbia, and with about 9.8 million users the

number of cellphones surpasses the number of total population of Serbia itself by 35%. Whereas

the number of Internet users in Ukraine was expected to nearly double by 2015. The mobile-

cellular telephone system's expansion has slowed, largely due to saturation of the market which

has reached 125 mobile phones per 100 people. Here again, market saturation of cell phones is

good news for cellular phone repair centers in development. Cell phones continue to circulate in

the market as refurbished and as an alternative to expensive and new iphones and other smart

phones.

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FIX MY PHONE BUSINESS PROPOSAL 15

RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

-  World 6,800,000,000+ 7,012,000,000[1] 97 2013[2][3]

01  China 1,227,360,000[4] 1,349,585,838[5] 89.2 December 2013[4]

02  India 904,510,000 1,220,800,359[6] 74.09 31 March 2014[7]

03 United

States327,577,529 317,874,628[8] 103.1 April 2014[9]

04  Brazil 273,583,000 201,032,714[10] 136.45 March 2014[11]

05  Russia 256,116,000 142,905,200[10] 155.5 July 2013[12]

06  Indonesia 236,800,000 237,556,363 99.68 September 2013[10]

07  Nigeria 167,371,945 177,155,754 94.5 Feb 2014[13]

08  Pakistan 139,000,000[14] 180,854,781[15] 77[16][17] April 2014[18]

09  Japan 121,246,700 127,628,095 95.1 June 2013[19]

10  Bangladesh 114,808,000 165,039,000 69.5 January 2014[20]

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RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

11  Germany 107,000,000 81,882,342 130.1 2013[21]

12  Philippines 106,987,098 94,013,200 113.8 October 2013[22]

13  Iran 96,165,000 73,973,000 130 February 2013[23]

14  Mexico 92,900,000 112,322,757 82.7 Dec. 2011[24]

15  Italy 88,580,000 60,090,400 147.4 Dec. 2013[25]

16 United

Kingdom75,750,000 61,612,300 122.9 Dec. 2013[26]

17  Vietnam 72,300,000 90,549,390 79 October 2013[27]

18  France 72,180,000 63,573,842 114.2 Dec. 2013[28]

19  Egypt 92,640,000 82,120,000 112.81

Egypt Ministry of

Communications &

IT, August 2013[29]

20  Thailand 69,000,000 65,001,021 105 2013[30]

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RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

21  Turkey 68,000,000 75,627,384 89.9 2013[31]

22  Ukraine 57,505,555 45,579,904 126.0 Dec. 2013[32]

23  Spain 55,740,000 47,265,321 118.0 Feb. 2013[33]

25  South Korea 52,510,000 48,580,000 110[34] 2013[35]

25  Argentina 56,725,200 40,134,425 141.34 2013[36]

26  Poland 47,153,200 38,186,860[37] 123.48 2013[38]

27  Colombia 49,066,359 47,000,000 104.4 2013[39]

28  South Africa 59,474,500 50,586,757 117.6

2013 GSM African

Mobile Observatory

report [40]

29  Algeria 33,000,000 35,000,000 94.2 2013[41]

30  Taiwan 28,610,000 23,197,947 123.33 September 2013[42]

FIX MY PHONE BUSINESS PROPOSAL 18

RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

31  Kenya 28,080,000 42,000,000 71.3 2013[43]

32  Venezuela 27,400,000 28,200,000 98.0 2013[citation needed]

33  Peru 33,000,000 30,000,000 110.0 Oct. 2013[44]

34  Romania 22,800,000 21,438,000 108.5 March 20[citation needed]

35  Canada 26,543,780 34,466,423 74.1 Q3 2013[45]

36  Morocco 36,550,000 31,968,361 113.6 Q1 2013[46]

37  Netherlands 20,000,000 16,515,057 121.1 Nov. 2013[47]

38  Australia 30,200,000[48] 22,700,000[49] 133.0 December 2013

39  Saudi Arabia 46,000,000 27,137,000 169.5 Jun 2013[50]

40  Malaysia 30,379,000 28,250,000 106 2013[51]

41  Chile 21,000,000 17,094,270 122.9 Dec. 2013[52]

FIX MY PHONE BUSINESS PROPOSAL 19

RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

42  Nepal 18,240,670 26,620,020 86.82 Apr. 2014[53]

42  Ethiopia 18,000,000 85,000,020 21.8 Dec. 2013[54]

43  Guatemala 17,571,895 14,713,763 119.4 Jun. 2013[55]

44  Sri Lanka 17,359,312 21,000,000 80.95 Dec. 2013[56]

45  Ecuador 15,900,000 14,300,000 111.18 Jan. 2013[57]

46  Portugal 13,400,000 10,562,178 126.87 November 2013

47  Hong Kong 17,098,440 7,219,700[58] 236.8 March 2014[59]

48  Belgium 11,822,000 10,414,000 113.6 2013[citation needed]

49  Hungary 11,561,890 9,908,798 116.7 Nov. 2013[60]

50 United Arab

Emirates11,540,040 8,264,070 139.6 Nov 2013[61]

51  Sweden 11,194,000 9,103,788 122.9 (July 2012 est.)

FIX MY PHONE BUSINESS PROPOSAL 20

RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

52  Bulgaria 10,655,000 7,600,000 140.2 2008[62]

53  Israel 9,319,000 7,310,000 127.5 2008[62]

54  Singapore 8,063,000 5,312,400 151.8 August 2013[63]

55  Denmark 7,000,000 5,543,819 126.2 February 2008[64]

56  Azerbaijan 7,000,000 8,900,000 78.7 November 2009

57  Jordan 6,010,000 5,950,000 101.0 March 2010[65]

58  New Zealand 4,620,000 4,252,277 108.6 2008[66]

59  Estonia 1,982,000 1,340,602 147.8 April 2009[citation needed]

60  Lebanon 2,720,000 4,224,000 64.4 Oct 2010[67]

61  Lithuania 4,940,000 2,955,986[68] 167.1End of Q2 2013

(Tentative)[69]

62  Cuba 1,300,000 11,200,000 11.6 December 2011[70]

FIX MY PHONE BUSINESS PROPOSAL 21

RankCountry or

region

Number of

mobile

phones

Population

Phones

per 100

citizens

Data evaluation

date

63  North Korea 2,000,000 24,451,285 8.3 April 2013[71]

64  Panama 6,900,000 3,405,813 202.5 July 2013[72]

-  Malta 452,515 554,651 122.57 June 2013[73]

The local economy's stage in the business cycle.

Expansion

Economic expansion increases the demand for both capital (as defined in economics) and

consumer goods. Industry will invest in the expansion of its facilities and inventories,

anticipating taking the advantage of expansive sales and bottom line profits. Low risk of default

encourages banks to lend for expansion at low interest rates. A robust demand pushes the need

for more workers to work in these aspiring companies, which spurs an increase in employment

levels. With the current GDP rising, the outlook for the expansion of cellular phone repair centrs

is good. (See Below).

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Recovery

This stage is characterized by the consumers' confidence in the market. The bank lending

rates are low, and companies can afford to defray the costs of capital projects. There is an

increase in productivity due to the increased aggregate demand in the economy. Increase in

production allows companies to start employing, which in turn, increases the income of

consumers who can now afford to purchase capital goods. Profit margins of companies starts

rising, and the gross domestic product also start to increase. By most accounts, the US economy

is showing real signs of recovery from the fiasco of the banking industry in 2008.

How do current credit market conditions affect the planning or operating decisions for

cellular phone repair centers?

At Fix-my-Phone Repair Centers and it expansion through franchises, the current credit

market conditions do not impact the planning or operating decisions significantly because it is

FIX MY PHONE BUSINESS PROPOSAL 23

moving forward on reserve capital. The idea is to work within a tight budget constraint

purposely. The less debt we carry, the stronger we will impact the market. Currently the banks

are reluctant to lend money for capital expansion. This is because of forced government

regulations that were imposed as a result of the financial melt-down of 2008. Because we have

no debt we can withstand the impact. Nevertheless, our concerns are real and cautious regarding

expansion. With the Affordable Health Care Act imposed on companies with 50 or more

employees, we are scaling back although we are expanding. How is this? We are not building

any more corporate stores and housing employees. We now are selling franchises with a scaled

back workforce.

Conclusion

This assignment entails the economic analysis of a business proposal for a cell phone repair

center. It includes statements about the market structure and the elasticity of demand for the

services, based on text book principles. Some but not all data is hypothetical, and based on

similar real world products to estimate fixed and variable costs. It has identified the market

structure, the elasticity of the services, and a rationale for elasticity for pricing. All information

points to a viable and profitable cell phone repair center.

FIX MY PHONE BUSINESS PROPOSAL 24

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References

Economics Help. (2012, November). Falling Price of Mobile Phones. Retrieved from

http://www.economicshelp.org/blog/6279/economics/falling-price-of-mobile-phones/

Market Watch/Wall Street Journal. (2014, June). Apple loses smartphone market share to

cheaper phones. Retrieved from http://www.marketwatch.com/story/apple-loses-

smartphone-market-share-to-cheaper-phones-2014-02-12

Occupational Employee Statistics. (2014, June). Bureau of Labor Statistics. Retrieved from

http://www.bls.gov/oes/charts.htm

theguardian-TheObserver. (2014, April). How to keep on selling smartphones when we've nearly

all got one already. Retrieved from

http://www.theguardian.com/technology/2014/apr/27/smartphone-market-saturation-

apple-samsung

Corbett, S. (2008). Can the cell phone help end global poverty? New York Times, April 13,

2008.