Identifying products and/or services was a challenge with the RANK Group due to the complexity of their firm and with them running multiple businesses, like Mecca, Grosvenor Casinos, and Enracha. However, three gambling games have been identified with an estimated sales price based on the Australian prices which were then converted to pounds. When determining the variable cost, I conducted some research to determine an industry benchmark within the gambling industry for how much the variable cost is usually. However, I could not find it or the variable cost in the annual report either so I estimated.
#1 Grosvenor Casinos – blackjack.
Sales price = £7
Variable cost = £1.20
Contribution margin = £7 - £1.20 = £5.80
#2 Mecca Bingo – live bingo games
Sales price = £11
Variable cost = £2.40
Contribution margin = £11 - £2.40 = £8.60
#3 Mecca bingo – electronic bingo games
Sales price = £6
Variable cost = £0.60
Contribution margin = £6 - £0.60 = £5.40
As calculated above, the contribution margin is defined as the total revenue, in this case, the sales price, minus the total variable costs (Broyles et al., 2009; Gutierrez, 2021). Variable costs are those costs that change in accordance with the number of services used, or number of products produced (Hoggett, 2017). However, there is fixed costs that must be covered by the contribution margin too. Therefore, if the contribution margin is negative, the firm should cease operation as they are operating at a loss (Broyles et al., 2009). Although, as listed in UK’s annual report for the gambling industry, costs associated with licencing and regulation are often some of the highest which are fixed costs (Gambling Comission UK, 2022). This means that contribution margin must be somewhat higher in this industry because the fixed costs are more pertinent than the variable costs, and the contribution margin must be able to cover these fixed costs and also generate profit (Spaller, 2006).
Similarities/Differences
Respectively, the contribution margins for each product varies according to the proportion of variable cost to the sales price. For example, product one, the variable cost is about 17% of the sales price, product two variable cost is 21% of sales price, and product three is 10% of the sales price. This shows a direct relationship where the variable cost percentage is increased, the contribution margin also increases.
Furthermore, the variable cost for the third product, electronic bingo games, is lower than the other products because it is digital and therefore does not have many costs that will fluctuate with how many times the customers plays. Whereas, ‘live bingo games’ occurs at the casino and therefore the variable costs are higher, depending on the number of games customers play. Variable costs might include the employee costs, the more games played, the longer the employee has to stay and be paid.
However, product one and three have a more similar contribution margin because there sales prices are proportionally lower than product two but the variable cost is higher for product one which counteracts the slightly higher sales price compared to product three. This potentially means that product one and three will have a similar profit after the fixed costs are removed from the contribution margin. Although, the fixed costs may vary between the two as one is an online game and the other is at a casino. Therefore, the fixed costs for the casino are going to include rent and electricity whilst fixed costs for the online game could be the cost of implementing app updates or bug fixes. This will ultimately mean a different amount of profit is produced for the different products.
Varying Contribution Margins
RANK Group have more multiple products, with different contribution margins, in order to ensure the ongoing stability of the company. If the company was to only have the product with the highest contribution, like the live bingo games, when the demand for this decreases, the company will be in trouble. Whereas, if the company have other products, even with lower contribution margins, it still provides another source of revenue, providing the fixed costs do not equal the contribution margin or exceed it. For example, during COVID-19, the company would have had restrictions on in-person attendance but online games would have been able to continue. This also demonstrates the importance of having more than one product. However, if there is a scarcity in resources, the company would remove the products with the lowest contribution margin first (Avi, 2023). Therefore, having a high contribution margin is ultimately preferred.
Contribution margins + Management
Contribution margins can help management make decisions in their firm as it can be a key indicator to profit levels. Is this product going to generate profit? At the end of the day, a firm does not want to be producing a product or service that is creating a loss or breaking even, not producing a profit. It also allows management to identify which expenses, fixed or variable costs, are causing the problem. For example, if the variable costs are too high, the contribution margin will be lower and therefore management need to determine where they can reduce variable costs. Alternatively, the contribution margin is high, but the fixed costs are resulting in a loss, then the company can look at where they can reduce fixed costs. Contribution margins help break down the costs and profits. Whilst contribution margins can be helpful in decision making for management, there are a lot other factors that they will need to consider.
Constraints
A resource constraint that specifically RANK group may face is being able to have a broad skill set who are all highly trained. Because RANK Group have both in-person and online gambling platforms, they have to employ more than just individuals to run the games. For example, there will need to be an IT team to ensure bug fixes and glitches are fixed and also to ensure cyber safety. Alternatively, at the venues, like Mecca, there needs to be staff to run the games, security to uphold safety. With that said, the staff operating at the venue, have to do a lot of training in regards to ”safe gambling” as RANK Group identified in multiple annual reports. Therefore RANK require a lot of specialised personnel to operate. And often, these specialised or highly trained individuals will not always be available, especially after COVID-19 where no one was allowed to do much. For example, if they didn’t have IT specialists, they couldn’t operate the Mecca online bingo games, and therefore could only do selective products.
To overcome this resource constraint, the company has to invest in the upskilling and educating of its employees. This affects the business model as it is another expense they must incur. However, promoting “safe gambling” is high on RANK Groups list and therefore want to invest time and money into training their staff to foster a safe environment.
Identifying anymore resource constraints for the RANK Group was hard because there is not many materials required. For example, the manufacturing industry often face resource constraints with the supply of timber or steel. Whereas with the RANK Group, their products do not require such specific materials. Furthermore, some industries experience a time constraint. The restaurant industry have to get their products to their customers in a timely manner otherwise they will not have a sale. This is because food has to be served immediately and therefore these businesses face time constraints. However, the only other resource constraint that I could identify in the RANK Group, which they may not experience but could one day, is the availability of cash. Since they are in the gambling industry, they pay their customers winnings in cash. If the company runs low on cash, they will struggle to pay their customers and therefore will deter sales away. This may have been a pertinent constraint during. COVID-19 where they would not have been able to operate any events in-person and would have relied heavily upon the online gaming. This would have been a loss in revenue and therefore less cash within the business. However, by the RANK Group having more than just in-person gambling venues, it provides other sources of revenue and therefore ensures ingoing viability of the business.
A market constraint for the RANK Group could be that this industry, gambling, is heavily regulated. When implementing a new game or new product, there is many more processes and requirements that have to be met in comparison to a company in the food industry. For example, if a restaurant wanted to trial a new meal, they could simply. Implement it and would only have to consider resource constraints. However, if the RANK Group was to implement a new online gambling product, they would have to get approval and ensure it meets all legislation from UK Government and the Gambling Commission. This in itself comes with relevant costs, both physical and time and therefore could jeopardise the products revenue. Overall, the gambling industry is heavily regulated and therefore market constrains the companies as it is much harder for them to introduce or implement new products or change their current products. It also determines what the companies can sell and what they cannot.
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