Assignment: Pricing Strategy

1. Consider Champion Manufacturing's pricing problem for a new project: Suppose it has estimated its total fixed costs (costs of renting land, maintenance of facilities etc.) at $30,000. Its variable unit cost (costs of raw material, labor going into producing each unit of Champion's products) is estimated to be $60 per unit.

(a) Suppose Champion estimates demand for its product to be 1000 units. It decides to implement a 5% mark-up when deciding on the price per unit of its product. Calculate the price per unit.

(b) Using the price per unit obtained in (a), derive the break-even quantity that Champion Manufacturing needs to sell. Comparing to the estimated demand in (a), would you say the mark-up that Champion used above makes the new project profitable or not?

2. Consider a retailer selling blenders currently priced at $54. Suppose it pays $29 per blender from the manufacturer.

(a) What is the initial contribution margin?

(b) Suppose it is considering a 33% cut in price to boost sales. What is the break-even change in sales required to maintain its profitability?

(c) Alternatively, suppose an expert tells the retailer that it should consider raising its price of the blenders to $59 to improve profit. What is the break-even change in sales permissible to again maintain its profitability?

(d) Using the break-even change in sales you obtained in (b) and (c), plot the break-even curve for the retailer.

(e) Suppose the retailer's market research team determines that the elasticity of demand for consumers of blenders is - 1.5. What does this imply about the actual demand for blenders in case of the two situations: a 33% price cut or a price increase to $59? Plot the demand curve alongside the break-even curve to show the difference between the two curves.

(f) Can you make recommendations to the retailer regarding which strategy makes more sense: a 33% price cut or a price rise to $59 from its current price level of $54?

3. XCELL Printing has created a new cartridge for 3D printers that they claim is far superior to the closest alternative cartridge sold by MM Printing. XCELL is in the process of selecting a price for the cartridge and wants to learn what the cartridge will be really worth to customers who are manufacturing firms. The MM cartridge sells for $200. While the MM cartridge breaks down with a probability of 40% after every 500 print jobs on a 3D Printer, the XCELL cartridge breaks down with a probability of 30% after every 900 print jobs. Every fix in case of a breakdown requires an hour of labor cost and also a material cost of $5. The XCELL cartridge requires a higher quality plastic compared to the MM cartridge. Suppose you are told that the cost of plastic amounts to $10 per carton for XCELL and $8 per carton for MM, and typically a customer would need to reorder a carton every 450 print jobs. Also, you are told that $20 is the hourly rate for labor hired by the typical manufacturing firm. Also, on the average, a manufacturing firm does 4500 print jobs in a year. Suppose the lifetime of a cartridge is 1 year. Calculate the total economic value of the XCELL cartridge.

4. Recall the steps required in calculating the total economic value of a product. Choose a product and brand that you typically purchase. Provide a list of drivers for that product that matter for you. Include both monetary and psychological drivers in that list. Next, identify a reference brand and describe your perceived points of differentiation for your chosen brand for each of the drivers you have mentioned before. Describe any advice you would provide the marketer of your chosen brand for its marketing strategy to influence your perceived benefits and perceived value of the brand.

5. Lily Valley Soaps manufactures fancy handmade scented soaps. It is interested in the price elasticity shown by the consumers of its lavender rose variety of soap. It has historical sales data for past two years of the number of bars of soap it has sold, the price of each bar and the number of retail outlets that have put the lavender rose variety of the soap on display for sale. Its current sales, price of each soap bar and number of retail displays are the following:

Suppose it carries out a regression analysis on its historical data and obtains the following output:

(b) How do you interpret the sign of the coefficients for the price and number of retail price in the regression analysis? Give an economic explanation for the signs.

(c) What is the price elasticity of demand for the lavender rose variety at the current sales and pricing point?

(d) Using your answer in (c) above, can you suggest what kind of strategy (price cut or price rise) that Lily Valley should consider?