You are currently working for a company called Pierogi's and More. This company specializes in authentic ethnic European style foods. Product offering includes Blintzes, Golabki, Kaputsa, and Kielbasa, but the main item in the product line is the traditional Pierogi. A pierogi is best described as a piece of pastry or dough that is stuffed with various ingredients. Going back to the tradition of the product, the original pierogis were normally stuffed with mashed potatoes, spinach, sauerkraut and/or variety of cheeses. The pierogi was the 'worker' or 'laborers' meal, so consequently did not include meats as they were not affordable but when available, some meats would be an ingredient in the pierogi. These meat-based pierogis were considered a delicacy and used mainly for special occasions.
The pricing strategy has been quality/value-priced based. The company has been trying to develop a reputation and perspective of a high quality item. The standard price for one dozen pierogis has been $5.99 per dozen. This price is a little higher than the prices of the main competitors. Depending upon the ingredients, the competitors' prices range from $2.79 to $5.39 per dozen in most grocery stores. Based on the current production costs and overheads, there is some room to manipulate price, but there is a desire to make sure that the pricing strategy reflects the quality of the product. While the company has completed no in-depth research or analysis, management believes they offer the highest quality pierogi on the market and believes their price should reflect as much. A breakdown of the cost structure revealed total variable costs of $1.87/dozen and total fixed costs of $0.20/dozen.
Pierogi's and More is starting to enter a new phase of distribution. To this point, sales were through the current company store front or direct sales to a few local markets. The company is now branching into specialty or higher end grocery retail. This change will require the inclusion of a wholesaler into the marketing channel. Studies have shown that most grocery wholesalers maintain a 30 percent mark-up while the retailer maintains a 25 percent mark-up. Pierogi's and More desires to maintain their current price point at the retail level when they enter this new distribution channel. The company would also like to maintain a 45 percent mark-up.
Based upon the above information, please respond to the following:
a: Using the target price of $5.99, determine the price point the company should use for the wholesaler. Does this price point allow the company to maintain its desired 45 percent mark-up? If you know that the consumer price elasticity for this product group is 0.80, what would be your concerns when establishing the price?
b: Do you believe the company should continue to use a value-based pricing mechanism? Why or why not? If you know the customer group has a high level of price sensitivity, what is your concern with this pricing scenario?