1. If SMG has a status quo pricing objective and strategy in mind for this produ
ID: 333980 • Letter: 1
Question
1. If SMG has a status quo pricing objective and strategy in mind for this product, what would be an appropriate retail selling price, in your opinion, given what you know about current toothpaste prices in stores right now? Suggested Retail Selling Price Briefly what are the most important pros and cons of this type of pricing objective? 2. If SMG has a sales volume maximization objective in mind for the brand, what would be an appropriate retail selling price, in your opinion, given what you know about current toothpaste prices in the stores right now? Suggested Retail Selling Price Briefly what are the most important pros and cons of this type of pricing objective? 3. If SMG has an image, or prestige-oriented pricing objective and strategy in mind for this toothpaste, what would be an appropriate retail selling price, in your opinion, given what you know about current toothpaste prices in the stores right now? Suggested Retail Selling Price Briefly what are the most important pros and cons of this type of pricing objective? 4. Another important input into the wholesale selling price decision is SMG's cost structure for the new product. Here is the information the company has given you to help them in their decision: The variable cost per unit is 75 cents. These variable costs are basically labor and materials required to manufacture each tube of toothpaste. The fixed cost allocation to this new product is $1.5 million, which includes factory space allocation, utilities, management salaries, and marketing costs, among other things If SMG sets the wholesale selling price they will charge to Walgreen's (and other retailers) at $2.50, then what is SMG's breakeven volume in units? In other words, how many tubes of toothpaste would SMG need to sell to retailers to break even and cover their fixed costs for the product? Show your work. 5. Given that businesses seek to earn profits, not just break even, calculate how many tubes of toothpaste SMG must sell to earn a $100,000 profit. 6. Now, from the retailer's perspective: Again, let's say that SMG sets the wholesale price they will charge Walgreen's at $3.50. If Walgreen's wants to calculate an appropriate retail selling price based on their costs, and they want to earn a 30% markup on retail, then what would be the resulting retail price? Show your work.Explanation / Answer
1, Retail price: Copy competitor price or maintain price level for similar product
Pros - 1. Simple to calculate, 2. Safe option for long-term survival
Cons - 1. No differentiation in price 2. If brand is not well-recognized customers will not buy at the same price as competition given competitor product is well-recognized
2. Retail price: Penetration pricing, prices much lower than competitor
Pros: 1. Creates market entry barrier 2. Volume growth is very high 3. Market share increases
Cons: 1. Low profitability per unit sold 2. Customer loyalty is price driven (If price increases, the customer may not buy). 3. Some customer segments may deem it to be cheap quality
3. Retail price: Higher than the competition
Pros: 1. Higher profitability per unit 2. Perception of the product is of a premium product (if positioned correctly) 3. Loyalty is high as loyalty is not price driven
Cons: 1. Toothpaste is a commodity item (daily use), people may prefer lower priced product 2. Differentiation is difficult to create if the higher price charged does not create customer value, the customer won't buy the product. 3. Low market share
4. Breakeven units = Fixed cost / ( Selling price - Wholesale price)
= 1,500,000 / (2.5 - 0.75) = ~857143 units of toothpaste
5. Profit target = 100,000
Additional units to be sold = 100,000 / 1.75 = 57143
Total units for 100K profit = 857143 + 57143 = 914286
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