Reference no: EM133132088
Question - Competition is intensifying and Sarnia Eco-Retailers is revising its pricing strategy. Alva, the founder of Sarnia Eco-Retailers, is considering moving towards competitive pricing. She the relevant information and is planning to analyze the effect of this move on sales and profits.
Sarnia Eco-Retailers, current pricing strategy is "Price Skimming", but the recent intensification in competition, is affecting the bottom line. Alva met with the finance director to obtain more information on this issue. The finance director explained that a while ago two companies entered the market, and started actively competing with Sarnia Eco-Retailers, thus the company's sales are declining, and profits are falling.
Alva believes that the company is offering a premium product, which dictates a higher price. She is not willing to risk the company's image in order to improve the bottom line. She strongly believes that any price cuts will lead to the deterioration of the company's image. This will put the company in a position similar to discount stores, and thus the company will face intense competition. The finance director does not agree with Alva, since premium brand name could still be achieved, and prices should not be cut substantially to improve the company's situation. But keeping prices at the current level, will halt the company's growth prospects, and the company will start losing 15% of its sales each year.
The finance director cited that a price cut of at least 10% should be implemented to keep the company's sales growth at 5% level. If nothing will be done to the pricing strategy, the company could risk going out of business in a couple of years. Alva realized the need for quick action, and asked his staff to summarize the key findings.
The second day, one of his staff brought an executive summary with the following information in it.
Current pricing strategy
Price Skimming
Current average product price when compared to competitors prices
Sarnia Eco-Retailers, average price is 20% higher than the average market price for a similar product in a store offering similar service.
Average product price at Sarnia Eco-Retailers $100
Average direct costs per product $20
Total overhead and indirect expenses $2 Million
Demand Elasticity
For a 10% decrease in price the demand goes up by 15%, i.e. sales increase by 15%
Current sales level $4 million
Note: Sarnia Eco-Retailers is not using any credit facilities at any bank or financial institution.
After examining this information Alva decided to calculate a couple of metrics before adjusting the pricing strategy. She is willing to know the current break-even point. She is also interested to know the change in sales if she adopts a "Competitive Pricing Strategy" with prices in-line with competition.
Required -
1. Calculate the company's current sales and profits.
2. Calculate the company's sales and profits if the company adopts a "competitive pricing strategy", and its prices will be 10% higher than the average price in the market place.
3. Based on your calculations analyze which strategy should be followed and why?
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