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Scenario 5: Module 5 (Pricing Strategy)
LusterLast: Business Year 2020
Ashanti is happy with your work, and pleased that the firm is growing as viewed from many perspectives. However, you and she have never been given an end-of-year bonus, and she believes it is due to the price. The price has never changed, but national inflation has risen, the costs of doing business have risen, and the firm’s wholesalers and retailers are making more money through increased inventory turns.
She has determined that the price of the shampoo should be increased. However, she does not want the brand to suffer due to mismanagement. She asks that you deliver to her what the price premium is as a percent of volume share. Additionally, she asks that you recommend an optimum price and tell her what the gross margin will be at the suggested optimum price.
Further, she is expecting you to offer a suggestion as to whether raising the price is a good idea. Or, conversely, is lowering the price or maintaining it for another year a better alternative?
Before you approach MIS, you pay a visit to your alma mater, since it is homecoming week. As luck would have it, you run into your old economics professor who inquires about how you are doing on your new job. Dr. Juanita Suarez tells you that she knew you would land a job shortly after graduation. You confide in her that you are happy with your work, but your boss is increasingly reliant on you to engage in data collection and analysis. And, you feel the assignments are a bit much since you just finished your undergraduate program.
Through the conversation with Dr. Suarez, you tell her about your latest assignment, and she tells you not to forget about the elasticity of demand. You grunt but remember her words. And after making a data request from MIS, you are given the following.
Benchmark Price ($) Maximum Reservation Price ($) Closest Competitive Rival’s Unit Price ($)
5.95 6.10 5.90
Category Average Price
2018 Unit Price ($) 2018 Demand in Units (#) 2019 Unit Price ($) 2019 Demand in Units (#)
5.85 598,29,060 5.90 640,170,940
You are to use the variable cost per unit and the price for a bottle of LusterLast shampoo used in earlier assignments since the price has not varied. Your current tasks are to calculate the data that Ashanti wants, input them into your spreadsheet, and provide your opinion relative to raising the current price of the company’s product.