TO:
FROM: XXX
DATE: XXX
RE: Sergeant-Major’s Pricing Strategy
Excessive discounting and price competition is eroding Sergeant-Major’s profits, hurting brand equity and raising production costs. To address these issues, Sergeant Major’s should move to an everyday-low price strategy.
Background
Flat growth in the dog-food industry and manufacturer overcapacity has created intense price competition in the market. The failure of retailers to fully pass through our price discounts has reduced unit contributions without substantially increasing volume. Increased discounting (up to 15%) has eroded brand loyalty and threatens our premium positioning.
Recommendation
Sergeant Major’s should stop discounting its products and switch to an everyday-low price strategy. In particular, Sergeant Major’s should reduce its wholesale case price by 10% to $16.65, eliminate promotional price discounts while holding other advertising expenditure constant (see Strategy 3, Exhibit A).
Basis for Recommendation
Failure to take action now will lead to continued declines in profits and do long-term damage to our brand equity (See Strategy 1, Exhibit A).
Lack of a stable price structure increases the variability of demand for our products and production costs.
Alternative strategies risk alienating retailers and provoking competitors to undercut our prices (See Strategies 2a and 2b, Exhibit A).
Assumptions and Risks
The recommended plan assumes that we will be able to maintain current volume with a stable, but lower, list price. Retailers may still retaliate by taking away shelf space. Competitors may seek to undercut our strategy through continued discounting. It will be important to convince retailers that the new pricing policy is in their best interest.
Next Steps
Start by using the sales force to educate retailers about the advantages of the new pricing policy. In three months, lower the wholesale case price to $16.65 and focus advertising expenditures on informing consumers of the advantages of everyday-low pricing. In six months, evaluate the effectiveness of the new strategy in terms of profits, brand equity and production costs.
Exhibit A: Pro-Forma Income Statements for Alternative Strategies
Strategy 1 Strategy 2a Strategy 2b Strategy3
2008 2009
Revenue
Number of Cases Sold 1,096,437 1,096,437 1,096,437 986,794 1,096,438
List price per case $18.50 $18.50 $18.50 $18.50 $16.22
Total Revenue $20,284,085 $20,284,085 $20,284,103 $18,255,693 $17,784,224
Cost of Goods Sold $8,654,365 $8,654,365 $8,481,285 $7,633,157 $8,481,285
Gross Contribution $11,629,720 $11,629,720 $11,802,818 $10,622,536 $9,302,939
Expenses
Promotional Price Discounts $2,347,693 $2,836,186 $0 $0 $0
Ad Allowance for Retailers $563,267 $641,828 $1,063,267 $1,063,267 $563,267
Other Ad/Coupons /Samples $2,277,883 $2,377,858 $3,277,883 $3,277,883 $2,277,883
Selling and Admin $2,345,321 $2,345,321 $2,345,321 $2,345,321 $2,345,321
General Overhead $2,467,455 $2,467,455 $2,467,455 $2,467,455 $2,467,455
Net Contribution $1,628,101 $961,071 $2,648,892 $1,468,610 $1,649,013
Assumptions:
Overall: Fixed costs are same as previous year.
Strategy 1: List price stays at $18.50, COGS ($7.89/case) are same as last year price discounts, ad allowances and other ad/coupons grow at same rate as previous year.
Strategy 2a: COGS (40.67%) are 2% less than previous year, ad budget increased by $1,000,000, co-op ad spending increases by $500,000, volume same as last year
Strategy 2b: COGS (40.67%) are 2% less than previous year, ad budget increased
by $1,000,000, co-op ad spending increases by $500,000, volume drops by 10%
due to retailer and competitor reaction
Strategy 3: COGS (40.67%) are 2% less than previous year, retail price is cut to $1.04 (average of regular and feature price and wholesale case price of $16.22 (1.04x24x65%)), volume same as last year, ad allowance and ad budget same as previous year
OTHER EXAMPLES OF EXHIBITS (created by students for a different case):
Exhibit A
Strengths
• Product leader & innovator
• Successfully developed interactivity
• Largest technology electronic components company
Weaknesses
No real competitive advantage in market
Lack of penetration in Business Mobile Market
Not as much brand equity/awareness as Apple
Opportunities
• Growing demand for smartphones in emerging markets
• Interactivity with other electronics
• Differentiation (competitive advantage) against Apple Threats
Intense competition from Apple, Blackberry, etc.
Constant innovation from other companies
Possible competition with cable companies if interactivity is enabled on smartphones
*Highlighted shows that Samsung’s strengths align with current market opportunities Samsung must jump on opportunity for interactivity
Exhibit B: Target Segments and Corresponding Benefits of Interactivity
Everyday Consumers (consumer market): Enables consumers to play their favorite games on the television simply by interacting with their smartphone. It allows individuals to access all of their favorite features on their smartphone on the TV/Internet in their very own home.
Business Professionals (business market): Allows working professional to access emails, presentations, reports etc. stored on their phone using TV’s/monitors at work. Can be very effective for storing materials on mobile phone and then using these in meetings, conferences, etc.
Advertising Agencies (commercial market): Can use interactivity to sell ads on screens that are 25 times larger than the Iphone screen. Thus, ads will arguably be more effective in capturing the attention of consumers.