Alma Pricing Strategy

MEMO

To : Julie Brighton

From : Insert Full Name

Date : 8th September 1992

Subject : Pricing Decision for Products ED 12 and ER 12

The market analysis carried out for both products reveal that such market is highly price sensitive . Indeed there is severe competition for charcoal products , in which ED 12 and ER 12 will compete . Plus there are also close substitute products , which are of gas and electric form . Nowadays one can easily find economic portable barbeques and as a result he can without doubt switch from charcoal to gas

or electric barbeques if it is viable

In addition , distribution costs will decrease if production increases In the information provided , we can note that freight charges can diminish from 6 to 3 per case if ten or more cases were shipped . If we further increase such quantities per shipment , due to higher production stemming from larger sales there is the possibility that the freight costs are further reduced

Such conditions highly favor a market penetration pricing scheme , in which a low price is initially charged in to enable the products to penetrate quickly and deeply into the market . The directors revealed that they are willing to break-even in the initial years of the product 's life . In this respect the calculations made below considered three market conditions and focused on the worst scenario . As can be seen the price of ER 12 can be 14 .50 per unit , while that of ED 12 can be set at 8 .26 per component . Both are lower than competitor prices and still sustain a small profitability margin of safety

Financial Determination of Optimal Price

ER 12 Model

Three different market conditions will be considered in the analyses of the optimal price . Best market condition under which 30 of the charcoal market will be attained , average market condition of 20 of charcoal market and worst market conditions comprising 10 of such market . Being at the introductory stage we will not consider shifts from substitute products , to this product . This will arise in the future stages of the product life when product awareness is enhanced

We shall first determine the materials used and freight costs . These are depicted in the following table

Possible Outcomes Demand (units ) Embers Material Costs ) One-time Tooling Costs ) Freight Charges Best 2 ,384 ,021 7 ,152 ,063 5 ,000 596 ,028 7 ,753 ,091

Average 1 ,589 ,348 4 ,768 ,044 5 ,000 397 ,356 5 ,170 ,400

Worst 794 ,673 2 ,384 ,019 5 ,000 198 ,678 2 ,587 ,697

Notes

Demand in units was derived from the demand data for the Barbecue Industry shown in Exhibit 1 of the information provided

The 3 per unit embers cost was multiplied with the demand determined

The one-time tooling costs of 10 ,000 were divided equally between the ER 12 Model and the ED 12 Product Type

The freight charges were accounted for first at the large s of 3 per case and then the remaining figure was measured in accordance...