Pricing SMG Manufacturing produces toothpaste, as well as other personal groomin

Question

Pricing

SMG Manufacturing produces toothpaste, as well as other personal grooming items. They have introduced a new brand ofultra whitening toothpaste called “Ultra-White” and they are working on pricing decisions. Walgreens has tentatively agreed to carry this toothpaste and they are waiting to hear what SMG will charge them for the product before they decideon their retail selling price to the consumer. There are several things to consider in making this decision for both the manufacturer and the retailer in setting the wholesale selling price and the retail selling price.

From the manufacturer’s perspective, SMG is concerned with two things –

What is the appropriate suggested retail price on the drugstore shelf for the customer to pay for Ultra-White given SMG’s pricing objectives, the nature of the consumer demand for the product, and SMG’s manufacturing and administrative costs to produce and market the product; and

What wholesale selling price should SMG set for the product? (This is the price that Walgreen’s would have to pay to SMG for each tube of the toothpaste.)?

Using the information presented below, answer the following questions to help SMG and Walgreen’s make these important decisions.

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?

Suggested Retail Selling Price: _____________________________________

Briefly what are the most important pros and cons of this type of pricing objective?

If SMG has a sales volume maximization objective in mind for the brand, what would be an appropriate retail selling price, in your opinion?

Suggested Retail Selling Price: _____________________________________

Briefly what are the most important pros and cons of this type of pricing objective?

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?

Suggested Retail Selling Price: _____________________________________

Briefly what are the most important pros and cons of this type of pricing objective?

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 $1.25. These variable costs are basically labor and materials required to manufacture each tube of toothpaste. The fixed cost allocation to this new product is $2.5 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 $3.50, then what is SMG’sbreakeven 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.

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

Given information -

BEP = Fixed cost / (Sellin price per unit - variable cost per unit )

= 2500000 / (3.5 - 1.25)

= 2500000 / 2.25

= 1111111 units

SMG charge the price to walgreen's = 3.50

walgreen wants to markup 30% over cost then the retail price should be = 3.50*1.30 = 4.55

1. If SMG has a status quo pricing then the same retail price and whole sale price can be taken.

2. If SMG has a sales volume maximization objective in mind for the brand, then they can sell at marginal cost which would be 3.50 - 1.25 = 2.25 means the cost of the product would be in between to 1.26 to 3.5 as the condition seems fit.

3. If it has prestige oriented pricing objective then he can raise the price of the same from 3.50 with certain limits if its products has special product attriburtes ans service features.

suggested retail selling price would be more than 4.55

pros and cons of this type of pricing objective -

Big brands has somthing differ in their product which makes them brand therefore

pros - differentiation is an expensive proposition. Newer entrants are not normally in a position to offer similar differentiation at a comparable price. In this manner differentiation acts as a fomidable entry barrier to new entrants.

cons - Diffferentiation fails to work if its basis is something that is not valued by the customers or someone competitors acheive the same formulation or uniqueness in their product this.

Please note all values are in $.

In case of further clarification required please comment.

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