According to the Case of Drinkworks: Home Bar by Keurig

https://hbsp.harvard.edu/product/521010-PDF-ENG

Question - Pricing Decision:

Page 6 and Exhibit 5 provide information from pricing

research.The Appliance and Pods are joint products - one is useless

without the other (more like printer and cartridge - In a joint product, a

company may sell appliance at less profit or loss that is to be made up from

profit in related products). Understand Exhibit 5 before making your

decision - read the explanation below to understand the interpretation of

Exhibit 5.

What

is your recommended price of the appliance to consumers? How many units of

appliances are expected to sell?What would be the Gross margin (loss) at

your recommended price?Executives are contemplating

a price of $199, but you need to consider other reasonable price points before

making a decision.

If

the product is distributed through traditional retail stores:Gross

Margin = Retail selling price - Retail margin - Cost of Goods

If

the product is distributed through E-commerce (through Amazon):Gross

margin = Retail selling price - Retail margin for e-commerce channels - cost of

goods

Explanation of Exhibit 5 -

Drinkworks appliance:1.6% of respondents are willing to pay at least

$499; 2.1% of respondents are willing to pay at least $399 and so on; From page

6, you can see about 50% of respondents are not interested in buying this

product at any price.You can infer that about 30% of the respondents are

looking at a price below $149.What is the approximate cost of the appliance to

Drinkworks?See page 6; You need to sell more appliances to be able to

sell Pods.

Sample Calculation of Gross

The margin for a price of $500. =

Retail selling price

$500

Minus Retail Margin (30%)

i.e., an average of the range given in the case

$150

Manufacturer selling price

$350

Minus Cost of Goods Sold

$200

Gross margin

$150

See page 6 of the case for

the actual cost of Goods

At this price, the company is

making a profit on the appliance, but only 1.6% of the target market (computed earlier)

will buy the appliance and therefore the Pods. If your target market was 15

a

Exhibit 5 Willbtgness to Pay for Drinkworls Machine and Pods, 201? m mm mm 463% 2-50 Hm Scum: DWIE- Research October 201?. Note: N - 2,301]. Dala are disguised In protest condimliality. Explanation of Exhibit 5 - Drinkworlcs appliance: 1.8% of respondents are willing to pay at least $499; 2.1% of respondents are willing to pay at least $399 and so on; From page 6, you can see about 5D% of respondents are not interested in buying this product at any price. You can infer that about 30% of the respondents are looking at a price below point, and complexity. (See Exhibit 4.) Pricing In October 2017, Drinkworks conducted an experiment using an online auction to estimate consumers' willingness to pay for the device and its pods. Drinkworks ran an auction where consumers placed bids at various prices to actually buy the machine. It recruited about 2,300 people between the ages of 21 and 65 years old, who consumed alcoholic beverages at least once per month, and had an annual household income greater than $50,000. First, respondents were shown a video and information about the Drinkworks device and the three pod options-cocktail (with alcohol), mixer (without alcohol), and beer. Then, if respondents were interested, they could place bids on the device and each pod option. Davis said, "We did a reverse auction to see how many people would purchase the machine at each price. When they pressed the button to buy it, they thought they were actually buying it." At the end of the experiment, Drinkworks told participants that the device did not yet exist and instead provided them with a coupon. The device auction started at $999 and went down in $50 increments. Mixer and beer pods prices started at $4.00 and went down by $0.25, and cocktail pods prices ranged down from $7.50 in steps of $0.50. By comparison, bars and restaurants often priced cocktails between $8 and $15. Results showed that more than 90% of respondents viewed the Drinkworks Home Bar device as a premium product. Forty-two percent of respondents were not interested in purchasing the device at any price, while 6.9% of respondents were willing to pay at least $199, about 3.8% were willing to pay at least $299, and 2.1% were willing to pay at least $399. (See Exhibit 5 for willingness to pay for the Drinkworks machine and pods.) The respondents who were willing to pay at least $299 were more likely to be between the ages of 21 and 29, live in an urban area, socialize at home at least once a week, and have higher household income levels. For the pods, Drinkworks looked only at respondents who were interested in the concept. About half of these respondents were willing to pay at least $4 per cocktail pod; only about 7% were willing to pay $4 per mixer pod; and 35% were willing to pay at least $4 per beer/ cider pod (refer to Exhibit 5). Generally, those who indicated higher willingness to pay for the device also tended to project slightly higher device usage. At scale, each Drinkworks Home Bar would cost approximately $250 to manufacture and distribute, accounting for returns, warranty replacements, promotions, fulfillment, and freight. The variable costs to manufacture alcoholic cocktail pods, non-alcoholic mixer pods, and beer pods were $1.20, $0.95, and $1.10, respectively. Usage Frequency While conducting research, Drinkworks had been building a device and repurposive and