Case 2. GoNuts International

GoNuts are a new savoury snack made from quinoa. Derived from the Spanish spelling of the Quechua name kinwa, quinoa was first grown in the Andes 3,000 to 4,000 years ago. It is a pseudo-cereal (not derived from grasses) that is in many ways healthier. This is partly because it has been less intensively cultivated and is mostly still farmed organically. For GoNuts the manufacturing method is similar to cornflakes but it is to be sold as a savoury snack. GoNuts look like potato crisps but are more golden and regular in shape. Raw materials and manufacturing costs are higher than for potato snacks but they are healthier in their basic form they have fewer calories and are low in saturates and cholesterol. GoNuts are sweeter than potato crisps but can be flavoured. Consumer trials showed that the versions of popular crisp flavours received satisfactory reviews. R&D were working on these flavours. Meanwhile the aim was to launch the product with four flavours that consumers liked: regular, sweet and sour, honey roasted, and ranch. GoNuts needed dedicated plant to produce the product for a direct cost of 1,500 per tonne, excluding cost of capital. With potato snacks selling for 3,000 per tonne, the brand manager was confident about the products profitability. Her confidence took a serious knock however when Sales, Finance and Market Research each came up with different recommended prices. The finance officer demanded that the price be set to cover the usual 100 percent of overhead charge plus a 20 per cent margin. His suggested price of 3,600 per tonne gave a very satisfactory 190,000 profit for the targeted 300 tonne annual sales.

Unfortunately, the finance officers view conflicted with the sales managers who wanted the price to be 100 per tonne below potato crisps. The sales manager claimed that only with a price advantage could they achieve the target sales against the established competition. The sales manager added that a low initial price would also compensate traders for the extra shelf space GoNuts used.

The marketing researchers contribution to the pricing debate confused the brand manager even more. Rather than giving a price, the researcher gave a string of prices and sales levels and to the annoyance of the finance officer, some financial information: Price(000) 2.5, 3.0, 3.5, 4.0, 4.3 Sales (tonnes) 405, 340, 270, 200, 110 The researcher also estimated the 315,000 annual fixed operating cost for the product and the capital investment that depended upon the annual volumes produced. Annual sales (tonnes) 405, 340, 270, 200, 110 Capital investment (000) 2,250 | 2,050 |1,650 |1,220 | 600 I assume you know that our average cost of capital is 14 per cent. Commented the finance officer. All very impressive, said the brand manager, but what price should we charge? That all depends on what you want to achieve. Replied the researcher. 1. Use the price and sales data provided by the marketing researcher to estimate price elasticities. Show how you would use them elasticities in setting the GoNuts price.

2. What prices give the highest sales value, sales volume, gross profit, gross margin, net profit, Return on sales, ROCE, capital cost covered (C3), economic value added (EVA)? Choose a price at which to market GoNuts and explain why. How much room is there to manoeuvre around this price?

3. At a price of 3,500 per tonne, sales levels for advertising levels are shown below. What level of advertising should the company should invest in? Explain the financial implications. Advertising (000) 25 50 100 200 400 Sales (tonnes) 180, 210, 290, 370, 420 Capital investment (000) 1,100 | 1,250 | 1,600 | 2,010 | 2,300