estis a real heaven for dogs! This was Zara's idea to helpSpooner, her lovely Border collie, who refused to go outside in the hot weather, shying from walks and exercise. Being a smart savvy business woman, Zara put her creativity to work and came up with this wonderful accessory for dogs: theCool Vest.

TheCool Vestis made with a special fabric that absorbs and retains water well. It contains no chemical gels. By simply soaking the adjustable, easy to wear, vest in water, it provides a protective layer from direct and indirect sunlight and heat. Its laminated lining keeps dogs dry. It is a lightweight vest, thin and hand washable. There is no refrigeration necessary, it is easily activated and re-activated with water. Completely pet safe!

The USA market:

Zara's idea is a great fit with the actual trends. The USA is a leader in the pet care market and has the biggest and fastest growth in this sector. The pet population in the USA reached 145,750,000 with owners spending an average of $450 on their pets each year. 80% of these expenses are on pet care sales and include cat and dog foods. 25% of pet care sales come directly from pet products such as accessories, cat litter, and pet dietary supplements, but only 4% of this percentage is devoted solely to pet accessories. The pet care industry is dominated by a few large firms, such as Purina, but players with less than 5% market share can be very influential.

Production and Cost Information:

To create herCool Vest^,Zara estimates her initial investment for the production facility and its equipment at $200,000 and the general overhead expenses at $17,000. To promote theCool Vest, Zara will set aside $175,000 to be spent in advertising, such as billboards and pamphlets, and $350,000 on fixed promotions, e.g., various point of sale displays and other price promotions, in the first year. Zara expects 8% of the retail price to go for labour costs, 25% for raw material expenses, while 5% will be for factory operating costs and 0.5% for transportation expenses. Zara decided to sell her product through distributors rather than directly to retailers. Distributors prefer margins of 15% while department stores and pet shops look for 25% margins on pet accessory products. TheCool Vestwill then be sold to consumers for $45.00.

Test market:

Before launching nationwide in the USA, Zara decided to test market herCool Vest, to test its potential success in a smaller market in Sprinfield. The pet population in this market is estimated to 650,000. Zara decided that her market test will last a period of 5 months. In the first 3 months she sold theCool Vestat its original price. During the following two months, Zara decided to run a sales promotion discount, selling theCool Vestat 20% off its original price. Sales for the first three months reached 2,100 units, and were estimated at a total of 1,500 for the following two months.

Zara's carries other pet related accessories to cool pets. The Asuma and the Rehydrate are well-established products. The Asuma is a bed that remains cool for a long period. Therefore, pets remain cool and comfortable at home. The Rehydrate is similar to a Gatorade for humans. The water contains electrolyte. Hence, the pet will be refraished with key elements to remain hydrated. The decision to introduce in the test market herCool Vestfor dogs influenced the sales of these two products (see table below):

Asuma(cool pet bed)

Rehydrate(Electrolyte sports drink)

Price

$25.00

$9.00

Units Sold - First 3 months

7,380

5,100

Units Sold- Last 2 months

3,200

4,800

(*assume sales are evenly distributed during the 5 months)

6)Calculate the market size for pet accessories in dollars in the USA.

7) Calculate the market share for Zara's products.

8) After an in-depth market analysis, Zara identifies that the objective value of her CoolVest to $50. Based on this assessment, she plans to set the product's retail price at $49.99. But after a quick focus group, she realizes that the consumers do not fully recognize or appreciate the product's true worth, and report a willingness to pay $40 (max.) for the vest.

Question:

If Zara holds avalue-basedapproach to pricing, what can be done about the identified discrepancy between objective value and perceived value?