North York Organic Stop Shops, current pricing strategy is “Price Skimming”, but the recent intensification in competition, is affecting the bottom line. Jennifer met with the finance director to obtain more information on this issue. The finance director explained that a while ago two companies entered the market, and started actively competing with North York Organic Stop Shops, thus the company’s sales are declining, and profits are falling.
Jennifer believes that the company is offering a premium product, which dictates a higher price. She is not willing to risk the company’s image in order to improve the bottom line. She strongly believes that any price cuts will lead to the deterioration of the company’s image. This will put the company in a position similar to discount stores, and thus the company will face intense competition. The finance director does not agree with Jennifer, since premium brand name could still be achieved, and prices should not be cut substantially to improve the company’s situation. But keeping prices at the current level, will halt the company’s growth prospects, and the company will start losing 15% of its sales each year.
The finance director cited that a price cut of at least 10% should be implemented to keep the company’s sales growth at 5% level. If nothing will be done to the pricing strategy, the company could risk going out of business in a couple of years. Jennifer realized the need for quick action, and asked his staff to summarize the key findings.
The second day, one of his staff brought an executive summary with the following information in it.

Current pricing strategy - Price Skimming

Current average product price when compared to competitors prices- North York Organic Stop Shops, average price is 20% higher than the average market price for a similar product in a store offering similar service.

Average product price at North York Organic Stop Shops - $100

Average direct costs per product - $20

Total overhead and indirect expenses - $20 million
Demand Elasticity - For a 10% decrease in price the demand goes up by 15%, i.e. sales increase by 15%

Current sales level - $ 4 million.

Note: North York Organic Stop Shops is not using any credit facilities at any bank or financial institution. After examining this information Jennifer decided to calculate a couple of metrics before adjusting the pricing strategy. She is willing to know the current break-even point. She is also interested to know the change in sales if she adopts a “Competitive Pricing Strategy” with prices in-line with the competition.

question :

Calculate the company’s sales and profits if the company adopts a “competitive pricing strategy”, and its prices will be 5% higher than the average price in the market place.

And Based on your calculations analyze which strategy should be followed and why?