Omnichannel Analytic Exercise
You work for a perfume company that is looking to implement a consistent pricing strategy across all of its channels. Recent research conducted by the marketing department has revealed that consumers are not only likely to check prices online when purchasing in stores, but due to inconsistent pricing across different channels, consumers have been unable to determine the exact position of the product which has led to confusion. Based on this information the CMO has insisted on the company implementing an omnichannel pricing strategy that maintains a consistent pricing approach across all channels.
In this multibillion dollar industry, there are several channels that drive the majority of the consumer spend. These are Department stores, Specialty stores, Discount stores, Drug stores, Supercenters and Online. The share of unit sales in each of these channels for the fragrance category is represented in the attached excel file. Each of these channels has a different type of price sensitivity which will result in different levels of distribution in each channel, and therefore different levels of sales resulting from this distribution.
Your fixed costs are fairly consistent as your company operates a large plant with a great amount of capacity. For the sake of this exercise no changes to fixed costs are possible in the near future so all decisions much be made with your fixed costs remaining as is.
Your variable costs are also fairly consistent for the category of your product. For purpose of this exercise, all products will be discussed in equivalized volume of 100 mL units. Each bottle of perfume, at this average size, has $6.25 of variable cost to produce.
There are additional costs to factor in. Each channel requires a specific margin off the selling price (which is the factor that will allow us to control consistent pricing) and due to the difference in volume purchasing along with value added. For simplicity sake, we will assume an additional $2 variable cost for the intermediary/distributor used in each channel.
Using the information provided below, determine three price points in this business. The most profitable price point, the price point that maximizes dollar sales to retail, and the price point that maximizes unit sales. Provide your answers for each of these questions along with the relevant information that reinforces that point (i.e. $34.99 is the most profitable price point because it delivers a total profit of $100 million). You must include the 3 price points and the relevant information (maximized profit, maximized sales to retail, and maximizes unit sales) in order to receive credit.
You must also provide a recommendation on which price to implement going forward. Hint: stating that you would pick the most profitable price point because it is simply the most profitable is ignoring many other factors such as market share and sales growth and an answer like this will result in no points for this portion of the exercise.
Fixed Costs Variable costs per unit Intermediary Costs Handling per unit $ 2.00 Operating Plant $ 6,500,000 Employee Salaries $ 2,250,000 Advertising Budget $ 5,000,000 Other Administrative $ 750,000 Total Fixed $ 14,500,000 perfume contents bottle / container packaging other costs per unit Total Variable Cost $ 2.25 $ 2.75 $ 0.95 $ 0.30 $ 6.25 Total Intermediary ( $ 2.00 Cost Department stores Specialty stores Discount stores Drug stores Supercenters Online Share 20% 22% 9% 15% 9% 25% Retail Margin 25% 30% 10% 20% 8% 15% Elasticity (0.66) (0.56) (1.20) (0.78) (1.40) (1.10) Distribution Previous year volume 1,458,769 Previous year price $35.99 Previous total sales $ 52,501,096 Total Sales to Retail $ 42,016,627 Previous Total Costs $ 26,534,844 Previous year profit $ 15,481,783 Previous Year Costs Last Year New Price Operating Plant Employee Salaries Advertising Budget Other Administrative Total Fixed Costs $ 6,500,000 $ 2,250,000 $ 5,000,000 $ 750,000 $ 14,500,000 Previous year volume Previous year price Previous total sales 1,458,769 $35.99 52,501,096 New price Price % increase New Total Sales $50.00 38.9% 47,918,450 $ $ Intermediary Cost Previous year VC Previous Total Costs $ $ $ 2,917,538 9,117,306 26,534,844 Intermediary Cost New VC Previous Total Costs $ $ $ 1,916,738 5,989,806 22,406,544 Iperfume contents bottle / container packaging other costs per unit Total Variable Cost Intermediary Cost per unit $ $ $ $ $ S 2.25 2.75 0.95 0.30 6.25 2.00 Total Sales to Retail $ 42,016,627 Total Sales to Retail $ 37,767,485 Previous year profit $ 15,481,783 New profit $ 15,360,940 Department stores Specialty stores Discount stores Drug stores Supercenters Online Share 20% 22% 9% 15% 9% 25% Volume 291,754 320,929 131,289 218,815 131,289 364,692 Retail Margin Price to Retailer Total Retail Cost Elasticity Change in Volume New Volume 25% $26.99 $7,875,164 (0.66) -26% 216.796 30% $25.19 $8,085,169 (0.56) -22% 250,969 10% $32.39 $4.252.589 (1.20) -47% 69,960 20% $28.79 $6,300,132 (0.78) -30% 152.375 8% $33.11 $4,347,091 (1.40) -54% 59,739 15% $30.59 $11,156,483 (1.10) -43% 208,530 New Price to Retail New Cost to Retailer $37.50 $ 8,129,851 $35.00 $ 8,783,900 $45.00 $ 3,148,205 $40.00 $ 6,095,020 $46.00 $ 2,747,975 $42.50 $ 8,862,533 Total 1,458,769 $ 42,016,627 958,369 $ 37,767,485 Fixed Costs Costs Last Year New Price Operating Plant Employee Salaries Advertising Budget Other Administrative Total Fixed Costs $6,500,000 $2,250,000 $5,000,000 $750,000 $14,500,000 Previous year volume Previous year price Previous total sales 1,458,769 $35.99 $52,501,096 New price Price % inc New Total $50.00 38.90% $47,918,450 Intermediary Cost Previous year VC Previous Total Costs $2,917,538 $9,117,306 $26,534,844 Intermedia New VC Previous T $1,916,738 $5,989,806 $22,406,544 perfume contents bottle / container packaging other costs per unit Total Variable Cost Intermediary Cost per unit $2.25 $2.75 $0.95 $0.30 $6.25 $2.00 Total Sales to Retail $42,016,627 Total Sales $37,767,485 Previous year profit $15,481,783 New profit $15,360,940 Share Volume Retail Margin Price to Re Total Retail Cost 20% 291,754 25% $26.99 $7,875,164 22% 320,929 30% $25.19 $8,085,169 9% 131,289 $32.39 $4,252,589 15% 218,815 20% $28.79 $6,300,132 9% 131,289 8% $33.11 $4,347,091 25% 364,692 15% $30.59 $11,156,483 Department stores Specialty stores Discount stores Drug stores Supercenters Online 10% Elasticity Change in Volu New Volur New Price New Cost to Retailer -0.66 -26% 216,796 $37.50 $8,129,851 -0.56 -22% 250,969 $35.00 $8,783,900 -1.2 -47% 69,960 $45.00 $3,148,205 -0.78 -30% 152,375 $40.00 $6,095,020 -1.4 -54% 59,739 $46.00 $2,747,975 -1.1 -43% 208,530 $42.50 $8,862,533 Total 1,458,769 $42,016,627 958,369 $37,767,485 Fixed Costs Variable costs per unit Intermediary Costs Handling per unit $ 2.00 Operating Plant $ 6,500,000 Employee Salaries $ 2,250,000 Advertising Budget $ 5,000,000 Other Administrative $ 750,000 Total Fixed $ 14,500,000 perfume contents bottle / container packaging other costs per unit Total Variable Cost $ 2.25 $ 2.75 $ 0.95 $ 0.30 $ 6.25 Total Intermediary ( $ 2.00 Cost Department stores Specialty stores Discount stores Drug stores Supercenters Online Share 20% 22% 9% 15% 9% 25% Retail Margin 25% 30% 10% 20% 8% 15% Elasticity (0.66) (0.56) (1.20) (0.78) (1.40) (1.10) Distribution Previous year volume 1,458,769 Previous year price $35.99 Previous total sales $ 52,501,096 Total Sales to Retail $ 42,016,627 Previous Total Costs $ 26,534,844 Previous year profit $ 15,481,783 Previous Year Costs Last Year New Price Operating Plant Employee Salaries Advertising Budget Other Administrative Total Fixed Costs $ 6,500,000 $ 2,250,000 $ 5,000,000 $ 750,000 $ 14,500,000 Previous year volume Previous year price Previous total sales 1,458,769 $35.99 52,501,096 New price Price % increase New Total Sales $50.00 38.9% 47,918,450 $ $ Intermediary Cost Previous year VC Previous Total Costs $ $ $ 2,917,538 9,117,306 26,534,844 Intermediary Cost New VC Previous Total Costs $ $ $ 1,916,738 5,989,806 22,406,544 Iperfume contents bottle / container packaging other costs per unit Total Variable Cost Intermediary Cost per unit $ $ $ $ $ S 2.25 2.75 0.95 0.30 6.25 2.00 Total Sales to Retail $ 42,016,627 Total Sales to Retail $ 37,767,485 Previous year profit $ 15,481,783 New profit $ 15,360,940 Department stores Specialty stores Discount stores Drug stores Supercenters Online Share 20% 22% 9% 15% 9% 25% Volume 291,754 320,929 131,289 218,815 131,289 364,692 Retail Margin Price to Retailer Total Retail Cost Elasticity Change in Volume New Volume 25% $26.99 $7,875,164 (0.66) -26% 216.796 30% $25.19 $8,085,169 (0.56) -22% 250,969 10% $32.39 $4.252.589 (1.20) -47% 69,960 20% $28.79 $6,300,132 (0.78) -30% 152.375 8% $33.11 $4,347,091 (1.40) -54% 59,739 15% $30.59 $11,156,483 (1.10) -43% 208,530 New Price to Retail New Cost to Retailer $37.50 $ 8,129,851 $35.00 $ 8,783,900 $45.00 $ 3,148,205 $40.00 $ 6,095,020 $46.00 $ 2,747,975 $42.50 $ 8,862,533 Total 1,458,769 $ 42,016,627 958,369 $ 37,767,485 Fixed Costs Costs Last Year New Price Operating Plant Employee Salaries Advertising Budget Other Administrative Total Fixed Costs $6,500,000 $2,250,000 $5,000,000 $750,000 $14,500,000 Previous year volume Previous year price Previous total sales 1,458,769 $35.99 $52,501,096 New price Price % inc New Total $50.00 38.90% $47,918,450 Intermediary Cost Previous year VC Previous Total Costs $2,917,538 $9,117,306 $26,534,844 Intermedia New VC Previous T $1,916,738 $5,989,806 $22,406,544 perfume contents bottle / container packaging other costs per unit Total Variable Cost Intermediary Cost per unit $2.25 $2.75 $0.95 $0.30 $6.25 $2.00 Total Sales to Retail $42,016,627 Total Sales $37,767,485 Previous year profit $15,481,783 New profit $15,360,940 Share Volume Retail Margin Price to Re Total Retail Cost 20% 291,754 25% $26.99 $7,875,164 22% 320,929 30% $25.19 $8,085,169 9% 131,289 $32.39 $4,252,589 15% 218,815 20% $28.79 $6,300,132 9% 131,289 8% $33.11 $4,347,091 25% 364,692 15% $30.59 $11,156,483 Department stores Specialty stores Discount stores Drug stores Supercenters Online 10% Elasticity Change in Volu New Volur New Price New Cost to Retailer -0.66 -26% 216,796 $37.50 $8,129,851 -0.56 -22% 250,969 $35.00 $8,783,900 -1.2 -47% 69,960 $45.00 $3,148,205 -0.78 -30% 152,375 $40.00 $6,095,020 -1.4 -54% 59,739 $46.00 $2,747,975 -1.1 -43% 208,530 $42.50 $8,862,533 Total 1,458,769 $42,016,627 958,369 $37,767,485
