case study for. what is the optimal base selling price for canty international’s new product,...
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CANTY INTERNATIONALCASE STUDY FOR
Problem
Problem
What is the optimal base selling price for Canty International’s New Product, Decoline?
Key Findings
Key Findings
• Canty International receives RFP from Bryant Inns
• Canty International Design lab develops Decoline
• Low Cost to produce Decoline
STRENGTHS
Strengths
• Has specific development department – Design Lab. • New product custom-made for Bryant Inns
• Currently no competition. • Requires very little effort to clean and maintain.
• New panels fit with current track systems
• Estimated service life is ten years. • Internal supplies cut down costs of
production. • Incoming transportation costs are non-
existent
• High quality materials at minimum cost
WEAKNESSES
Weaknesses
• Internal transfer - quality control is essential • New equipments expenses • Selling and administration expense • Customization prevent advance preparation
• Decoline’s price > Current price
OPPORTUNITIES
Opportunities
• Expansion of new product to new customers. • Low costs of materials allow market flooding
• Opportunity to build image and brand loyalty.
THREATS
Threats
• Increasing competitive pressures. •Current capacity restrictions limit expansion. • Tailored customizations are costly.
• Economic recession limits potential consumers
Competitive Analysis
Competitive Analysis
• Level of competition determined by the market structure of the industry.• Monopolistic competition• Better Product than the current wallpapers• Products customization by each customer• Elastic demand due to close substitutes
Target Market
Target Market
Bryant Inns’ Business of 150 inns and hotels across Canada
Current customers of Canty International
Hotels, Hospitals, Restaurants DayCares, Schools, Karaoke Bars,
Any Commercial Building that requireSoundproof, Fireproof, and Decorative walls
COST CALCULATIONS
Costs TotalFixed Costs/month
Supervision 1,080.00
Inspection 165.00
Miscellaneous indirect labour 84.00
Floor-space expense 327.00
Small tools and materials 30.00
3 building tables 10 years service life
($3450 / 10 years / 12 months = $28.75/month) 28.75
Cutting machine 10 years service life
($480 / 10 years / 12 months = $4/month) 4.00
Selling and Admin expense 4,300.00
Total Fixed Costs 6,018.75
Variable Costs/monthEnvironmentally cement: 500 m2 / 10 m2 = 50 50 * 8.3 litre = 415 litre 415 litre * $0.96 = $398.40 398.40 Direct labour: 500 m2 / 10 m2 = 50 50 * 1.84 hours = 92 hours 92 hours * $7.10 = $653.20 653.20 Techno-fibre: 90 cm * (1/100) = 0.9 metres 500 m2 / 0.9 metres = 555.56 metres 555.56 metres * $6.55 = $3638.92 3,638.92 Bamboo backing: 90 cm * (1/100) = 0.9 metres 500 m2 / 0.9 metres = 555.56 metres 1,650.01 555.56 metres * $2.97 = $1650.01Total Variable Costs 6,340.53
Total Costs 12,359.28
Breakeven:
$12359.28 / 500 m2 = $24.72/m2
ALTERNATIVE 1
PRICE SKIMMING STRATEGY
• Set an initial high price for product
First Alternative
• Lower price after sale saturation
Start off with a 35% mark up (innovators and early adopters)
$24.72 (per m2) x 1.35 = $33.37 = markup price
$24.72 (per m2) x 1.20 = $29.66 = second markup price
Followed by 20% mark up (early majority and late majority)
Advantages:
• high prices result in high-quality image
• Value seems greater than other products
• Allows the company to reduce price
Disadvantages:
• Slow rate of adoption • Discontent when price drops • Lead to Shortage in Supply • Competitors may undercut the high price
ALTERNATIVE 2
PRICE PENETRATION
Second Alternative
Set low initial price at the break-even price (zero profit)
High volume of sales decrease the cost for Canty International
Advantages: • Due to economies of scale: Average Cost will diminish as production increases
New competitors will incur a higher cost than Canty International
• Discourages competitors• Experience Curve Effect
Disadvantages:
• Setting the price low could give a negative perception of the quality of the product.
• Short-term losses due to the low price
• Could potentially lose out on producer's surplus.
ALTERNATIVE 3VALUE BASED
PRICING
Third Alternative
Set the price for Decoline using the Value based pricing strategy
Determines the price by the cost of owning the product over its useful life.
No discount given to innovators and early adopters
The calculations for the Decoline are as follows:$ 24.72 per meters squared+ 5.40 installation fee$ 30.12 every ten years*
The calculations for the current product are as follows:
$ 11.50 per meters squared+ 4.80 installation fee$ 16.30 every two years$16.30 x 5 times = $ 81.50 every ten years*
*mark-up not included
Advantages:
• Innovators and early adopters will purchase Decoline
• Decoline can be sold at a higher price
• High price adds value to Decoline
• Environmentally friendly cement used
Disadvantages:
• Difficult to implement • No reference prices for consumers
• Negative word of mouth
SOLUTION
1
•Early adopters and Innovators buy products at high price
2
•During product lifetime, sales (revenue) decrease
3
•Lower the Price to improve sales
Price Skimming
IMPLEMENTATIONPLAN
PLACE PRICE
PRODUCT PROMOTION
DIRECT DISTRIBUTION
Freight On Board, Factory
Starting Price for Innovators/Early Adopters will be 35% above breakeven price.
Price for Early/Late majority will be 20% above Breakeven price.
Contact Customers using Current Product
Sales Incentives
Niche Marketing
Decoline
Customized Product
10 year Service Life
Meets Standard Safety Requirements
Company Growth
Use a Market Growth Strategy• Expand into US hotel Industry• Expand to restaurants, malls, warehouses
PLAN B
PLAN B
Value Based PricingAdd Markup to Break even price of 45%
$24.72 x 1.45 = $35.84 per meter squared
Course Concepts
Marketing Mix
Pricing Strategies: Value BasedPrice SkimmingPrice PenetrationCost of Ownership
Diffusion of Innovation
SWOT (Strength, Weakness, Opportunity, Threat)
OPMT 1110. (Break Even)
Sources
Grewal, D., Levy, M., Persaud, A., & Lichti, S. (2009). Marketing (Canadian Edition). McGraw-Hill Ryerson Limited. Chapter 12. (All)
Ragan, C. & Lipsey, R. (2008). Microeconomics (Twelfth Canadian Edition). Pearson Addison Wesley. Chapter 7, 9. (All)