Whole Planet Beverages, Inc., wants to determine the correct product pricing for a new 12-ounce bottled flavored tea beverage distributed through DSD (Direct Store Delivery) distributors. The optimum price will:
- cover the cost of goods to Whole Planet
- cover marketing expenses
- provide profit objectives
- afford distribution margin discounts
- afford sales commissions
- be competitive
Here are the facts:
- Cost of goods are $0.32 per unit, including all ingredients and the shipping carton.
- Marketing expenses are estimated at $0.075 per unit.
- Overhead is estimated at $0.10 per unit in the first year.
- Profit objective is $0.05 per unit in the first year.
- Distributor price is $0.545 per unit (total of above numbers).
- Distribution channels include selling through DSD distributors who require a 30 percent margin prior to wholesale price to retailers. Dividing $0.545 by 0.70 (the reciprocal of 30 percent) yields a wholesale price to retailers of $0.78 per unit.
- Broker commissions are 5 percent of distributor price, or $0.0275 per unit, which are paid by the manufacturer.
- Retail price is estimated at $1.11, based on a 30 percent margin by stores carrying the beverage.
- Competitive products are selling at retail from $0.89 to $1.69 for 10-to 16-ounce sizes.
On first glance, the new tea beverage pricing appears to be OK. Its retail price of $1.11 is in the midrange between the smaller-sized 10-ounce competitor at $0.89, and the premium-priced market leader at $1.69 for 16 ounces.
However, let's assume that shipping the heavy finished product to distributors is expensive, adding an average $0.20 per unit, which Whole Planet must absorb. Distributors want a price that includes delivery. In addition, overhead expenses turn out to be higher, without a cushion for the broker commission expense. In total, an average of $0.25 per unit must be added to the factory price of the new tea beverage, resulting in a unit cost to distributors of $0.795 per unit.
This results in a retail price of $1.62 for a 12-ounce unit, edging precipitously close to the leader's price of $1.69 for 16 ounces, a better price per ounce for consumers.
The pricing decision: The company decides to downsize the new tea beverage to 10 ounces per unit and to switch from glass bottles to a lighter aluminum can. Also, it will use co-packing of the new can from a local plant, which also reduces overhead (co-packing refers to using the services of a company that produces goods and/or services for other companies, usually under the other company's label or name).
This results in a win-win situation for the new tea beverage. More exciting graphics and copy can be printed on the lighter can. Size impression does not seem to be a significant factor when compared against a 12-ounce bottle in local test markets. And shipping costs can be reduced to distributors.
The result is a reduction in additional costs from $0.25 to $0.185 per unit. The new factory price to distributors is $0.73 per unit, with a retail price of $1.49 per unit.