Question

Green Gro is an innovative new pH-balanced lawn fertilizer that will be sold by the manufacturer directly to homeowners. In the area where Green Gro has been developed, the fertilizers currently being sold are spread on a lawn only after a layer of lime has been applied. Green Gro has the advantage of not requiring an application of lime.

The manufacturer’s variable costs for producing Green Gro are $11.00 per 50-pound sack. A 50-pound sack of Green Gro covers approximately 1,000 square feet of lawn. The amount of currently sold fertilizer necessary for covering one square foot of lawn costs the homeowner $0.02. The amount of lime necessary for covering one square foot of lawn costs the homeowner $0.005. Market research has determined that the value of the homeowner’s leisure time necessary for spreading something on 1,000 square feet of lawn is approximately $8.00.

(a)   Use this information to calculate the value to the typical homeowner of a 50-pound sack of Green Gro. Show your work.

(b)   Name and describe the three basic new-product pricing strategies discussed in the course and indicate when, in general, each would be most appropriate. Then give and justify your opinion concerning which of the three strategies should be used by the manufacturer of Green Gro.

(c)   Assuming your answer for Parts (a) and (b), give and justify your recommendation of the price that should be charged for a 50-pound sack of Green Gro. What would be the manufacturer’s contribution margin at that price?

Answer 1

Answer (1) Value of typical homeowner of a 50 pound sack of Green Gro

$11 + $0.02 × 1000 + $0.005 × 1000 + $8 = 11 + 20 + 5 + 8 = $44

Value of typical homeowner of 50 pound sack of Green Gro is $44.

Answer (2) Three basic new product pricing strategies are as follows :

(a) Penetrate pricing strategy : It is strategy in which price of product is set low in order to have wide reach of product to consumers. Due to low price consumer will switch to new brand. It is quick way to gain market share. This enable firm to enter competative industry.

(b) Skimming price strategy : In this strategy high price is set in order to skim profits and then lower price over time so that it could reach remaining market. It have higher return on investment and help in creating brand image.

(c) Following price strategy : In this strategy prices are set by matching prices with price leader. This is used in case of oligopolistic market.

In order to have more profits skimming price strategy should be used.

If brand in new then in order to have wide reach of product, penetrate pricing strategy is used.

If firm is in oligopolistic environment then it should use following pricing strategy.

Answer (3) Manufacturer should charge price above $44. In order to make brand image skimming price strategy should be adopted. $ 70 should be set initially and margin contribution will be $ 26. ( $70 - $44 )

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