In: Operations Management
Pricing is one of the most complex decisions in marketing because it requires balancing multiple objectives, including cost/margin, positioning in the mind of the consumer, impact on channel/distribution partners, and competition. This assignment is designed to illustrate the effects of the pricing decision in these different contexts.
COUNTRYMANAGER |
Pricing / Margins |
SKU #1 |
SKU #2 |
SKU #3 |
|
MSRP |
8.00 |
10.00 |
12.00 |
Average Discount |
25% |
30% |
28% |
Allowance % |
5% |
8% |
10% |
Unit COGS |
2.15 |
2.43 |
2.56 |
Shipping / Tariffs |
0.33 |
0.36 |
0.37 |
MSP |
|||
Gross Margin |
|||
Gross Margin % |
Channel #1 |
Channel #2 |
Channel #3 |
|
Channel Discount |
20% |
25% |
30% |
Cost to Channel |
|||
Channel Margin |
20% |
20% |
23% |
Retail Price |
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What is the role of the MSRP in your pricing decision?
The Manufacturer Suggested Retail Price (MSRP) is a price which is set by the manufacturer of a specific product. Retailers receive a volume discount for buying said product in large quantities to allow for acceptable profit margins to be received by the retailer through the sale of the product. In order to avoid disagreements between the manufacturer and the retailer and to give the manufacturer more control over the sales price, the sales price is preset and contains sufficient mark-ups to allow for price adjustments made by the retailer.
How might consumers respond to a brand with two SKUs, a medium-sized economy toothpaste priced at $4.00 and a large healthy product at $3.50? |
Subject to the customer’s personal preference (i.e. taste or benefit gained by switching) the consumer will likely buy the product that he/she feels is the best value and I personally would most likely at least try the large healthy option at the lower cost.
For each SKU in the following table, calculate the manufacturer’s selling price (MSP), the unit margin, and the gross margin as a percentage of MSP. |
SKU #1 |
SKU #2 |
SKU 3# |
|
MSRP |
8.00 |
10.00 |
12.00 |
Average Discount |
25% ($2.00) |
30% ($3.00) |
28% ($3.36) |
Allowance % |
5% ($.40) |
8% ($.80) |
10% ($1.20) |
UNITS COGS |
2.15 |
2.43 |
2.56 |
Shipping/Tariffs |
0.33 |
0.36 |
0.37 |
MSP |
$6.00 |
$7.00 |
$8.64 |
Gross Margin |
$3.12 |
$3.41 |
$4.51 |
Gross Margin % |
52% |
48.71% |
52.2% |
For retailers buying direct from the manufacturer, the MSP represents their product cost, which they will mark up to set the retail price. Given that an SKU has an MSRP of 10.00, calculate the MSP (cost to channel) and retail price for each channel in the table. |
Channel #1 |
Channel #2 |
Channel #3 |
|
Channel Discount |
20% |
25% |
30% |
Cost to Channel |
$8.00 |
$7.50 |
$7.00 |
Channel Margin |
20% |
20% |
23% |
Retail Price |
$9.60 |
$9.00 |
$8.61 |
Many small retailers will buy through a wholesaler instead of buying direct from the manufacturer. Given an SKU with an MSRP of 10.00 and a discount to the wholesale channel of 30%, what would be the wholesaler’s selling price (WSP) if the wholesaler has a desired margin of 15%? If the retailer has a desired margin of 20%, what would the retail price be? |
|||
SKU |
|||
MSRP |
$10.00 |
||
Discount |
30% |
||
Cost to Channel |
$7.00 |
||
Wholesaler Margin 15% |
+1.05 |
||
Wholesaler selling price |
$8.05 |
||
Retail Margin 20% |
+1.61 |
||
Retail price |
$9.66 |
||
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