The right price must generate enough sales dollars to pay for the costs of developing, producing, distributing and marketing the product as well as earn a profit for the company. There are various factors that affect the pricing decision such as objectives, demands and market forces. We will examine these factors in detail below.
1.1 Company Factors
Before embarking on pricing decisions, it is necessary to understand companys objectives. Lee Jr. and Albert are looking to achieve long-term profit making and sustainability in the market. Higher importance would then be given to obtaining increased market share and sales over immediate profit making. Glitzz needs to focus on gaining foothold in the market, as it would be a new product facing relatively established competing brands and products. As such, Glitzz should not be priced at premiums but instead work to encourage trials, consumer acceptance and return business. If successful, high profits should follow.
1.2 Consumer Factors
Consumer factors such as demand for the particular product class, product or brand, price and availability of similar product, price sensitivity as well as perceptions of value can affect pricing decisions and help Lee Jr. and Albert gauge feasibility and acceptability of prices.
The demand for the product is extremely important for pricing decisions. The greater the demand, the higher can the product be priced. Demand by consumers is affected by four factors. (1) Consumer Tastes (2) Price and Availability of Substitutes (3) Consumer Income and (4) Price of product.
Glitzz can be classified as unsought goods; products that potential consumers do not normally want or know they can buy. These products are not searched for and do not create demand in consumers initially. Consumers of such product only buy when they perceive the necessity for it. As such, creation of awareness and education about product benefits becomes crucial for retailers and creators. This translate to the need for increased budgeting assigned to advertising strategies such as personal selling, relatively aggressive advertising and benefit demonstrations, increasing fixed overhead costs for marketing and distribution.
Glitzz would be a complementary product, with its demand somewhat predicated on the prices and sales of relevant product classes such as jewelry, diamonds and watches. There is negative cross elasticity between Glitzz and the above mentioned product class, i.e. the decrease in prices of jewelry, diamonds and watches would bring an increase in demand for cleaning agents such as Glitzz. In times of recession, luxury goods such as the above may not be highly sought after, affecting Glitzzs ability to sell due to its nature as a derived product. Pricing strategies should take into consideration market trends and demands of these product classes and be adjusted accordingly.
Consumers perception of values and benefits provided by a product will affect the amount of money they are willing to pay in exchange for the product and their price elasticity. Assessing value involves the judgment by a consumer of the worth and desirability of a particular product relative to its substitutes. At the core level of the product, Glitzz is a jewelry cleaner, delivering to consumers the opportunity to renew and bring back the shine in their precious stones, jewelry and watches.
The tangible benefits offered come from the products non-corrosive, non-abrasive and gentle on skin nature. Premium natural ingredients used in the making of the product are also marketed as a key attribute. The attribution values of Glitzz will translate into a definitive price that consumers deem worthy for the product. Lee Jr. and Albert have already taken steps to survey consumer market and test product responses. The NUS student researchers found that few consumers are willing to pay more than SGD20 for the product.
Price and availability of similar products are also strong molding forces on pricing for new entry products such as Glitzz. Technological advances and increasingly discerning consumers meant heightened awareness about substitute products and prices. The ability to compare similar products and weigh out the benefits against cost, affects consumers decision-making and willingness to pay for a product. The way to mitigate such comparisons is to possess strong distinguishing characteristics from its competitors. Glitzz, however, seem to be substitutable by many alternatives in the market. An in-depth competitor analysis is as follow.
Brilliant Restorer and Glitzz
Brilliant Restorer and Glitzz appear to be offering analogous product benefits and have similar dispensing system and packaging. It is also under a largely established distributor brand, Gordon Max. It is distributed through channels that Glitzz is thinking of using, taking up counters at large departmental stores such as Tangs. It appears to be Glitzzs main competitor, targeting similar markets, offering similar benefits and marketing in similar channels.
Connoisseur and Glitzz
Connoisseur practices product differentiation, offering a range of specialized cleaning agents for different kinds of metals. It may lose out on the convenience associated with the all-purpose Glitzz, but can market its specialized uses as a plus point. The company has strong advertising roots, marketing its products in mainstream newspapers and online. Glitzz may face threats stemming from Connoisseurs strong advertising efforts.
Powervescent and Glitzz
Powervescent is a tablet-form cleaning product, offering similar benefits at very low price. It may be less convenient to use when compared to Glitzzs pump bottle design. Powervescent does not distribute in Singapore and is in process of setting up its e-store. While Powervescent may prove to be a competitor among price sensitive consumers in the future, its low prices may also be viewed as a reflection of its quality. As such, it may not be as big a competition to Glitzz as others.
Cleaning Machines and Glitzz
The second tiered competitors offer jewelry-cleaning machines with high technology performances such as the Connoisseur Jewelry Bath ($49), Savco Jewelry Cleaner ($95) and OSIM uSonic ($108). It is priced much higher than cleaning solutions such as Glitzz but seem to promise better and more targeted results. The products may be marketed at affluent consumers or retailers mostly. It is not as close a substitute as portable, self-administered cleaning products such as Brilliant Restorer.
Other solutions for dirty or tarnished jewelry include common soap and toothpaste as well as free cleaning services provided by retailers as a value-add for purchases.
The large number of substitutes makes demand for such products very elastic; i.e. consumers are price-sensitive and decrease in prices will lead to increase in demand for the product. Glitzz would have to pay extra attention to Brilliant Restorer and Connoisseurs as they are close substitutes and their prices will be critical in the pricing decision. Glitzz is a normal good and is relatively price elastic as compared to necessity goods or luxury goods. As such, lowering prices and keeping check with competitors prices becomes the key to increasing consumer demand.
1.3 Competitive Factors
Pricing for Glitzz is constrained by the type of market in which it competes. Jewelry cleaning products compete in a monopolistic competition market structure. There are a number of competitors competing on both price and non-price factors. For example, Lockhart competes with its low prices in the sector while OSIM offers high technology solution as the unique selling point. Understanding the environment in which they compete will allow a deeper insight into the range of acceptable prices, extent of market differentiation and importance of advertising. In such an environment, Glitzz should allocate more budgets to advertising to distinguish itself from its competitors. This means a rise in costs and subsequently, a necessary rise in pricing. Also, its prices should strive to not deviate too much from the competing products prices.
To be effective, pricing must work to cover the costs and make profits. It is therefore necessary to take into considerations the various costs involved in producing, packaging, marketing and distributing the product. The cost of production for Glitzz in this case includes the SGD5000 re-packaging consultation fee and the direct production cost of Glitzz cleaning solution and fees associated with packaging it into 30ml pump bottles to achieve sales state. Overhead costs may also include distribution fees such as retailers cut in exchange for sales services and media fees to advertise the product.
Keen research and delicate mediation of all the above company, consumer and competitive factors will allow conclusion of a feasible price that is most symbolic of the value Glitzz hold.
I propose a price range of SGD13 to SGD17. The ultimate upper limit as surveyed by NUS students is SGD20. The ultimate lower limit is established with the unit variable costs and other production costs in mind, which will be SGD5 at the initial stage. The recommended price ranging between SGD13 to SGD17 takes into consideration competitors prices, companys objectives and consumers buying responses. The suggested price should work to undercut competitors prices and stimulate trials while not deviating too much from the market rate. This way, Glitzz can remain profitable, competitive and achieve a breakeven within a short period of time.
2. What price would you recommend for Glitzz? Why?
I would recommend Glitzz be sold at SGD14. In the monopolistic competition market structure, Glitzz cannot simply establish its price as an independent company. It has to be subjected to the market demand and supply forces, causing prices to be relatively similar to its close competitors.
To use a demand-oriented pricing approach, Glitzz should engage in penetration pricing. By setting a relatively lower price to its competitors, Glitzz can ensure interest and high levels of appeal during the launch stage in the market. Whether or not penetration market works is predicated on several factors. Firstly, consumer base should be relatively price sensitive. This aspect is fulfilled in the case of Glitzz. With the existence of many substitute products in the market, there is high demand elasticity.
Consumers with no immediate preferences or prior experiences may make purchase decisions based on prices. By setting the price at SGD14, Glitzz can subtly undercut its competitors and establish its value. Secondly, as a new product in its introductory stage, Glitzz has to work on overcoming its weakness in terms of its new entry and unknown brand identity. Glitzzs main objectives should then be to stimulate trials and slowly accumulate market share. Penetration pricing helps to encourage first purchases and can work hand-in-hand with quality control and good brand management to build market share. Increased volume of sales will help maximize profits for Glitzz as unit production and marketing costs falls.
That being said, Glitzz products must not be priced too low and deviate too much from similar competitors. Assuming Glitzz eventually decides to market and distribute its product through large departmental stores like Robinsons, its breakeven price for the initial batch of 20,000 where total cost = profit margin will be at SGD10.50. We have to price higher than SGD10.50 to break even and lower than SGD14 to SGD17 to undercut the competition. It is not feasible for Glitzz to price its product closer to the end of SGD10.50. Firstly, it may encourage a price war where competitors engage in successive price-cutting to increase or maintain market share. This can only be detrimental to the entire industry in the long run. Secondly, Glitzz as a new company needs to have buffer in profits to invest in further marketing or advertising efforts, cope with emergency operational issues or save up for brand expansion.
Also, the skimming pricing method would not work for Glitzz as its product is too homogenous and not differentiated enough to justify premium pricing.
In addition, the pricing of Glitzz cleaning solution at the higher end of the SGD10.50 to SGD14 range ensures Glitzz have future opportunities and space to conduct promotional initiatives such as discounts and still be profitable. Consumers may not take kindly to products increasingly their prices after a successful intitial promotion period where low prices were offered. This may affect their perceived image of the brand and be detrimental to future sales.
In essence, Glitzz product pricing must be low enough to undercut competitors to generate interest in consumers and high enough to allow profit maximization. While the penetration pricing strategy can help to build volume, managers must keep close track of the costs and monitor its effects on the market.
3. What strategy would you propose for Glitzz? What costs and expenses would be involved? Calculate the break-even point.
Glitzz at its point of entrance would be at the introduction stage of its product life cycle. Here, the marketing objective should be to gain awareness. This objective is further amplified by the nature of Glitzz as an unsought good. There is high level of need for promotional and advertising efforts to inform and educate the public about the presence and benefits of Glitzz. According to past track records, Glitzz did well in promoting with in-store counters and consumer exhibitions.
This has roots in the personal selling and benefits-demonstration means of promotion. I would recommend Glitzz to continue with such channels of marketing and to distribute and promote their products with departmental stores such as Robinsons. As a new product, this would allow consumers to experience the benefits of Glitzz first-hand at well-established shopping places, triggering first purchases and trials.
To give a concrete example, on top of in-store distribution, Glitzz could hold demonstration booths at shopping mall forums to introduce its products. Free samples could be given out to generate brand awareness and trials.
Costs involved and Assumptions made
* Production cost of one bottle of Glitzz at SGD5 (Unit Variable Cost) * Branding Consultation Fee at SGD5000 (Fixed Cost)
* Promotional Event at approximately SGD25000 (Fixed Cost) Amount from assuming a 3 days (6 hrs/day) promotional event at a shopping mall costing about SGD9000 in rentals, with an estimated 3000 samples to be given out and an employment of 3 sales assistants at SGD100 per day. The event will total up to about SGD$24900 * Distribution Margin for Retailers at its maximum of 50% Profit Margin * One bottle of Glitzz is priced at SGD14
Hence given the list price of SGD14, the newly incurred marketing cost coupled with the sunk cost of consultation fee will result in the breakeven point being at 15 000 bottles of Glitzz, a highly feasible goal. I believe that promotions and demonstrations should be used at the initial stage of the product launch to create awareness and inform consumers of its existence. Subsequently, advertising in other forms should follow to distinguish Glitzz from its competitors and achieve brand recognition and preference. Glitzz would have to reevaluate costs and prices to determine next marketing move then.