Firms continually seek to maximize profits by pricing their products above marginal cost in a way that captures potential consumer surplus as profit (Brickley, Smith, & Zimmerman, 2009). There are numerous ways to price products, but the key is to remain the preferred provider of the good or service being produced and to possess market power that prohibits other competitors from increasing their market share. The only element in the marketing mix that produces revenue for a company is price and this element is the easiest to change (Kotler & Keller, 2012).
It is industry standard to suggest retail prices for retailers. The price that the consumer pays is ultimately set by the retailer and is influenced by volume discounts and promotional allowances which will be discussed in the next section of this paper. At the beginning of the simulation, the manufacturer’s suggested retail price (MSRP) for Allround was higher than the competition but was not effecting sales due to consumer loyalty and the brand’s effectiveness (James, Kinnear, & Deighan, 2014).
Team B’s pricing decisions are summarized in Table C1 (Allround) and Table C2 (Allround+) in Appendix C. In periods 4, 6, and 8 pricing surveys were purchased in order to compare the MSRP of Allround and Allround+ to their direct competition Besthelp for Allround and Coldcure for Allround+. The surveys provided valuable information for pricing decisions. Allround maintained its price leadership position throughout the simulation while Allround+ initially was priced lower than Coldcure to provide an incentive for consumers to try the new brand. In periods 7 and 8 Allround+ was prices slightly higher than Couldcure. Unit sales increased for Allround+ while Allround’s unit sales decreased initially and were up and down towards the end of the simulation. Volume discounts may have contributed to the decrease in sales.
We also found that the best strategy is to adjust each price to the previous year’s inflation rate. This allows Allround to remain competitive while recovering any potential losses due to rising inflation our industry trade-off grid has shown our prices have remained in the optimal zone.
Volume Discounts and Promotional Allowances
Each period we established the MSRP, and then we focused on the overall pricing strategy which included volume discounts and promotional allowances. We, as brand managers, thought sharing discounts and promotions to reward large volume customers, would improve our strategy, as a result profits and stocks failed horribly. With the over the counter cold remedy market, it is common industry practice for drug manufacturers to recommend to retailers what their suggested retail price for their product. However, the final determination of the final product price was made with the consumer in mind instead of profits and stock prices.
We lowered prices for manufacturers in order to provide an additional volume discount to retailers based on the volume quantities of products purchased (James, Kinnear & Deighan 2014). Once the volume discounts were established, there was little to no changes during the entire simulation. The strong brand equity and high demand for the Allround product line resulted in heavy discounting which lead to an eroded profitability. Consequently, pricing was managed primarily at the suggested retail price level once discounts were established.
Advertising budget for the Allround brand differed in the different periods of the simulation. Essentially, the total advertising budget was $15 million for the first period, which increased to $16 million for the second period. The budgets for the other periods in a successive manner were $15 million, $15 million, $10 million, $12.6 million, $13 million, $15 million and $15 million. These budgets were relatively similar because of the bigger size of the targeted markets for Allround. Furthermore, since the product was in its maturity stage, it had benefited immensely from economies of scale, a factor that informed the decisions not to increase the advertisement budget substantially.
For the new Allround+ brand, the advertising budget for the first and second periods was $6 million. This gradually increased to $6.5 million in the third and fourth periods while the figure reduced to $6.3 million for the fifth and sixth periods. We decided to increase the advertisement budget for Allround+ since we were still not getting the results that we required from the new product in terms of sales and revenues.
Since we expected to increase the market share and keep abreast of competitors, we also decided to increase the advertisement budget for Allround+ as we progressed through the periods. In addition, there was need to increase the advertising budget for the new product during the successive period in order to create brand awareness among the target market which mainly comprised of children suffering from colds and flu. In deciding the advertisement budget, some of the factors that warranted consideration included the competitive atmosphere, the available funds and the goal of the advertising, which is primarily to increase the awareness of potential customers about the existence of the brands.
The promotion allowance for both brands also had some variations. For the first five periods, the promotion allowance for Allround dropped substantially from 17.0% in the first period to 15.5%, 13.5%, 10.5% and 10.5% in succession. Since many consumers were already aware of this product, we decided that it was not necessary to allocate a majority of the advertisement budget to promotion allowance. For the sixth and seventh periods, the promotion allowance increased to 16.0% while for the period the allowance was 16.1%.
For the Allround+ brand, we decided to allocate promotion allowances in an ascending order, from 10% during the first period of simulation followed by 14.5%, 16% and 17.4% before reducing it to 13.0%. The decision to allocate the promotion allowances in an increasing manner stemmed from the rationale that since the brand was new and in the introduction stage, it would significantly benefit from increased promotion allowance geared towards enhancing brand awareness among the targeted consumers.
Selected Advertising Agency
The advertisement agency chosen for the Allround Brands during all the periods except the third period was Brewster, Maxwell, & Wheeler. For the third period, the agency chosen was Sully and Rogers. We thought that by reducing our advertising cost to a particular agency that we would increase sales for that period. However, we found that cheaper does not always mean better. The rationale for choosing Brewster, Maxwell, & Wheeler stemmed from the fact that the agency is a high cost agency; therefore, it is likely to generate higher quality ads (Kurtz & Boone, 2014). It was responsible for creating, handling and planning all the advertising initiatives at the organization. Moreover, the agency had the responsibility of handling overall branding strategies as well as sales promotions for the organization. As part of the advertising campaign, Brewster, Maxwell, & Wheeler also produced television and radio commercials, conducted mobile marketing, out of home advertising and online advertising. All these forms of advertising are essential for guaranteeing the success of the brands (Kotler & Keller, 2012).
Similarly, for the Allround+, Brewster, Maxwell, & Wheeler was the only advertising agency during all the periods. The team reasoned that the advertising agency would be responsible for commissioning surveys and market research, booking advertising time and providing other services that aid the organization to succeed in the targeted market. It also became apparent that the agency was highly knowledgeable about media placement and other aspects of business strategy, a factor that would be of great benefit to the organization and the Allround+ Brands. The advertisement and logo designed in period 2 can be viewed in Appendix D.
The team also placed huge emphasis on the four types of advertising messages. The four types of advertising messages are primary, benefits, comparison, and reminder. The major focus of the advertising and of the advertising strategy was promoting the benefits of the products. For the first year, the percentage of advertisement messages focusing on benefits was 40% for Allround, followed by 44%, 40%, 18%, 28%, 37%, 45%, 30% and 30% respectively for the other periods of the simulation. Some of the major benefits outlined during these periods included; reducing aches, clearing nasal congestion, drying up running nose, suppressing coughing, reducing chest congestion, relieving allergy symptoms and helping patients to rest. For this brand, reminder messages also increased throughout the periods in the hopes that we could retain our current customer base throughout the simulation.