Bus-10
Mentoring Moment: Product Life Cycle The life cycle for both goods and services is a natural process in which products are born, grow in stature, mature, and finally decline and die. Maturity is typically the longest stage in the product life cycle (PLC) for many products. Sales growth peaks, and then starts to slow. Increased competition eventually forces price cutting, increasing the costs of advertising and promotional expenditures, and lowering profits. Toward the end of the stage, sales start to fall. Some products that have reached the maturity stage are Levi's jeans, Campbell's soup, and Coca-Cola. Let's consider products in various life cycle stages. Drag each item into the correct stage of the product life cycle.
Did you place the items correctly into the product life cycle? Growth: Uber, Activity wristband Maturity: Milk, Laptop Decline: Flip phone, Typewriter
Mentoring Moment: Breakeven Analysis Breakeven analysis sounds complicated, but it's not. In its simplest terms, breakeven analysis lets you know how many units you need to sell in order to cover your costs. It uses only three simple pieces of information - fixed costs, variable costs, and price per unit. In producing a product, a firm has both fixed costs and variable costs. Fixed costs are costs that must be paid regardless of how many units are produced and sold. Variable costs, on the other hand, fluctuate directly with sales volume. The more you produce, the higher your variable costs. Let's try this out. Using your client's crystal soap business, indicate which costs are fixed and which are variable by dragging them onto the correct side of the ledger.
That's correct. Fixed costs are costs such as rent or mortgage payments, insurance, utilities, and salaries. Variable costs would include raw material, production supplies, packaging, shipping, and commission. Once you have the cost data (both fixed and variable) and a target price (i.e., what you would like to charge for the product), all you need to do is plug those numbers into the formula: Fixed Costs/Price - Variable Costs = Breakeven Point
Decision Point: Calculating Breakeven Before recommending a price, you need to gain an understanding of your client's costs in producing the soap. She gives you the following information: Fixed costs (rent, insurance, utilities): $10,000 annually Variable costs (raw materials, production, shipping): $2.00 per unit She thinks that she might be able to sell the soaps for $4-$5 and wants to have an idea of how many soaps she would need to sell in order to break even. At a selling price of $5, how many units would your client need to sell in order to break even? Select an option from the choices below and click Submit.
You chose 3,333. That was the best choice. The breakeven point is calculated as: Total Fixed Cost / Price - Variable Cost In this case, $10,000 / ($5 - $2) = 3,333 units.
Decision Point: Recalculating Breakeven Your client seems relieved with this figure. "That's actually better than I thought," she confesses. "But how would that number change if I only charged $4 per unit?" You run a quick calculation and give her the news. If she sells the soap for $4, she'll need to sell _______ units in order to break even. Select an option from the choices below and click Submit.
You chose 5,000. That was the best choice. The breakeven point is calculated as: Total Fixed Cost / Price - Variable Cost In this case, $10,000 / ($4 - $2) = 5,000 units.
Decision Point: Your First Meeting: Crystal Soaps Your first client has a unique crystal-like soap set to launch. She's sent you the following information: The Crystal Soap Next-generation soap Set to go to market this month Took time to develop, test for safety, and work out production problems No current competitors Crystal Soaps wants your help in setting an initial price for its products to ensure a dramatic launch. Your client is convinced that this new product is truly different from anything else on the market, and she tells you that she doesn't see any competitors on the horizon for the foreseeable future. Based on this information, which of the following should you recommend to your client to capitalize on the situation? Select an option from the choices below and click Submit.
You chose price skimming. This was one of the best choices. Price skimming involves setting an initial high price to cover development and introduction costs and generate a large profit on each item sold. It can be a good strategy while there are no competitors on the market. However, before setting a price, your client needs to fully understand its costs and how much customers might be willing to reasonably pay for the product.
Decision Point: How to Persuade Your Customer to Follow Your Advice You have advised your client that he should use discounts to stimulate sales. Your client has expressed reservations about this course of action. Which of the following, if true, would be most likely to encourage your client to take your advice? Select an option from the choices below and click Submit.
You chose that it has a large inventory it wants to clear out. That was the best choice. A discount is a reduction (either a dollar amount or a percentage) off the normal price for goods or services. Discounts can be used to reduce inventory, attract new customers, retain existing customers, and increase sales.
Decision Point: Why You Shouldn't Lower the Price You've recommended that Alan drop the price of the RC helicopter to sell out the remaining inventory. Which of the following, if true, suggests that reducing the price to sell out the remaining stock is not a good idea? Select an option from the choices below and click Submit.
You chose the main competitor has increased its price. That was one of the best choices. If the main competitor has just increased its prices, your client doesn't need to reduce prices. He may be able to take advantage of increased sales by virtue of the fact that his RC helicopter is now priced lower than the competition.
Decision Point: Alternatives to Lowering the Price Your client doesn't want to lower the price on The Boss and asks you to come up with some other ideas to extend the life of the product. What other strategies could you suggest? Select an option from the choices below and click Submit
You chose to consider bundling. That was the best choice. A customer might be enticed to buy the sound bar/subwoofer combo if the combo price is lower than what those components would cost individually... and you've increased the amount of the sale!
Decision Point: Your Final Meeting: RC Helicopter Your next client is Alan, who runs a high-tech toy company. He has some concerns: "We have a radio-controlled (RC) helicopter that's been in the market for about 4 years. It was a smash in the market when it was launched, but honestly, it's kind of outdated now. Let's face it, fixed pitch RC helicopters aren't exactly top-of-the-line anymore. The good news is that most of our competition is off the market. The bad news is that our sales have sunk like a rock, and we're sitting on a lot of inventory. What do you think we should do to pick up the most sales?" Select an option from the choices below and click Submit.
You chose to drop the price to sell out the supply. This was the best choice and allows the company to drop the product line when its inventory is depleted.
Decision Point: Your Third Meeting: Home Theater Sound Bar Your next client sells a home theater sound bar. When the product was first introduced, its performance was unmatched and it took the market by storm. However, over the last couple of years, the competition has caught up. It's still profitable and has good brand recognition, so the company wants to keep it on the market, but market share is lagging. You've been sent the following report: The Boss Sound Bar On the market 3 years Lacks some features of newer, more sophisticated (but pricier) models Still profitable, but high initial sales have tapered off and market share is sagging Several competitors have entered the market Current price: $399 Competitors have similar units on the market for $289 to $649. What price would you recommend to your client? Select an option from the choices below and click Submit.
You chose to lower the price to $359. That was the best choice. During the maturity stage of the product life cycle, increased competition eventually forces price cutting, and market share leadership may outweigh profit as a pricing objective, so this is a good option. However, it would take some research to determine whether the company can still make a profit at this price.
Decision Point: Choosing Your Price Your next step before recommending a price is to determine what customers may be willing to pay. Your client tells you that the market research she has done on this product suggests that the maximum price customers would be willing to pay for the soap is $6. Let's see what happens to the anticipated sales volume at different price points: Price Anticipated Sales During the First Year (Units) $36,000$45,000$54,000$62,000$7.50500 What price should you recommend to your client? Select an option from the choices below and click Submit.
You chose to price the soap at $5.00. This was the best choice. According to the breakeven analysis you performed, your client would need to sell only 3,333 units before she started earning a profit, so if your client wants to pursue a profit-maximizing objective, this may be her best bet. A profit-maximizing objective aims to establish a price that will yield the highest possible profits (even at the expense of market share).
Decision Point: Your Second Meeting: Furniture Your next client is a retailer of ready-to-assemble furniture. He's sent you the following report: Easy Lifestyle Furniture Popular ready-to-assemble bedroom, living room, and office furniture. Three store locations in the state as well as online sales. Product line has been on the market for 2 years. Sales are steady, but untapped sales potential exists. Heavy marketing efforts have already taken place. Pricing is at or near market prices for competitors' products. What should you recommend to increase sales? Select an option from the choices below and click Submit.
You chose to use discounts to stimulate sales. This was the best choice. By temporarily reducing the price by offering customers a discount, your client could steal some business away from competitors and increase market share.
