Cost vs. Price vs. Values
Cost vs. Price vs. Values
A drought has left a significant shortage of the potato crops, leading to an increase in the prices of the potato. The increased price of the potato has left the company with a challenge of survival as they are running their operations on a small profit margin. Julie, a brand manager at a potato chip making company is left at odds over the decision to add the price of the product or reduce the size of the packet. The management has already given their opinion and approved the reduction of the size of the packets to ensure the company retains their small profit margin.
The organizational goals are to retain the customer base, maintain the profit margin, compete with competitors, and business survival. The intended customers of the organization are customers looking for salty snacks, potato chips, etc. The actual customers of the organization are the current customers who purchase their products and the potential customers are the competitor’s customers and others who consume alternative products. The organization wants to satisfy the need of salty snacks, especially potato chips. The organization wants to offer customers their favorite potato chips at competitive pricing with standard competitive quantity in each packet.
The product strategy of the company is using potato as their main ingredient and use only vegetable oil, salt and only 3 favoring spices in the Potato chips brand. The organization operates at a significantly small margin of only 5 percent due to the market competitiveness. Product strategy is making potato based chips with only vegetable oil, salt and flavoring spices used. Price strategy is competitive pricing with low margin on sale. Due to fierce competition in the market, the competitors are also working on a small profit margin. It is possible that due to the increase in the prices of potato, competitors might reduce the size of their packets or increase the price of their product.
Other variable included in the market is the current increase in the price of potato’s that has led to a business and ethical dilemma and the decision taken by competitors over increasing price or decreasing the size of their packet. The organization needs to either increase the price of their products to ensure they retain their small profit margin. Or, they can reduce the size of the packer that has been recommended by the marketing director.
The problem has been caused by the increase in the prices of potato, which is the main ingredient in the potato chips. The prices have been increased due to a drought that has caused a reduction of 35 percent in the potato crops. A drought has reduced the potato crops, which has increased the price of potato in the market. The increased price of potato has decreased the company’s small profit margin. Decrease in the profit margin requires the company to either reduce the size of the packet, or increase the size of each packet. Therefore, there is an obvious cause-effect relationship chain in this case.
The basic marketing strategy of the company was based on competitive pricing and they avoided other variables such as seasonal changes in the production of necessary material such as potato. This strategy of competitive pricing is costing the company as they now face a dilemma in terms of increasing the price or reducing the size. The elements of the marketing mix such as price and product were the essence of the problem in this case as the company’s product and pricing strategy has left them in a loophole. Their plan to compete and survive on the basis of charging competitive prices has left them with limited scope to earn and increased prices of the raw material has left them without any other option, but to make changes for survival.
There is no one way out for the company and as the brand manager Julie needs to experiment with the alternative solutions to create value for the organization. The two options in front of the team are either reducing the size of each packet by 1.1 oz or increase the price of each packet by 25 percent. Reducing the size has its advantages as it is not against the FDA regulations and has been practiced widely by other companies. But, it carries the disadvantage of communicating unethical corporate values to the customers (Kazmi, 2007, p. 80). Increasing the price can cause loss of market share and loyal customers, but it will ensure the profit margin is maintained (Du, Strydom & Jooste, 2012, p. 340).
The company also needs to identify what their competitors are planning as they would also be affected by the increased prices of potato. This would help in creating a future strategy. Overall, the company should research the issue and identify what competitors are doing, analyze the pros and cons of each situation, management consultation, check past scenarios and identify what the law allows. On the basis of the law and past scenarios, it is obvious that the company needs to reduce the size of their packets. But, they should do it only after their competitors have already done it. If the competition is increasing the price, then the company can offer the larger size at competitive pricing and offer the smaller size at the old price.
Du, P. P., Strydom, J. W., & Jooste, C. J. (2012). Marketing Management. Cape Town, South Africa: Juta.
Kazmi, S. H. H. (2007). Marketing Management: Text and Cases. New Delhi, India: Excel Books.