Price Management: 40 Foods Company

Table of contents:

1. Introduction

2. Demand forecasting

3. Analysis of competitors

4. Objective selection

5. Production costs

6. Comparative analysis of demand, competition, and costs of production

7. Pricing strategy development

8. Choosing the best pricing policy

9. Conclusion

10. References

1. Introduction

40 Foods introduced Miss K Ice Cream Food to offer customers an alternative ice cream which has features of the conventional ice cream but, in contrast to a conventional ice cream, Miss K Ice Cream uses healthy ingredients. In such a way, the company attempted to achieve the balance between the attractive taste of the ice cream and the minimal negative impact of the ice cream on the customer health. The introduction of Miss K Ice Cream opened wide opportunities for the company due to the unique positioning of the product and its differentiation from rivals. The company could potentially take advantage of its product, but the temptation to set the unreasonably high price raised the problem of the possible failure of the new product. If the company sets too high price, the company will lose customers and fail with the new product because customers will simply refuse to buy the ice cream at the exorbitant price. On the other hand, the company faces the risk of setting too low price that means that the company can lose profits which the company has deserved to earn after the introduction of the exclusive, unique product. Therefore, Miss K Ice Cream Food confronts the problem of the adequate and effective pricing of the new product. The elaboration of the pricing strategy requires seven basic steps, including demand forecasting, analysis of competitors, objective selection, production costs analysis, comparative analysis of demand, competition, and costs of production, pricing strategy development, and choosing the best alternative among pricing strategies identified.

2. Demand forecasting

The first step toward the selection of the adequate price is the analysis of the existing demand and forecasting the demand in the time of the introduction of the product. The price of the product should meet the demand that means that the company should set the price that is as high as customers, who could like to purchase the product, would be able to afford to pay and to buy that product. In other words, demand forecasting has to reveal the scope of the demand on the product and to admit the possible price customers could pay for the product (Kumcu & McClure, 2003). At the same time, demand forecasting includes not only the analysis of the potential demand but also and mainly the current demand because it is on the ground of the current demand the company may build up its pricing strategy. The analysis of the current demand helps to understand which products are popular now and what the comp[any may expect from the introduction of a new product in the market.

In case of Miss K Ice Cream Food, the company may benefit from the high demand on the product with some seasonal fluctuations since the demand on the product increases during the hottest season and decreases during the coldest one. Even though seasonal fluctuations are not substantial in South Africa, they still have certain impact on the customer behavior and, therefore, on the demand change. Miss K Ice Cream Food should also take into consideration that customers are looking soft serve ice cream which holds over 40% of the market, while tubs and impulse ice cream sales hold just slightly above 21 and 27% respectively. This means that the product is on demand but Miss K Ice Cream cannot count on almost a half of the market held by soft sold ice cream. Nevertheless, the company can count on the approximately the same share market due to the different packaging of its product to sell impulse ice cream, which the company plans to sell vial small shops in truck shops, schools, etc., and ice creams in tubs, which the company plans to sell through large retailers. The large demand on ice cream in South Africa evokes the large supply. This is why the price of Miss K Ice Cream should match the demand and should by as high as customers may be eager to pay for the new product.

3. Analysis of competitors

Competitors of the company hold a large market share but the company plans to gain 14-18% of the regional market that is a large but not dominant share of the ice cream market in South Africa. This means that the pricing strategy of the company should be attractive enough for customers to gain such a market share (Case & Fair, 1999). Taking into consideration that Miss K Ice Cream aims at almost a half of the total ice cream market. This means that the total share of the company in the ice cream market will be around 7-9% because the company will not compete with rivals in other segments of the ice cream market. In terms of pricing policy, the company still cannot elevate the price much higher than its rivals because, in such a case, the company will face the risk of failure of the product to gain the planned market share.

At the same time, the company still can set the price that is higher than the average in the industry because Miss K Ice Cream is different from the conventional ice creams. The company offers the ice cream that does not have a negative impact on customer health. At least its impact is less harmful and the difference is substantial enough to attract more customers and to make them pay for the new product. The product differentiation gives Miss K Ice Cream Food a competitive advantage that allows setting the price higher than the average price in the market, but taking into consideration the stiff competition and the planned market share of the company, the price should not be too high.

4. Objective selection

The objective of the company defines the pricing policy to a significant extent. To put it more precisely, if the company has the objective to take a large market share, then the price of the product cannot be high because it would be unaffordable to the majority of customers. The company cannot take a large market share without attracting the majority of customers (Yeoman, 2011). The market share of the product mirrors the demand and the affordability of the product. Therefore, if the company plans to gain 14-18% of the market in its segment, then the price of Miss K Ice Cream should be affordable for that amount of customers or even for a larger customer group to ensure the stable demand on the product. The slight deficit of the product is acceptable to keep the demand high and reserve the opportunity to elevate the price of the product, if needed. In addition, the company plans to pay 8% royalties for any outside unit used by the company. Therefore, royalties should also be included into the price because the company has to cover royalties from the price of the product. Otherwise, the company will suffer financial losses and product will bring losses rather than profits.

5. Production costs

The production costs also influence the price because the company should include the production cost into the price of the product and add the earned value to earn some profits for each item sold. In case of Miss K Ice Cream, the costs of production are higher compared to the conventional ice cream because the company uses ingredients which are healthy and make the ice cream not harmful for customer health. Therefore, the differentiation strategy which gives Miss K Ice Cream a competitive advantage plays a trick on the costs of production and urges the company to elevate the price to cover higher costs compared to its rivals. Alternatively the company can minimize its profits and set the price close the industry average and just slightly higher, for example 3-5% above the average.

6. Comparative analysis of demand, competition, and costs of production

The next step 40 Foods should undertake while defining the price of Miss K Ice Cream is the comparative analysis of demand, competition and costs of production. The company should determine the cumulative price of the product based on the combination of the demand, competition and costs of production. The high demand on the product implies the possibility for setting high price, but the high costs of production will still prevent the company from earning high profits for its new product. At the same time, the stiff competition in the industry leaves even smaller margin for increasing the price of Miss K Ice Cream because, if the price is unreasonably high, customers would rather prefer products of the company’s rivals, in spite of the uniqueness of Miss K Ice Cream. In case of 40 Foods and Miss K Ice Cream, the demand is high and costs of production are also higher compared to rivals because of the use of costly ingredients that make Miss K Ice Cream healthy. Therefore, the company should set the price above the average in the industry, but the high competition requires the company to avoid excessive rise of the price. The price of Miss K Ice Cream should be above the average but not too much.

7. Pricing strategy development

The next step in the elaboration of the price of the product is the development of the pricing strategy. In this regard, Miss K Ice Cream has several options. First, the company may set the price of the product as low as are the costs of production. In such a case, the company is likely to gain no profits or even suffer from financial losses. On the other hand, the company may gain a larger market share because its product will be different and better than that of rivals but the product will be sold at the competitive price (Rolf, 2000). Second, the company can set the price consistently higher than the industry average that will move Miss K Ice Cream close to the premium segment of the market. However, such a price is likely to limit the market share of the new product to the share of premium segment ice cream, where the company will have to compete with other rivals. The competition in the premium segment is more challenging because customers are not easy to change their preferences in this segment of the market and they prefer reputable brands and products. 40 Foods can only count on the uniqueness of its product. Finally, the company may set the price slightly above the average, for example 3-5% above the average ice cream price. In such a case, the company will be more certain that sales will cover production costs and the company may gain a larger market share and some profits.

8. Choosing the best pricing strategy

The strategy of setting the price slightly above the average is the best option. The company needs to have such a price to cover higher production costs. At the same time, the company can count on the higher demand on its product because of its differentiation that gives the product a competitive advantage over rivals. Therefore, the recommended price would be sufficiently high to cover costs and to take 14-18% of the market and earn some profits. Even if the company fails to earn profits during the first-second year since the introduction of the product, the company will profit later as its market share reaches the target 14-18% level.

9. Conclusion

Thus, the last step is choosing the best pricing strategy alternative on the ground of those identities during the previous step. In case of Miss K Ice Cream the best pricing strategy is setting the price slightly, 3-5% above the average in the industry. Such price derives from the seven steps of pricing and meets needs of the company and demand in the market.

References:

40 Foods Distributors.

Case, K. E. and Fair, R. C. (1999). Principles of Economics. New York: Random House.

Kumcu, E. and McClure, G. (2003). “Explaining Prestige Pricing: An Alternative to Back-Bending Demand”. Marketing Education Review. 9 (1): 49–57. 

Rolf, K. (2000). World Economy: Past, Present, Future. London: Routledge.

Yeoman, I (2011). “The changing behaviours of luxury consumption”. Journal of Revenue and Pricing Management. 10 (1): 47–50

The terms offer and acceptance. (2016, May 17). Retrieved from

[Accessed: March 29, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016.

[Accessed: March 29, 2024]

freeessays.club (2016) The terms offer and acceptance [Online].
Available at:

[Accessed: March 29, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 29, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 29, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 29, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 29, 2024]
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