Glitzz: Devising a Pricing Strategy

1. What factors influence the pricing decisions for a product such as Glitzz? Analyze these factors and comment on the range of prices that can be set for Glitzz.

Price is the amount of money given in exchange for the ownership or use of a good or service. Firms, like Glitzz need to consider the amount of money that consumers are willing to give up in exchange for their products. In making pricing decisions, firms, like Glitzz must first consider a few factors:

Company Factors
Pricing Objectives
Pricing Objectives involve specifying the role of price in an organization’s marketing and strategic plans. These objectives guide the pricing strategies.

The company is currently in the beginning stage of marketing the Glitzz product. The passage also mentions long-term plans for developing brand awareness and preference.

Hence, Glitzz’s current pricing objectives seem to be
* Increase Product Sales
* Capture Market share.
* Long-term profits

Increasing sales revenue can be an indirect objective to achieve the objective of capturing the market share and thus long-term profits According to the case passage, the industry of the jewelry spray cleaners appears to be oligopolistic, with a few dominant producers, Brilliant Restorer and Connoisseurs. Thus, to enter the market, Glitzz must carry out 2 strategies.

* Product differentiation
Glitzz can be differentiated through packaging, which has been mentioned in the passage. The seller can also consider differentiating its method of application of the solution; i.e. spray.

* Penetration pricing strategy
Secondly, Glitzz should use a penetration pricing strategy by setting a lower initial price, which can appeal to the mass market. Glitzz might earn a smaller profit margin but it is able to capture the volume of the mass consumers. This strategy may not maximize current profits but focus on long run profits and market share instead.

Pricing Constraints
* Demand
The main demand of Glitzz jewelry cleaner would be derived from mainly jewelry retailers and departmental stores However, there exist similar products in this industry, and already sold to such business entities, limiting the price of Glitzz to within the price range of the existing products.

* Newness of Product
While Glitzz is a new brand in the industry of jewelry cleaners, there are other existing similar products. Hence, Glitzz needs to focus on differentiating themselves from the existing products. Glitzz should be priced near the price range of the substituting products in the market.

* Cost of Producing and Marketing
The cost of producing and marketing the product needs to be accounted for in pricing Glitzz. The price of Glitzz should at least cover the total costs of producing and marketing the products. According to the passage, the cost of producing and packaging the product costs $ 5.00 per unit. However, the firm will have to take into account the fixed costs on top of the $5.00 variable cost per unit. Hence, assuming the total cost (fixed and variable) of producing one unit of Glitzz is $ 9.00. The lowest price that Glitzz can be priced at should be $9.00.

The firm needs to take into account the expected quantity demanded of the product by the market. However, the price can affect the quantity demanded of the product. Thus, this concept may complicate the process of pricing Glitzz.

* Type of Competitive Market
Types of market affect the behaviour of both consumers and competitors in response to your product. The industry is an oligopoly market with few sellers such as Brilliant Restorer and Connoisseurs. Glitzz may be priced below the lowest price of the existing substitute products but this strategy is not sustainable as it can ignite a price war. Instead, the firm should differentiate Glitzz from its existing competitors. The firm can perhaps look into the method of application and sustainability of the solution. Subsequently, Glitzz can perhaps start to increase their price as it differentiates itself from other products.

* Competitors’ Prices
Considering only the direct substitute products (i.e. Brilliant Restorer and Connoisseurs) in the market, the price of Brilliant Restorer was not stated. Hence, the only price that can be compared with would be the price range of Connoisseurs, between $14.00 and $16.90.

Consumer Factors

Demand

* Availability of Substitutes
Glitzz faces direct competition of similar products from a few sellers, namely Brilliant Restorer and Connoisseurs.

Brilliant Restorer bears the most similarities to Glitzz and both cleansers come in the form of sprays. Connoisseurs differ in the method of application, as it comes in the form of a brush and tray. Powervescent is not considered as a direct existing competitor in the market as its shop is yet to be set up. In addition, it intends to sell via its future e shop, which targets a different consumer group as Glitzz. At the current stage, the jewelry cleaning machines also target a different consumer group, as compared to Glitzz. Hence, Glitzz should focus on capturing customers from Brilliant Restorer and Connoisseurs, using them as a benchmark for price and product features.

Price Elasticity of Demand (Ep)
Price Elasticity of Demand is the percentage change in quantity demanded relative to a percentage change in price.

Ep = Percentage change in quantity demanded / Percentage change in price However, as Glitzz is still a new product, it is difficult to compute the quantity demanded Glitzz, and thus Ep of Glitzz.

Price elasticity of demand is determined by a few factors
Availability of Substitutes
The more substitutes there are, the higher the price elasticity of demand. For the product Glitzz, the direct substitutes are Brilliant Restorer and Connoisseurs and there are more high-end cleaners such as the cleaning machines. If Glitzz is priced higher than the direct substitutes, consumers can easily switch to the lower-priced substitutes, as they bear zero switching costs. However, this theory is valid vice-versa. Pricing Glitzz at a lower price can attract consumers from the direct competitors.

Necessities or Luxury goods
Many consumers also do not view jewelry cleaners as a necessity. Hence, Glitzz should be priced that can appeal to consumers to forgo an amount of their money for this product. Charging a premium price may appeal to the higher end of the consumer group but then again, these consumers can easily turn towards the high-end products i.e. jewelry-cleaning machines.

Hence, the general opinion on the range of prices that can be set for Glitzz is to price between the total unit cost of producing and marketing the product and the highest price of existing substitute in the market – between $9.00 and $16.90.

2. What price would you recommend for Glitzz? Why?

I recommend $13.90 for Glitzz. This price is arrived by the following steps:

Upper Price Limit
Firstly, as quoted from the passage “From results of a survey carried out by NUS students, appears very few customers were willing to pay more than $20 for Glitzz”. Hence, this limits the price below $20.00. Glitzz has an important task on hand – to capture the existing customers from its direct competitors. In this market, Glitzz must price to capture the volume of consumers in the market. Thus, Glitzz must be priced lower than the existing highest price of substitute products – $16.90.

Lower Price Limit
However, the price must be sufficient to cover the cost of producing and marketing the Glitzz. The passage writes that “the cost of the content and packaging to be around $ 5.00 per unit.” However, the firm will have to take into account the fixed costs on top of the $5.00 variable cost per unit. Hence, assuming the total cost (fixed and variable) of producing one unit of Glitzz is $ 9.00. The price of Glitzz must at the very least be higher than $9.00 per unit.

Why $13.90?
We price at $13.90 as it is below the lowest price of existing substitute – Connoiseurs at $14.00. Hence, by charging below $14.00 with an insignificant $0.10 difference, the competitors may take some time to decide to start a price war, as there is a chance of underestimating the effect of this $0.10 difference on the consumers. Which brings us to the next point of this pricing effect on consumers.

Odd-even Pricing
We decide to price at $13.90 due to psychological perception of the price. $13.90 is recommended instead of a whole number. This is done based on the odd-even pricing strategy. Consumers tend to view the price as “over $13.00” than “ about S14.00 ” The price of $13.90 tends to provide a “cheaper” feeling as compared to $14.00 even though it only has a difference of $0.10. Hence, it can induce more consumers to turn towards Glitzz.

3. What strategy would you propose for Glitzz?

Penetration pricing strategy. (Short Run)
Glitzz should be priced lower than the prices of the substitute products. Glitzz should target capturing high volume of the consumers in the market at the expense of the profit margin. While this may not maximise current profits, it allows Glitzz to capture the market share and sustain long-term profits.

The market for jewelry cleaning products follows an oligopoly. Thus, just solely focusing on pricing strategies is neither sufficient nor sustainable as it ca ignite a price war. Hence, Glitzz should also adopt non-pricing strategies.

Skimming pricing strategy
In the long run, when the brand identity and marketing efforts are well established and market share largely captured, Glitzz can consider pricing at a premium price.

Product differentiation strategy
Create a brand identity
Glitzz can consider creating a brand image and identity that coheres to the nature of product. This can include coming up with brand mission and logo. Creating awareness of the brand identity may even add value to the accreditation and quality of the product in the perception of certain consumers. Thus, this serves to distinguish the Glitzz from other products.

Packaging
Glitzz should conduct Research & Development to provide a more convenient and attractive packaging for the product. This appeals to consumers who values convenience as well as younger generation of consumers.

Marketing
As Glitzz is currently a new product in the market, Glitzz needs to be marketed to the mass consumers, considering the pricing objectives of the firm. Hence, Glitzz should invest in advertising and publicity through the media such as television advertisements. Also, Glitzz can consider printing posters and brochures that can be placed in jewelry retail outlets. Glitzz, a jewelry cleanser and jewelry are complements. Hence, jewelry retailers are the best marketing assets.

3.What costs and expenses would be involved?
In the Long run,
Costs:
Fixed Costs| Variable Costs|
Warehouse rentalResearch and developmentMarketing costsAdvertising costsConsultant fees| Content and packaging|

Given your recommended price in (2), what would be the breakeven point? In the Short Run, (based on information provided in the case study)

Cost driver| Cost|
Consultant Fees | $5000|
Advertising Costs| $2 mil|
Content and Packaging| $5.00 per unit|

Annual Fixed costs
= Costs of (Advertising costs + Consultant fees)
= $2 mil + $5000
= $2,005,000

Unit Variable cost
= Cost of Content and Packaging
= $5.00

Breakeven Point Quantity
= Fixed Cost/ (Unit Price – Unit Variable Cost)
= $2,005,000/ ($13.90 – $5.00)
=$ 2,005,000/ $8.90
= 225,280.8
= 224,281 units

In the Long Run,
Assuming the following figures
Cost driver| Cost|
Warehouse rental | $10,000 per month|
Research and Development cost | $1 mil|
Marketing cost| $1 mil|
Advertising costs | $2 mil|
Consultant Fees | $5000|
Content and Packaging| $5.00 per unit|

Annual Fixed costs
= Costs of (Warehouse rental + Research and development + Marketing costs + Advertising costs + Consultant fees) = ($10000 X 12) + $1 mil +$1 mil + $1 mil + $2 mil + $5000
= $4,125,000

Unit Variable cost
= Cost of Content and Packaging
= $5.00

Breakeven Point Quantity
= Fixed Cost/ (Unit Price – Unit Variable Cost)
= $4,125,000 / ($13.90 – $5.00)
=$ 4,125,000/ $8.90
= 463,483 units