MRKT 4501 Week 6 Pricing Decision Paper Example

Raising the Forged Spade's Wholesale Price by Five Percent: A Pricing Decision Weighed on Margin and Volume Together, With the Sales Loss the Change Can Absorb Before It Stops Paying

Student Name

Walden University

MRKT 4501: Marketing Management

Instructor Name

Month Day, Year

Raising the Forged Spade's Wholesale Price by Five Percent: A Pricing Decision Weighed on Margin and Volume Together, With the Sales Loss the Change Can Absorb Before It Stops Paying

The Recommended Change

Tillman Forge & Garden should raise the wholesale price of its forged steel spade by 5 percent, from $28.00 to $29.40, effective with the fall order cycle. The spade is the best-selling item in the forged line, which the portfolio review placed as a cash cow whose margin funds growth elsewhere. A jump of about nine percent in steel costs last year has squeezed the spade's margin. A modest price increase restores some of that margin to fund the pruner expansion. Nagle and Müller describe pricing as a strategic decision that should be judged by its effect on profit, not on volume or share alone (Nagle & Müller, 2018), and this paper judges the change that way.

The Numbers

If volume holds, the change adds about $364,000 in contribution. Volume will not hold entirely, so the real question is how much volume the firm can lose before the change stops paying.

Table 1

Current and Proposed Spade Economics

Composite company. Figures are illustrative case data.

How Much Volume Can Be Lost

To keep total contribution at the current $3,120,000 with a margin of $13.40 per spade, Tillman needs to sell $3,120,000 divided by $13.40, or about 232,800 spades. That is about 27,200 fewer than today, a drop of roughly 10.4 percent. As a rule of thumb, the share of volume a firm can give up is the price rise over the new unit margin: $1.40 divided by $13.40, or 10.4 percent. If unit sales fall by less than 10.4 percent, the price increase earns more than the current price; if they fall by more, it earns less.

How likely is a drop of more than 10 percent? For a 5 percent price increase to cut volume by more than 10 percent, buyers would need to be very price sensitive, with an elasticity worse than about negative 2. Three things in the case suggest they are not. Forged spades are a durable purchase that gardeners make rarely, so the price difference is small relative to how long the tool lasts. Tillman's lifetime warranty gives buyers a reason to pay more. And the steel cost increase affects every maker of forged tools, so rivals are likely to raise prices as well.

Rival and Retailer Reactions

The independent garden centers will likely pass the increase through to shelf prices, raising the retail price from about $48 to about $50. Some may push back if their margin percentage shrinks; Tillman should hold its suggested retail markup constant so retailers keep their usual margin in percentage terms. The farm-and-home chain, which is developing its own private label, is the main risk: it could use the increase as a reason to give more shelf space to its own spade. Tillman's sales team should present the increase with the steel cost data before the fall orders, rather than letting the chain discover it on an invoice.

Brannock Outdoor, the main rival in forged tools, cut its website price on forged spades by 15 percent this spring. If Brannock extends the cut to retail, Tillman's increase could lose more volume than estimated. Rao et al. (2000) found that price wars destroy value for everyone involved and that firms are often better off not matching cuts that target segments they do not depend on; Tillman's buyers mostly shop at garden centers, not on Brannock's website.

When to Reverse

The paper sets a reversal point in advance. If spade unit sales in the first two quarters after the change fall by more than 8 percent compared with the same quarters last year, with no matching drop in the category, the price should return to $28.00 for the next order cycle. The 8 percent trigger sits below the 10.4 percent break-even so that the reversal happens while the change is still roughly breaking even, rather than after it has started losing money.

What the Change Funds

If volume falls by about 4 percent, a reasonable estimate for a durable tool with a warranty, contribution would rise to about $3,345,000, or about $225,000 more than today. That sum covers more than half the cost of the pruner entry into Southeast garden centers, which is why the change is worth making now. Kotler and Keller (2016) describe price as the one element of the marketing mix that produces revenue rather than cost; here it also funds the strategy.

References

Kotler, P., & Keller, K. L. (2016). Marketing management (15th ed.). Pearson.

Nagle, T. T., & Müller, G. (2018). The strategy and tactics of pricing: A guide to growing more profitably (6th ed.). Routledge.

Rao, A. R., Bergen, M. E., & Davis, S. (2000). How to fight a price war. Harvard Business Review, 78(2), 107-116.