Culinarian cookware is a successful company with biggest market share in the premium cookware market. The company’s goals in 2006 are to (1) widen its distribution network, (2) increase its market share in premium cookware segment, (3) preserve prestigious image, and (4) continue to grow topline at 15% while maintain pretax earnings margins of 12%.
Would price promotion create value and help the company achieve these goals?
On one hand, price promotion can accelerate customers’ response and awareness. On the other hand, price promotion can lead customers or channel members to be more price sensitive, posing a potential threat to brand equity and profitability.
Donald Janus, the VP of marketing of Culinarian, sees that price promotion devalue the products and is unnecessary to achieve the goals. Victoria Brown, the senior sales manager, however, believes that price promotion would boost overall brand awareness, increase the sales volume, and lead to positive profitability.
Consulting study shows that price promotion during March – May 2004 had a negative impact on the profits. Brown felt that, under the right assumptions, the promotion should make a positive profit contribution.
I think that Brown’s objections are not valid.
First, Brown’s “normal” sales forecast of 24% below the 2003 sales seems too low (see Figure below for the accumulated actual and forecast units). It does not well capture the seasonal impact on the sales which tend to increase around April and May. The 2002 sales increased significantly during this period. The increase rate in 2003 is not as high as that in 2002, but using Brown’s forecast would result in even lower increase rate. The consultant’s forecast, on the other hand, follows the high increase rate achieved in 2002. I think the sales forecast should be in between Brown’s and Consultant’s forecast, following about the same trend line as that in 2003 but with a bit higher slope.
Second, Brown’s assumptions of 59871 units, $38.64 variable cost, and no cannibalization costs result in a negative profit contribution of $82.7K, not a positive profit as she expected (see Table below). The profit contribution would be even more negative if the normal sales were actually higher than what she forecasted.
From financial perspective, price promotion is clearly not effective in achieving the goals in this case. Moreover, the price promotion is not consistent with the company objectives. It devalues the prestigious image of the brand which is in contrast to the company’s goals.
I think that trade relationship is a key factor to help company meet the goals. The company’s products were sold through multiple distribution channels (see Figure below). When Culinarian executed price promotion in 2004, it was not successful at managing the supply chain and enforcing the price arrangement with the channel partners. Without collaboration from the channel partners, there is no guarantee that the discount is passed along to the consumers and generates consumers’ awareness and response as expected.
Culinarian should not run price promotion, but should consider other ways to promote its products.
For majority of consumers, price is important but not that significantly important. Market research on cookware shows that quality is ranked one and price is ranked three in order of importance, and more than half of consumers have received cookware as a gift or purchased it as a gift. Instead of price promotion, Culinarian should consider other promotion techniques such as providing gift card, offering something extra to enhanced product’s value, or giving retailer financial reasons to support the product. Rather than reducing price, Culinarian should focus on advertising to increase the perceived value. In addition, research shows that 50% of consumers favor a brand of cookware they recognize. So Culinarian should also consider other ways to improve brand awareness, for example by partnering with popular cooking television shows.
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