The new permanent price
Product pricing is another important factor in brand and product purchasing. The purchasing buyer often uses coupons to initially purchase a consumable product. Having a strong coupon campaign for the Kellogg’s Frosted Flakes cereal will increase purchases by new consumers and assist with the continuation of purchasing by established brand loyal customers. The initial price of a 400g box of the cereal would be $3. 95 each. Using a coupon campaign, consumers could redeem a fifty cent coupon to make the cereal cost $3.45 a box.
For mark up profits, the wholesaler would receive sixty cents a box and the retailer ninety-nine cents a box thus generating eighty-six cents profit for each box of cereal. With the fifty cent coupon campaign, the profit would drop to thirty-three cents per box of cereal. This coupon marketing campaign would work for a fixed cost budget of $5 million. At $3. 69 cost per box of cereal, the budget allows for the purchase of 1,355,014 boxes of cereal to break even on the promotion.
With the coupon promotion, there will generally be a decrease in sales once the promotion has ended. To further promote the growth of the Kellogg’s Frosted Flakes cereal selling within the market, a decision to drop the price of the cereal to $3. 45 per box permanently. To encourage sells to more retailers, the retailer market will increase to 30% instead of a 25% markup. The retailer would then receive $1. 03 per box of cereal for mark up. The wholesale market markup would remain unchanged.
Combined with the price change, a $2 million TV advertisement campaign is implemented for the Kellogg’s Frosted Flakes cereal. The revenue-based market share has grown from less then 5% to 8. 5% with the entire cereal market making an estimated $500 million in retail sales. The cost per box becomes $3. 13 per box with the new marketing campaign. With the 8. 5% share of the $500 million market, we sold 123,188,406 boxes of cereal with a net revenue of $425 million and generating a cost of $385,579,711 in operating expenses.
Adding the $2 million to the television campaign to our costs, our profit for the year on the Kellogg’s Frosted Flakes cereal is $37,420,289. Having a successful campaign, a major grocery chain approaches us with the potential to sell 300,000 boxes of our cereal if we will give them a $200,000 slotting allowance. With a 30% markup on $3. 45 the retailer will receive $309,000. Adding the slotting allowance, the retailer will then receive $509,000. At $1. 50 per box, the cost of production of the boxes is $450,000.
The entire cost of the 300,000 boxes would be $959,000. The net value of 300,000 boxes at $3. 45 a box is $1,035,000 leaving an overall profit of $76,000. Since the profit is less then half of the slotting allowance requested by the retailer, it would not be worth paying the additional $200,000 allowance. In order to reach a significant profit and make the slotting allowance economical, the retailer would need to guarantee sell of 900,000 boxes or the retailer would have to increase the base price of the boxes of Kellogg’s Frosted Flakes cereal.
Increasing the base price of the Kellogg’s Frosted Flakes cereal would decrease the earning potential since the coupon campaign was effective and the lowering the price was effective. Effective positioning of the Kellogg’s Frosted Flakes cereal within the retail stores along with offering non-consumable products such as Kellogg’s brand collectible items will increase the brand loyalty for purchasing the cereal.
Brand loyalty decreases the competition from other cereal marketers and the macro-environmental forces thus increasing the growth potential and consumer purchasing of the Kellogg’s Frosted Flakes cereal. After effective positioning has been established within the retail facilities, a strong coupon campaign needs to be implemented to encourage buying from new consumers and continue to build brand loyalty for current customers. There will be a decrease in sales when the coupon campaign is complete resulting in a price lowering of the Kellogg’s Frosted Flakes by fifty cents.
The new permanent price of the cereal will become $3. 45 per box but offer retailers a 30% markup rate over the previous 25% markup rate. This change in price and markup rate will then encourage retailers to purchase more of the Kellogg’s Frosted Flakes cereal to place in their facilities. With increased product availability, there should also be a rise in product consumption. Unless the retailer is offering to purchase a substantially high volume of the Kellogg’s Frosted Flakes cereal boxes, paying an additional slotting allowance location is not profitable.
Utilizing the non-consumable products, a strong coupon campaign, brand loyalty, targeting the children, teens, young adults and caregivers for the market and lowering the overall price of the Kellogg’s Frosted Flakes cereal there is no need to waste valuable resources and budget on additional slotting allowance charges. Kellogg’s Frosted Flakes cereal is a consumable product with a large, brand loyal consumer market. A strong marketing campaign as described would allow for growth in the retail sales of the product and generate both a new and strong market for other Kellogg’s brand items.