Determining the Price of the New Easd
Essay by Varun Reddy • September 24, 2015 • Case Study • 354 Words (2 Pages) • 1,311 Views
Avon Analysis
Objective – Determining the Price of the new EASD
Dilemmas – Should the focus be on maximizing market share or per unit profits
Avon would like to target the MAS market as the market analysis shows that it could capture 50% of the total speed drive market. This is possible if the new product is priced is comparable to MAS drives in market. Hence the analysis below considers OEM MAS pricing and quantity to calculate the multiplying factor. This, as shown below, helps to determine the price of 5 hp EAS so as to maximize contribution margin:
[pic 1]
The contribution margin will be the highest at the price of $4400.
To calculate pricing for other sizes of the product with the given information, we could calculate the following ratio at MASD prices:-
Unit sold for the specific size per annum/ Total units sold per annum
This would give us the contribution of each size on total units sold. We could compare this ratio to the below ratio:-
Unit sold for the 5 hp EAS per annum/ Total units sold per annum
Assuming the cost decreases in similar proportions as for 5 hp EAS with increase in quantity produced, We could use the difference between the above two ratios and the price of 5hp EAS to calculate price for the other sizes.
Company’s pricing strategy should be to maximize the market share using the new product. This product has the potential to capture MASD and EASD markets. Pricing is a critical factor that shall determine the market share captured by the product in the future.
The new drive can be produced at lower costs than the existing EASDs in the market and hence can afford to lower its prices than all current EASD products in market. The value proposition of the new product is higher efficiency and better control than other EASDs. The competitive advantage is the design of the speed drive.
Avon has the widest distribution network amongst the EASD players. Hence they could use their reach to have a larger foot print and compete against regional players using its distribution network as a competitive advantage.
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