1.a) You can calculate a potential retail price in the Australian market by using the domestic price PolyPrin receives, along with the normal mark-ups, distribution costs, and duties.
PolyPrin’s products are priced at approximately $30 per item, calculated by dividing the annual revenue of $90 million by the production and sale of 3 million units domestically. This results in a charge of $30 per item.
The item’s total price, which includes a 5% import duty and $5 shipping insurance, goes up from $30 to $36.75 ((30+5) x 1.05). Additionally, the manufacturer applies a 10% markup, increasing the price to $40.43 (36.75×1.1). Finally, there is an extra 25% markup for the customer, resulting in a final retail price of $50.53 USD (40.43×1.25).
In order to find the potential retail price in the Australian market, you need to first calculate the production cost of a single dress. After that, you should factor in mark-ups, distribution costs, and duties as per usual.
The total production cost of one dress can be determined by considering both fixed and variable costs. The combined variable costs, including materials ($22M) and energy ($6M), amount to $28M. This translates to a cost of $9.3 per dress when divided by the number of units (3M). On the other hand, the fixed costs which include labor ($12M), plant overhead ($3M), and SG&A Costs ($14M) add up to $29M. When this is divided by the total number of units (3M), it results in a cost of $9.6 per dress. Consequently, the overall cost for producing one dress is $18.9.
Total variable(22)+(6)28/3= 9.3
Items produced (3)
Total fixed cost (12) + (14) + (3)29/3 = 9.6
Items produced (3)
($9.3) plus ($9.6) equals $18.9
Now, we incorporate additional costs to calculate the final retail price of $34.5 per dress. These costs include an insurance cost of $5 per item, import duties at a rate of 5%, a manufacturer to retail markup of 10%, and a retailer to customer markup of 25%. (See calculations below)
The total amount is $34.5, which consists of the following calculations: 18.9 + 5 = 23.9, 23.9 x 1.05 (5%), 25.1 x 1.10 (10%), and 27.6 x 1.25 (25%).
2) Determine which pricing scenario is more advantageous for the company by analyzing key factors that impact pricing decisions beyond just costs.
Before evaluating the effectiveness of a pricing strategy, it is important to take into account the market and its characteristics. Additionally, understanding how each pricing strategy can align with Polyprin’s long-term strategy is crucial. Ultimately, making an informed decision about the most appropriate strategy that supports Polyprin’s objectives is significant.
The potential of the Australian market is being analyzed and it is particularly reassuring to Polyprin’s decision makers due to the similarity between Australian culture and the surfer culture of California’s American west coast. The climate, style, and laid-back way of life in Australia perfectly align with what Australians are known for on their extensive coastline, which spans nearly 50,000km. This alignment significantly reduces marketing stress as consumers will immediately connect with the product without any need for explanation. Furthermore, Australia’s promising economic future further supports the enthusiasm for this market. The increased demand for Australian commodities has led to a rise in the value of its dollar, currently amounting to 3 cents for every American dollar. This rise has become a significant contributing factor to Australia’s growing purchasing power.
According to Polyprin, the casual wear market in Australia is valued at $5 billion. While there are local competitors, the majority of the business is controlled by imported products from neighboring countries. These products are typically priced between $A30-35 and can go up to $A45. However, Polyprin considers them to be of inferior quality.
Now let us consider pricing options. A cost escalation strategy involves determining the production cost of each item and then adding shipping costs, duties, and markups to calculate the final retail price. This strategy ensures that the company covers their operational costs and prevents them from losing money on the venture. By keeping the price low enough to attract consumers, the company is able to employ a market penetration strategy while reducing the risk of financial loss on each item sold.
A price escalation strategy involves determining the price for the domestic market and then adding the costs of shipping, duties, and markups to establish the final retail price. This approach ensures that the company not only covers the expenses of exporting but also includes a profit per item. By starting with the amount they would charge in the United States, which already yields a profit, they guarantee returns equal to or greater than what they would earn by selling domestically. Although a cost escalation strategy would result in a lower price, it may not be detrimental to the success of high-end products like those manufactured by Polyprin.
Which strategy is better? Assuming efficient plant operation allows Polyprin to produce 1 million more items per year, a price escalation strategy generates $16 million more revenue than a cost escalation strategy ($50.5M-$34.5). It is evident that a price escalation strategy would enable Polyprin to maximize its earning potential and is the more lucrative option. By basing its export price on the domestic price, Polyprin can position itself as a niche product. This approach differentiates Polyprin from the average market price and justifies its higher price compared to the $45 imported items from Southeast Asia.
Considering this information, what price would you ultimately charge and why? How would you enter the Australian market and distribute the product?
If I were one of the decision makers responsible for setting the price of Polyprin’s casual type wears for the Australian market, I would strongly support retailing the clothing at $49.95. Several reasons support my stance.
True, the price of $49.95 is about 10% higher than the more expensive imported clothes. However, this cost is justified when consumers acknowledge the notable superiority in fabric quality and the sophistication and elegance of its design. Additionally, the “left digit-effect,” where consumers associate the leftmost digit with their judgment on price, makes 49.95 feel more like an item priced at $40 rather than $50. As a result, it may be less likely to be considered “too pricy”.
Secondly, by pricing the items at 49.95, there is a chance to generate an extra 55% in overall revenue. This increase comes from exporting 25% of all goods to Australia, where Polyprin exports the additional 1 million goods produced through efficient production. This strategy aligns with the market entry approach.
To enter the Australian market, it is advisable to start with exporting rather than taking on the risk of diving headfirst without knowing the market well. It is important to ensure that the returns from exporting align with projections and can be sustained over a certain period. Afterward, establishing a wholly owned subsidiary should be considered.
Assuming the sales of 1 million items at $49.95 continue and factoring in the cost per item ($34.5), the total annual profit from exports is expected to be around $15.45 million. If these figures are achieved for two consecutive years, the profits from these exports alone will be sufficient to finance the expansion of a wholly owned subsidiary in Australia, which was estimated at $30 million.
Once established in Australia, Polyprin could sell through its subsidiary, enabling it to collect the 35% in markups that it used to give up to local retailers. The revenue generated from this would more than compensate for the 10% retail tax incurred by wholly owned subsidiaries. Additionally, this expanded market presence might incentivize Polyprin to allocate a greater share of its 4 million in production to the Australian market. Subsequently, in the fourth year (after running 1 million items through its newly acquired subsidiary for one year), Polyprin may opt to distribute a larger proportion – perhaps 35 to 45 percent – of its products to the premium-priced Australian market.
