'Sansy plc is a leading producer of luxury ice-cream, selling to the shops all over the UK.
The cost of its main ingredient, milk, has fallen significantly in recent weeks. Discuss whether the firm should pass on this fall in costs to its consumers in the form of lower prices. ' This is an interesting question and different people would have very different opinions to the matter. Firstly, I think that it is important to establish why the milk prices have fallen. Firstly, a new agricultural method may have been developed that extracts more milk from cows more quickly and more cheaply.
This is cost efficient and beneficial to the company in the short term but this could be deemed as animal cruelty to the public if it was published in a poor light. This negative advertising would be detrimental to the firm and would subsequently affect future sales. In this case it would be advisable for firms not to use cheaper milk but use suppliers with whom trust has been built over a long period of time. Further more, the milk maybe foreign imported milk. This would be under cutting British agriculture and the government may enforce quotas (if milk not from EU) at a later date.If Sansy lowered prices in reaction to lower raw material costs then prices were raised again due to external taxes, consumers would loose faith in the brand and loyalty would be lost.
Move over, the company is unsure of how long this period of cheaper milk will last. Therefore, if passing savings onto the customer in the short term, customers may expect these savings to continue regardless of the price of milk. This could affect profits in the long term. In addition, the reduced cost of milk maybe due to the business cycle.
Milk is a staple food item and if the economy was in a period of recession and unemployment was high, milk prices may be lowered to allow those of lower socio economic groups to maintain a balanced diet. For the period of slump, Sansy could therefore raise the price of their ice cream as milk would be cheaper. However, it must be noted that if this was the case, due to the nature of the product, there may be a reduced demand, as the population would not need luxury foodstuffs.This would be due to a reduction in people's disposable income. It could therefore be advised, in such an economic climate, that Sansy reduced the price of the product as the demand is elastic. If there were no external factors such as those mentioned above then the pricing strategy used is still influenced by many factors.
Primarily, customers are very price sensitive. With a luxury ice cream, a price premium is carried, as consumers perceive that high quality goods cost more.It is important that the firm prices the product at a price that customers feel to be at a psychologically 'right' price range or customers may become suspicious and brand loyalty will be lost as well as marketing that promotes the product as a quality item. The company may well be advised not to use cost plus pricing methods.
It must also be commented that even if the company does reduce the final selling price, Sansy sell their product to shops nationwide who may well maintain the same price as before thus keeping the profit margin for themselves.It is also important to see what price Sansy's competitors are applying to their brands of ice cream. If the market leader has reduced prices then it is advisable that Sansy follows or sales volume could be very low. However, this may lead to a price war and the product will not generate as much profit as before if the price is reduced to more than the initial saving made on cheaper milk. Also, as the product is a luxury item, customers are willing to pay an expensive price.
If Sansy did not reduce the final price, the saving would be converted into direct profit.This would lower the Break Even point and would make the company. In addition, as more profit was being made, Sansy could retain more profits into the company. This may allow a period of growth in the future or purchase more fixed assets to make the company more efficient.
In conclusion to my essay, I believe that price is very important to the final selling price of a good but there are lots of factors that need to be considered before selecting an appropriate pricing strategy. The economic climate, competitor's actions, consumer perception and the product itself are all valuable considerations.In Sansy's case, I think that they should research more into the reasons why the cost of milk has decreased. If the price reduction appears to be long term I would advise that they strongly regard what competitors are doing in the same situation. If prices remain the same, I think it would be beneficial that they gave dividend payments to shareholders as the business is likely to do well. This maintains good relationships between ownership and management and prevents problems if there is a period when the business doesn't do as well.
