PriceWize

Value Based Pricing

This brief covers the following:

  • INTRODUCTION
  • DESCRIPTION OF THE SIMULATION
  • OBJECTIVES
  • THE BUSINESS
  • USING THE COMPUTER

INTRODUCTION

Price setting is perhaps the most crucial and most difficult decision that a business person can make. This simulation allows you to explore pricing and hone your skills.

You will set the price for several market sectors. Based on these prices, sales demand is generated and used to determine financial success. You must analyse these results to see how well you are performing and what further action is needed.

Your objective is to price to maximise profit contribution.

THE SIMULATION

The simulation consists of the following:

  • PREPARATION
  • DECISION MAKING
  • REVIEW

PREPARATION

Preparation involves becoming familiar with the basic business situation, defining individual responsibilities, considering objectives and deciding how to measure and control the business. While doing this it is important to recognise that it takes some time before you fully understand the way your price decisions impact sales and profit. It is probable that you will only fully understand the business after you have run it for several periods. Thus your understanding and the effectiveness of decision making will improve throughout the simulation.

DECISION MAKING

Once the initial preparation is complete the operation of the business is simulated for several periods each representing one trading month. (The first decision period is period 1). Each period involves the following:

  • SUBMISSION OF DECISIONS
  • SIMULATION OF THE BUSINESS
  • ANALYSIS OF THE RESULTS

Decision Submission - you enter your price decisions into a computer.

Simulation - the decisions are then evaluated and their impact calculated producing results.

Results - are printed and displayed for you to analyse and evaluate before making your next price decisions.

As the simulation progress additional decisions will be introduced and reports produced.

REVIEW

At the end of the simulation the computer will review your actions and this and the results of the other teams will be discussed. (You may be asked to make a short presentation).

OBJECTIVES

Your objectives are to run the business for six periods and by the end of the sixth period increase profits for all market sectors.

YOUR BUSINESS

The business that you set prices for manufactures and sells meal boxes. These provide in a single box a complete meal. The contain vegetables and meat plus starters and puddings. Where appropriate sauces, preparation and cooking instructions etc. are included and some pre-preparation done.

MARKET SECTORS

The company sells four different types of meal boxes to different market sectors - family, organic, gourmet and special

The Family Meal Box

This meal box provides meals for busy working families often with several children. The emphasis is on good nutrition and value. This meal box provides several meals and so can serve an individual for several days or a family for, perhaps, a single meal. This meal box is bought by people who are time and cash strapped and is bought box on a regular basis.

The Organic Meal Box

This meal box provides locally sourced organic and free-range vegetables and meat. The meal box is bought by people who are environmentally friendly. Each meal box contains two meals and so can serve an individual for two days or a couple for a single day. Customers buy this meal box on a reasonably regular basis but, perhaps, not every week.

The Gourmet Meal Box

This meal box provides unusual, exotic and exciting meals for the cook and friends. They are bought by people who enjoy cooking and culinary challenge (and want to show off). Besides vegetables and meat these meal boxes include sauces, special ingredients, menus, cooking and preparation advice. Customers buy this meal box irregularly - perhaps once or twice a month.

The Special Meal Box

This meal box provides for people who wish to make that special meal for that special friend, partner or the boss. The emphasis on providing a good and straightforward meal that does not overwhelm the cook or require special skills but is special. The meal boxes include instructions and where appropriate the contents are suitably prepared. Purchases are either very infrequent or one-off.

DECISIONS

Price: Each period you can influence your success by setting prices for each of the sectors. When deciding price you need to consider the customer and the value they place on the purchase. If you evaluate what customers value well then you should be able to increase profits.

Other Decisions: In later periods you will be able to make decisions that influence value and cost and may lead to additional sales and profits.

FINANCIAL INFORMATION

To simplify the simulation, the contents of each meal box cost the same and are sold at the same price. But the different types of meal box can sell for different prices. To simplify the numbers and ensure that you do not have preconceived ideas about value financial information is provided in a notional currency - the Account Unit (AU).

Up to the start of the simulation the company has used Cost Based Pricing with the same Gross Margin % for all sectors. The table below shows the last period's prices and results.

Meal Box / Family / Organic / Gourmet / Special / Total
Meal Box Price / 100 / 100 / 100 / 100
Meal Box Cost / 60 / 60 / 60 / 60
Gross Margin / 40 / 40 / 40 / 40
Gross Margin % / 40% / 40% / 40% / 40%
Meal Box Demand / 100 / 100 / 100 / 100 / 400
Meal Box Sales / 100 / 100 / 100 / 100 / 400
Revenue / 10000 / 10000 / 10000 / 10000 / 40000
Cost of Sales / 6000 / 6000 / 6000 / 6000 / 24000
Gross Profit / 4000 / 4000 / 4000 / 4000 / 16000
Other Sector Costs / 400 / 400 / 400 / 400 / 1600
Contribution / 3600 / 3600 / 3600 / 3600 / 14400
Contribution % / 36% / 36% / 36% / 36% / 36%

Meal Box Price

This is the price currently charged for an individual meal box. Your task is to change this appropriately.

Meal Box Cost

This is the cost of an individual meal box. The price covers all the direct costs of the meal box's contents, assembly, packaging, shrinkage etc.. As shown above, meal box cost of 60 is the same for all sectors, but, eventually, you will be able to change meal boxes on a sector-by-sector basis and hence cost and perhaps value. Of the 60 AU box cost, its contents and packaging cost 30 AUs and the remaining 30 AUs is the staff cost of preparing and assembling the box.

Meal Box Margin

This is the profit earned on each meal box sold and is Meal Box Price less Meal Box Cost. It represents the profit earned on each meal box.

Meal Box Margin %

This is Meal box Margin expressed as a percentage of Meal Box Price and is a measure of profitability.

Meal Box Demand

This is the number of meal boxes that could be sold it there is sufficient capacity and is impacted by price. It can vary slightly period-to-period but there are no seasonal patterns.

Meal Box Sales

This is the number of meal boxes sold during the period. If the total of these is less than the current capacity of 450 then some of the staff who assemble the box will be idle but will still need to be paid. If demand is above capacity sales will be reduced proportionately.

Revenue

This is the revenue earned and is the Meal box Price multiplied by Meal Box Sales.

Cost of Sales

This is the total, direct cost of the meal boxes sold and is the Meal Box Cost multiplied by Meal Box Sales.

Gross Profit

This is the Revenue less Cost of Sales.

Other Sector Costs

These are the fixed costs directly necessary to serve the market sector. They include the cost of updating menus, sourcing ingredients, etc. for the period. These costs are not impacted by the number of meal boxes sold but are still directly attributable to the market sector.

Contribution

This is Gross Profit less Total Other Costs. It is the profit contributed by the market sector to the company's total net profit.

Contribution %

This is Contribution expressed as a percentage of Revenue and hence is a measure of profitability.

COMPETITORS

Competition for the supply of a complete meal that you can eat in the comfort of your own home comes from several sources - other food box suppliers, supermarket ready meals, supermarket ingredients and takeouts.

Food Boxes

There are a handful of suppliers of food boxes. Usually these just contain the ingredients for the main course and not starters or pudding. Prices for main course boxed range from 63 AUs for a very basic box to 137 AUs for an exotic box. The average box price is 102 AUs.

Supermarket Ready Meals

A second group of direct competition is supermarkets' ranges of ready meals. However, as reported in the press, there may be quality problems with ready meals and, even if you try to fake it, their source may be too obvious to guests. Price-wise, costs are between 72 AUs (for a low end meal) and 131 AUs (for a high end meal) with the average cost about 100 AUs.

Supermarket Ingredients

Supermarkets are indirect competitors. Here the ingredients for the meal could be bought separately and the cook would use their own recipe book to prepare the meal. This would be the most cost effective approach but time consuming and with the risk that the meal would not be created successfully. Making from scratch reduces the cost of low end meals to about 50 AUs, high end meals to about 125 AUs and the average meal to about 90 AUs.

Takeouts

Takeouts are indirect competitors where one buy a pre-cooked meal (either collecting it or getting it delivered). As for Super Market Ready Meals, their source may be questionable, additionally it may necessary to source a starter and pudding separately. Bottom end takeouts cost about 100 AUs, top-end (gourmet) takeouts cost about 160 AUs with an average cost of about 120 AUs.

USING THE COMPUTER

When you use the computer you are identified by a team name that you decide the first time you use the computer. The name you choose consists of up to six letters. In following periods, after entering your team name, your current situation is retrieved and enter decisions for the next period.

When entering decisions, a template is displayed on the screen showing the previous prices and your current entry cell is highlighted. To move between the cells use the arrow keys or the mouse. To change a price, position on that cell and enter a new price Enter or move to a new cell. When you have made all the changes click the Confirm button.

If you make an error as you enter data use Backspace to erase the incorrect data. If you notice an error after moving to a new cell, return to the incorrect cell and re-enter.

After you have made and confirmed your decisions, the simulator checks your decisions and, if appropriate, comments on them. If there are no problems, the effect of your decisions is simulated and the results produced.

(c|) 2014 Jeremy J. S. B. Hall PriceWize Page 1