preview case
Amaizer: it tastes awful, but we’re working on it
Amaizer is a new savoury snack made from maize. Its method of manufacture is similar to Cornflakes breakfast
cereal, but it is to be sold as a savoury snack. Amaizers look like potato crisps, but are more golden and regular in
shape. Raw materials and manufacturing costs are higher than for potato crisps, but they are healthier – in their
basic form, they contain the same calories, but are low in saturates and cholesterol.
Amaizer is sweeter than potato crisps, but it can be flavoured. Unfortunately, consumer trials showed that the
Amaizer versions of popular crisp flavours – salt and vinegar, cheese and onion, etc. – ‘taste awful’. The R&D
department was still working on the taste of these flavours. Meanwhile, the aim was to launch the product with
four flavours that consumers did like: regular, sweet and sour, honey roasted ham and ‘1,000 Islands’ dressing.
Although originally designed to use spare breakfast cereal capacity, the developed product needed dedicated
plant. This produces Amaizer for a direct cost of [***]1,500 per tonne, excluding the cost of capital. With potato
snacks selling for [***]3,000 per tonne, the brand manager was confident about the product’s profitability.
The brand manager’s confidence crashed, however, when sales, finance and market research each came up
with recommended prices. The finance officer demanded that the price be set to cover the usual 100 per cent
overhead charge plus a 20 per cent margin. His suggested price of [***]3,600 per tonne gave a very satisfactory
[***]180,000 profit for the targeted 300 tonne annual sales.
Unfortunately, the finance officer’s view conflicted with the sales manager’s, who wanted the price to be
[***]100 per tonne below potato crisps already sold by the company and several competitors. The sales manager
claimed that only with a price advantage could they achieve the target sales against the established competition.
The sales manager added that a low initial price would also compensate traders for the extra shelf space Amaizer
used. Amaizer was bulkier than potato crisps and therefore needed about 20 per cent extra shelf space.
The marketing researcher’s contribution to the pricing debate confused the brand manager even more. Rather
than giving a price, the researcher gave a string of prices and sales and, to the annoyance of the finance officer,
some financial information:
Price ([***]000)
2.5
3.0
3.5
4.0
4.5
Sales (tonnes)
400
350
280
200
100
The researcher also estimated [***]300,000 annual fixed operating cost for the product and capital investment
that depended upon the annual volumes produced:
Annual sales
400
350
280
200
100
2,250
2,000
1,650
1,200
600
(tonnes)
Capital investment
([***]000)
‘I assume you know that our average cost of capital is 15 per cent’, commented the finance officer.
‘All very impressive’, said the brand manager, ‘but what price should we charge?’
‘That all depends on what you want to achieve’, replied the researcher.
Questions
1.
Evaluate the pricing suggestions of the sales, finance and market research officers.
2.
What criteria should be used to select the best price?
3.
Calculate the prices that give the highest gross margins, return on investment, economic value added (EVA),
net contribution, sales value and sales volume (Marketing Highlight 16.2 shows how to calculate these).
Based on these results, what price would you choose and why? What do you notice about the room to
manoeuvre around the optimum prices?
SOURCES:
Adapted from in-company information. Names and figures have been changed for commercial reasons.