KRAMER is a small Irish company that manufactures and sells innovative hair restoration and grooming products. It has focussed exclusively on the Irish market to date, but it has a strategy to expand into the wider EU market. Based on market research management believe that its latest hair restoration product, SuperGro, could be successful in the French market. KRAMER currently sells 200,000 units in Ireland and anecdotally management is aware that many French tourists to Ireland stock up on SuperGro to bring home. The market research firm has estimated total market demand in France to be 1,250,000 units. Currently, there are two French companies supplying a similar product in France and they have roughly equal market shares. The market research firm considered three pricing strategies for KRAMER in France. Competitive pricing – Price SuperGro in line with the competition. The market incumbents currently sell at prices in the range €23.50 to €24.50. Using this strategy, they estimate that KRAMER could obtain a market share of 16% (200,000 units) at a price of €24 (which is the same as the market price in Ireland) Premium Pricing – Position SuperGro as a premium product emphasizing the “green” image of Ireland. Pricing at a premium of 12.5% the market research firm estimate that KRAMER could obtain a market share of 11% (140,000 units) Aggressive Pricing – Undercut the competition and position SuperGro as a “value” alternative to the competitor products. The discounted price would need to be in excess of 15% to have an impact. Using this strategy, the market research firm estimate KRAMER could obtain as much as 40% market share. (500,000 units) In summary, the expected demand for the three strategies is as follows:

Sales Price (€)	Estimated Annual Demand (units)
Aggressive Pricing €20.00	500,000
Competitive Pricing €24.00	200,000
Premium Pricing €27.00	140,000

Question 1 (continued) Estimates of other relevant costs are as follows:

 It currently costs KRAMER €15 per unit to manufacture SuperGro. If production levels are above 600,000 management estimates that the production cost per unit will fall to €14.50 due to economies of scale.

Shipping costs to France are €2 per unit however the average price drops to €1.80 for volumes of 500,000 and above

 The annual cost of renting a serviced office and a small warehouse in France is estimated to be €150,000 (€300,000 if annual sales volumes are 500,000).

KRAMER would need one sales representative in France for every 100,000 sales units, subject to having a minimum sales force of three reps. The estimated cost of having a sales rep on the ground in France is €100,000 per sales rep.

KRAMER estimates that it would need to maintain three months stock of SuperGro at its warehouse in France to service the French market.

KRAMER currently pays 5% per annum on its bank loans.

Requirements: (a) Calculate the expected financial outcomes of each strategy. Clearly show your workings.

Answer rating: 100% (QA)

Aggressive Pricing Strategy Sales Price Estimated Annual Demand unitsRevenue Production Cost S... View the full answer