1.

Situation

In Nov 2006, Donald Janus, vice president of marketing, and Victoria Brown, senior sales manager,
met to discuss whether the company should offer a price promotion for the company’s line of
premium cookware in the coming year. Donald feels that due to the unparalleled product quality,
the most advanced performance technology in the industry, strong dealer support, on track to grow
overall revenue by 21%, as well as the consulting study that showed that 2004 price promotion had a
negative impact on the profits, offering price promotion may not be necessary and it cheapens the
product image. On the on the other hand, Victoria feels that providing a 30% discount promotion
will increase commitment and support from the trade and it will boost overall brand awareness.
And she also feels that the number one complain that uh her Salesforce hears from the trade
accounts is the lack of consistent and meaningful price discount event, also she feels that if the data
in the consulting study is re-examined 2004 price promotion was very profitable. After the
discussion Donald recommends Vic to dig deeper into the consulting study and provide with the
calculations for profitability of the 2004 promotion as well as a formal recommendation on whether
to run a price promotion in 2007 and if so what merchandise to promote and on what terms.
Hence, Victoria's task was to take a step back and think critically before making her
recommendation, clearly explain her perspective on the profitability in 2004 promotion, lay out the
consultants’ assumption next to her own for Donald to review. And then, considering the previous
analysis and the strategic objectives of the company Victoria had to determine on the type of price
promotions, if any, should be recommended.

2. Questions
1. Choose between retail pricing round dollars ($200) vs 99-cent Pricing ($199.99)?
2. If needed, how to structure the promotion to maintain or not lose heavy margins.
3. What type of infrastructure is needed to avoid any bottlenecks in backorders (such as the one
happened in May 2005 promotion?
4. How to maintain the same order levels even after the promotion ends (i.e. after running the May
2005 promotion, June, July and August 2004 orders dropped below 2004 levels).
5. Are there any alternative way of increasing the price without increasing the price?
3. Hypothesis
1. Top players in the cookware market included star chef (mid level and low end products) at 18%
of the market dollars, Kitchen Select (mid level and low end products) at 14%, Culinarian
(premium products) at 6.5%, Le Gourmand (premium products) at 4% and Robusto (premium
products) at 3%.
2. The CEO’s four Strategic priorities for the company are (1) widen the distribution network (2)
increase the market share of the premium cookware segment (3) preserve its prestigious image,
and (4) continue to capture revenue growth of at least 15% while maintaining pretax earnings
margins of 12%.
3. The market research by the Culinarian, in 2004, revealed that 75% of its customers were 30 to 55
years of age, 82% were women, 70% had household incomes over $75,000 and 60% considered
cooking to be their number one hobby. Product performance and durability were regarded as
the most important features.
4. The company had very strong relationships with the retailers and they all carried all the product
lines of Culinarian; because of the retailers capturing higher margins versus but competing
products.
5. 36% of trade orders came through a network of three upscale kitchen specialty chains, 32% of
the trade orders came through Neiman Marcus department stores, 27% of the trade orders
came through 75 local specialty stores and approximately 5% of the orders came direct sales via
company's website.
6. In 2006 culinarian was forecasting $4 million (4% of sales) in advertising expenses versus the
competition would spend about 3% and some of the industry leaders who were spending about
4% of the sales. Majority of the budget went towards national advertising campaign.
7. Pricing and Promotion in May 2005 yielded surge in orders, however promotion dropped well
below 2004 levels following months after May 2005. However, several retailers complained that
the promotion is of little value to them, and culinarians saw only a slight increase in trade orders
during this period.
8. The outside consulting firm, using a computer-generated model, concluded that the promotion
lost $469,489 in contribution. Using another time series analysis, consultants estimated that
Culinarian lost $99,332 in contribution due to cannibalization and saved approximately $39,540
in inventory costs because the company dipped below normal inventory levels.
4. Proof and Action

First, we need to verify the consultants followed by Victoria’s analysis.

With promotion:
Profit Contribution is: $1,914,615.5 [184,987*(62.4-52.05)]
Loss due to cannibalization: $99,332
Savings in the inventory: $39,540
Profit Increase or Decrease: $(529,281.4)

Without Promotion:
Profit Contribution is: $2,384,104.8 [119,504*(72-52.05)]

Victoria’s Analysis:

With promotion:
Profit Contribution is: $4,395,291.1 [184,987*(62.4-38.64)]
Profit Increase or Decrease: $2,397,994.6

Without Promotion:
Profit Contribution is: $1,997,296.56 [59,871*(72-38.64)]

From both the calculations, it appears that Victora didn’t consider the losses due to cannibalization
and savings in the inventory costs. Only variable costs and raw material costs were used ($38.64).
Hence the difference. Hence Victoria’s calculations show profitability via promotions.

It looks like no promotion is required at this point. Keep the same price level of $150 for CX1 line,
$300 for PROX1, $250 for SX1 and $200 for DX1.

5. Alternatives:

1. Culinarian can provide its customers rebates that can be used to buy their higher end products
at a discount.
2. Combo option: Package the combination of fast- and slow-moving items.
3. Having a bulk inventory decreases the fixed costs. Hence bulk manufacturing of products can be
another option.