ECO 550 – Managerial Economics
September 8, 2014
The maker of a leading brand of low-calorie frozen, microwavable food is looking to expand. The company is currently looking into how to budget for long-term capital planning. Currently the company needs a way to make the consumer response to price less elastic.
Making the Product Stand Out to Consumers
First, we will need to develop an optimal pricing policy for the product. The low-calorie frozen microwaveable food market is price elastic. Consumers have other substitutes available to them in this market. Therefore, a strategy is needed to help this product stand out from its competitors.
Differential pricing is a strategy that has been successful for other companies. In this strategy, different prices are set based on the consumer group and each group is charged exactly what it is willing to pay. This is also known as perfect price discrimination. CITATION Chi14 \l 1033 (Basu, 2014) Reasonable assumptions can be made based on historical sales patterns to set the product mix and pricing strategy. For example, in supermarkets in upscale neighborhoods, the price of the frozen food item may be priced higher than the same item in a low-income neighborhood.
However, differential pricing must be entered into cautiously. Many consumers today are much more price-aware than in the past. So even in upscale neighborhoods, care must be taken to have a campaign of peak and non-peak pricing periods. Say for example, that when holidays are approaching, coupons are provided to consumers so that quick meals are available for unexpected guests. Or during the spring, when consumers are more mindful about getting in shape, coupons are circulated once again. Otherwise, prices would be in place that would maximize profits.
Companies have used the power of consumer surveys to help gauge this sensitivity. One study that looked at consumer dissatisfaction in price queried on the following categories of everyday prices, price given quality, prices compared to other stores and sales and promotions. It was found that millenials are highly sensitive to price, because they came of age during one of this country’s harshest recession, those 65 and older are largely satisfied with price strategy. Consumers are more likely to use their smartphones to check prices and comparison shop than perform any other commerce-related function or activity. Boomers, while smaller in number, have greater purchasing power and therefore exercise less price discretion. CITATION Gil13 \l 1033 (Miller, 2013)Even with the differential price strategy, the company will also need to market the food as a healthy meal when there’s little time. They will need to focus on the fresh vegetables that are “flash frozen” to maintain quality freshness. This strategy coupled with the differential pricing should prove very effective.
Government Regulations for the Frozen Food Market
One entity that can impact costs for the product is government regulations. Several regulations were reviewed that could impact pricing/marketing strategy for the company. Food safety for the consumer is very important for any company in the food market. The Food Safety Modernization Act (FSMA), signed into law in January 2011 represents the first major overhaul of the nation’s food safety system in over 50 years.
The FSMA authorizes the U.S. Food and Drug Administration (FDA) and the secretary of Health and Human Services (HHS) to increase inspections of many domestic food facilities, enhance detection of food-borne illness outbreaks and order mandatory recalls of tainted food products. The law requires most food companies to write and implement new safety protocols to mitigate potential hazards. (AFFI, 2014)In light of this, it will be crucial for the company to have good, repeatable safety processes in place to ensure that facilities…