As A Pricing Analyst For Thriftway, You Are Asked To Prepare

As A Pricing Analyst For Thriftway You Are Asked To Prepare The Analy

As a pricing analyst for Thriftway, you are tasked with analyzing a proposal to use turkey as a loss leader during the Thanksgiving shopping period to attract more customers. The current price of turkey is $0.92 per pound, and the proposal suggests setting a promotional price of $0.55 per pound. The wholesale cost for turkey is $0.60 per pound. Past data indicates that the price elasticity of demand for turkey is -3. Additionally, it has been observed that each one-pound change in turkey sales correlates with specific percentage changes in sales of other grocery products, with known contribution margins for these products: fruits and vegetables, packaged groceries, frozen foods, and other meats. Your task is to analyze whether, given the price elasticity and the historical relationship between turkey sales and overall store sales, this loss leader promotion would be advisable. You should determine if the promotion would be profitable or if it would incur losses, considering the impact on both turkey sales and the increased sales of other products, and the contribution margins involved. Based on this analysis, you should provide a reasoned recommendation explaining whether or not Thriftway should proceed with using turkey as a loss leader during Thanksgiving.

Paper For Above instruction

Implementing strategic pricing initiatives such as loss leader promotions requires careful analysis of demand elasticity, product costs, and the potential for increased sales of complementary products. In this case, Thriftway considers setting an aggressive promotional price for turkey to attract more customers during Thanksgiving. To assess the viability of this plan, it’s critical to evaluate the cost implications, expected demand response, and resulting effects on overall profitability, including increased sales across the store.

First, an examination of the cost structure is crucial. With a wholesale cost of $0.60 per pound and the proposed promotional price of $0.55, the store would incur a loss of $0.05 per pound if only turkey sales are considered. This initial loss suggests that the promotion is not profitable based solely on turkey sales. However, the strategic intent behind loss leader pricing is to leverage increased foot traffic and stimulate sales of other higher-margin products.

The demand elasticity for turkey is given as -3, indicating that a 1% decrease in price would lead to a 3% increase in quantity demanded. Applying this elasticity to the proposed price cut from $0.92 to $0.55 per pound results in a substantial price reduction of approximately 40%. Since the percent change in price is roughly -40.2%, the expected increase in turkey sales volume can be estimated as follows:

• Percentage change in demand = elasticity × percentage change in price = -3 × (-40.2%) ≈ +120.6%

This means that the demand for turkey could potentially increase by about 120.6%, effectively more than doubling sales volume. Although the exact volume increase depends on the current sales levels, this significant rise can considerably boost overall sales during the promotional period.

Next, the impact of increased turkey sales on other products is crucial. Past data indicates that for each one-pound increase in turkey sales, sales of other grocery items increase according to fixed percentage contributions. Specifically, the increases in sales and their contribution margins are as follows: fruits and vegetables, packaged groceries, frozen foods, and other meats. These additional sales, driven by the increased foot traffic, can compensate for the losses incurred from selling turkey at a reduced price. For example, if the increased sales of store-wide products yield high contribution margins, then the overall profitability could improve despite the loss on turkey per pound.

To evaluate this, we analyze the net contribution margin changes linked to increased sales. Suppose the baseline average sales per shopper and the average increase in sales for other products are calculated, then the additional contribution margins from these increased sales can be estimated. For simplicity, assume that the contribution margins for these categories are substantial and that the increased sales offset the loss from turkey sales, resulting in a net gain for the store.

Furthermore, the promotional strategy aligns with retail best practices that leverage loss leaders to boost customer traffic and promote overall basket size. The expected increase in overall sales volume could justify the initial loss incurred per turkey pound, as the elevated sales of higher-margin products can lead to profitable basket totals. The key is ensuring that the increased sales of other products are sufficient to recover and surpass the loss from the discounted turkey.

In conclusion, based on the demand elasticity estimate of -3, setting a particularly low promotional price for turkey could significantly increase demand, thereby attracting more customers and stimulating additional sales of other higher-margin products. If the store can effectively track the contributions of these increased sales and confirm that the aggregate contribution margins outweigh the losses on turkey, then pursuing this loss leader promotion is justified. Conversely, if the increased sales of other products are insufficient to recover the losses, or if operational capacity constraints limit the effectiveness of the promotion, then it might be advisable to reconsider the pricing strategy.

Overall, a carefully calibrated promotion that accounts for the expected increase in customer traffic, accurately estimates the resulting sales uplift across product categories, and ensures contribution margins cover the initial losses can successfully enhance store profitability. Therefore, given the high price elasticity and the potential for increased sales of complementary goods, the strategy to use turkey as a loss leader during the Thanksgiving season appears promising—provided the store monitors performance and adjusts the approach based on real-time sales data.

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