As a market leading brand primarily focusing in designing, manufacturing, distributing and marketing premium cookware, Culinarian Cookware takes pride in its outstanding product quality, advanced performance technology and the strong dealership with retail stores established throughout the years, which Donald Janus, the VP of Marketing believes makes Culinarian stands strong in its competitive industry. In regardless of Culinarian’s usual practice of avoiding price discounting, an official price promotion program was launched in 2004, which was later concluded by a consultant firm that these promotions had a negative impact on profits. There are different views toward the price promotion strategies and the corresponding report in the senior management: Janus felt price promotions were unnecessary, potentially damaging to the brand image, and possibly encouraged retailer hoarding;
Brown believed the promotions strengthened trade support, improved brand awareness, and stimulated sales from both new and existing customers. While Janus trusted the report results, Brown believed the study assumptions were flawed and required further analysis, suspected the promotions had actually produced positive results. In November of 2006, debates among the senior management team had been going on regarding the pros and cons of price promotions for the company’s premium cookware products. A decision is needed to be made in terms of how price promotion can be utilized in Culinarian’s marketing strategy.
The urgent and key question is whether to run a price promotion in 2007 and, if so, to determine what merchandise to promote and on what terms. The broader issue is what strategy Culinarian should pursue to achieve its sales growth objective, and what role, if any, price promotion should play. Clearly there are attractive advantages and draw-backs with significant consequences for a price promotion program. The final recommendation will need to be in line with the four strategic objectives of the company: (1) Widen its distribution network; (2) Increase its market share of the premium cookware segment; (3) Preserve its prestigious image; (4) Capture its revenue growth of at least 15% while maintaining pre-tax earnings margins of 12%.
(1) No Price Promotion
This alternative would means there will be no official price promotion, only occasional free gifts would be given out with purchase of items at regular price. There are least risks associated with this option but the company will need to seek other ways to maintain their competitiveness.
(2) Discount on Slow Growing Items
The second option would be to apply a 30% discounted price to the slow growing items like what the company did in 2006. (3) Price Promotion Campaign (Discount on selected premium items) To invest in a comprehensive price promotion campaign. Discount price will be applied not only to the cheapest and slow growing items but to selected items from all lines. The campaign will be assist with edgy advertising methods to create a “hype” to the price cutting.
Alternative 3: Price Promotion Campaign
The recommendation to pursue the third alternative was made based on a decision matrix with the following set of criteria: risk; ability to widen distribution network; positive impact on brand image; ease of implementation and financial return.
Price promotion is superior to a gift incentive in the following ways.
As Culinarian is heavily relied on retailers for distribution, their opinions carry a certain weight of important. Many of the retailers expressed that a free gift approach often confuse them as to how many gifts to order. These 0 value-carrying gifts also occupy valuable inventory spaces and thus are generally not welcomed by these distribution channels.
When looking at the company strategies, one should realize that the current very low brand awareness among the target groups (HHI $75,000+) is a big issue (Exhibit 4). Discounting merchandize can effectively attract attention and raise awareness, broaden its customer base and stimulate excitement for the brand among the customers.
When looking at the analysis of Culinarian’s target group – the households with income over $75,000, 30% cited price as the most important criterion in selecting cookware; 30% of these consumers would be motivated to buy new cookware because of a price discount versus 20% being motivated by a free gift; 20% would intentionally wait for a sale and “Price” is ranked top 3 in the criteria of choosing a cookware. These study result show that the customers value a price promotion and even actively seek these promotion out. Clearly a cut in price will generate increased sale volume.
Indeed it is true that there are uncertainties in whether the price promotion in 2004 was profitable or not. A report by a consultant firm concluded that the promotion program was not profitable. However, one group in the management team including Brown believes there are significant flaws exist in the analysis due to the following errors: the normal sales figures being too high; variable costs including overhead cost incorrectly; the cannibalization costs and inventory savings which, instead of being left out of calculations, were included and estimated inaccurately.
Another argument being that when you look at the figures provided in the case exhibit, one could see that sales volume drop right after the price promotion in both 2004 and 2005, thus easily hurry to conclude that a price promotion does not benefit the company. However it is possible that the failure of these programs is due to other factors affecting the profitability including the level of discount rate, the ordering size allowances etc. execution considerations. Thus, these calculations cannot serve as a proof against a price promotion.
Because of the above rationale, a price promotion would be appropriate to be run in 2007. Janus’s worries of the disadvantage of a price promotion could be counteracted by the recommendation of the second alternative, which were recommended with two major objectives in mind: raise brand awareness (while maintaining a leading prestige image) and widen distribution network (which potentially serve as a gateway to increase market share and profit).
The major concern of Janus was the potential negative impact to the brand’s premium image especially when the two direct competing premium cookware brands do not use price promotion. However this generally happen only when discounted items was focused on the cheapest line or the slow growing ones (which exactly was what happened in 2004 and 2005). In the new price promotion campaign, a limited number of premium items will needed to be selected for a discount to maintain the prestige and premium image of the brand while specific communication campaign will be employed to increase customer satisfaction on buying the premium product with a discount price. Expanding the discount to more expensive line could also
The next question would be how the promotion will be executed.
Again a limited number of premium items (eg. PROX1) combine with cheaper lines (eg. CX1) will be selected for a discount. In fact, the selection will cover specific items of all 4 lines. A communication campaign will be employed to call out the message to the public: “Here is the premium brand, and we are selling it for a lower price so that YOU can also try out these high-quality cookware” (“Quality” remains the top motivator for choosing cookware).
The discount period will still be around April and May to avoid direct competition with the other big cookware brands. In terms of the problem of retailers placing over-size trade orders and eating up the difference, Culinarian can counteract this by pre-print or attaching a discount notification on the product packaging and limiting each order size during the pre-discount period.
In conclusion, Culinarian should implement a price promotion campaign in reaction to the demand of customers. Discount price will be applied to items based on the direction of boosting relationship between the company and retailers, and raise consumer awareness to the prestige brand name. With the appropriate calculation of discount rate and promotion tactics, market share is likely to increase and the profit margins will be brought to the new height.