1. Should Lille Tissages lower the price to FF15? (Assume no intermediate prices are being considered)
My recommendation for Lille Tissages would be to keep their prices at the current FF20 and not to lower it back to FF15 again. While creating my analysis (which is based on the financial data in Appendix1), I considered the following angles:
a) Profits. From profit angle, the scenario is straightforward, at any given volume, based on the estimation from the financial director, the profit would be higher by keeping the price at FF20. In fact, as per presented projection, FF15 will never reach BEP and won’t make profit at all (in fact it makes loss), while FF20 will always produce profit, even at the suggested very low volume (which is considered as a worst case scenario, and actual figures could and should be better). Please refer to Appendix2
b) Contribution. As shown in the attached analysis, the contribution at FF20 is higher at any volumes than at FF15. A further look reveals that the highest contribution for FF15 is reached at the production volume of 175,000 meters, which is accidentally (?) the suggested volume by the sales director. However, by keeping the price at FF20, the contribution is still more, even at the worst case scenario volume of 75,000 meters. I also would like to highlight that maximum contribution of 227,325 for the FF15 scenario is reached by a significantly bigger absolute costs (FF2,696,750), while the FF315,000 contribution figure of the FF20 case is reached by a “mere” overall costs of FF1,485,000. This means lower working capital, and better cash flow, which, given the management’s intentions for modernisation, is a much preferable scenario. Please refer to Appendix3
c) Market expectations. Most of the competitors on the market are small companies, generally following the prices communicated by Lille Tissages. In the year of 2000, both Lille Tissages and it’s competitors dropped their prices, as the market shrinked significantly and they probably hoped to keep or increase their customer base by lower prices. However, the whole industry went on the edge by this radical step, and though the market volumes are on the rise again, the profitability is questionable at FF15. To cope with their losses, Lille Tissages raised their price back to FF20, while the competition didn’t follow this step and they started to gain market share. To this point it all sounds like Lille Tissages should go back to FF15, however, the report clearly states that the competition “all had higher costs and several of them were in tight financial straits”. This suggests that competitors will probably have to, sooner or later, raise their prices. Even if they don’t raise it to FF20, any middle value will strengthen the position of Lille Tissages, since with the price gap shrinking, they value of their brand will probably tempt over customers from the competition again. Also, fabric 345 is not the only product of Lille Tissages, in fact it is responsible only for 3% of their sales, so if it produces low profit for another year until the competition start raising their prices (but still, it produces profit, not loss, like in case of FF15), that shouldn’t be an issue for the management.
d) Branding. This is hard to estimate, but it is highly probable that in case Lille Tissages will drop their prices so significantly (25%), their customers might ask for the reasons, and many of them will probably not even do that, just will walk away, afraid of lower quality (maybe due to possible outsourcing or cheaper raw materials, or so they might assume). Unless there is a very good marketing campaign with a good and acceptable reason (which probably won’t be “since the competition dropped their prices, so will we”), the value of the brand might suffer from a significant price drop. Not to mention that a successful marketing campaign will cost significant money, making the position of the FF15 proposition even worse.
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