Business Proposal

James A.White Sr. ECO/561 Business Proposal October 9, 2014 Mr. Robert Dratwa Selected good: Vegetable and fruit mix based ice cream for Unilever’s “Heartbrand” Introduction Frozen dessert, particularly ice cream, is one of the most prominent sectors of production due to its wide market scope and popularity. However, it is threatened by the increasing concern for healthy diets due to its fat, calorie, and sugar content. As a result, the demand for a healthier version of ice cream with retained or even improved sensory properties arises. Unilever responds to this demand by launching a new kind of ice cream which is based on vegetable and fruit mix, therefore improving the nutrient content. Economical analysis of the product, including market structure, associated costs, elasticity of demand, and pricing and non-pricing strategies is provided below. Market Structure In order to identify the suitable strategies for the product launch, it is essential to identify the type of market structure in which the product will engage in. The product is a differentiated version of conventional ice cream, but is an imperfect substitute. In essence, the product is expected to compete in the market by means of value added attributes. Furthermore, there is relatively large number of sellers which could enter and exit the industry easily based on the market conditions. From the mentioned characteristics, it could be inferred that the type of market structure for the product is a monopolistic competition (McConnell, et al., 2009). Target Market There is also the need to identify the target consumer scope in the market, which would be useful in the consideration of strategies to improve the standing of the brand in the market. The product itself is a value-added product, in which people are expected to pay a premium price for the improved version of ice cream. As a result, from the income level, it could be concluded that the target market will be middle to higher level income consumer groups. From the aspect of age, ice cream product is consumed widely by all age groups, with less consumption shown by elderly individuals due to health concern. However, the introduction of the improved features of the product allows the approach to be carried out even to those previously limited groups. Thus, from the age group, it could be inferred that it could be targeted to all age groups. Fixed and Variable Costs Aspects In any kinds of businesses, two costs are associated with production namely the fixed cost or the cost of fixed resources which does not change with output change and variable cost, which fluctuates along with the change in production output (McConnell, et al., 2009). Fixed cost comes from those required for machineries such as freezer, air filter, ice-cream tank, and condenser, equipment, and plant facilities such as pollution control, sanitation, warehousing, and even the areas of the plant itself (MSSEWB, 2012). Meanwhile, the variable cost comes from the raw materials such as sugar, milk, fruit and vegetable base, labor, power such as electricity, and other aspects (MSSEWB, 2012). The cost taken for the production and other operations mainly depend on the scale of the production and the location of the facilities (MSSEWB, 2012). As a guideline, a production plant located in West Bengal, India producing about sixty thousands cup monthly requires a fixed capital investment of forty thousand dollars and five thousand dollars for its monthly variable cost (MSSEWB, 2012). This value is a rough estimate, and changes in business operations such as the decision to adjust output to the pricing decisions mentioned below will alter the proportion of the variable costs (McConnell, et al., 2009). Fixed costs are largely unaffected, unless the need for a major scale-up and thus the purchase of new equipments arise (McConnell, et al., 2009). In essence, the proportion of variable cost will increase if output is increased, and vice versa (McConnell, et al., 2009). Price Elasticity of Demand It is also important to consider the price elasticity of demand of the product before determining suitable pricing strategies. Being in a monopolistic competitive market, the price elasticity of the product is highly elastic (McConnell, et al., 2009). The product itself is an incomplete substitute of ice cream, and thus increase in price will most likely result in the consumers being discouraged to buy the value-added product and turn to the conventional ice cream products instead, leading to the price elasticity (McConnell, et al., 2009). However, it is not perfectly elastic since there is the limit of the competitors present in the market and that there is slight differentiation between the products, which contribute a little towards its inelasticity (McConnell, et al., 2009). Pricing Strategies Apart from the price elasticity of demand, two aspects need to be considered in determining the pricing strategies namely the marginal cost and revenue. The former refers to the additional cost of producing another unit of output, while the latter refers to the additional revenue of producing another unit of output (McConnell, et al., 2009). In essence, an under-produced product will have larger marginal revenue while an over-produced product will have lower marginal revenue compared to marginal cost (McConnell, et al., 2009). The ultimate goal of the company is to maximize the profit, and this may be attained when the output is such that marginal cost is equal to marginal revenue (McConnell, et al., 2009). Furthermore, considering the fact that the price elasticity is highly elastic, the lower the price is set, the higher the demand will be. Thus, as a result, the pricing decision is made such that the demand corresponding to the price from the demand curve is equal to the output which corresponds to the profit maximization point (McConnell, et al., 2009). Impacts of Pricing Strategies In monopolistic competitive markets, the firms are relatively free to adjust their price independent from their competitors (McConnell, et al., 2009). However, there are also impacts of pricing strategy of one firm to another (McConnell, et al., 2009). In the short run, the pricing strategy of adjusting the price corresponding to the output in which marginal cost is equal to marginal revenue results in profit maximization (McConnell, et al., 2009). However, loss possibility may occur if there is shift in demand as a result of competition and entry of new incomplete substitutes in the market (McConnell, et al., 2009). The shift in demand, in turn, alters the marginal cost and revenue of the current price and output (McConnell, et al., 2009). This results in the need of re-adjustment of the price to attain the point where marginal cost is equal to marginal revenue (McConnell, et al., 2009). Theoretically, firms may profit in the short run, but will ultimately earn only normal profit in the long run (McConnell, et al., 2009). However, in reality, firms could still earn profit in the long run by ensuring sufficient product differentiation and utilizing other strategies which are not price-related (McConnell, et al., 2009). Non-pricing Strategies In order to maintain the competitive advantage of the product, several approaches such as branding, advertising, and continuous improvement in the product may be done (McConnell, et al., 2009). Branding allows product differentiation by creating an exclusive view of the product compared to the other conventional ice cream products. Stressing upon the benefits of the product allow the product to be distinct from its competitors. For instance, concentrating upon the nutrition fact and the benefits of the vegetables and fruits used within, coupled with good taste may be a good approach. Advertising, which is the next approach, comes together with branding. Advertising ensures that the benefits of the products are well acknowledged and recognized by the consumers, which would then be appealed to buy the product. Lastly, there is also the need of continuous improvements in the product characteristics such as the fortification of nutrients and improvement of taste to ensure that the product is sufficiently distinct from future competitors, even including those who may mirror the concept of the product, as well as imposing certain barriers to entry for the competitors to engage the market with similar products. Conclusion Unilever new “Heartbrand” product of vegetable and fruit based ice cream is included in monopolistic competition market and products with high elasticity of demand. Pricing strategies employed involve those which are oriented to maximize the profit by means of optimum production in a point where marginal cost and marginal revenue is equal. There is the need to readjust the price and to deploy other strategies not related to pricing due to the impacts brought by the competitors, which result in demand shift and ultimately shift in marginal cost and revenue. Advertising, branding, and continuous product improvement ensure that the product will maintain its standing even in the long run and impose certain barriers of trade. References McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, Problems, and Policies, 18th ed. New York: McGraw-Hill Irwin. MSSEWB. (2012). Market analysis. In Scheme of Ice Cream Manufacturing. Retrieved October 18, 2013, from: http://www.mssewb.org/scheme/data/Birbhum/ice_cream.pdf. BUSINESS PROPOASAL 6