BUSN 491 Pricing Strategy

According to Safety Research and Strategies (2007), the used tire business is booming. "The industry generates high profit margins for retailers and wholesalers" (Anonymous, 2007). Tire recyclers receive a fee of $1.00 to process a tire, but may cull a tire with legal tread that then undergoes an inspection process and return it to market with a price between $1 and $10. "According to the Rubber Manufacturers Association, a tire industry trade group, an estimated 30 million used tires are sold to motorists each year. That represents nearly 10 percent of the 318 million new tires sold in the U.S. annually" (Anonymous, 2007). Safety Research and Strategies (2007), further report one tire company processed 17 million tires and of those, 6 million were returned to the market. Those 6 million tires generated revenue of $6 - 60 million for the tire processor. Gleaned from this is that the used tire market is at least 6 million tires annually. Other tire processors engage in this market practice, which substantially increases the size of the used tire market.

A 13" tire will be sold for $35.20, following a proven business model. A local competitor sells similar sized tires for $35 - 45, depending on grade (quality) of tire. The cost of a 13" tire is $13.00 and will sell for $32.00. The cost of disposal is $1.25. The price to the customer for tire disposal is $3.20. A competitor charges $5 per tire to dispose of the take-offs (Prices). Total cost for a 13" tire is $14.25, which will sell for $35.20. This is $0.20 higher than one competitor. This pricing generates a dollar mark-up (gross profit) of $20.95. This pricing structure is competitive due to product elasticity, and yet yields a 147% mark up on cost of goods and a 40% mark-up percentage on the selling price.

The markup percentage on cost = dollar markup (20.95) divided by cost (14.25) = 147%. The markup percentage on selling price = dollar markup (20.95) divided by selling price (35.20) = 60%.

Tire sales are forecast on the cost and price of 13" tires at 30 tires per day based on a 24 day month. With sunk costs of $15,040 and a mark-up of $20.95, 718 units will need to be sold to recuperate sunk costs. At an average sale of 30 tires per day, it will take 24 days to recuperate sunk costs. 24 days is the average days the business is expected to be open each month.

Additional auto services, such as tire repairs and brake replacement service, will generate $9,100 per month. Combined with expected tire sales of $25,344 per month, a monthly revenue of $34,444 will be realized. Total monthly expenses are forecast at $17,855. This provides a monthly gross profit of $16,589 and an annual gross profit of 199,068. Subtracting the sunk costs, first year profit is expected to be $184,028. (see next page)

Additional Services Revenue

Additional services will generate approximately $9,100 in sales at an additional cost of only $195. One month of additional service sales will cover the entire month’s labor ($4600) and operating costs ($2800) leaving $1700. $1700 - $195 (cost of additional services) generates $1505 as gross profit for the month. This does not include revenue from used tire sales, which generate 74% of monthly income. Additional services generate 26% of monthly income.

Income from additional services ($9100) will pay the overhead costs ($7400).

Cash Flow

Used tire sales will generate $25,334 minimum per month. This figure was based on the number of expected tires sales, calculated at the 13” tire size rate. Greater income will be realized from sales of the larger tire sizes.

Ramp Up

Business will start with most of the equipment calculated in sunk costs. The biggest expense is the low profile tire machine with a cost of $15,000. Five air impact wrenches are not needed at start up, saving $450. During ramp up operations, the business will not have employees and will add them when sales permit. Potential employees will be interviewed prior to and during ramp up operations. Sales during ramp up operations may not support the lease and will come out of personal investment until payment can be shifted to the business. This type of business allows for easy ramp up due to its simplicity and low investment requirements. New employees can be trained within a few hours and become proficient within a few days. Due to inventory storage needs, a large gas station or small warehouse facility is needed. Starting small and then moving within a few months could potentially harm the business. This necessitates the building is omitted from scaling during ramp up considerations. Ramp up to full scale operations is estimated to be 3 months.

Anonymous (2007). Used Tires: A Booming Business with Hidden Dangers. Retrieved from http://www.safetyresearch.net/Library/Used_Tires.htm

Prices. UsedTireExpress.com. Retrieved from http://usedtireexpress.com/prices/2489267