peer review on a proposal

Brooke Hetherington

Business Proposal – Pantene Hair care

ECO/561

Professor Ronald Merchant

My Business Proposal

In this assignment explanations will center around introducing a new product in an existing line of business and focus on how to develop the good to increase the revenue. In addition I will be touching upon the concepts of the elasticity of demand, market structure as well as profit maximization techniques, which would be useful to the good and also the barriers to entry. Pricing strategies and non-pricing strategies will be the other important topics which will be discussed as well. I have chosen a successful product that is a shampoo product from Pantene ProV, which is currently the world number one selling shampoo, conditioner, hair care, hair spray and many other similar products. It is hair care product brand and it owned by Procter and Gamble (P&G). This product line was first introduced in 1947 in Europe by Hoffmann-La Roche of Switzerland and branded the name on the basis of the shampoo ingredient panthenol. In 1985, it was purchased by Proctor & Gamble to compete in the beauty products (Burke, D’Autilio, O’Brian, & Robichaud). Pantene is constantly innovating and improving to stay on top of the market and keep their customers satisfied.

Elasticity of Demand & Product

Simply put, the demand for Pantene shampoo is highly elastic for the main reason that today there are so many substitutes available and so many other companies launching their shampoo products on a daily basis.

Elasticity is different for every product because some products are important for the customers. Product that is important for the customers is insensitive to changes in price because the customers would continue purchasing the product no matter what the price is. On the other hand, if there is an increase in a price of a product that has many substitutes available in the market, then there will be decline in its demand (Heakal). Pantene Shampoo is an elastic product because there are many other shampoos available that are providing the custom hair solutions so if the organization would increase the price of the product then the customers would shift to some other brands that are providing the same product at lower price.

Price Related to Elasticity of Product

The organization makes sure that they provide the Pantene shampoo at a reasonable price so that they customers do not switch to other brands. According to McConnell, Bruce & Flynn, (2009), when the product demand is elastic, a decrease in price will increase total revenue; and, a rise in pricing will result in decline of total revenue. The organization understands that there are many options available for the customers so elasticity of the Pantene shampoo plays an important role in the price. The organization wanted to increase its profit so they provide the shampoos at affordable prices and exceptional quality.

Market Structure

The Pantene shampoo has a feature of Monopolistic Competition market structure. This is situation where a product or service is produced by a large number of sellers and is perceived different from its competitors by customers but is quite similar in reality. Product differentiation is the main reason of the perception of difference and is key to success in monopolistic industry. Products are differentiated on the basis of image, quality, price and some other features depending on the product.

Marginal Revenue and Marginal cost

Economic theory recognizes that resources are scarce thereby it aims to allocate those resources in an efficient and most useful manner. Some firms have a limitation on monetary resources and the purpose of using this capital is to fund activities that will generate profit. When a company obtains the level where marginal revenue is equal to marginal cost, then it is possible to locate the appropriate quantity needed to manufacture where profit is at peak (Mankiw, 2012). Marginal revenue is the revenue gained in selling one additional unit of output; and a marginal cost is the extra cost of producing one more unit of output (McConnell, 2009).

Pantene has an Annual sale of nearly $3 billion and the numbers of units sold annually are around $500 million with the average retail price being around $7.99 (Burke).Since it cannot afford to bring down its price as it is already priced competitively, the other methods of increasing revenue would have to be cuts in the manufacturing and production areas. They would have to redo their slow, manual and inefficient inventory systems by taking advantage of the new Inventory Technology. The new product is custom made for people looking for color solutions and custom made for people with fine hair and medium thick hair. These attributes when advertised effectively would generate more revenue for the company. The scientist have spent a great amount of time studying the scalp and hair science, its behavior and its response to all kind of experiments. With the help of this, the organization would be able to gain the trust of the customers and loyalty. There would be increase in demand of the product that would result in the increase in supply which eventually would lead to increase in marginal cost and marginal revenue.

Pricing and Non Pricing Strategies

The pricing strategy for the product is that the organization needs to set an affordable price where they can gain the maximum profit from it and also gain a competitive edge in the market. Other pricing factors such as the manufacturing costs, market place, and quality of product etc. would also have to be taken into account before setting the price. The non-pricing strategies would be like more effective advertising, Brand endorsement by a celebrity and organizing events at different malls. Effective and attractive messaging also will go out to the niche audience by:

· Free gifts

· Money-off coupons

· Store displays

· Publicity in magazines.

Barriers to Entry

There are many obstacles that make it difficult to enter a given market. There may be hindrances in the form of Government regulations, licensing requirements, economies of scale etc. Pantene can create some barriers to entry by advertising so heavily that the newcomer simply cannot match them. It could have the cost advantage as well as the customer loyalty card too thus creating barrier to entry for a newcomer. It could also play the Intellectual Property card since it has a huge Research and development base and could prevent newcomers as they may not have an equally effective production and invention technology. The organization could also provide such a good quality product that it becomes difficult for the newcomers to compete it.

Fixed Cost and Variable Cost

Fixed costs are costs that do not alter with changes in production output, which includes equipment, payments for rental, insurance premiums, building depreciation, and the business debt interest, while variable costs are costs that change with the level of production output, and includes fuel, labor, power, transportation services, and payments for materials (Mankiw, 2012). Managing an efficient business operation with a lean production and skilled workforce may reduce the firms’ costs and raise profitability. The changes on how business operate will modify the mix of fixed and variable costs such as when a firm changes its level of production, the average total cost may rise more in the short run than in the long run (Mankiw, 2012).

The organization would have to pay celebrity that would be endorsing the product and also need to organize events at different malls so there will be increase in variable cost. On the other hand, the fixed cost like rent, equipment, wages etc. would remain the same.

Conclusion

Pantene is a well known product and especially since when they have come with the custom hair solution they have become more popular. The organization should make sure that they keep in mind the elasticity of demand and elasticity of product and also pricing and non-pricing strategies to remain in the market. The organization would be able to gain the competitive edge in the market if they would follow above mentioned strategies.

References

Burke, J., D’Autilio, S., O’Brian, A., &Robichaud, L. Pantene Pro-V. Retrieved May 19, 2014. http://www.slideshare.net/jburke213/pantene-powerpoint1

Heakal, R. Economics Basics: Elasticity.Retrieved May 19, 2014. http://www.investopedia.com/university/economics/economics4.asp

McConnell, C. R., Brue, & Flynn, S. M. (2009).Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.

Mankiw. (2012). In Principles of Economics (6th ed). Ohio:Cengage Learning

The History of Pantene. http://www.pantene.com/en-us/Pages/about-pantene.aspx