Having defined the overall offering objective and selecting the generic strategy Afton must then decide on a variety of closely related operational strategies. One of these is how they will price the offering. A pricing strategy is mostly influenced by Afton’s requirement for net income and your objectives for long term market control. If near term income is not so critical and rapid market penetration for eventual market control is desired, then you set your prices very low.
Environmental factors positively or negatively impact the industry and the market growth potential of your product/service. Factors to consider include:
- Government actions - Government actions (current or under consideration) can support or detract from their strategy. Consider subsidies, safety, efficiency and operational regulations, licensing requirements, materials access restrictions and price controls.
- Demographic changes - Anticipated demographic changes may support or negatively impact the growth potential of their industry and market. This includes factors such as education, age, income and geographic location.
- Emerging technology - Technological changes that are occurring may or may not favor the actions of their enterprise.
- Cultural trends - Cultural changes such as fashion trends and life style trends may or may not support their offering's penetration of the market
Consider relevant information
Information that should be considered is centered on the pricing strategy of Afton. All pricing decisions that affect marketing objectives should be considered. “To a large extent, pricing decisions determine the types of customers and competitors and organization will attract. Likewise, a single pricing [effort] can effectively nullify all other marketing mix activities (pg. 383, Kerin and Peterson).” In the instance of Afton, the element of the marketing mix that is under consideration is promotion as it relates to the distribution of the product. For example, Afton’s primary objective of modernizing and expanding operation facilities will be affected by the company’s pricing strategy because the price hike would have been used to finance these efforts. If there is a reduction in price, the expansion plans could be brought to a halt; however, if the price hike stands, the expansion plans will be allowed to continue.
Afton should revisit strategy as it relates to the company’s product. Since sales and marketing efforts for asphalt shingles focus on roofing material distributors and research by the National Roofing Contractors Association indicates that for new construction, architects or builders typically decide what type of shingle should be used, the consumer should be more knowledgeable of Afton’s product and should be empowered by the company through advertising and marketing efforts. Roofing contractors usually decide which manufacturer to use. For reproofing, roofing contractors play an influential role in both shingle and manufacturer choice. In deciding between roofing materials, contractors report that shingle performance and level of manufacturer service were the dominant choice considerations. This decision process can be attributed to the fact that the ultimate customer is not familiar with the Afton brand. Afton should be create some type of brand equity with its ultimate customer base and acquaint this base with their product and involve them with the decision process.
Afton should consider their current product-line pricing and the extent of demand as it relates to each product line. For instance, the premium line is priced at $55 per square, is a very heavy, laminated shingle with a prorated 40-year warranty. This line comes in a variety of colors. The moderately priced line is priced at $40 per square and is a less heavy shingle with a prorated 30- year warranty and fewer color options. The value line, with a $32 per square price is the lightest weight shingle, has a prorated 20-year warranty, and comes in two colors. The premium line accounts for 35% of volume and the moderately priced and value line account for 55% and 10% of volume. Afton should expand the features and possibly considered extending the warranty periods of the various lines to complement the need to increase the company’s price hike. By offering some type of incentive to the ultimate customer via the implementation of a pull strategy the company will salvage market share and offset concerns surrounding pricing strategy.
Afton should consider the structure of the industry in order to determine the proper pricing strategy. Currently the industry structure is oligopolistic. This type of industry structure is characterized by few number of firms, strategic pricing between monopoly and perfect competition, restricted output, interdependent strategic pricing and output decisions, and possibility of long run economic profit. Knowing the characteristics of this type of industry structure will allow Afton to minimize losses and maximize gains.
Afton must also consider any political risk associated with pricing and the law. The company should examine and conform to any pricing strategies set by the National Roofing Contractors Association or any existing regulator or industry guided organization. This should be done to ensure that the company is exercise price hike in accordance to possible existing rules concerning price.
Finally, Afton Industries must consider external factors effecting pricing decisions. Market and demand coupled with competitive interaction should be considered. Competitors, price, cost, offers and economic conditions must be considered. Re-sellers needs and social concerns regarding the product should be considered by Afton as well.
S.W.O.T. Analysis
Strengths
Afton Industries had been a regional price leader over the years and the company was a market leader. Afton industries produces organic-based asphalt shingles for the residential market in the upper-Midwestern United States. The company also distributes a line of roofing accessory products under the Afton brand name. In the company’s region, Afton had been the dominant asphalt shingles manufactures.
Weakness
In terms of product, the key weakness with Afton’s product is its organic base. Organic based asphalt shingles are better in cold weather regions and fiberglass based shingles are better in hot weather areas. Currently, the company’s product line is its weakness because Afton only produces a certain type of shingle that functions in a limited market the company should consider expanding its product line to include a fiberglass based product the will allow the company to enter into other geography.
Opportunity
Opportunity for the company lies in the three lines of asphalt shingles that the company produces. Afton should employ a combination of a push and pull strategy to capitalize on business increases. Along with the consideration of increasing price, Afton should be considering adding incentives for buyers and resellers with their product. In this consideration lies the opportunity for Afton to salvage market share and increase profits.
Threats
The primary threat for Afton is the company’s competition and Afton’s pricing strategy. In the past the competition as responded to price hikes created by Afton by increasing their prices. The last price hike created by Afton did not dictate the price of the competition and Afton in this instance was not viewed as a market leader. Since the competition did not respond to the price hike, they (the competition) were considered to be attempting to capitalize on market share because of Afton’s price increase. The increase will allow the competition to capture a greater market share if Afton does not properly price its product.
Recommendations
Our recommendation is for Afton Industries to consider the question of why did the competition not raise price and will they possibly raise their price in the future. The competition did not raise price in hopes of Afton’s price hike to serve as a demise to Afton and increase their (the competition) market share. After salvaging greater market share, the competition may consider price hikes in the future because greater market share will be gained and the competition will be perceived as a market leader instead of Afton.
Identify the best alternative
EMV44.50 = .55 (12,984,054) + .45 (10,335,443) = $11,792,179.05
7,141,229.7 + 4,650,949.35
= .50 (12,984,054) + .50 (10,335,443) = $11,659,748.50
6,492,027 + 5167721.5
= .60 (12,984,054) + .40 (10,335,443) = $15,793,952.7
7,790,432 + 4134177.2
EMV40.50 = .55 (12,858,754) + .45 (10,904,570) = $11,979,371.2
7,072,314.7 + 4,907,056.5
= .50 (12,858,754) + .50 (10,904,570) = $11,881,662
6,429,377 + 5452285
= .60 (12,858,754) + .40 (10,904,570) = $12,072,280.4
7,710,452.4 + 4,361,828
Afton’s industry has found itself in a market share struggle with its competitors during a highly uncertain upcoming 1999 year. Dan Eagan and Pat Shearer have to make the decision on which price recommendation would have the best chance of gaining the largest market share by the end of the year. Their first recommendation was to maintain Afton’s average price per square at $44.50, or lowering the average price to $40.50.
Even though the company would like to price its shingles at $44.50 and make a profit of $5,866,000 at it’s lowest sales volume of 700,000 per square or $12,090,000 at it’s highest sales volume of 775,000 per square, this would not be the best decision. If asphalt shingle sales grew by two percent, their market share would only gain 1%, increasing to 45% market share. Even with the 5% decline in shingle volume, Afton would only be looking at a 2% increase in market share at 46%. This price also gives competitors the opportunity to set a lower selling price while raising their installation fee so that they still make as much as Afton but gain the sales and market share. It also presents the opportunity to for “fly-by-night” or freelance contractors to continue to linger around. Plus, the average price difference between Afton and competitors was too great to begin with.
Afton’s best alternative is to lower its price to $40.50. By doing so, Afton’s market share would grow 2% in a slowing market, giving itself a 47% market share. If there happens to be a 5% decline, Afton has the opportunity to regain its 49% market share. Either direction leads to a greater market share than pricing at $44.50. Especially if the industry would experience a 5% decline, manufactures who could offer lower prices would be able to get a greater amount of business. By creating this markdown, eventually all other companies would have to do the same. Many competitors that set lower prices previously were found increasing their installation fees, which usually equaled Afton’s typical markup price. This would give Afton a huge advantage over its competitors because they wouldn’t have the opportunity to lower their prices even more and still have outrageous installation fees to compete with Afton. This would also reduce the number of fly-by-night contractors, because they will not be able to compete with the low prices and low installation fees. Lowering the average price would also remove the economic incentive for some roofing contractors to recommend a competitor's shingles to homeowners and builders. Even though there would be a $2,800,000(700,000 per square) to $3,100,000(775,000 per square) difference in sales volume in choosing to sell at $40.50 rather than $44.50, Afton’s main goal is to drive up the market share and indirectly increase its profit margin. It would be important for the company to sell more than to sell at a higher price.
Develop a Plan for Implementing the Chosen Alternative
After determining the overall strategy, which was to drive up market share and to increase profit, the next step in the planning process involves implementing and carrying out this strategy. This requires the development of marketing programs which involve tactical elements. The marketing strategies must be transformed into a set of specific actions or tactics for accomplishing their pricing strategy. With that said, Afton Industries should implement a variable-cost pricing strategy. The basic idea underlying this strategy is that the relevant costs to consider are the variable costs, not total costs. This strategy will enable Afton to stimulate demand and increase revenues, and hence will lend to economies of scales, lower unit costs, and greater profits. This strategy makes sense because fixed costs must be met no matter whether a product is sold.
Afton Industries wanted to increase their price because they wanted to embark on an extensive plant modernization and expansion program. With that said, Afton Industries must be concerned with the promotional as it relates to creating and the distribution of the product. Essentially, to expand their operations, Afton Industries must re-visit the marketing mix entirely. For example, currently, Afton Industries is using an organic base product that works well only in cold weather regions. In considering expanding their operations and programs and modernizing plant facilities, they will have to consider other means in producing a product like a fiber glass base product that works well only in hot weather regions. This will allow them to expand to other regions and have a visible product that will work in different climates. This example demonstrates the need for Afton Industries to re-visit various aspects of the marketing mix. Key components of the marketing mix that must be reexamined are product related decisions, promotional related decisions, pricing related decisions, and distribution related decisions. These decisions are:
Product Related Decisions
- Determining the most effective product mix to serve each market segment (should be based on costs and buyer demand).
- Branding the products in the product line, if possible (shingle patents, etc.)
- Provide attractive and informative labels for shingle materials.
- Provide guarantees for each product in the product line. Modifying the existing product mix as the need arises.
- Planning and introducing new products Provide information on the care of the shingles after they are sold.
- Service considerations - delivery, credit, convenient business hours.
Promotional Related Decisions
- Select and prioritize target groups and geographical marketing areas.
- Determine whether advertising is required for the target markets selected. If so:
- Determine advertising appeals and specific messages to use in those campaigns.
- Select appropriate advertising media such as radio, television, newspaper, road signs or direct mail.
- Determine the size of the ads to be used.
- Determine the duration of the advertising campaign.
- Determine the frequency of advertising.
- Determine how advertising effectiveness is to be measured.
- Select appropriate sales promotional media such as point-of-purchase materials, samples, demonstrations, or trade shows.
- Develop a logo that is colorful and prominent.
- Public relations events - donate to charities, community meeting place, sponsor festivals, etc.
Pricing Related Decisions
- Determine base prices for each product in each market served
- Determine the appropriate types and sizes of volume discounts used, if any.
- Determine the use of psychological pricing tactics such as prestige pricing, promotional pricing, etc.
- Determine credit policies.
- Allow consumers to buy the quality of shingles they can afford.
Distribution Related Decisions
- Provide protective packaging for goods in transient and storage.
- Determine the modes of transportation to be used.
- Determine inventory requirements and maintain these requirements.
- Provide frequent small shipments, even on weekends, if necessary.
Evaluate the Decision and the Decision Process
Performance of the plan must be measured, and this means that standards must be developed against which performance can be evaluated. Typically, the manager develops quantitative measures of overall planning performance such as the following:
- Comparing total sales and profits with figures from preceding years.
- Measuring performance relative to competitors (i.e. market share).
- Performing a sales analysis by breaking down sales into categories such as geographic region, primary customers, and fast-moving products.
- Measuring customer satisfaction with surveys and other market feedback.
The importance of proper and timely evaluation cannot be overlooked. Communication between the business and the customer is essential for success. Customers will try a new supplier "one time." If they are not pleased with the product, they will look elsewhere. A good evaluation system and prompt corrective actions, when required, can assist managers in maintaining their individual market share. Information gained in the control and evaluation analysis may be used to update objectives, to alter strategy approaches, and even change tactics to be used. When this happens, the planning process has come full circle and the entire marketing planning process begins again.
We came to a decision of selecting to lower the current price to $40.50. This decision is appropriate because it allows Afton Industries to receive the maximum amount of profit from the customers. After considering all relevant information, we came to the decision of lowering the price. Since average price difference between Afton and competitors was so far apart, it would be inevitable for the company to reduce their price to $40.50. The more they can produce, the less cost per square it would pay. After looking at the Expected Monetary Value table, it would be more beneficial for the company to sell more shingles than to have a higher price, especially if the industry would experience five percent decline in single volume. Manufactures who could offer low price would be able to get business. Lowering the price of their shingles would remove any opportunity for any other company to enter into the market because companies could not afford to keep prices so low and it would give contractors and incentive to recommend the shingles because it is a good quality with a low price. Information gained in the control and evaluation analysis may be used to update objectives, to alter strategy approaches, and even change tactics to be used. When this happens, the planning process has come full circle and the entire marketing planning process begins again. In conclusion, lowering the price would increase their market share to 47 percent in a two percent growth market and a 49 percent in five percent decline market.
