Part 1: A local pet store, Roscoe\'s Rascals, which has concentrated on selling
ID: 1187955 • Letter: P
Question
Part 1: A local pet store, Roscoe's Rascals, which has concentrated on selling puppies, is considering adding a line of pet food. A contractor estimates that it will cost $10,000 to convert some storage space into a retail area for food. Roscoe's Rascals will purchase the specialty food for $15 and sell it for $30. Marketing research indicates that the store will sell 900 bags. Should Roscoe's Rascals add pet food to its products.
Part 2: Assume that Roscoe's Rascals decided to add the pet food line. Two months after it began selling the food, its pet food sales declined dramatically because a competitor across the stress started selling the identical food for $22 per bag. Should Roscoe's Rascals match the price offered by the competitor?
Explanation / Answer
If they can sell it for $30 a bag and it only costs them $15 then they are making $15 a bag profit. For 900 bags, that's $13,500. Since $13,500 is more than the $10,000 cost to set up to sell it, they'd be coming out ahead by $3,500 so it seems worth it to me. (Of course in the real world, it's not that simple. There would be costs to advertise that they now sell food, some of the bags might get ripped and have to be thrown away, etc.)
When the competitor cuts the price, they'd have to figure out whether the profit they are making on the bags that they are selling at $30 is more or less than the profit they'd make selling the larger number of bags at $22. (Or they could try $23 or $25. Some people will choose convenience over price and might buy it even if it's more expensive if it saves them from making a trip across the street to the competitor.) If they're making more selling less bags at $30, stick with that. If they'd make more by selling more bags at $22, then they should do that. Either way it's going to take longer than they anticipated to cover the original $10,000 cost for setting up the space to sell food, but by that point, they've already spent that money, so they just have to do the best they can going forward.