Pricing Management

Case Submission 3:
Signode Industries

Submitted by:
Ayush Vasishtha (B13017)
Dhruv Gupta (B13083)
Subhro Mukherjee (B13118)

PROBLEM IN HAND:
Mr. Gary Reed, president of SI, must decide
Whether to pass on or absorb a 6.8% increase in the price of cold rolling
steel
Whether to accept the flexible pricing policy (Price-flex) that will
authorise SI salespeople to discount the book price as much as 7%
ISSUES AT HAND:

Mature Marketso market share protection is key

No major Product differentiationleading to customers buying on price

SI is the leader, so competitors give discount on SIs price

SI is the leader, its action will dictate the future of the market

And most importantly, this division is the cash cow to fund expansions of the
mother company, so cash is important!

The idea is we need to look at scenarios on financials- Profit, Profitability and Cash flow.
There are 4 scenarios for the two questions above. i.e.
1. Pass 6.8% increase to customers and reject price flex
2. Pass 6.8% increase and accept Price Flex
3. Absorb 6.8% increase and accept Price Flex
4. Absorb 6.8% increase and reject Price Flex
Current Data obtained from exhibit 1:
SALES FORCE SITUATION

Pass 6.8% increase to customers and reject price flex Here the sales team will
be unhappy as the price has been passed to the customer and flexible price has
not been given as a power to the sales force. This would result in loss of market
share although margins will remain high.

Pass 6.8% increase and accept Price Flex : In such a scenario, sales people will
neither be completely happy nor unhappy. Their price will increase leading to a

chance of reduction in market share, which will have to be countered by the flex
pricing option provided.

Absorb 6.8% increase and accept Price Flex- Here the sales person will be happy
since the price remains the same (it is absorbed) and he also has the flexibility to
customize discounts according to the type of benefit customers want. There will
be increase in market share but margins will be hit.

Absorb 6.8% increase and reject Price Flex In this case the price is absorbed
which will make the sales people happy and will increase the moral but the
ability to make flexible pricing is removed which will make them inflexible.
Hence they wont be able to set discounts as per the requirement and they will
not be completely happy either

PROFITABILITY AND CASH FLOW

From Exhibit 1, we get the following data
PACKAGING

1983

Market Size

714875

% Market Share

Common size 1983

40%

Revenue

285950

100.00%

Cost of Sales

181473

63.46%

2879

1.01%

0.00%

101598

35.53%

Selling Expense

24178

8.46%

Material
management
General Adm.
Expense
Direct Expense

12560

4.39%

8547

2.99%

45285

15.84%

550

0.19%

56863

19.89%

9975

3.49%

R&D
Freight
GM

Other income
Operating income
Other income

EBIT

46888

16.40%

Calculations:
New Cost= 104.62 times of old cost
Steel strapping original percentage of total cost= Raw material as percentage of
Apex*Weightage of sale of Apex +BBM Raw material*weightage+HDM*Weightage of
HDM = 67.89%
New Cost= 67.89%* 1.068%+ (1-67.89%)=104.62%
If we take packaging industry into account:
Baseli
ne

Market
Size
% Market
Share
Revenue

CS

Pass+
Accep
t
Price
Flex

CS

Absor
b+
Accep
t
Price
Flex

CS

26724
3
18985
1

24178

100.0
0%
71.04
%
1.08
%
0.00
%
27.88
%
9.05
%

12560

4.70
%

Absorb
+
Reject
Price
Flex

CS

40.00%

Cost of
Sales
R&D
Freight

Selling
Expense
Material
manage
ment
General
Adm.
Expense
Direct
Expense
Other
income

Pass
+
Rejec
t
Price
Flex

714875

28595
0
18147
3
2879

GM

CS

10159
8
24178
12560

8547

100.
00%
63.4
6%
1.01
%
0.00
%
35.5
3%
8.46
%
4.39
%

29915
1
18985
1

24178

100.
00%
63.4
6%
0.96
%
0.00
%
35.5
7%
8.08
%

12560

4.20
%

2879
0
10642
1

2.99
%
8547

45285
550

15.8
4%
0.19
%

45285
550

2.86
%
15.1
4%
0.18
%

27958
0
18985
1

24178

100.
00%
67.9
1%
1.03
%
0.00
%
31.0
6%
8.65
%

12560

4.49
%

2879
0
86851

8547
45285
550

3.06
%
16.2
0%
0.20
%

2879
0
74513

8547
45285
550

3.20
%
16.95
%
0.21
%

189851

100.00
%
66.39
%

2879

1.01%

0
93220

0.00%
32.60
%

24178

8.46%

12560

4.39%

8547
45285

2.99%
15.84
%

550

0.19%

285950

Operatin
g income
Other
income
EBIT

56863
9975
46888

19.8
9%
3.49
%
16.4
0%

61686
9975
5171
1

20.6
2%
3.33
%
17.2
9%

42116
9975
32141

15.0
6%
3.57
%
11.5
0%

29778
9975
19803

11.14
%
3.73
%
7.41
%

16.96
%

48485
9975
38510

3.49%
13.47
%

As per the calculations EBIT is highest for Scenario 1, i.e Pass 6.8% increase to
customers and reject price flex.
Probable reasons for change in market share which are not factored in the above
calculations :

1. Pass 6.8% increase to customers and reject price flex: Reduction in market share
by 2-3% owing to no price flex
2. Pass 6.8% increase and accept Price Flex- Market share is supposed to increase
2-3%
3. Absorb 6.8% increase and accept Price Flex highest increase in market share
assuming it is supposed to jump around 6-7 %
4. Absorb 6.8% increase and reject Price Flex: same as 1.

Therefore if they want to increase market share, they should adopt Price Flex and
Absorb the price increases. However, EBIT will be severely hit.