Heinz Ketchup Pricing the Product Line Case Solution

1. How profitable are the current SKUs in the product line for both Heinz and for retailers? Consider the profitability of both regular and promotional prices on a dollar and percentage basis. 

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The profitability for both regular and promotional prices on a dollar and percentage basis was high.

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2. What is the current retail pass-through for Heinz’s 24- and 36-oz. sizes? Do these numbers surprise you? (“Retail pass-through” is a measure of how the dollars that manufacturers allocate for trade promotions are converted into retail promotional dollars. This measure is often expressed as a percentage of trade promotional dollars. For example, if a manufacturer reduces the unit price of an item by $1.00 during a trade promotion, and the retailer then reduces its price by $0.50 during the promotional period, “retail pass-through” is said to be 50 %.) 

A recurring motif emerged: When customers bought larger-size bottles, there appeared to be a slight rise in ketchup usage. This conclusion wasn't based solely on the observation that consumers who wanted to consume more ketchup often bought larger sizes.

Instead, Heinz researchers saw what was referred to as "exogenous stockpiling...which prompts consumption," revealing how consumers' consumption patterns changed if they were persuaded to buy a package size that was bigger than they generally bought.

These brands were aggressively promoted on store shelves because retailers were able to increase their margins by reserving shelf space for their products. Heinz's margins have shrunk due to frequent trades, and so has profitability. Did. But over the past two decades, the technology has allowed Heinz to stop expanding its own brand of ketchup and dramatically increase its market share.

Running seven yearly trade promotions that reduced the Red Rocket to a 99-cent retail price point was one of the primary strategies Heinz used between 2000 and 2007 to thwart the expansion of private-label products. 

Retailers effectively compressed their gross margin when they conducted sales to cut the price of any of their products in an effort to increase sales volume. In order to help the retailer counteract the margin compression during these promotional periods, Heinz and other manufacturers gave trade allowances to the store. Retailers all around the nation supported this Heinz advertising plan, providing it front-page coverage in their weekly fliers and large in-store displays for each of the seven promotional periods.

While the Red Rocket campaigns led to a brief expansion of the category and significant retail backing, they also had a number of unfavourable outcomes. The 99-cent price point taught customers to hold off on ketchup purchases until these recurring promotions. By 2004, promotions accounted for more than 50% of retail volume sales. Walmart's "Everyday Low Price" (EDLP) approach kept prices so low that Heinz felt pressure to extend Red Rocket's discount period, but it's a great way to take advantage of the Counter Red Rocket promotion. was discovered by a retailer as. (Exhibit 3 shows the pricing ranges for Heinz Ketchup items sold between 2000 and 2002 at brick-and-mortar stores, Wal-Mart, and club consumer retail sites.)

3. What are the consumption-adjusted margins, both for Heinz and for retailers, of the SKUs currently offered? Consider both regular and promotional prices. (Consumption-adjusted margins are dollar margins that reflect the fact that different package sizes of the same product may influence the rate at which customers consume the product. A natural question that arises from this phenomenon is how product managers should adjust their understanding of product profitability to reflect this possibility. Here is one simple way: Suppose a manufacturer makes $0.20 on a 10-oz. can of soup and $0.40 on a 20-oz. can of soup. In either case, the manufacturer makes $0.02 per ounce. But in this case, the larger size causes consumers to increase their consumption of soup by 30%, so the consumption adjusted margins per ounce of the 20-oz. size can be calculated as ($0.40 × 1.3) ÷ 20 = $0.026, where the term in parentheses adjusts the dollar margin up to reflect the consumption expansion, and then that adjusted margin is divided by the number of ounces in the package size. This per-ounce margin is now directly comparable to the per-ounce margin of the 10-oz. size: $0.02. In this case, Heinz is making more money on the larger package size.)