Lille Tissages, S.A Case Solution

1. Should Lille Tissages lower the price to FF15?

LT has several product lines. As the firm is financially strong, all the product lines would be profitable. LT also has at least 20% market share. Therefore, the firm would have large operations resulting in economies of scale. The total market volume is forecasted to be 700,000 meters. According to the Marketing Manager, if the price remained unchanged, the sales volume would reach 75000 meters. However, the sales manager believes that, if the price of Item 345 is dropped back to FF15, the firm will be able to gain 25% of the market share which means a sales volume of 175,000 meters. Hence, reducing the price will lead to increased market share for LT.

As the competitor is small and unable to take advantage of economies of scale, it can be assumed that competitors have higher product cost than LT. Therefore, at the price of FF15, all the competitors would be facing a loss. It could be expected that firms would follow LTs price leadership and raise prices to earn prices. Therefore, reducing the price would not be such a viable option.

An important fact is that lowering the price from FF20 to FF15 would be the decrease in product cost. As the sales volume rises from75, 000 to 175,000 meters, the product price falls from FF19.80 to FF15.41. At FF20, the firm is making a profit of FF0.2 per product. However, at FF15 the firm is making a loss of FF0.41 per product. By lowering the price, LT will be to do predatory pricing. As LT is the largest producer of Item 345, it would have greater economies of scale. This means that the product prices for LT are lower than those of its competitors. LT will be able to bear a little lost as it is financially stable. Hence, as LT charges a lower price, the competitors, with higher product costs, will not be able to increase prices to earn profits. Hence, lowering the price to FF15 will be able to drive its competitors out of the market.

Lowering the price to FF15 could also lead to a change in customer perception. At the price of FF20 with a superior product, LT has created a brand that differentiates it from other small competitors. If the price was brought down to the level of the competitors, the customers will be uncertain about the quality of item 345. Therefore, to increase sales volume and drive out its competitors, LT should reduce the price to FF15.

2. If the department that produces Item 345 was a profit center and if you were the manager of that department, would it be to your financial advantage to lower the price?

If the department producing Item 345 was a profit center, the prices should be reduced as long as it would be profitable. For a profit center, the main goal is to make profits. At the price of FF15, the firm will have to bear a loss of FF0.8 per product as stated above. Therefore, in this case, it is not of financial advantage to lower the price.

However, if the product cost can be reduced and the firm earns a profit per product, reducing the price would be financially viable for the profit center. For Instance, the prices could be reduced by negotiating with suppliers to reduce the material cost. The cash flows and profitability can also be improved by reducing the credit period. Additionally, as the volume of sales rises, the product cost falls. Hence, LT should encourage his salesmen to make more sales by offering them better incentives. With lesser product costs, the financial advantage of lower prices will be high.

Another way that lowering prices could benefit the profit center is considering lowering the price to a price between FF15 and FF20. This would prevent the loss borne at the price FF15. Lowering the price would facilitate the firm in increasing sales. Hence, lowering prices would be a viable option for the profit center.