Recommendations Mr. Gary Reed should increase the price of Steel Strapping Consumables by 3.6% and tie the salesperson's compensation to gross margin instead of sales revenues. He should Maintain the loyalty of existing customers in National and Large segment by providing value added services like providing custom sizes, grades, tools and machines. He should also focus on stimulating further volume growth by taking actions to convert nonusers into users, to increase use frequency among current users, or to expand into untapped or underdeveloped markets.
Pricing Decision Pricing decision in this case involve an inherent conflict between (1) the need to win customers and (2) the need to maintain/increase profit margins to satisfy the firm's financial need to generate as much capital as possible for further expansion. The complete analysis for arriving the pricing decision was shown in the Exhibit 1. The revenue generated by steel consumables is $133 millions. Its existing margins percentage is 36.5.
The 6.8% increase in material cost resulted in $4.8 million burden on Signode. Signode either have to pass on this burden to customer in the form of price increase or absorb the burden by reducing its margins. Signodes past experience showed that the introduction of price increases and substitute products like plastic-strapping materials resulted in 10% drop in market share. So it is assumed that the price increases would result in 10% reduction in revenues. Gross revenues are calculated for the three options: ÃÂ· Increasing price ÃÂ· Keeping the price constant ÃÂ· Price Flex It is evident from Exhibit 1 that "Increasing price" option provides greater gross margin compared to "Keeping the price constant" or "Price Flex" options. So Gary Reed should increase the prices to maximize the gross margins for Signode.
Sales personnel Compensation Current sales personnel compensation is tied to the...