04 Jul Mrketing
Solving the profit problem of this:
In review, Vaseline’s marketers improved their annual profit performance by adding a 5% incremental increase to the price of Vaseline with confidence that they wouldn’t lose as much revenue as they gained from the tactic (because of intense customer loyalty, showing the power of strong brands). In fact, they only lost 1% of the revenue they would have gotten had they only taken the traditional 2% price increase (based on the prevailing inflation rate). Instead, they increased the price by 7% (2% normal + 5% incremental) and successfully improved their profit margin that year by nearly 5%. Here’s your problem to solve:
Assume:
- Vaseline’s normal annual profit margin is 10% (dependent upon a normal 2% inflationary price increase)
- Vaseline increased its price 7%
- Vaseline lost 1% of revenue due to the extraordinary price increase
- The net effect of the 7% price increase yielded a 14.9% profit margin (an almost 50% increase in the annual profit margin)
Now, show how a 7% price increase combined with a 1% revenue loss resulted in a final profit margin of 14.9% for Vaseline. (This is a simple equation and does not involve any sophisticated accounting tricks. If you read the problem carefully and apply what you learned this week about profit calculations, you can easily discover how the math works.) Show how you arrive at your answer.
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