You are the product manager for the Natural Energy drink brand at the Owasis Drinks Company (ODC) and have been tasked with exploring the current pricing strategy for the brand. Senior management knows that net profitability is low and that intr

Jamez

12 Feb 2025 • 3 min read

The SituationYou are the product manager for the Natural Energy drink brand at the Owasis Drinks Company (ODC) and have been tasked with exploring the current pricing strategy for the brand. Senior management knows that net profitability is low and that introducing the brand in regions such as the West will require a new pricing strategy.There are concerns that the Natural Energy brand is not highly profitable due to the high cost of the natural ingredients and relatively high marketing expenditures.The Energy Drink CompetitionThere are three main competitors to the Natural Energy brand:Blue Danube dominates the market. It targets all consumers who have a bias for action. Blue Danube offers consumers a distinctive sweet taste, in one flavor, with or without calories, while containing all the energy drink ingredients that have defined the category—ginseng, taurine, guarana, and caffeine. Blue Danube is offered in sleek, 8 oz. cans at $3.50 per unit (45% market share).Dynamo targets young partygoers with a great-tasting energy drink in larger sizes and priced more affordably than competitors. Dynamo differentiates itself in the market with a variety of delicious flavors, such as pineapple, red cherry, blue ice, orange citrus, and purple rain, and it offers a variety of packages for various occasions. It came onto the market with its original 16 oz. can and owns 16% market share. The 16 oz. can is priced at $2.50.Dragon Juice focuses on athletes and gamers who need the energy to reach peak performance. Dragon Juice offers consumers four basic flavors of lime, orange, grape, and cherry in 16 oz. resealable cans. Dragon Juice commands a 35% market share. Dragon Juice has a strong presence on social media as it works with influencers who frequently post sponsored videos showcasing the brand. A 16 oz. can is priced at $2.75.While Dynamo and Dragon Juice barrage Blue Danube with pricing promotions and guerilla marketing tactics, Blue Danube continues to protect its premium, market leader position with consistent quality and functionality.Natural Energy Profit and Loss (P&L) StatementAn analysis of the latest P&L statement of Natural Energy’s brand revealed that despite the impressive growth in recent years and healthy gross margin (64.63% YTD), the brand has relatively low net profitability (7.93%). This might be because sales, marketing, research, and development expenses increased dramatically in that year. Currently, sales and marketing expenses are at 19.31% of total sales.Total annual unit sales for the current fiscal year are 14,057,142 for the 12 oz. can. The average retailer’s cost was $1.75, with a unit cost of $0.62. On average, the retailer’s margin is 36.36%, with a retail price of $2.75. Total sales and marketing expenses are expected to be at $0.34 per can, research and development (R&D) expenses at $0.18 percan, and other operating expenses at $0.29 per can. Taxes are expected to be at $0.19 per can.The cost of ingredients is relatively high (35% versus the industry average of 25%) because natural ingredients are more expensive to source. Cost of sales are expected to increase 10% given supply chain cost increases passed through by the suppliers.Natural Energy Profit and Loss StatementTable 1: P&L statement. Natural Energy brand. Current year.*Based on the volume of 14,057,142 units (12 oz. cans)Pricing ResearchA recent price research study using the brand price trade-off (BPTO) research technique found that consumers in the Northeast perceived the price for the Natural Energy drink (in a 12 oz. can) to be at $2.99 (versus the current price of $2.75). Moreover, the product could be priced between $1.90 (lower end of the range) and $3.25 (upper end of the range) without risking the product being considered too cheap or too expensive.Similarly, the study revealed that the same product could be priced in the West region at $3.50 (optimal price) with a price range of $2.99 (lower end of the range) and $5.75 (upper end of the range).Northeast Region

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