Pricing a New Detergent Sachet
Kona Consumer Products sells a 500g detergent powder at ৳85 with variable cost ৳51 per unit. Monthly fixed costs are ৳6,80,000 and current volume is 40,000 units. The marketing team proposes a 100g sachet at ৳22 with variable cost ৳15, aimed at rural buyers. Research suggests 60,000 sachets per month could be sold, but 25% of sachet buyers would otherwise have bought the 500g pack. Sachet launch adds ৳1,20,000 per month in fixed costs. The sales head argues the sachet is clearly profitable because each unit earns ৳7 contribution, while the finance head worries about cannibalisation.
1. Calculate the incremental monthly profit or loss from launching the sachet, accounting for cannibalisation.
Read the worked answer
Sachet contribution per unit = 22 − 15 = ৳7.
Gross sachet volume = 60,000 units, contribution = 60,000 × 7 = ৳4,20,000.
Cannibalised volume = 25% of 60,000 = 15,000 units, which would have been 500g packs. Lost contribution = 15,000 × (85 − 51) = 15,000 × 34 = ৳5,10,000.
Net contribution change = 4,20,000 − 5,10,000 = −৳90,000.
Less additional fixed costs ৳1,20,000.
Incremental result = −৳2,10,000 per month, a loss.
The sales head's per-unit view ignores that each cannibalised 500g sale gave up ৳34 of contribution, nearly five times the ৳7 earned on a sachet. The sachet destroys value at the assumed cannibalisation rate.
2. Find the maximum cannibalisation rate at which the sachet launch still breaks even, and advise the marketing team.
Read the worked answer
Let x be the cannibalisation rate. Net contribution = 60,000 × 7 − (60,000x × 34) − 1,20,000 = 0.
4,20,000 − 20,40,000x − 1,20,000 = 0 3,00,000 = 20,40,000x x = 0.147, i.e. about 14.7%.
At the projected 25%, the launch loses ৳2,10,000 monthly. The team must reduce cannibalisation below 14.7%, for example by targeting districts where the 500g pack has low penetration, by differentiating the sachet (variant or scent) so it attracts new buyers, or by raising sachet price or cutting its variable cost.
Sensitivity: each 1% of cannibalisation costs 60,000 × 0.01 × 34 = ৳20,400 per month. If fixed launch costs could be held to ৳60,000, break-even cannibalisation rises to about 17.6%, still below the 25% forecast. Recommendation: pilot in two low-penetration districts before a national launch.