Serowe Solar: Pricing and Promotion Under Pressure
Serowe Solar installs small solar home systems. It currently charges P4,500 per installation and completes 40 installations a month. Variable costs are P2,700 per unit; fixed costs are P54,000 a month. A competitor has entered the district charging P3,900. Serowe Solar's owner believes the answer is a 15% price cut to P3,825, expecting sales to rise to 60 units a month. The marketing officer disagrees, arguing that the product is a considered purchase, that customers care about after-sales service and warranty, and that the money would be better spent on promotion and a longer warranty. The firm has P30,000 available for either the price cut's effect on margin or a promotion campaign.
1. Calculate the effect of the proposed 15% price cut on monthly profit, assuming sales do rise to 60 units. Compare this with the current position.
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Current position
- Contribution per unit = 4,500 − 2,700 = P1,800
- Total contribution = 40 × 1,800 = P72,000
- Profit = 72,000 − 54,000 = P18,000
After the price cut to P3,825
- New contribution per unit = 3,825 − 2,700 = P1,125
- Total contribution = 60 × 1,125 = P67,500
- Profit = 67,500 − 54,000 = P13,500
Conclusion: despite selling 50% more units, profit falls by P4,500 a month. The price cut destroys P675 of contribution on every unit, including the 40 units that would have been sold anyway - a loss of P27,000 on existing sales, only partly recovered by the extra 20 units.
To keep profit at P18,000 at the lower price, the firm would need contribution of P72,000 ÷ P1,125 = 64 units, i.e. a 60% increase in volume, not 50%. That is a demanding target in a district market. The price cut therefore looks weak on the numbers alone.
2. Recommend whether Serowe Solar should cut price or invest in promotion and warranty instead. Justify your answer.
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The figures favour not cutting price: the cut lowers profit even on optimistic volume assumptions, and it invites a price war with a competitor who may simply undercut again.
Supporting the promotion and warranty route:
- Solar systems are a high-involvement purchase: buyers risk several thousand pula and need confidence in installation quality and after-sales support. A longer warranty attacks the real customer concern.
- Promotion can differentiate rather than compete on price, protecting the P1,800 contribution margin.
- The P30,000 budget spent on promotion is a one-off cost; a price cut permanently reduces revenue on every future sale and is hard to reverse without alienating customers.
- Break-even volume at the current price is 54,000 ÷ 1,800 = 30 units, so the firm has a margin of safety of 10 units (25%). It can absorb some loss of volume.
Risks to manage: the competitor's P3,900 price will still win purely price-sensitive customers, so Serowe Solar should offer a cheaper basic package alongside the premium one, and monitor whether the promotion actually lifts enquiries. If sales fall below 30 units for two consecutive months, the pricing decision should be revisited.