Kelvane: pricing a refill pouch against its own core product
Kelvane is a direct-to-consumer skincare brand with revenue of $7.4m. Its core product, a 250 ml cleanser, sells online at $24. Variable cost is $9.10, annual volume is 180,000 units and fixed costs are $1.9m. Kelvane plans a 200 ml refill pouch made from 70% recycled plastic, with a variable cost of $6.20. Two pricing options have been modelled. Option P (penetration): $12, forecast 260,000 pouches a year. Option Q (premium): $18, forecast 150,000 pouches. Research suggests 40% of pouch buyers would otherwise have bought a bottle, and no competitor offers refills yet. Separately, a national pharmacy chain has offered to stock the pouch but requires a 35% retail margin and 60-day payment terms; Kelvane currently collects payment immediately and holds 45 days of stock. The finance director is worried that the pharmacy deal will tie up cash.
1. Using contribution, evaluate which price Kelvane should set for the refill pouch, taking cannibalisation into account.
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Unit contribution. Bottle: $24.00 − $9.10 = $14.90. Pouch at $12: $5.80. Pouch at $18: $11.80.
Gross contribution.
- P: 260,000 × $5.80 = $1,508,000
- Q: 150,000 × $11.80 = $1,770,000
On this alone Q is $262,000 better.
Cannibalisation. Each pouch sold displaces 0.4 of a bottle, so the true contribution per pouch is price − $6.20 − (0.4 × $14.90) = price − $12.16.
- P: $12 − $12.16 = −$0.16 per pouch → 260,000 × −$0.16 = −$41,600
- Q: $18 − $12.16 = $5.84 per pouch → 150,000 × $5.84 = +$876,000
Penetration pricing destroys value because the discounted pouch earns less than the bottle it replaces. The premium option adds nearly $0.9m of contribution.
Elasticity check. Using arc elasticity: quantity falls 53.7% when price rises 40%, giving PED ≈ 1.34. Demand is elastic, so the higher price reduces revenue (from $3.12m to $2.70m), yet contribution rises because the unit margin more than doubles. Revenue is the wrong target here.
The consumer-value problem. At $18, the pouch costs $0.090 per ml against $0.096 for the bottle - only about 6% cheaper per ml. A refill needs a visible saving to change behaviour. At $12 the saving is 37.5% per ml.
Judgement. Set $18 initially, because it maximises contribution under the research, but test $16 and monitor repeat purchase. If refill adoption stalls, the reason will be weak perceived value, not price alone.
2. Evaluate whether Kelvane should accept the pharmacy chain's offer.
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Margin. With a recommended retail price of $18, a 35% retailer margin means the pharmacy pays $18 × 0.65 = $11.70. Contribution per unit falls from $11.80 (direct) to $11.70 − $6.20 = $5.50 - less than half the direct margin.
Volume needed. To earn the same contribution as one direct sale, Kelvane needs 11.80 ÷ 5.50 = 2.15 pharmacy units. The pharmacy must therefore more than double volume, and only genuinely incremental sales count.
Illustration. Suppose the pharmacy sells 220,000 units and 30% of those buyers would otherwise have bought direct:
- Incremental contribution: 154,000 × $5.50 = $847,000
- Lost direct contribution: 66,000 × $11.80 = $778,800
- Net gain: $68,200
Working capital. Pharmacy revenue would be 220,000 × $11.70 = $2.574m. The cash cycle becomes 45 days of stock plus 60 days of debtor days = 105 days, or 105/365 = 28.8% of annual revenue: about $740,000 tied up. At an 8% overdraft rate that costs roughly $59,000 a year, which almost wipes out the $68,200 gain. Listing fees, returns and promotional payments would push it negative.
Qualitative factors. The pharmacy gives national distribution and credibility, and reaches customers who will not buy online. But it may undercut Kelvane's direct price, confuse the brand's premium positioning, and give a powerful buyer leverage over future pricing.
Judgement. On the current terms, reject or renegotiate. Accept only if payment terms fall to 30 days, the retail price is held at $18, and the order is large enough to justify the working-capital cost. A smaller trial in 50 stores would limit the risk.
3. Assess how the launch of the refill pouch might affect Kelvane's fixed costs and break-even.
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Current break-even on bottles: fixed costs $1.9m ÷ $14.90 = 127,500 units, against sales of 180,000 - a margin of safety of 29%.
If the pouch adds, say, $250,000 of fixed cost for tooling, certification and a separate fulfilment process, break-even volume must be recalculated using the blended contribution per unit. Under the premium option the pouch contribution after cannibalisation is $5.84 per pouch, far below the bottle's $14.90. A shift in sales mix towards pouches therefore raises the number of units needed to cover fixed costs, even though total contribution rises.
Illustration. If 150,000 pouches displace 60,000 bottles, bottle volume falls to 120,000. Bottle contribution becomes 120,000 × $14.90 = $1,788,000, and pouch contribution 150,000 × $11.80 = $1,770,000, giving $3,558,000 against fixed costs of $2.15m. Profit rises to about $1.4m, but the margin of safety in unit terms is now spread across two products.
Judgement. The pouch is profitable but lowers contribution per unit, so Kelvane becomes more dependent on volume. That makes the fixed-cost commitment risky if the refill market develops slowly. Kelvane should avoid dedicated tooling at first, use a contract filler, and keep the pouch's fixed costs variable until repeat purchase rates are proven. It should also track contribution per ml and per customer rather than revenue growth.