The LED Price War Before Diwali
A small LED bulb manufacturer in Noida sells 1,00,000 bulbs a month through 120 distributors. Its variable cost is ₹58 per bulb and fixed overhead works out to ₹14 per bulb at current volume. The printed MRP is ₹149, inclusive of 18% GST. Retailers get 20% margin on MRP and distributors get 8% margin on MRP. A large competitor has just launched a 9W bulb at MRP ₹119 with a buy 10 get 1 free trade offer. The Noida firm's sales team proposes cutting MRP to ₹119 and matching the free offer to protect its 12% market share in western UP. The finance manager warns that this will wipe out profit; the marketing manager argues that losing shelf space will be worse. The firm has ₹25 lakh cash and a Diwali window of six weeks. It cannot change variable cost quickly, but it can add a 2-year warranty or a decorative pack at low cost.
1. Calculate per-bulb contribution at MRP ₹149, at MRP ₹119, and at ₹149 with the buy 10 get 1 free offer. State your assumptions.
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Assumptions: GST is 18% and is included in MRP; trade margins are calculated on MRP; the free unit carries the same variable cost.
At MRP ₹149: taxable value = ₹149 ÷ 1.18 = ₹126.27; GST = ₹22.73. Retailer margin = 20% × ₹149 = ₹29.80; distributor margin = 8% × ₹149 = ₹11.92. Manufacturer realisation = ₹149 − ₹29.80 − ₹11.92 − ₹22.73 = ₹84.55. Contribution = ₹84.55 − ₹58 = ₹26.55.
At MRP ₹119: taxable value = ₹119 ÷ 1.18 = ₹100.85; GST = ₹18.15. Retailer margin = ₹23.80; distributor margin = ₹9.52. Realisation = ₹119 − ₹23.80 − ₹9.52 − ₹18.15 = ₹67.53. Contribution = ₹67.53 − ₹58 = ₹9.53. After fixed cost of ₹14, this is a loss of ₹4.47 per bulb.
At ₹149 with buy 10 get 1 free: the manufacturer supplies 11 bulbs but receives realisation for 10. Realisation per bulb supplied = ₹84.55 × 10 ÷ 11 = ₹76.86. Contribution = ₹76.86 − ₹58 = ₹18.86.
2. Advise the firm: cut MRP to ₹119, match the free offer, or use a non-price response. Justify using contribution and channel reasoning.
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Do not cut MRP to ₹119. Contribution falls from ₹26.55 to ₹9.53, and after the ₹14 fixed cost the firm loses ₹4.47 per bulb. Matching both the price cut and the free offer would be worse: realisation per bulb supplied would be about ₹67.53 × 10 ÷ 11 = ₹61.39, contribution only ₹3.39, and a loss of ₹10.61 after fixed cost.
Matching only the buy 10 get 1 free at ₹149 is financially survivable: contribution is ₹18.86, leaving ₹4.86 after fixed cost. But a blanket scheme across 120 distributors is expensive and may be copied. A better response is a targeted trade scheme in the affected western UP districts for six weeks, with a per-distributor cap, plus a 2-year warranty or decorative pack to give retailers a reason to keep shelf space. This defends distribution without resetting the market's reference price to ₹119. The objective should be contribution protection, not matching every competitor move.
3. What pricing objective is the firm currently following, and what objective should guide the Diwali decision? Explain the difference.
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The current MRP with fixed retail and distributor margins looks like a cost-plus or target-return pricing objective: cost is calculated, margins are added, and the printed MRP is expected to deliver a stable profit per bulb. The implicit objective is profit stability and status-quo pricing.
For Diwali, the objective should shift to contribution maximisation subject to defending distribution. This is not the same as sales maximisation. A sales-maximising price cut to ₹119 would increase unit volume but lose money on every bulb. A contribution approach asks: which response protects shelf space at the lowest sacrifice? The answer is a limited, time-bound trade offer or a value-added warranty, not a permanent MRP cut. This distinction matters because the firm has only ₹25 lakh cash and a six-week window; it cannot buy share indefinitely.