Nangula's Marula Oil: A Pharmacy Chain Order
Nangula Shivute makes marula oil skincare products in a converted garage in Katutura, Windhoek. She sells 180 jars a month at N$120 each through weekend craft markets and a Facebook page. Each jar costs N$55 in materials and packaging, and her fixed costs are N$6,000 a month. Her maximum output is 400 jars a month. A buyer for a national pharmacy chain offers to take 250 jars a month at N$68 each, paid 60 days after delivery. Filling this order would require barcode registration, new labels and product liability insurance costing N$1,500 a month. Nangula has 220 jars of spare capacity; the remaining 30 would have to be taken from her existing direct sales. She has N$9,000 in savings. A research agency has quoted N$15,000 for a nationwide survey of shoppers' attitudes to natural cosmetics.
1. Advise Nangula on how she should carry out market research before deciding, given her resources. Justify your advice.
Read the worked answer
Nangula's research budget is effectively capped by her N$9,000 savings, and the N$15,000 national survey costs more than the whole first-year gain the order might produce. A survey of that size is poor value at this stage: it answers broad questions about the cosmetics market, not the narrow questions that decide this order.
She should first use secondary data, which is nearly free: the chain's own category sales figures, Namibian retail trade reports, and short conversations with two or three small suppliers already selling to the chain about how reliably it pays.
She then needs cheap primary research aimed at three specific questions: will pharmacy shoppers buy at the shelf price the chain will set; which label claims and pack sizes matter; and can she physically supply 430 jars a month. A two-day stall in a Windhoek mall with a short questionnaire to about 60 shoppers, a patch test and a Facebook poll of her followers would cost perhaps N$1,500. Sixty shoppers is not a statistically robust sample, but it is enough to expose obvious rejection reasons before she takes on N$1,500 a month in compliance costs and 60-day payment terms.
She should also get volume, price and payment terms in writing from the buyer, because the greatest risk here is cash flow rather than demand.
2. Using the figures, calculate the monthly effect of accepting the order at N$68. Recommend whether Nangula should accept, reject or negotiate, showing the price at which the order would break even.
Read the worked answer
Work on incremental (marginal) figures, because existing fixed costs are paid either way.
- Extra revenue: 250 x N$68 = N$17,000
- Extra variable cost: 250 x N$55 = N$13,750
- Contribution from the order: N$3,250
- Lost contribution on the 30 jars diverted from direct sales: 30 x (N$120 - N$55) = N$1,950
- Extra fixed costs (barcodes, labels, insurance): N$1,500
- Net monthly effect: 3,250 - 1,950 - 1,500 = -N$200
At N$68 the order reduces her monthly profit by N$200, so on financial grounds it should be rejected as offered. Break-even price: 250(p - 55) = 1,950 + 1,500, so 250(p - 55) = 3,450, giving p - 55 = N$13.80 and p = N$68.80.
She should negotiate rather than walk away. At N$72 the net gain is 250 x 17 - 3,450 = N$800 a month, and the chain may accept because N$4 is small against its shelf price.
Cash flow is the second problem. Sixty-day terms tie up roughly two months of sales (about N$34,000), and she would pay N$13,750 of variable costs each month before being paid, against savings of N$9,000. She needs 30-day terms, a deposit or an overdraft facility, plus a three-month trial period.
3. If Nangula sells through the chain while keeping her direct sales, recommend how her marketing mix should change.
Read the worked answer
The mix has to serve two channels without letting one destroy the other.
- Product: the chain needs identical jars every month, standard labels, batch numbers and a stated shelf life. She should keep a premium jar, for example a larger or gift pack, for direct sales so the two channels are not identical.
- Price: the wholesale price is N$68 to N$72, but the chain will probably retail near N$110 to N$120, close to her own N$120. She risks undercutting her market stall customers, so differentiate by pack size or fragrance rather than by discounting the same jar.
- Place: dual distribution is workable but brings channel conflict if the chain's branch competes with a market where she also sells. She should agree which branches and whether she may sell nearby.
- Promotion: the chain will expect supplier support such as a launch promotion or in-store tester. She should budget a small allowance and use her Facebook page to send buyers to branches, which also proves she can drive sales.
- People and process: 430 jars a month is close to capacity, so she needs a part-time assistant and a simple stock record, or she will miss deliveries and lose the contract.
The mix must protect the natural, Namibian-made positioning while meeting the chain's reliability demands, and it must stay within her limited working capital.