Economical Strategies Report for Profit

Economical Strategies Report for Profit Maximization

Strategies to Increase Sales Revenues for Wokland

Wokland is a relatively new company that came to being in the beginning of 2004. The company operates in the agricultural sector and their stated mission is to improve the quality of life by presenting customers with the highest quality products while at the same time registering profits and growth. Wokland is committed to preserving their customers' health; therefore they do not use chemical fertilizers. However naturally grown products have more beneficial effects upon consumers, they require more attention while cultivating, they have a less appealing look than non-organic products and they are more expensive. As such, the company's initial goal to register high profits has not been met.

In order to maximize their profits, Wokland has to develop and implement a strategy to increase sales revenues. The strategy has to take into account the following: the current and future price of fruits and vegetables, the supply and demand for organic products, the price elasticity, market equilibrium, government interventions on the agricultural products market, consumers' preferences and behavior.

There are four available strategies Wokland could implement in order to increase their sales revenues:

increase the retail prices of their products;

reduce the production costs;

launch a strong advertising and promotional campaign to increase their customer palette diversify their product palette in the meaning of producing and selling both organic and non-organic fruits and vegetables.

To be able to choose the most appropriate alternative, the company has to first analyze the features of the market and those of the products.

Market Features

The organic products have only recently entered the market, but the companies operating this particular business sector are constantly growing in number. Furthermore, the "market for organic foods is growing by 20% a year." Therefore, there is a growing and intense competition between organic food providers.

Another feature regards the prices on the organic foods market. Given the difficulty of cultivating organic fruits and vegetables, the fact that they require more workers that non-organic products and the fact that they take longer to ripen as compared to chemically fertilized products, the prices for organic fruits and vegetables are significantly higher. The organic fruits and vegetables are often sold at prices double than those of the non-organic products.

Directly linked to prices of organic foods is the price elasticity. The price elasticity generally reveals how the product demand changes given that the price changes. As such, if the average price per one kilogram of fruits increases with one dollar, the demand for organic fruits and vegetables will decrease by 5%. The price increase will, on one hand, generate increased sales revenues, but on the other hand, it will decrease them due to a reduced demand. If the average price per one kilogram of organic fruits and vegetables decreases with one dollar, the demand for the products will increase by 10%.

The difference between the 5% demand decrease in the case of price growth and the 10% increase of demand in the case of price reduction can be explained by customers' behavior. As such, the already existent organic food consumers have become accustomed with the benefits of naturally grown fruits and vegetables and only a small percentage of them will be influenced by a price increase. On the other hand, a reduced cost stimulates existent customers to purchase larger quantities of products, accounting for a 5% growth in demand. The remaining 5% is represented by new customers who find the cheaper products more accessible and become consumers.

Based on this particular feature, the most appropriate strategy is that of reducing production costs and consequently reducing the retail price, in the detriment of simply increasing the retail prices. However, the proposed strategy possesses several problems. Wokland would have to reduce costs by downsizing some of their employees; they would have to use cheaper workforce and cheaper raw materials, which would eventually affect the quality of the final product. Also, the company might have to replace some of the manual labor with machineries, which bring about additional costs.

Product Features

Organic fruits and vegetables, just like non-organic ones, are fragile products. They have short existences, they require special treatments and they can rarely survive on supermarket shelves longer that a week. Also, they are influenced by weather conditions and by seasons. As such, when establishing organic foods prices' the company has to implement the seasonal pricing strategy.

This means that during full agricultural seasons, prices will be lower, while during extra season, prices will increase. The price increase is explained by a lower and more difficult production of fruits and vegetables during winter times and also by the necessity to properly store the goods produced during the full season so that they remain fresh. In all, the retail price has to incorporate the production, transportation and storage costs and also the company's profit.

Price Increase

Currently, the average price promoted by Wokland is of 17 dollars per one kilogram of fruits and 10 dollars per one kilogram of vegetables. The net profit for 2005 was of 1.7 million dollars and the net profit for 2006 was of 1.5 million. In order to reach the desired 2 million dollars profit in 2007, the company has to increase their revenue sales by 33%. The easiest way to achieve increased income from sales is to increase the retail price.

But this strategy does not insure a one hundred percent success rate as it generates the risk of loosing customers. The 33% in price increase would generate an average price per kilogram of fruits of $22.61 and an average price per kilogram of vegetables of $13.3. Taking into calculation the price elasticity and knowing that a one dollar increase generates a 5% drop in demand, the demand for fruits would decrease by 28% (adherent to a price increase by 5.61 dollars). The demand for vegetables would decrease by 16.7% (adherent to a price increase by 3.33 dollars). As such, the simple increase of the retail price is not the most appropriate strategy in the given conditions.

Cost Reduction

The second alternative to increasing sales revenues is that of reducing costs. However it was previously mentioned that this could generate additional costs and generate certain problems, the strategy would be welcome by consumers who would purchase larger quantities of organic products. The cost reduction would be realized through downsize and through the replacement of human labor with mechanized workforce.

Part of the additional costs generated by this strategy could be covered by the United States government who offers several subsidies in the agricultural sector. Agricultural subsidies represent financial aid received by companies activating in the agricultural sector in order to stimulate the production of agricultural products. Wokland could sign a petition to the U.S. government requesting these subsidies which would support their cost reduction strategy.