One way to maintain exclusivity for a brand is to raise its price. That’s what luxury fashion and leather goods maker of Louis Vuitton did. The company does not want the brand to become overexposed and too common, so it raised prices 10 percent and is slowing its expansion in China. The Louis Vuitton brand is the largest contributor to the company’s $13.3 billion revenue from its fashion and leather division, accounting for $8 billion of those sales. It might seem counterintuitive to want to encourage fewer customers to purchase a company’s products, but when price increases, so do the product’s contribution margins, making each sale more profitable. Thus, sales can drop and the company can still maintain the same profitability as before the price hike. If the company’s original contribution margin was 40 percent, calculate the new contribution margin if price is increased 10 percent. Refer to Appendix 2,Marketing by the Numbers, paying attention to endnote 6 on the price change explanation in which the analysis is done by setting price equal to $1.00. Determine by how much sales can drop and still let the company maintain the total contribution it had when the contribution margin was 40 percent.
One way to maintain exclusivity for a brand is to raise its price. That’s what luxury fashion and leather goods maker of Louis Vuitton did. The company does not want the brand to become overexposed and too common, so it raised prices 10 percent and is slowing its expansion in China. The Louis Vuitton brand is the largest contributor to the company’s $13.3 billion revenue from its fashion and leather division, accounting for $8 billion of those sales. It might seem counterintuitive to want to encourage fewer customers to purchase a company’s products, but when price increases, so do the product’s contribution margins, making each sale more profitable. Thus, sales can drop and the company can still maintain the same profitability as before the price hike.
If the company’s original contribution margin was 40 percent, calculate the new contribution margin if price is increased 10 percent. Refer to Appendix 2,Marketing by the Numbers, paying attention to endnote
6 on the price change explanation in which the analysis is done by setting price equal to $1.00.
Determine by how much sales can drop and still let
the company maintain the total contribution it had
when the contribution margin was 40 percent.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
