Colonial Homes

PRICING STRATEGIES

COLONIAL HOMES

CASE STUDY – HOMEWORK

Student: 

Professor: Polona Domadenik, Ph.D.

Skopje, September 2016

1. Describe briefly a problem faced by Noel Desalutes. 

Noel Desalutes problem was in decision of changing supplier. Their solo supplier (Davey) has insisted on an 8% price increase for next 6 months, and new possible supplier Northland has offered a contract for lumber at 5% less than Davey`s current price but for next 3 months. If he accept price rise and in same time create new dealer price, he risk losing on competiveness of the market, complications with dealers and adverse consumer response. From other side, starting of collaboration with Northland will increase risk of being without 6 month price guarantee, and can create potential loss of relationship with Davey.

1. Would you agree with Mr.Musson`s suggestion to change supplier? Argument your answer.

Suggestion of Mr. Musson for changing supplier can have positive impact on business, but on very short terms. According seasonality first three months of the year are very low season, and the will have price guarantee only for that period.    

1. What would you suggest to president of Colonia homes, Mr.Desalutes?

Recommendation for Mr.Desalutes will be to divide supply between Davey`s and Northland. Supply from Northland will help to offset the price increase of Davey, and will be maintained on an anticipated level of rise in raw material for 2, 5%. From income statement we can conclude that average cost per house in 1988 was 24.567$, and projection for 1989 is 25.250$. Accepting the price rise of Davey will increase average cost per house on 26.532$.

[pic 1]

Figure 1: Income statement

Mr.Desulates benchmark was to keep projected prices and number of units sold. In order to maintain his projected profitability, if he split supply between Northland 65% and Davey 35%, he will manage to keep his benchmarks.

[pic 2]

Figure 2: Supply split

Beside offsetting the price increase, Colonial Homes will also be able to maintain longstanding relationship with Davey`s, and can make more pressure on price stability for future contracts. They also create balance between contracts, where longer one create stability and short term contracts increase volatility during the high season. After three months to renegotiate both contracts.