This case study has gave us the insight on an underperforming bakery business that is ran by Karen Faulkner, who is the only owner/entrepreneur. She just recently brought the bakery that lacked profitability due to pricing concerns. Since she purchased the bakery, she concluded that she has to turn it around by changing the prices that it currently has so that she can continuously make a profit in the future. The problem is not the quality of the food, because the bakery has better quality than the larger grocery chain and bread shops because their bread is bad.
Karen had decided to start by reducing the price of the bakery’s signature product, which is the honey wheat loaf. It was overpriced in 2002 due to the cost of production. (Hackert, Brookman, 2014)
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Karen’s bakery is known to have a bright, clean, and nice atmosphere. It is a local business that is centrally located in the heart of downtown. There is seating in the bakery as well as outside in front of the establishment on the sidewalk. The Artisan bread that they sell, is healthy with no preservatives and it has superior taste and texture. The well liked bakery foods taste of high quality from the premium products that they use.
The bakery community is classified as being medium in size with an average income that easily attracts its customer base. The primary reason that the business remains to have a stable economy is due to the lunch crowd. The frequent customers come from the nearby high school, businesses, and the local university who supports them greatly. Since it is centrally stationed, it contributes to the strong value of customers who are more than willing to pay more for better quality and their uniqueness.
Pros and Cons
A few of the pros are the frequent reevaluation of the variable costs which will give a better estimate. Making general trends about consumer wants, needs and interests, and changing the total costs can be most beneficial to the bakery. Having another type of bread and more variety can assist in increasing profits. Also, having accurate estimates on the total costs gives an even easier pricing method.
Some of the cons is that it can have more variable costs which makes it harder to estimate the coverage of commodities. No consideration to rapid fluctuation of prices and too large of a scale for a small business is a huge issue. Lowering costs is more difficult for small business which give them less power over supplies is a problem to consider. Another is that there is much competition from the local larger grocery chain and other bread shops. This leaves for there to be a heavy amount of competitive disadvantage for the bakery. Plus, it does not include financial goals or fixed costs such as the taxes and the electricity.
As a first solution, she have to suite the nature of the small business by not ignoring the aspect of mainly focusing on the quality of the bread, and what ingredients that could help in lowering the cost to make her money. Periodically, she can strategize a pit fall of assumptions of a contribution analysis that is negligible. As a second solution, she have to keep in mind that she cannot ignore the aspect of not considering the creative attraction of the bakery business. Lastly, operate from a break-even point to estimate: (Per Unit Production Cost) X (2 or 3) = Price which will allow the financial records to increase the cash flow of the bakery.
In conclusion, Karen should be focused on the qualitative pricing strategy aspect which should be focused on a small scale of the cost analysis by focusing on income before taxes. With a focus on covering costs by estimation, she should be able to lower any of her operating costs. The shifting relative price of the contribution margin: Price of Bread – Variable Cost = Income, Tax, Fixed Cost and the Profit Margin % = Income/Revenue is necessary in order for the business to stay alive.
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