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...
In this context, Wokland would develop and implement a strong media campaign in order to advertise and promote their products. This strategy is also a generator of additional costs but it insures an increase of the customer palette.
The downside of launching a promotional campaign is that it has the risk of false increase in revenue sales. As such, during the promotional campaign, the amount of sold products would definitely increase, but once the campaign is over and the products return to their actual price, the sales rate would probably drop back.
Diversification of product palette
The diversification of the product palette in the meaning of also producing non-organic fruits and vegetables does not seem like an appropriate strategy in the give circumstances. Not only would these actions increase costs, they would distract Wokland from their initial goal, that of producing healthier food.
The market of organic products is relatively new and has yet to develop and reach a state of equilibrium. As such, given the supply and demand for organic products, price elasticity, consumers' behavior, the possibility to benefit from governmental subsidies and the company's overall goals, the best strategy imposed is that of reducing the costs. This would first increase the demand for organic products, the number of customers, revenue sales and ultimately Wokland's profits.
Bibliography
Koplin, H.T., 1963, the Profit Maximization Assumption, Oxford Economic Papers, Volume 15, Number 2
Lipsey, R.G., Chrystal, K.A., 1989, Introduction to Positive Economics, 7 Rev Edition, Weidenfeld & Nicolson
Schneider, G., Knoedler, J., Sackrey, C., 2005, Introduction to Political Economy, 4th Edition, Dollars & Sense / Economic Affairs Bureau Inc.
Roth, R., 2001, Organic or not Organic? Serendip, First Report Web, http://serendip.brynmawr.edu/biology/b103/f01/web1/roth.html#1,last accessed on October 31, 2007
Roth, R., 2001, Organic or not Organic? Serendip, First Report Web
