Product Line Pricing
As a pricing analyst for Thriftway, you are asked to prepare the analysis of a proposal to use turkey as a loss leader in order to attract shoppers to its stores during Thanksgiving. The current price for turkey is $.92 per pound. The proposal is to set a promotional price of $.55 per pound. The wholesale cost of turkey, prepackaged and ready for sale, is $.60 per pound. Based on past promotions, you have estimated that the price elasticity of demand for turkey is -3. By tracking past changes in sales of turkey with changes in sales of other grocery products, you discover that each one pound change in the sales of turkey is associated with the following changes in the sales of other products (Percentage contribution margin for these products are also reported below):
Product Dollar Change Percentage Contribution Margin
Fruits and Vegetables $+.540 50%
Packaged Groceries $+.692 20%
Frozen Foods $+.114 33%
Other Meat $-.250 40%
If the price elasticity and the past relationship between the sales of turkey and the increased sales of other goods are expected to hold, would you recommend such a loss leader promotion? Why or why not?