Economics - Product Pricing & Costs

Product Pricing Component

It is practically everywhere. In the workplace. Beside exercise stations in health clubs. At athletic events. In backpacks hanging from the shoulders of students. Even on tables at conferences and workshops. Bottled water, once considered the refreshment of the affluent, has become the liquid icon of today's active, health-conscious consumer (Lambert, 1991).

Aquafina, a Pepsi product, introduced itself in Wichita, Kansas in 1994, and reached national distribution in 1997. According to Aquafina's website, since its debut, Aquafina has won over consumers with its great taste and purity. In 2003, they were the best-selling brand of bottled water.

Bottled water emerged as the second largest commercial beverage category by volume in the United States in 2003, and, despite its significant stature, it continued to grow at a rapid pace in 2004. The category is growing even more forcefully on a global scale but in the U.S., volume is unparalleled. In 2004, total U.S. category volume surpassed 6.8 billion gallons, an 8.6% advance over 2003's volume level. That translates into an average of 24.0 gallons per person, which means U.S. residents now drink more bottled water annually than any other beverage, other than carbonated soft drinks (Beverage Marketing Corporation, 2005).

Carrying around a bottle of water has become a status symbol for many younger Americans. Aquafina recognized the trend, and broke into this once exclusive market. Because water is so important, health and nutrition experts recommend drinking at least two liters of water each day. Bottled water a convenient way to ensure enough water is consumed at wherever a person may be. Bottled water is the beverage of choice for hydration and refreshment because of its consistent safety, quality, good taste, and convenience. The U.S. Food and Drug Administration (FDA) fully regulates bottled water as a packaged food product and requires bottled water to adhere to FDA's extensive food safety, labeling, and inspection requirements.

Aquafina's bottled water is inelastic. Water is the single most abundant substance in the human body, making up to 60% of an adult's weight and up to 80% of an infant's weight. A person can live several days without food, but just a few days without water. Like air, water is essential to life.

Aquafina's bottled water prices are comparable to all bottled water manufacturers, yet comes with a higher quality. Water is the second most important thing the human body needs, and consumers will pay whatever price necessary to get clean drinking water.

There are hundreds of brands of bottled water. Some name brands are Dasani, Geyser, Natural Springs, Evian, and Aberfoyle. Currently Aquafina water is the most advertised, and the most consumed bottle of water. To stay ahead, Aquafina should employ the four P's:

Price- Make sure that the price is the lowest in can be.

Place-Make sure the product is in the right stores, on the right aisles, and on the right

Shelves.

Product- Make sure that the product is high quality.

Promotion- Advertise, discount, and place the product first on the shelf.

Cost Component

A food system firm faced with a change in the cost of an input has several options. If the input cost increases, the firm can (1) absorb the higher costs by keeping its prices steady and accepting a lower profit level, (2) pass on at least some of the higher costs by raising the price of products, or (3) adjust its production process and employ fewer units of the higher cost input by substituting one or more other inputs. If the input cost decreases, the firm has the opposite options--higher profits, lower output prices, or expanded input use. Of the three options, the last two can directly affect food prices either by the firm raising the price of its food products, or by food production adjustments that influence the amount of food available, and thus its price.

Several key factors influence how an input cost increase might affect the prices of food and kindred products under conditions of competition among numerous firms. For a given increase in an input's cost, the larger will be an increase in the food product's price when:

1) The share of the input in the total cost of producing food products is larger.

2) The input has fewer good substitutes in the food production process--that is, few other inputs or processes could be used to produce the food product.

3) Consumers have few good substitutes for the food product, in which case consumers do not decrease purchases substantially when the price is higher.

4) A short period of time is considered, as a rule of thumb. For example, weather or transportation problems can temporarily cause sharp price increases, with prices returning to previous levels once the problem ends. If instead an input cost increase is permanent, two types of long run responses affect the product's price. On the one hand, consumers more readily find and use substitute food products as more time passes, which would tend to make the price increase of a particular food larger in the short run than in the long run (mimicking the earlier case of weather or transportation problems). On the other hand, the input cost increase can affect some firms' ability to remain in business. As those firms leave the market, the price increase would be larger in the long run than in the short run. The relative strengths of the consumer-side and firm-side changes determine the ultimate path of the product's price (Economic Research Service, 2005).

All these forces may be exerting pressures for higher prices when the cost of an input in food production increases. Retail food prices are more volatile than the prices of other goods and services. Market conditions such as whether a market has relatively few firms, can play an important role. Yet, casual observation of food price patterns reveals that food prices do not change every time an input cost changes (Economic Research Service, 2005). Additional items that can cause prices to escalate include technology, an increase in the minimum wage, an increase in taxes, and/or an increase in energy prices.

Market