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Case Study 2

The Procter & Gamble Company (P&G) is a multinational consumer goods corporation that specializes in various personal health and hygiene products. The case study discusses the pricing strategy for a new product, estimating the expected price at $4.25, with a standard deviation of 0.4559, indicating a 90% probability that the price will fall between $3.50 and $5.00. Additionally, the document includes calculations and graphical representations of the normal distribution of these prices.

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15 views5 pages

Case Study 2

The Procter & Gamble Company (P&G) is a multinational consumer goods corporation that specializes in various personal health and hygiene products. The case study discusses the pricing strategy for a new product, estimating the expected price at $4.25, with a standard deviation of 0.4559, indicating a 90% probability that the price will fall between $3.50 and $5.00. Additionally, the document includes calculations and graphical representations of the normal distribution of these prices.

Uploaded by

jad safi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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CASE STUDY 2:

The Procter & Gamble Company (P&G) is an American multinational consumer


goods corporation headquartered in Cincinnati, Ohio, founded in 1837 by William
Procter and James Gamble.[2] It specializes in a wide range of personal health/consumer
health, and personal care and hygiene products; these products are organized into several
segments including Beauty; Grooming; Health Care; Fabric & Home Care; and Baby,
Feminine, & Family Care. Before the sale of Pringles to Kellogg's, its product portfolio
also included foods, snacks, and beverages.[3] P&G is incorporated in Ohio.[4]
In 2014, P&G recorded $83.1 billion in sales. On August 1, 2014, P&G announced it was
streamlining the company, dropping and selling off around 100 brands from its product
portfolio in order to focus on the remaining 65 brands,[5] which produced 95% of the
company's profits. A.G. Lafley—the company's chairman, and CEO until October 31,
2015—said the future P&G would be "a much simpler, much less complex company of
leading brands that's easier to manage and operate".[6] (Wikipedia)

PROCTER AND GAMBLE PRICING A NEW PRODUCT

When pricing a new product, the product manager of P&G estimates that the most
optimistic price the firm can charge (not expected to be exceeded more than 5% of the
time) is $5.00 per unit. The most pessimistic estimate of the price that can be charged
(not expected to be less than this amount more than 5% of the time) is $3.50.
Assuming normality, the expected price is $4.25.

a. Use the table of the values of the Standard Normal Distribution Function (Z)
to calculate the variability of prices (Standard Deviation, σ). Show all your
calculations.
b. Represent all your findings graphically by making use of a normal curve.
Have an axis for the price values (X), an axis for the Z values, and show the
areas under the curve.
Case Study 2

ANSWER

The case study above shows a risk study for a new product pricing in the market. It have
a discrete observation. Being said that, a normal probability distribution should be
reflected.
Please refer to APPENDIX for the Z-Table.

Given:
E ( X )=4.25
X 1 =3.5 Being the lowest range (pessimistic price)
X 2 =5 Being the highest range (optimistic price)
Probability Pr for optimistic and pessimistic cases are both 5%,
Pr=Pr 1 ¿ Pr 2=5 %

a) The number of standard deviation σ (know as Z) that a particular value X is from


E(X) can be computed as:
X− E(X )
z=
σ
Any number in the table reflect the probability Pr (Z≤z).

First, using the table of values of standard normal distribution (z)


For the most pessimistic price ($3.50):
z 1=−1.645 (According to the table 0.05 (5% if less or equal to 3.5) is between 0.0505
and 0.0495 and between -1.64 and -1.65)
We calculate the Standard deviation σ
X−E( X )
σ 1=
z1
3.5−4.25
σ 1=
−1.645
σ 1=0.4559 OR 45.59%
Therefore, the standard deviation of the price of $3.5 is 49.59% of the mean $4.25

For the most optimistic price ($5.0):


z 2=1.645 (According to the table 0.95 (95% if less or equal to 5) is between 0.9505 and
0.9495 and between 1.64 and 1.65)
We calculate the Standard deviation σ
X−E (X )
σ 2=
z2

[2]
Case Study 2

5.0−4.25
σ 2=
1.645
σ 2=0.4559 OR 45.59%
Therefore, the standard deviation of the price of $5 is 49.59% of the mean $4.25

b) Graphical findings are presented by using the normal curve with price values (X)
on a first horizontal axis that shows the distribution of the prices and their
expected value (normality) and the z values on a second horizontal axis.

Then we need to shade the area under the curve that reflects our calculations with
standard deviation of 0.4559 for each price and show the probabilities of prices in certain
ranges.

Three areas as follow:

The probability of the price being between $4.25 (E(x)) and $5.00 (the most optimistic
price) is equal to the area under the curve between z = 0 and z = 1.645, which is 0.95-
0.5=0.45 or 45%
The probability of the price being between $3.50 (the most pessimistic price) and $4.25
(E(x)) is equal to the area under the curve between z = -1.645 and z = 0, which is also
0.5-0.05=0.45 or 45%
The probability of the price being above $5.00 or below $3.50 is equal to the area under
the curve to the right of z = 1.645 or to the left of z = -1.645, respectively, which is both
0.05 or 5%
Therefore, the total probability of prices falling within the range of $3.50 to $5.00 is
1-(2*0.05)=0.90 or 0.45+0.45=0.90 (represents the range of prices that can be charged
with 90% probability)
This means that there is an 90% chance that the price of the new product will fall within
the range of $3.50 to $5.00.

[3]
Case Study 2

APPENDIX
0.050

[4]
Case Study 2

0.9500

[5]

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