Masweta Ltd is a company solely engaged in the manufacture of sweaters, primarily for sporting activities. Present sales are direct to retailers, but in recent years, there has been a steady decline in output due to increased foreign competition. In the current trading year (2024), the accounting report indicated that the company produced the lowest profit in 10 years. The forecast for 2025 suggests that the current deterioration in profits is likely to continue. The company considers that a profit of Shs 80,000,000 should be achieved to provide an adequate return on capital.
The managing director has requested a review of the current pricing and marketing policies. The marketing director has completed the review and passed the proposals for evaluation and recommendation, along with the profit and loss account for the year.
Evaluate the current pricing and marketing policies of Masweta Ltd and make recommendations based on the provided profit and loss account.
The correct answer and explanation is :
To evaluate the current pricing and marketing policies of Masweta Ltd, we need to consider the factors influencing the company’s profit, including the profit and loss account, market trends, competitive pressure, and internal strategies.
1. Current Profit Performance:
Masweta Ltd’s reported lowest profit in 10 years indicates a significant decline in profitability. The forecast for 2025 suggests that this deterioration will likely continue. Given the company’s reliance on direct sales to retailers and its focus on sweaters for sporting activities, the current profit situation can be linked to various factors:
- Increased Foreign Competition: The company faces rising competition from foreign brands, which could offer lower prices or superior quality, diminishing Masweta’s market share.
- Declining Sales Volume: Reduced output and declining sales directly affect profitability, especially when fixed costs (such as factory overheads and salaries) remain constant.
- Stagnant Pricing Strategy: If Masweta’s pricing strategy hasn’t adapted to changing market conditions, it could be misaligned with the current market environment, particularly in light of foreign competition.
2. Marketing and Pricing Policies:
- Pricing Strategy: A static pricing strategy may not be viable given the increased foreign competition. If prices are too high relative to competitors, it could be a major reason for the decline in sales. On the other hand, lowering prices might compromise profit margins.
- Marketing Approach: The company should evaluate whether its marketing strategies are effectively reaching the target audience, particularly with the growing competition. The company needs to innovate or diversify its marketing channels, possibly expanding its presence in online sales or adopting more aggressive promotions.
Recommendations:
- Review Cost Structure: Masweta Ltd should analyze its cost structure and determine areas where cost efficiencies can be achieved, especially in production or logistics. A leaner operation could help improve profitability.
- Product Diversification or Innovation: To stay competitive, Masweta should explore diversifying its product offerings, perhaps incorporating new designs or improving the quality of its sweaters. They could also explore entering new markets or developing complementary products.
- Competitive Pricing Strategy: A flexible pricing strategy could be implemented to stay competitive. This might involve offering discounts, promotional offers, or introducing tiered pricing to cater to different customer segments.
- Improve Marketing and Online Presence: The company should invest in digital marketing and e-commerce platforms to reach a broader market. Engaging with customers through social media and targeted campaigns can also help revive the brand.
By addressing these aspects, Masweta Ltd could improve profitability and market position in a competitive landscape.