Calculate the pricing strategy, Strategic Management

Stephen Hecht, grandson of Marcus Hecht, the founder of Classy Formal Wear and now executive vice president and chief operating officer of the firm, was considering how his new line of tuxedos, made in Korea but carrying the Yves Saint Laurent label, should be priced. It was June 1987. A large quantity of the new, black, pure-wool tuxedos would be arriving in early 1988 at a cost that would permit a retail price well below any comparable tuxedo in the market. However, a low price might have an unfavorable impact on the firm's marketing image among its most important customers. Stephen Hecht was pondering both the tactical and strategic consequences of alternative prices, in preparation for choosing a price for the new line.

Marcus Hecht had founded the firm in 1919 as one of the first formal wear rental stores in Canada. At that time, formal wear-tuxedos, full-dress black tailcoat outfits, and morning suits-was worn almost exclusively by well-to-do men. They wore formal attire to such events as weddings, balls, concerts, and school graduations. Hecht felt that the appeal of this type of dress could be broadened if quality formal garments were made available at prices that the growing middle class could afford and, hence, he founded Classy as a formal wear rental company. By renting tuxedos, tailcoats, and morning suits at a fraction of their retail selling prices, Hecht believed that he could attract substantial numbers of new customers who would otherwise not dress in formal wear.

After a slow start, business in Hecht's single store boomed, once Montrealers became aware that they could rent quality formal wear at affordable prices from Classy. Soon Hecht opened a second and a third store. His sons joined the company and even more new stores were opened. Every one of them was a success.
The success did not go unnoticed, especially in other Canadian cities. During this period, other formal wear rental stores were opened in Toronto, Hamilton, Winnipeg, Calgary, Edmonton, and Vancouver, as well as in Montreal. By the late 1940s, Classy had five stores in Montreal and, in anticipation of competitive expansions, the company began opening stores in new cities. An Ottawa store was opened and very quickly it was successful. In the 1950s, the company opened outlets in Toronto and Hamilton and for the first time went head-to-head against other major formal wear specialists. In both of these cities, Classy profitably captured a significant share of the market.

During the 1960s Marcus Hecht handed the presidency of the company over to his eldest son Jack, who continued Classy's expansion with the successful opening of stores in Vancouver and Quebec City.
Parallel to the growth experienced in the six cities where Classy now had stores, there were two other important developments. First, the company had built an extensive wholesale network to bring its products to those cities and towns lacking a Classy store. Through this network, Classy would set up a local men's wear store as an agent to represent and rent the company's line of formal wear. Typically, these stores were given a 30 percent commission for performing these functions. Second, Classy began to offer formal wear for sale on a limited scale through their stores and wholesale agents. A narrow range of formal shirts was made available. A small back-up inventory was held in the company's Montreal distribution centre. The product line was widened further by tuxedos being offered for sale on a made-to-order basis only, with an average delivery time of six weeks.


By the 1970s, retail and wholesale sales still accounted for just about 5 percent of total company volume. These sales were basically regarded as an add-on rather than a mainstream contribution to corporate revenues from rentals. Towards the end of the 1970s, two new trends emerged.
The first trend was a leveling off in the number of weddings taking place. This was mainly because the baby boom generation born in the late 1940s and early 1950s had by now moved beyond the early marriage age. Close to 80 percent of formal wear rentals were for weddings, and this stabilization in the number of weddings was not encouraging. The other 20 percent of the market was split about evenly between school graduations and other formal occasions. The second trend was increased competition. In each of the Montreal, Vancouver, and Hamilton markets, Classy had two major competitors, while in Toronto there were four.

In 1978, Jack Hecht died without an heir. His brother Joseph became Classy's president and the trends in the marketplace concerned both him and his son Stephen, who had been appointed executive vice president and chief operating officer in the early 1980s. A recent MBA graduate from the University of Western Ontario, Stephen brought a pronounced marketing emphasis to Classy's way of doing business. His research and analysis of the formal wear market showed that the leveling off in the number of weddings was being more than offset by an increasing number of weddings "going formal." In other words, although there was no increase in actual weddings, there were more formal weddings. However, he could not be sure how long
this trend would continue.


Stephen decided to establish two fundamental marketing objectives for Classy. The first was to significantly increase the company's share of the formal wear rental market across the country. The second was to substantially increase the level of Classy's retail and wholesale sales.
One of the key strategic tools that the company used to help it achieve these objectives was the location and design of Classy stores. First, the company opened stores in new cities-namely, Edmonton, Calgary, Winnipeg, and Kitchener. Also, it developed firm plans to open in other major centres. Second, Classy opened additional stores in Vancouver, Toronto, Ottawa, and Montreal. Third, all the new stores were located in prime retail areas, either in downtown cores or in major regional shopping malls. Finally, all of the company's stores, including the older ones, were fitted with retail merchandising fixtures such as suit racks, shirt display units, and point-of-purchase shelving for formal wear accessories.
Another key strategic action Classy deployed was to increase the availability and inventory levels of its retail merchandise. All stores now carried and displayed a basic line of tuxedos from $399 to $599, formal shirts from $39 to $49, and bow tie and cummerbund accessory sets priced at $37. By comparison, very few of Classy's competitors carried any retail stock whatsoever, although they all offered used as well as custom-ordered tuxedos for sale.
By late 1987, Classy had 38 retail stores and over 1,000 wholesale agents across Canada and was by far the most dominant formal wear company in the country. Retail sales now accounted for about 10 percent of company revenues. But in Stephen Hecht's assessment, Classy had barely scratched the surface of the potential retail sales market. Moreover, he felt the company was now well positioned to dramatically increase its sales revenues.

It was with this in mind that Stephen Hecht developed an aggressive plan to make Classy the leading Canadian formal wear retailer. In early 1987, he visited a number of manufacturers of men's suits in Korea. During his three-week stay in that country, he discovered that the quality of suits being produced there was equal to and, in may cases, better than that of the suits being made in Canada. He also determined that any of the major Korean manufacturers could make quality tuxedos at about 60 percent of the cost of Classy's Canadian suppliers. The same cost structure proved to be the case with the Korean shirt manufacturers. Toward the end of his trip, Stephen Hecht gave an order of 2,000 black pure wool tuxedos to one of the suit manufacturers, for delivery in early 1988. He also placed a substantial order for formal shirts.
On his return to Canada, he actively pursued and secured the exclusive license for the Yves Saint Laurent name and pattern. As a result of this, all of the tuxedos he had ordered from Korea would carry the Yves Saint Laurent label and Classy would be the only formal wear specialist in Canada permitted to sell Yves Saint Laurent tuxedos.
The total landed cost to Classy for these Korean-produced Yves Saint Laurent tuxedos came to $137.50 including licensing fees. To begin the process of developing a pricing strategy for the new tuxedos, Stephen Hecht called a meeting of his three key executives on June 26, 1987. It was a Friday afternoon and so there was less likelihood of interruptions.

Attending the meeting were Stephen Hecht and Classy's vice presidents of finance, operations, and marketing. Stephen opened the meeting by reviewing the highlights of the plan he had put together. He stated that the company's goal should be to sell 2,000 tuxedos during 1988. He then asked the group for suggestions in regard to a retail selling price for the tuxedos.
The vice president of finance remarked that this purchase of tuxedos by Classy was the largest investment in retail stock that the company had ever made. He went on to say that the company's overall objectives would be best served by recouping this investment as quickly as possible, so that funds for expansion would not be tied up for any appreciable amount of time.
The vice president of operations expressed his agreement with this point of view but was quick to add that in the company's 68-year history, it has never sold more than 500 tuxedos in any one year.

Can the new tuxedo line be effectively positioned so as to improve Classy's image? What pricing strategy for the new line is likely to yield maximum profits? What is the extent of the trade-off between higher profits and higher market share in regard to the new line of tuxedos?

Posted Date: 2/26/2013 6:38:59 AM | Location : United States

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