Frankie Frommagio’s PizzaPalace

The competition for pizza consumers in the Bloomington Indianamarket is fierce. Indiana University has 38,000 undergraduatestudents. On average, undergraduate students eat 1.2 pizzas perperson per week throughout the August 31 – May 1 academic year

Frankie Frommagio’s Pizza Palace is a newcompetitor in the Bloomington pizza market, which includes nationalpizza chains such as Papa John’s, Pizza Hut andLittle Caesar’s, local chains such asAvers, and Pizza X, andindependent restaurants such as Mother Bears.

The price of a basic 14” cheese and 1 topping pizza atFrankie Frommagio’s is $12.95 compared to $14.85at Mother Bears, and $11.49 at PapaJohn’s. Frankie’s standard contribution margin on thatpizza is $7.00.

Knowing that undergraduate students have limited budgets,Frankie is considering a reduction in the price of the basic pizzato $11.00 beginning on the weekend the first home Hoosierbasketball game. He believes that if he reduces his price for thebasic 14” pizza to $11.00 he will generate a lot of newbusiness.

How much of an increase in pizzas will Frankie have tosell at $11.00 to generate the same total contribution dollars ashe currently generates?

Frankie’s partner, Melanzana Frommagio, was not sure aboutFrankie’s idea. In fact, he wanted to increase the price of thebasic pizza the company sold to $16.00, making the Frommagio’sbasic pizza by far the most expensive in the Bloomington area.Mellanzana argued that his idea would allow Fromagio’s to focus onthe more sophisticated pizza consumer who would appreciate his “oldworld” secret sauce recipe. Mellanzana believed the sauce madepizza much better than any other pizza available, and that mostpeople would be willing to pay the extra amount for his“buongustaio” (gourmet) recipe. Frankie, however, worried about thesize of the “sophisticated pizza consumer” segment in Bloomington.Would it be large enough to be profitable?

If he adopts Mellanzana’s recommendation, how manycustomers could Frankie afford to lose and still generate the sametotal contribution as he currently generates?

10 Bonus points: Which pricing action should Frankietake? Provide a rationale for your decision based on the classdiscussion, and not just an opinion.