Citation
Consumer reaction to varying prices for frozen orange concentrate

Material Information

Title:
Consumer reaction to varying prices for frozen orange concentrate
Alternate title:
Bulletin 598 ; University of Florida. Agricultural Experiment Station
Creator:
Godwin, Marshall R. ( Marshall Reid, 1922- )
Powell, Levi A. Sr.
Place of Publication:
Gainesville, Fla.
Publisher:
University of Florida Agricultural Experiment Station
Publication Date:
Copyright Date:
1957
Language:
English
Physical Description:
27 p. : ill., map ; 23 cm.

Subjects

Subjects / Keywords:
Frozen concentrated orange juice -- Prices ( lcsh )
Consumers -- Attitudes ( lcsh )
Consumer prices ( jstor )
Market prices ( jstor )
Prices ( jstor )
Genre:
non-fiction ( marcgt )

Notes

General Note:
Cover title.
Statement of Responsibility:
by Marshall R. Godwin and L.A. Powell, Sr.

Record Information

Source Institution:
University of Florida
Holding Location:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
AEN7502 ( ltuf )
18283763 ( oclc )
027106185 ( alephbibnum )

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Full Text

Bulletin 589 August 1957



UNIVERSITY OF FLORIDA
AGRICULTURAL EXPERIMENT STATIONS
J. R. BECKENBACH, Director
GAINESVILLE, FLORIDA












Consumer Reaction to Varying Prices for

Frozen Orange Concentrate


By
MARSHALL R. GODWIN
and
L. A. POWELL, SR.
Associate and Assistant Agricultural Economists










FEB 28 1951



Single copies free to Florida residents on
AGRICULTURAL EXPERIMENT STATE
GAINESVILLE, FLORIDA





















CONTENTS

Page


SUMMARY .. --..- --...---.. .------ -- ------.......--- .....------. .. ........ 3

INTRODUCTION .---.......... --..--..------... --..----- -- .......... .-...... 5

PROCEDURE ....--...--. ---..-......--.-----..-....---------- ---- ........ 6

SETTING FOR THE EXPERIMENTAL TESTS ...........-.....-..... ................. 11

Description of the Market Area ..---........-...... ..................... 11

Characteristics of Retail Stores .............. --........................ 12

Volume of Citrus Products Handled ..--.................---.......-- ...... 14

VARIATION IN CUSTOMER PURCHASES AND EXPENDITURES

AT SELECTED PRICES .--.........-...-----....... ----- -........................ 16

Price-Quantity Relationship ....................--.--- ......----- ..-..- ..... 16

Revenue Aspects of Demand ......--..... ---..........--- -.....-- .... 20

ACKNOWLEDGMENTS .....-------......--...------........ ... -................... 26









SUMMARY
In this study an effort was made to determine the character-
istics of the demand for frozen orange concentrate. The basic
procedure employed was that of deliberately varying the price
of frozen orange concentrate above and below the established
market level under carefully controlled conditions. The experi-
mental pricing tests were carried out during the 9-week period
June 7 through August 7, 1954. The test prices employed in
the study were 8.5, 10.5, 13.5, 16.5 (the prevailing market price
at the time of the study) and 20.5 cents per 6-ounce can.
The study was conducted in 10 retail food stores in the Lower
Delaware Valley area of Pennsylvania and New Jersey. All of
the stores involved in the study would be considered large super-
markets by most standards. Total weekly sales per store ranged
from $23,827 to $29,134. The weekly sales of produce per store
varied from $2,505 to $3,752 during the 10-week period covered
by the study. Produce sales averaged 12.2 percent of total store
sales.
The supermarkets used in the test handled a considerable
volume of citrus products. The fresh fruit equivalent of the
average weekly sales of these items (excluding lemons and limes)
amounted to 6,149 pounds per store. Oranges and orange prod-
ucts accounted for 78.3 percent of the total amount of citrus
handled; grapefruit products accounted for 19.6 percent; and
tangerine products for the remaining 2.1 percent. Orange con-
centrate was the single most important citrus item handled. The
average weekly volume of this product sold per store was equiva-
lent to 3,374 pounds of fresh fruit and accounted for 54.9 percent
of the total volume of citrus handled.
Results of the pricing experiment showed marked variation
in concentrate purchases over the range of prices tested. At the
lowest test price of 8.5 cents for a 6-ounce can, concentrate sold
at the rate of 236 ounces for each 100 customers, or the equiva-
lent of 122 pounds of fresh fruit. As the test price was increased,
concentrate purchases dropped successively to a low of 111 ounces
at the highest test price of 20.5 cents per can. Purchases per
100 customers at this price level amounted to about 57 pounds in
terms of fresh fruit.
Variations in purchase rates in response to the induced prices
indicated that customer sensitivity to price change declined con-
tinuously as price was varied from the lowest to the highest test
level. Evidently, at the theoretical price of about 12.5 cents, a






4 Florida Agricultural Experiment Stations

1 percent change in price would have been accompanied by a 1
percent change in purchases-increasing by this amount if price
decreased and decreasing if price increased. At test prices be-
low this level, demand grew more elastic. That is, consumers
became increasingly sensitive to price change as lower test prices
were introduced. Changes in the rate of purchase were propor-
tionally larger than changes in price. But at test prices above
12.5 cents per can, a 1 percent change in price resulted in less
than a 1 percent change in the purchase rate-with the effect
diminishing, the higher the price.
Because demand elasticity diminished as price rose, minimum
revenue from concentrate sales theoretically should have oc-
curred at the price associated with a demand elasticity of unity,
i.e., at about 12.5 cents per can. However, since this price was
not among those tested, minimum revenue was realized at the
test price of 13.5 cents per can. This occurred because the
elasticity figure linked with the price of 13.5 cents approximated
unity more closely than did the elasticity related to other test
prices. Hence, revenue obtained at the various test prices in-
creased as these prices diverged from 13.5 cents in either di-
rection.
The elastic character of the demand for concentrate in low
price ranges suggests that it may not be in the interest of the
concentrate industry to attempt to increase revenue during
periods of long supply by reducing the quantity marketed. Per-
haps more could be achieved by arranging cooperative promo-
tional programs with the retail trade as a means of moving
above-normal supplies. A desirable arrangement would require
a pricing method in the promotional program mutually beneficial
to both. the concentrate industry and retailers. If retail handling
cost per can declined moderately with the increased volume, an
approximately constant percentage mark-up on selling price
would appear to meet this requirement. Under these circum-
stances, net profit to the retail trade as well as gross revenue
to the concentrate industry would be maintained.









Consumer Reaction to Varying Prices for

Frozen Orange Concentrate

By
MARSHALL R. GODWIN and L. A. POWELL, SR.
Associate and Assistant Agricultural Economists

INTRODUCTION
Within the past two decades the Florida citrus industry has
expanded at a spectacular rate. The flow of income into the
Florida economy generated by the production, processing and
marketing of citrus and citrus products ranks second only to the
income derived from tourism. In the three seasons from 1952-53
through 1954-55, Florida produced an annual average of 126
million boxes of citrus fruit, or about 67 percent of the total
United States supply. In a comparable three-season period 20
years previously, Florida produced an average of 30 million boxes
annually, or about 38 percent of the total U. S. supply.
As a result of such phenomenal development, the Florida
citrus industry has occasionally experienced "growing pains".
From time to time producers have been faced with disastrously
low prices resulting from the pressure of the mounting produc-
tion on the market. Only through vigorous research and pro-
motional programs has it been possible to forestall price depres-
sions that otherwise might have extended over a period of sev-
eral years and resulted in economic repercussions that would
have adversely affected the economy of the entire state.
There is little to indicate that the citrus industry in Florida
will not continue to expand. In light of past experiences, grow-
ers, packers, shippers and processors have shown considerable
interest in the accumulation of economic information that will
be of assistance in dealing with the future problems arising from
increasing production. Through their several industry organi-
zations, various elements of the industry engage in a continuing
search for solutions to the problems which they envision in the
years ahead.
Although the deliberations of industry groups have not been
crystallized into a specific course of action, it is evident that the
fundamental objectives sought are: (1) a stable market for
citrus and citrus products and (2) a price that, in the long run,
will yield equitable returns to the producer in relation to other






6 Florida Agricultural Experiment Stations

enterprises requiring comparable resources and involving equal
risks. The means of obtaining these objectives are the source
of much controversy both within and without the Florida citrus
industry. Many regard an industry-wide system of controlled
marketing as the only feasible approach.
There is considerable need for certain economic information
in evaluating the possibilities of a market control program as a
means of obtaining the objectives sought by the industry. Of
fundamental importance in this connection is information con-
cerning the characteristics of the market demand for each of
the major citrus products.
The principal objective of this report is to furnish informa-
tion relating to the retail demand for Florida's most important
citrus product-frozen concentrated orange juice.
This is the second in a series of research projects being con-
ducted by the Florida Agricultural Experiment Stations for the
purpose of establishing demand relationships for the major Flor-
ida citrus products. The initial study was undertaken during the
spring of 1952 and dealt with the characteristics of demand for
fresh oranges.' Both the previous and the present study utilized
relatively new and controversial approaches to the problem of
studying the nature of the demand for an agricultural com-
modity. In a sense, each may be regarded as a preliminary ven-
ture that will provide a source of methodological information for
more comprehensive investigations of the demand for citrus
products on an area or a national basis. However, the results
may be taken as generally indicative of the response, in terms of
consumer purchases, to varying price levels for citrus products.

PROCEDURE
Prior to the initiation of the field work, much consideration
was given to the problem of obtaining data that would be of
practical value to the Florida citrus industry in dealing with its
economic problems. Special attention was therefore given to
the development of a procedure that would exclude some of the
more objectionable weaknesses of the usual types of demand
analyses.2 In the planning phase of the project, three criteria
1 Marshall R. Godwin, "Customer Response to Varying Prices for Florida
Oranges", Florida Experiment Station Bulletin 508, December, 1952.
2 A full explanation of the economic model and the analytical techniques
employed in this study is given in Florida Agricultural Experiment Station
(Technical) Bulletin 592, Experimental Pricing as an Approach to Demand
Analysis (A Study of the Retail Demand for Frozen Orange Concentrate)
by L. A. Powell, Sr., William G. O'Regan and Marshall R. Godwin.







Consumer Reaction to Orange Concentrate Prices 7

were adopted as a frame of reference for developing a study
that would accomplish the desired results. These were:
1. The data should be obtained during a relatively short
period in order to avoid the disturbing influence of
changing economic conditions arising from such factors
as changes in consumer income, taste and preferences
and in availability of substitute commodities.
2. The data should reflect customer responses to a wider
range of price circumstances than is ordinarily en-
countered in the existing system of competitive market-
ing.
3. The data should be obtained under rigidly controlled con-
ditions with regard to pricing and merchandising in
order that the effect of price may be isolated from the
other variables which may influence the quantity of
frozen concentrate that customers buy.
Experiences in the previous study of the demand for fresh
oranges during the spring of 1952 served as a basis for the de-
velopment of these criteria.
The actual field work for the study involved a measurement
of customer response to five predetermined price levels for frozen
orange concentrate during a nine-week period extending from
June 7 through August 7, 1954. The tests were conducted in 10
retail food stores of one chain located in the Lower Delaware Val-
ley area of Pennsylvania and New Jersey. The price levels tested
were: the price in effect at the time the study was initiated;
prices 3, 6 and 8 cents per 6-ounce can below the market price;
and one, 4 cents higher. Hence, customers in the test stores
were subjected to retail prices varying over a range of 12 cents
per can.3
All stores included in the sample handled three types of
frozen orange concentrate: a nationally advertised brand selling
at the highest retail price, a private label 2 cents lower, and a
packer's label 4 cents lower than the advertised brand.
No distinction was made between brands in applying the vari-
ous price differentials. For example, if a particular price treat-
ment required a discount of 6 cents per can, the retail price of
each brand in 6-ounce containers was lowered by this amount.
3 The price differentials were purposely selected with reference to the
market price, so that with the market price included, the series would ap-
proximate a geometric progression. With this pricing arrangement, pur-
chases at the different prices would tend to be dispersed uniformly along the
derived demand curve and would, therefore, increase the reliability of the
estimates based on the extremities of the curve.









00


TABLE 1.-PRICING SCHEDULE FOR STORES INVOLVED IN EXPERIMENTAL STUDY OF THE CHARACTERISTICS OF THE DEMAND FOR
FLORIDA FROZEN ORANGE CONCENTRATE, DELAWARE VALLEY AREA, JUNE 7-AUGUST 7, 1954.

Store Manner in which Merchandise is Marked Store
Number Differential | Number
(Period II) Private Brand Nat'l Adv. (Period IV)
Pro______It B Packer's Brand Brand
6 oz. 12 oz. 6 oz. 6 oz.
9 -8 2/17 2/29 2/13 2/21 6
10 -8 2/17 2/29 2/13 2/21 1
6 -6 2/21 2/35 2/17 2/25 8
3 -6 2/21 2/35 2/17 2/25 10
I Id
2 -3 2/27 2/45 2/23 2/31 7
4 -3 2/27 2/45 2/23 2/31 5
8 0 2/33 2/55 2/29 2/37 2
5 0 2/33 2/55 2/29 2/37 3
7 +4 2/41 2/69 2/37 2/45 9
1 +4 2/41 2/69 2/37 2/45 4 4
_____________ ___ I --____ ________________________________ ____________







Consumer Reaction to Orange Concentrate Prices 9

Thus, the absolute price differences between the three brands re-
mained the same regardless of the price level tested.
In addition to 6-ounce containers, the cooperating organiza-
tion marketed a 12-ounce can of orange concentrate under its
private label. The price of concentrate per ounce in this con-
tainer was slightly less than for the 6-ounce can bearing the same
label. Price treatments applied to the 12-ounce unit were varied
proportionally to those for the 6-ounce can of the same brand.
A translation of the price differentials into the actual retail
prices employed in the study is given in Table 1.
The price testing technique was especially designed to facili-
tate the isolation of price effect upon consumer purchase rates.
Because orange concentrate is a storable commodity, it was nec-
essary in constructing the experimental design to take cogni-
zance of the possibility that some consumers might purchase
above-normal supplies at low prices in anticipation of higher
future prices. Furthermore, the possibility existed that the
consumer response to a particular price treatment might be de-
pendent upon the level of prices prevailing prior to its introduc-
tion. Either separately or in combination, the existence of such
conditions would have given rise to "carry-over" effect-that is,
a situation in which considerations other than the current price
influenced customer purchase rates. Provision was made in the
experimental design for the dissipation of possible "carry-over"
effect by continuing the same price treatment in each store for
a period of several weeks.
A schematic representation of the experimental design em-
ployed in the study is presented in Table 2. The pricing system
used in the study consisted of four distinct periods. During the
first week of the study, prices in all stores were maintained at
the prevailing market level.4 This was followed by a second
period of 3-week duration in which each of the five test prices was
maintained in 2 of the 10 sample stores. The third period in-
volved a re-establishment and maintenance of the original mar-
ket price in all stores for two weeks. In the fourth period, each
of the five price levels was again established in 2 stores for three
weeks.5

'The only difference between the normal store operations during this
week and those prior to the initiation of the study consisted of (a) stand-
ardizing the pricing system to conform to the procedure to be employed
throughout the pricing tests (i.e., pricing frozen orange concentrate in units
of two cans), and (b) maintaining normal displays of each type of the prod-
uct to assure that inadequate supplies would not be a factor influencing sales.
Price treatments for the second and fourth periods were randomly as-
signed to the individual stores, subject to the restriction that a particular
price treatment could not be employed in the same store during both periods.







10 Florida Agricultural Experiment Stations

TABLE 2.-EXPERIMENTAL DESIGN FOR THE STUDY OF THE DEMAND FOR
FLORIDA FROZEN ORANGE CONCENTRATE, DELAWARE VALLEY AREA,
JUNE 7-AuGusT 7, 1954.

Store Period
Number I II III IV
(______1 week) (3 weeks) (2 weeks) (3 weeks)
1 0 4 0 -8
2 0 -3 0 0
3 0 -6 0 0
4 0 -3 0 4
5 0 0 0 -3
6 0 -6 0 -8
7 0 4 0 -3
8 0 0 0 -6
9 0 -8 0 4
10 0 -8 0 -6

The above differentials represent departures from the base price estab-
lished for the week of June 7, 1954, and are in terms of 6-ounce cans. Prices
for 12-ounce cans were varied proportionately.

In order to minimize the disturbing influence of within-store
factors that might have affected purchases, a considerable de-
gree of control was exercised over retailing operations pertaining
to frozen orange concentrate. The display space devoted to this
product was kept comparatively constant throughout the 9-week
study. Care was also taken to retain the original space alloca-
tion among the various brands and can sizes of orange concen-
trate that were handled. Furthermore, a special effort was made
to see that adequate supplies of each item were on hand at all
times in each store. To obviate the necessity for reckoning with
the effects of advertising upon customer purchase rates, the co-
operating organization refrained from advertising frozen orange
concentrate throughout the test period.
Since variation in the merchandising policy of different firms
(with regard to product assortment, display techniques and
pricing practices) could materially affect the results of such a
study, the sample units selected were all members of one firm.







Consumer Reaction to Orange Concentrate Prices 11

THE SETTING FOR THE EXPERIMENTAL TESTS
General Description of the Market Area.-The 10 retail food
markets employed in the study were located in a relatively small
geographic area extending generally along the Delaware River
from Trenton, New Jersey, to Philadelphia, Pennsylvania, and
frequently referred to as the Lower Delaware Valley. Seven
of the 10 stores were located in New Jersey-four in Trenton
and one each in Bordentown, Mount Holly and Burlington. The
remaining three were located in the Pennsylvania towns of Mor-
risville, Penndel and Bristol (Fig. 1).





Morrisville



Bordentown
Penndel\ .


Bristol / 3


Burlington





Mt. Holly



Fig. 1.-Geographic area covered by the pricing tests of frozen orange
concentrate, June 7-August 7, 1954.

In general, the area in which the study was conducted may be
characterized as one of intense industrialization. Numerous ma-
jor manufacturing concerns are located in the metropolitan areas
of Philadelphia and Trenton, as well as in Camden, New Jersey.
In addition, considerable heavy industry is found along the Dela-
ware River waterway between Trenton and Philadelphia.








12 Florida Agricultural Experiment Stations

Population density and employment opportunities in the Low-
er Delaware Valley area are fairly typical of northeastern in-
dustrial sectors, which are the major market outlets for Florida
citrus and citrus products. For this reason the area was deemed
an appropriate locale for the study.
Characteristics of the Retail Stores.-By any commonly ac-
cepted definition, all of the retail stores employed in the study
would be regarded as supermarkets.6 All contained three distinct
departments-grocery, meat and produce. In all cases, each of
these departments was operated essentially on a self-service
basis. However, customers frequently received clerical assist-
ance in connection with their purchases of meats and fresh fruits
and vegetables, and were at liberty to request special items or
services from either of these departments. In each store custo-
mer purchases were handled through a central check-out system
which served all departments.

TABLE 3.-AVERAGE WEEKLY SALES PER STORE AND BY DEPARTMENTS, 10
RETAIL FOOD STORES, LOWER DELAWARE VALLEY AREA, JUNE 7-AUGUST 7,
1954.

Week Department Total
Beginning Grocery Meat Produce |
(dollars)
June 7 15,449.15 7,853.66 3,342.81 26,645.62
14 16,353.30 8,429.28 3,419.29 28,201.87
21 15,047.68 7,423.60 3,407.82 25,879.10
28 16,710.67 8,671.82 3,751.64 29,134.13
July 5 14,494.03 7,090.42 2,993.48 24,577.93
12 15,703.74 7,301.75 3,429.16 26,434.65
19 15,101.61 7,234.28 2,936.47 25,272.36
26 14,197.21 6,819.81 2,809.71 23,826.73
Aug. 2 14,688.83 7,062.26 2,504.81 24,255.90


From the standpoint of sales volume, all of the 10 stores were
relatively large food retailing operations. Average weekly sales
per store ranged from $29,134 during the week beginning June 28

A commonly accepted definition of a supermarket is: "A complete, de-
partmentalized food store with a minimum volume of $500,000 a year and
at least the grocery department fully self-service." The Super-Market In-
dustry Speaks, 6th Annual Report of the Members of the Super-Market
Institute, Chicago, Illinois, 1954.







Consumer Reaction to Orange Concentrate Prices 13

to $23,827 for the week beginning July 26 (Table 3). Sales
in the produce department, which included frozen fruits, vege-
tables and juices as well as fresh products, ranged from $3,752
to $2,505 weekly. Average weekly sales in the grocery depart-
ment varied from $16,711 to $14,197 and those of the meat de-
partment ranged from $8,672 to $6,820.
The distribution of sales among the three departments of the
test stores and a comparison with a national average for stores of
the supermarket class are given in Figure 2. Grocery depart-
ment sales in the 10 stores accounted for 59 percent of the total,
while sales in the meat and produce departments amount to 29
and 12 percent, respectively. In these stores, meat and produce
.sales were slightly more important than in the average U. S.
supermarket, whereas grocery sales were somewhat less impor-
tant in terms of total dollar volume.

10 Test Stores q l.:::*:: .2.. 2 .0. 12.2
Grocery Meat Produce
All Supermarketsa

0 10 20 30 40 50 60 70 bO 90 100
Percent
Fig. 2.-Distribution of total sales among departments, 10 retail food
stores, Delaware Valley area, June 7-August 7, 1954.
"Based on a survey of food retailing operations of the Super-Market
Institute for the year 1953; The Super-Market Industry Speaks, 1954.

The volume of store traffic, or number of customers served,
provides an additional indication of the size of the food stores
employed in the study. About 5,500 customers passed through
each of the test stores during an average week (Table 4). About
two-thirds of the total store traffic was concentrated in the last
three days of the week. Friday was the peak day from the stand-
point of customer traffic. An average of 1,468 customers, 27 per-
cent of the weekly total, was served by each store on this day.
Each of the first three days of the week accounted for 10 to 11
percent of total store traffic. From the beginning of the study on.
June 7, 1954, until its termination on August 7, the 10 stores
served a total of 494,967 customers. Since each store customer
may be regarded as a potential purchaser of citrus products, it
is evident that the response to the five price levels tested is indica-
tive of the reactions of a comparatively large number of indi-
vidual shoppers.







14 Florida Agricultural Experiment Stations

Volume of Citrus Products Handled.-When considered in the
aggregate, the supermarkets employed in the test handled a con-
siderable volume of citrus and citrus products. The fresh fruit
equivalent of the average weekly sales of all citrus products (ex-
cept lemons and limes) amounted to 6,149 pounds per store
(Table 5). Of this amount, 4,814 pounds, or 78.3 percent, con-
sisted of oranges and orange products. The sales of fresh grape-
fruit and the fresh fruit equivalent of grapefruit products ac-
(counted for 1,204 pounds, or 19.6 percent of the total volume.
The weekly sales of tangerine products were the equivalent of
132 pounds of this fruit and represented 2.1 percent of the total
sales of citrus products.

TABLE 4.-DISTRIBUTION OF TOTAL CUSTOMER TRAFFIC AMONG DAYS OF THE
WEEK 10 RETAIL FOOD STORES, LOWER DELAWARE VALLEY AREA,
JUNE 7-AUGUST 7, 1954.
Weighted
Day of Week Total Number Number per Percent of
of Customers Store per Week IWeekly Total
Monday 50,230 558.11 10.15
Tuesday 54,863 609.59 11.08
Wednesday 54,461 605.12 11.00
Thursday 99,671 1,107.46 20.14
Friday 132,088 1,467.64 26.69
Saturday 103,654 1,151.71 20.94

Total 494,967 5,499.63 100.00


The single most important citrus item from a sales volume
standpoint was frozen orange concentrate. Weekly sales of this
product per store averaged the equivalent of 3,374 pounds, or
about 37.5 packed boxes of fresh oranges. Frozen orange con-
centrate accounted for roughly two-thirds of the total sales of
oranges and for 55 percent of the total sales of all citrus fruit in
these stores. Fresh oranges were second in importance from a
volume standpoint. Average weekly sales of this product per
store amounted to 823 pounds. Third in importance was single
strength grapefruit juice with average sales equivalent to 575
pounds of fresh fruit. Other major items, in order of importance,
were single strength orange juice, fresh grapefruit and the
grapefruit juice used in the preparation of blended juices.








Consumer Reaction to Orange Concentrate Prices 15


TABLE 5.-AVERAGE SALES OF CITRUS AND CITRUS PRODUCTS DURING SE-
LECTED WEEKLY PERIODS, 10 RETAIL FOOD STORES, LOWER DELAWARE
VALLEY AREA, 1954. (CONVERTED TO A FRESH FRUIT EQUIVALENT BASIS.)

Aver- I
Week Ending age Percent
Product I Weekly I of Total
June 12 July 10 July 17 Sales I Volume

(lbs.) (lbs.) (lbs.) (lbs.)
Orange products:
Orange juice,
single strength .............. 482.7 467.3 469.7 473.2 7.7
Orange juice blended ........ 94.9 70.8 89.2 85.0 1.4
Frozen concentrate .......... 3,227.4 3,111.3 3,782.0 3,373.6 54.9
Hot pack concentrate ....... 62.6 31.2 56.1 49.9 0.8
Fresh oranges ................... 1,690.5 457.0 82.8 823.0 13.4
Frozen blend concentrate. 4.3 8.8 13.7 8.9 0.1

Total ............................ 5,562.4 4,146.4 4,493.5 4,813.6 78.3

Grapefruit products:
Grapefruit juice,
single strength ............ 600.2 539.8 586.5 575.5 9.4
Grapefruit juice blended. 161.8 120.7 152.1 144.9 2.3
Frozen concentrate ........- 85.0 75.5 93.5 84.7 1.4
Fresh grapefruit .--........... 665.4 188.3 197.2 381.9 6.2
Frozen blend concentrate.. 8.1 16.5 25.5 16.7 0.3

Total ........................... 1,520.5 940.8 1,054.8 1,203.7 I 19.6

Tangerine products:
Tangerine juice,
"single strength ........ 95.8 62.4 78.1 78.7 1.3
Frozen concentrate .......... 60.9 49.4 48.6 53.0 0.8


Total .------..................-.. 156.7 111.8 126.7 131.7 2.1

Total all types -- 7,239.6 5,199.0 5,675.0 6,149.0 100.00







16 Florida Agricultural Experiment Stations

VARIATION IN CUSTOMER PURCHASES AND
EXPENDITURES AT SELECTED PRICES
Knowledge that enables predicting customer reaction to vari-
ous price conditions is the core of an informed pricing policy.
This section is devoted to an examination of the relationship be-
tween the rate at which frozen orange concentrate is purchased
and the price at which this product is sold. It should be helpful
in extending the insight of those concerned with the marketing
of this product.
The measurement of customer reaction to induced prices in
terms of purchase rates could not be established without also
reckoning with the other forces which influence the sales of
frozen orange concentrate in a retail store. Consequently, the
mathematical relationship selected to explain concentrate sales
took into account not only price, but also several factors to meas-
ure effects other than those related to price. However, only
the relationship between rates of purchase and prices is dealt
with in this report.
Since patronage and volume of business varied among the
sample stores, the total sales of frozen orange concentrate did
not directly reflect the response of individuals to the various test
prices. To facilitate interpretation of the results, sales were
expressed in terms of quantities purchased per 100 customers.7
Through the use of this procedure, the effect of price upon sales
per sales opportunity at the retail level is more readily apparent.
Price-Quantity Relationships.-Results of the pricing experi-
ment indicate that concentrate purchases varied markedly over
the range of prices tested. The average relationship between
prices and customer purchase rates for frozen orange concen-
trate is shown in Figure 3.8 When the product was sold at 20.5
cents per can, or 4 cents above the prevailing market level, the
purchase rate per 100 customers was 111 ounces. As successively
lower prices were introduced in the test stores, volume of sales
increased. At a test price of 13.5 cents per can, or 3 cents below
the prevailing market level, each 100 customers bought an aver-
age of 130 ounces of concentrate. At 8.5 cents per can, the lowest
SMeasurement of sales in terms of purchases per 100 customers appeared
to be an acceptable procedure, because a formal statistical test indicated
that the imposed variation in concentrate prices did not significantly affect
customer traffic in the sample stores.
8 Interest was centered in the aggregate demand for frozen orange con-
centrate as a commodity. Since the prices of several brands were involved,
the price of the company's private brand was utilized as an index of all con-
centrate prices.







Consumer Reaction to Orange Concentrate Prices 17

price level tested, sales were 236 ounces per 100 customers, or
more than twice the amount purchased at the highest test price.

VOLUME OF PURCHASES
(Ozs. per 100 customers)
250
236.2


200

169.8

150
129.6
114.8 111.0





50




8.5 10.5 13.5 16.5 20.5
PRICE
(Per 6-ounce can)
Fig. 3.-Sales of frozen orange concentrate at varying prices, 10 retail food
stores, Lower Delaware Valley area, June 7-August 7, 1954.

Many in the Florida citrus industry will be interested in the
sales of frozen orange concentrate in terms of the volume of fresh
fruit which consumers can be induced to take at different retail
prices. The translation of concentrate sales into fresh fruit
equivalents for each of the prices tested is given in Figure 4.
When concentrate was sold at a test price of 20.5 cents per can
(4 cents above the prevailing market level), the fresh equivalent
of sales was 57 pounds of fruit per 100 customers. At the pre-
vailing market price of 16.5 cents per can, each 100 customers
purchased the product in quantities equivalent to 59 pounds of
fresh fruit. At a price 3 cents per can below the prevailing
market, sales per 100 customers were equivalent to 67 pounds.
As the price was reduced further to 10.5 cents per can, each 100
customers purchased the equivalent of 88 pounds of fresh fruit






18 Florida Agricultural Experiment Stations

in the form of concentrate, or approximately one box. At the
lowest test price of 8.5 cents, sales per 100 customers increased
further to the equivalent of 122 pounds of fresh fruit.

VOLUME OF PURCHASES
(Pounds per 100 customers)
160

140-
122.1
120

100
87.8
80
67.0
60 yi59.3 57.2

40

20-

0
8.5 10.5 13.5 16.5 20.5
Price
(Per 6-ounce can)
Fig. 4.-Fresh fruit equivalents of sales of frozen orange concentrate
at varying prices, 10 retail food stores, Lower Delaware Valley area, June 7-
August 7, 1954.

Presumably, at low price levels customers can be induced to
substantially increase their consumption of oranges in the form
of concentrate through the use of price reductions at the retail
level. At high price levels, however, it appears that price re-
ductions will have a relatively small effect upon the volume of
oranges which consumers can be induced to take in this form.
It is characteristic of the economic behavior of individuals
that as the price of a product declines their purchases increase.
Conversely, as the price increases, their purchases become small-
er. The "demand" for a product refers to the quantities of that
product consumers will buy at various prices. The nature of the
demand for a product may be such that the rate at which custo-
mers increase or decrease purchases in response to a change in
price differs substantially as prices vary over a wide range. For
instance, customers may be quite sensitive to price changes







Consumer Reaction to Orange Concentrate Prices 19

when the price of a product is relatively low, but rather insensi-
tive to price changes when it is expensive. Or, they might react
in an entirely different manner. This demand characteristic,
which reflects consumer sensitivity to price change, is best meas-
ured in relative terms. Treated in this fashion, consumer re-
sponse is expressed in terms of the percentage change in pur-
chases associated with a 1 percent change in price. Since this
relative measure is independent of the quantitative units in-
volved, it has more general applicability in analyzing marketing
problems.
The customer response to price changes was relatively small
when frozen orange concentrate was sold at high prices. As
successively lower prices were introduced, customer purchases
reflected an increasingly larger response to price changes (Table
6). Customers were most sensitive to price changes at the
lowest price interval of 8.5 to 10.5 cents per can. Within this
interval, purchase rates changed approximately 1.55 percent
with a 1 percent change in price.

TABLE 6.-CUSTOMER RESPONSE TO PRICE CHANGES FOR FROZEN
ORANGE CONCENTRATE AT DIFFERENT PRICE LEVELS.
Percent Change in Purchases
Price Interval Associated with a 1 Percent
Price Change *
16.5-20.5 .15
13.5-16.5 .59
10.5-13.5 1.06
8.5-10.5 1.55

For purposes of representing the nature of the customer responses for the respective
price intervals, elasticity was computed at the midpoint of each interval. Since elasticity
changed rapidly over the range of prices tested, obviously, the midpoint estimates do not
provide correct measures of the demand elasticity within such large price intervals. Demand
elasticity would assume a number of values from one price level to the next.

The character of the demand for concentrate changed ma-
terially within the price interval of 10.5 to 13.5 cents per can.
At price intervals above 13.5 cents the customer response to a
price change was less than proportionate. (That is, a 1 percent
price change resulted in a change in purchase rates of less than
1 percent.) On the other hand, at price intervals below 13.5
cents per can, changes in customer purchase rates were relatively
larger than changes in prices. Consequently, at some point be-
tween the test prices of 10.5 and 13.5 cents, the demand for con-
centrate was of such nature that a change in the quantity pur-







20 Florida Agricultural Experiment Stations

chased would have been exactly inversely proportional to a
change in price. This point was estimated to be at a theoretical
price of 12.35 cents per can. At all prices higher than this
amount the demand for frozen orange concentrate was "inelas-
tic". That is, price changes resulted in less than proportionate
changes in customer purchase rates. Below 12.35 cents per can
the demand was "elastic", or the customer purchase response to
a price change was more than proportionate. Thus, according
to information obtained in this study, the transition from a con-
dition of elastic to inelastic demand (or the reverse) occurred
at the pivotal price of about 12.5 cents per can.
The fact that customers are quite responsive to price changes
at prices below 12 or 13 cents per can, and progressively less re-
sponsive to price changes as the selling price is increased above
this general level, is of particular significance both to the concen-
trate industry and to retailing organizations. A relationship of
this type suggests that, at prices below 12.5 cents, the market
will absorb increasingly larger-than-normal stocks at a dimin-
ishing sacrifice in terms of price. On the other hand, short sup-
ply situations would be especially rewarding to the citrus in-
dustry, since consumers apparently are reluctant to cease pur-
chasing a certain amount of concentrate even in the face of sharp
price increases.
Revenue Aspects of Demand.-The concept of demand elas-
ticity is important in the analysis of marketing problems be-
cause of its usefulness in predicting what will happen to revenue
from the sale of a given commodity as prices and the quantities
available to consumers vary. If it is known that, for a 1 percent
increase or decrease in price, purchases will correspondingly de-
crease or increase by less than 1 percent (i.e., that the demand
is inelastic), it follows that the total revenue will rise with price
increases and fall with price decreases. On the other hand,
if changes in purchases are proportionately larger than price
changes, revenue will decline as prices rise and increase as
prices fall.
The amount of money spent for frozen orange concentrate
per 100 customers at the various test prices is shown in Figure
5. When the product was sold at prices progressively lower than
13.5 cents per can, total expenditures per 100 customers in-
creased. In like manner, expenditures increased as prices suc-
cessively higher than 13.5 cents per can were charged for the
product.








Consumer Reaction to Orange Concentrate Prices 21

REVENUE
(Dollars per 100 customers)
4.00
3.78


3.50 -
3.35

3.16

3.00 2.97 2.91




2.50 -




2.00
8.5 10.5 13.5 16.5 20.5
PRICE
(Cents per 6-ounce can)
Fig. 5.-Total revenue derived from sales of frozen orange concentrate
at varying prices, 10 retail food stores, Lower Delaware Valley area, June 7-
August 7, 1954.

The lowest total revenue was obtained at a price of 13.5 cents
per can, because customer purchase response to a price change
was more nearly proportionate at that price level than at any
other test price.9 At 13.5 cents per can a 1 percent price change
brought about a change in purchase rates of 0.81 percent. At
test prices below this level customers responded to price reduc-
tions by increasing their purchases by a more than proportionate
amount. Hence, the total revenue (price x quantity) increased
as successively lower prices were charged. When higher prices
were introduced, consumers failed to reduce their purchases at
a rate equal to that of the price increases. Consequently, the
total revenue also increased as successively higher prices were
charged. The maximum total expenditure of $3.78 per 100 custo-
mers was obtained at the highest test price of 20.5 cents per can.

"If the elasticity of demand declines as price increases, minimum total
revenue from the sale of a product would be obtained at the point of "unitary
elasticity". As previously mentioned, this point was estimated to be a price
of 12.35 cents per can. When price changes are accompanied by an exactly
proportionate change in the quantity taken by consumers, the total revenue
(price x quantity) is the same at all prices and for all quantities.







22 Florida Agricultural Experiment Stations

While the character of the demand for frozen orange concen-
trate was such that gross revenue increased as prices moved in
either direction away from the pivotal point of about 12.5 cents
per can, the revenue position of the retailer will depend upon
the prices he must pay for the product. Clearly, then, the gross
net revenue of the retailer (his total revenue less the actual cost
of goods sold) would diminish as frozen orange concentrate was
sold at successively lower prices, unless the price he paid for
frozen orange concentrate also declined.
The test prices employed in this study represented in some
instances rather extreme departures from existing market con-
ditions and from the experiences of retail store operators. Under
these circumstances the behavior of retail margins, if these prices
were to actually prevail in the market, cannot be predicted with
certainty. However, it is appropriate to examine the revenue
position of the retailers and concentrate suppliers under two sets
of assumptions regarding the possible behavior of margins if
the test prices were to prevail in true market situations. These
assumptions are: (a) under all price conditions the margin of the
retailer will be a constant percentage of the selling price, and (b)
under all price conditions the retail margin will be a fixed amount
per can.
With the given demand relationship, a constant percentage
margin on selling price would have yielded retailers a larger gross
profit at prices both above and below the point of minimum total
revenue (Figure 6). Table 7 demonstrates the division of the
gross revenue at retail between the retailer and the supplier of
concentrate if retailers had taken, at the various test prices, a
margin of 20 percent for their services.10 Since under the as-
sumed conditions suppliers would have received the remainder
of the gross receipts not absorbed by the retailer in the 20 per-
cent margin, they also would have received a larger gross return
as prices diverged in either direction from the point of lowest
total revenue.
Should retailers maintain a constant absolute mark-up at all
price levels, the division of gross receipts between retailers and
concentrate suppliers would be quite different. The effect of
charging a constant absolute margin of 3.3 cents per can on the
"1o The assumed margin of 20 percent, which amounted to 3.3 cents per
6-ounce can, approximated the actual margin retailers were obtaining for
frozen orange concentrate at the time of the study. Hence, both the as-
sumption regarding a constant percentage margin and the following one
which supposes a constant absolute margin are based on separate aspects
of the same actual margin.








Consumer Reaction to Orange Concentrate Prices 23

REVENUE
(Dollars per 100 customers)


4.00 -




3. 00 Gross revenue









1.00
2.00 -




1.60 -

20% gross margin


8.5 10.5 12.5 14.5 16.5 18.5 20.5
PRICE
(Cents per 6-ounce can)
Fig. 6.-Revenue position of the retailer at varying prices with an
assumed gross margin of 20 percent on sales.

REVENUE
(Dollars per 100 customers)
4.00



Gross revenue
3.00




2.00.-







3.3 cents gross margin


8.5 10.5 12.5 14.5 16.5 18.5 20.5

PRICE
(Cents per 6-ounce can)
Fig. 7.-Revenue position of the retailer at varying prices assuming
a margin of 3.3 cents per can.










TABLE 7.-REVENUE POSITION OF THE RETAILER ASSUMING A CONSTANT MARGIN OF 20 PERCENT ON SALES.
Revenue
Price Quantity (per 100 Total Total Per Can Percent
(6 oz. cans) customers) Cost Margin Cost Margin Margin

8.5 39.36 $3.35 $2.68 $0.67 6.84 1.74 20
10.5 28.30 2.97 2.38 .59 8.4 2.1 20
13.5 21.59 2.91 2.33 .58 10.8 2.7 20
16.5 19.13 3.16 2.53 .63 13.2 3.3 20
20.5 18.45 3.78 3.02 .76 16.4 4.1 20
S1'+




TABLE 8.-REVENUE POSITION OF THE RETAILER ASSUMING A CONSTANT MARGIN OF 3.3 CENTS PER CAN.
S Revenue
Price Quantity (per 100 Total Total Per Can Percent
S(6 oz. cans) customers) Cost Margin Cost I Margin Margin
8.5 39.36 $3.35 $2.05 $1.30 5.20 3.30 38.8
10.5 28.30 2.97 2.04 .93 7.2 3.3 31.3
13.5 21.59 2.91 2.20 .71 10.2 3.3 24.4
16.5 19.13 3.16 2.53 .63 13.2 3.3 19.9
20.5 18.45 3.78 3.17 .61 17.2 3.3 16.1







Consumer Reaction to Orange Concentrate Prices 25

revenue position of the retailer is shown in Figure 7. Under
this assumed condition, the division of the gross receipts from
concentrate between the retailer and the supplier is presented in
Table 8. In this case, the supplier would receive proportionately
less of the gross retail receipts during periods of large supplies
and, consequently, low prices. Retailers, on the other hand,
would obtain a smaller proportional share of the gross receipts
when supplies were short and prices high. Gross profit to the
retailer would rise as prices fell and decline as prices rose. Re-
turns to suppliers, however, would bear the opposite relation to
price.
Because of a lack of information, the nature of the costs
incurred by retailers in handling various quantities of frozen
orange concentrate is largely a matter of speculation. Yet, it
is apparent that these costs should be considered in pricing the
product. The revenue relationships observed in this study indi-
cate that, if handling costs per can for small volumes had de-
creased rapidly as the quantity handled increased and for some-
what larger volumes had tended to gradually decline, something
approaching a constant percentage mark-up on selling price would
have served to reduce variation in net profit over the several
levels of volume.1 If, however, handling costs had increased
slightly with an increase in volume over the range of volumes
experienced in the study, a relatively constant absolute mark-up
would have maintained net profit at a near stable level.
Perhaps, except for quantities of concentrate much greater
than the largest encountered in this study, the assumption of
decreasing handling cost would appear to be the most plausible.
If handling costs were of this nature, a percentage margin which
showed little variation would tend to maintain not only retail
profit but also gross revenue to concentrate suppliers, in periods
when concentrate stocks were above normal and prices were low.
Provided the demand relationship established in this study
reflects the real nature of the demand for frozen orange concen-
trate, a policy of restricting the amount marketed during years
when concentrate was in long supply would be likely to result in

"1 More precisely, since decreasing total cost with increasing volume is
not a realistic assumption, a constant percentage margin would yield a net
profit that declined somewhat with an increase in volume at prices for which
demand was inelastic. After demand became elastic, however, a relatively
stable net profit could be realized as larger quantities were sold at lower
prices provided handling costs were as described.







26 Florida Agricultural Experiment Stations

a loss of revenue to the concentrate industry.1213 The loss in
revenue would occur because the character of the demand for the
product is such that gross revenue falls at intermediate price
levels but increases in both low and high price ranges.
In years of above-normal supply, it appears that the concen-
trate industry would benefit by arranging cooperative promo-
tional programs with retailers. One approach might involve
persuading retailers to "push" concentrate in heavy supply situ-
ations while at the same time maintaining a relatively constant
percentage mark-up on price. Even though a price reduction
were required to move the increase in supply, retailers would
realize a higher gross profit. Furthermore, if the increased
volume lowered the unit cost of retailing the product, retailers
would obtain a higher net profit as well. At the same time, the
gross revenue to the concentrate industry would also increase.
Any number of alternatives might be pursued should the con-
centrate industry seek to develop a cooperative program with
the retail trade for the purpose of coping with the problem of
above-normal supplies. However, specific arrangements mutually
beneficial to both interests will be more likely to succeed. Judg-
ing from the character of the demand for frozen orange con-
centrate as determined by this study, an arrangement involving
a relatively constant percentage mark-up on selling price could
well be favorable to both groups. This pricing method seem-
ingly would be desirable from the standpoint of the concentrate
industry, and perhaps acceptable to the retail trade as well.

"12 Certainly, it is not meant to imply that the industry should expand
concentrate output unduly in periods of long supply without consideration
of costs and returns. The shape of the revenue function, however, suggests
that an attempt on the part of the industry to stabilize income over time by
withholding a part of the supply during long years and disposing of it in
short years may well result in a lower income over time.
The terms "concentrate supplier" and "concentrate industry" have
been usd synonymously in this section. In many cases frozen food distribu-
tors and not concentrators supply the retailer with frozen orange concen-
trate. Charges for the services of such agencies should be reckoned with
in deriving returns to the concentrate industry. However, since little is
known regarding the nature of intermediate distributing costs, these costs
have been ignored. Although the omission of such costs over-simplifies the
analysis, the general principle holds.








Consumer Reaction to Orange Concentrate Prices 27

ACKNOWLEDGMENTS

A study of this type requires the advice, assistance and cooperation of
a large number of people. Although space does not permit the mention of
all who were helpful, particular recognition is accorded the following indi-
viduals whose contributions were of singular importance to the success of
the study:

MANAGEMENT AND PERSONNEL OF THE
AMERICAN STORES COMPANY, PHILADELPHIA, PENNSYLVANIA

Mr. H. D. Williamson, manager of produce operations, who evaluated the
initial request for the cooperation of his firm and spearheaded the move-
ment to make facilities available.
Mr. Paul V. Cupp, then vice-president in charge of sales and now president,
who saw the importance of the work to the Florida citrus industry and,
in the face of the many adversities anticipated when the study was
being planned, gave the final permission for it to be conducted in
stores under his jurisdiction.
Mr. Earl L. Zeigler, produce supervisor, who was responsible for liaison be-
tween the researchers and his company and unfailingly gave the study
his enthusiastic support and invaluable assistance.
The authors are also most grateful for the courtesy, patience, sympathy
and understanding of the following personnel of the retail stores in which
the study was conducted:
Dominick Gioscio, Thomas Redding, Mrs. Mary Alice Roberts, Louis
Colvell, Rudolph Sandhoff, John Szalay, David Maze, Edward Bossio, Robert
Irwin, Richard Denney, John McCormack, Harry Burness, George and
Clifton Frake and Thomas Clark.

OTHERS

Dr. R. L. Anderson and Dr. H. L. Lucas, Department of Experimental Sta-
tistics, North Carolina State College, developed the experimental de-
sign used in the study and rendered valuable advisory assistance in the
preliminary phases of the analysis.
Mr. W. G. O'Regan, Department of Agricultural Economics, University of
Florida, supervised the statistical analysis and gave freely of his ex-
cellent advice and assistance during all phases of the work.
Dr. H. G. Hamilton, Head, Department of Agricultural Economics, Univer-
sity of Florida, bore the brunt of the administrative burden which the
study created.

To these, and to many others, the authors are deeply grateful.





Full Text

PAGE 1

CONTENTS Page SUMMARY .. --..--...---.. .------------.......--.....------. -.. ........ 3 INTRODUCTION .---.......... --..--..------... --..-----...........-...... 5 PROCEDURE ....--...--. ---..-......--.-----..-....-------------........ 6 SETTING FOR THE EXPERIMENTAL TESTS ...........-.....-..... ................. 11 Description of the Market Area ..---........-...... -..................... 11 Characteristics of Retail Stores .............. --........................ 12 Volume of Citrus Products Handled ..--.................---.......-...... 14 VARIATION IN CUSTOMER PURCHASES AND EXPENDITURES AT SELECTED PRICES .--.........-...-----....... -----........................ 16 Price-Quantity Relationship ....................--.--......----..-....... 16 Revenue Aspects of Demand ......--..... ---..........---.....-.... 20 ACKNOWLEDGMENTS .....-------......--...------........ ... -................... 26



PAGE 1

22 Florida Agricultural Experiment Stations While the character of the demand for frozen orange concentrate was such that gross revenue increased as prices moved in either direction away from the pivotal point of about 12.5 cents per can, the revenue position of the retailer will depend upon the prices he must pay for the product. Clearly, then, the gross net revenue of the retailer (his total revenue less the actual cost of goods sold) would diminish as frozen orange concentrate was sold at successively lower prices, unless the price he paid for frozen orange concentrate also declined. The test prices employed in this study represented in some instances rather extreme departures from existing market conditions and from the experiences of retail store operators. Under these circumstances the behavior of retail margins, if these prices were to actually prevail in the market, cannot be predicted with certainty. However, it is appropriate to examine the revenue position of the retailers and concentrate suppliers under two sets of assumptions regarding the possible behavior of margins if the test prices were to prevail in true market situations. These assumptions are: (a) under all price conditions the margin of the retailer will be a constant percentage of the selling price, and (b) under all price conditions the retail margin will be a fixed amount per can. With the given demand relationship, a constant percentage margin on selling price would have yielded retailers a larger gross profit at prices both above and below the point of minimum total revenue (Figure 6). Table 7 demonstrates the division of the gross revenue at retail between the retailer and the supplier of concentrate if retailers had taken, at the various test prices, a margin of 20 percent for their services.10 Since under the assumed conditions suppliers would have received the remainder of the gross receipts not absorbed by the retailer in the 20 percent margin, they also would have received a larger gross return as prices diverged in either direction from the point of lowest total revenue. Should retailers maintain a constant absolute mark-up at all price levels, the division of gross receipts between retailers and concentrate suppliers would be quite different. The effect of charging a constant absolute margin of 3.3 cents per can on the "1o The assumed margin of 20 percent, which amounted to 3.3 cents per 6-ounce can, approximated the actual margin retailers were obtaining for frozen orange concentrate at the time of the study. Hence, both the assumption regarding a constant percentage margin and the following one which supposes a constant absolute margin are based on separate aspects of the same actual margin.



PAGE 1

Consumer Reaction to Orange Concentrate Prices 23 REVENUE (Dollars per 100 customers) 4.00 3. 00 _ Gross revenue 1.00 2.00 1.60 20% gross margin 8.5 10.5 12.5 14.5 16.5 18.5 20.5 PRICE (Cents per 6-ounce can) Fig. 6.-Revenue position of the retailer at varying prices with an assumed gross margin of 20 percent on sales. REVENUE (Dollars per 100 customers) 4.00 Gross revenue 3.00 2.00.3.3 cents gross margin 8.5 10.5 12.5 14.5 16.5 18.5 20.5 PRICE (Cents per 6-ounce can) Fig. 7.-Revenue position of the retailer at varying prices assuming a margin of 3.3 cents per can.



PAGE 1

20 Florida Agricultural Experiment Stations chased would have been exactly inversely proportional to a change in price. This point was estimated to be at a theoretical price of 12.35 cents per can. At all prices higher than this amount the demand for frozen orange concentrate was "inelastic". That is, price changes resulted in less than proportionate changes in customer purchase rates. Below 12.35 cents per can the demand was "elastic", or the customer purchase response to a price change was more than proportionate. Thus, according to information obtained in this study, the transition from a condition of elastic to inelastic demand (or the reverse) occurred at the pivotal price of about 12.5 cents per can. The fact that customers are quite responsive to price changes at prices below 12 or 13 cents per can, and progressively less responsive to price changes as the selling price is increased above this general level, is of particular significance both to the concentrate industry and to retailing organizations. A relationship of this type suggests that, at prices below 12.5 cents, the market will absorb increasingly larger-than-normal stocks at a diminishing sacrifice in terms of price. On the other hand, short supply situations would be especially rewarding to the citrus industry, since consumers apparently are reluctant to cease purchasing a certain amount of concentrate even in the face of sharp price increases. Revenue Aspects of Demand.-The concept of demand elasticity is important in the analysis of marketing problems because of its usefulness in predicting what will happen to revenue from the sale of a given commodity as prices and the quantities available to consumers vary. If it is known that, for a 1 percent increase or decrease in price, purchases will correspondingly decrease or increase by less than 1 percent (i.e., that the demand is inelastic), it follows that the total revenue will rise with price increases and fall with price decreases. On the other hand, if changes in purchases are proportionately larger than price changes, revenue will decline as prices rise and increase as prices fall. The amount of money spent for frozen orange concentrate per 100 customers at the various test prices is shown in Figure 5. When the product was sold at prices progressively lower than 13.5 cents per can, total expenditures per 100 customers increased. In like manner, expenditures increased as prices successively higher than 13.5 cents per can were charged for the product.



PAGE 1

Consumer Reaction to Orange Concentrate Prices 25 revenue position of the retailer is shown in Figure 7. Under this assumed condition, the division of the gross receipts from concentrate between the retailer and the supplier is presented in Table 8. In this case, the supplier would receive proportionately less of the gross retail receipts during periods of large supplies and, consequently, low prices. Retailers, on the other hand, would obtain a smaller proportional share of the gross receipts when supplies were short and prices high. Gross profit to the retailer would rise as prices fell and decline as prices rose. Returns to suppliers, however, would bear the opposite relation to price. Because of a lack of information, the nature of the costs incurred by retailers in handling various quantities of frozen orange concentrate is largely a matter of speculation. Yet, it is apparent that these costs should be considered in pricing the product. The revenue relationships observed in this study indicate that, if handling costs per can for small volumes had decreased rapidly as the quantity handled increased and for somewhat larger volumes had tended to gradually decline, something approaching a constant percentage mark-up on selling price would have served to reduce variation in net profit over the several levels of volume.1 If, however, handling costs had increased slightly with an increase in volume over the range of volumes experienced in the study, a relatively constant absolute mark-up would have maintained net profit at a near stable level. Perhaps, except for quantities of concentrate much greater than the largest encountered in this study, the assumption of decreasing handling cost would appear to be the most plausible. If handling costs were of this nature, a percentage margin which showed little variation would tend to maintain not only retail profit but also gross revenue to concentrate suppliers, in periods when concentrate stocks were above normal and prices were low. Provided the demand relationship established in this study reflects the real nature of the demand for frozen orange concentrate, a policy of restricting the amount marketed during years when concentrate was in long supply would be likely to result in "1 More precisely, since decreasing total cost with increasing volume is not a realistic assumption, a constant percentage margin would yield a net profit that declined somewhat with an increase in volume at prices for which demand was inelastic. After demand became elastic, however, a relatively stable net profit could be realized as larger quantities were sold at lower prices provided handling costs were as described.



PAGE 1

Consumer Reaction to Orange Concentrate Prices 13 to $23,827 for the week beginning July 26 (Table 3). Sales in the produce department, which included frozen fruits, vegetables and juices as well as fresh products, ranged from $3,752 to $2,505 weekly. Average weekly sales in the grocery department varied from $16,711 to $14,197 and those of the meat department ranged from $8,672 to $6,820. The distribution of sales among the three departments of the test stores and a comparison with a national average for stores of the supermarket class are given in Figure 2. Grocery department sales in the 10 stores accounted for 59 percent of the total, while sales in the meat and produce departments amountd to 29 and 12 percent, respectively. In these stores, meat and produce .sales were slightly more important than in the average U. S. supermarket, whereas grocery sales were somewhat less important in terms of total dollar volume. 10 Test Stores q .' l.:::*:: .2.. 2 .0. 12.2 Grocery Meat Produce All Supermarkets"a 0 10 20 30 40 50 60 70 bO 90 100 Percent Fig. 2.-Distribution of total sales among departments, 10 retail food stores, Delaware Valley area, June 7-August 7, 1954. "Based on a survey of food retailing operations of the Super-Market Institute for the year 1953; The Super-Market Industry Speaks, 1954. The volume of store traffic, or number of customers served, provides an additional indication of the size of the food stores employed in the study. About 5,500 customers passed through each of the test stores during an average week (Table 4). About two-thirds of the total store traffic was concentrated in the last three days of the week. Friday was the peak day from the standpoint of customer traffic. An average of 1,468 customers, 27 percent of the weekly total, was served by each store on this day. Each of the first three days of the week accounted for 10 to 11 percent of total store traffic. From the beginning of the study on. June 7, 1954, until its termination on August 7, the 10 stores served a total of 494,967 customers. Since each store customer may be regarded as a potential purchaser of citrus products, it is evident that the response to the five price levels tested is indicative of the reactions of a comparatively large number of individual shoppers.



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Consumer Reaction to Orange Concentrate Prices 9 Thus, the absolute price differences between the three brands remained the same regardless of the price level tested. In addition to 6-ounce containers, the cooperating organization marketed a 12-ounce can of orange concentrate under its private label. The price of concentrate per ounce in this container was slightly less than for the 6-ounce can bearing the same label. Price treatments applied to the 12-ounce unit were varied proportionally to those for the 6-ounce can of the same brand. A translation of the price differentials into the actual retail prices employed in the study is given in Table 1. The price testing technique was especially designed to facilitate the isolation of price effect upon consumer purchase rates. Because orange concentrate is a storable commodity, it was necessary in constructing the experimental design to take cognizance of the possibility that some consumers might purchase above-normal supplies at low prices in anticipation of higher future prices. Furthermore, the possibility existed that the consumer response to a particular price treatment might be dependent upon the level of prices prevailing prior to its introduction. Either separately or in combination, the existence of such conditions would have given rise to "carry-over" effect-that is, a situation in which considerations other than the current price influenced customer purchase rates. Provision was made in the experimental design for the dissipation of possible "carry-over" effect by continuing the same price treatment in each store for a period of several weeks. A schematic representation of the experimental design employed in the study is presented in Table 2. The pricing system used in the study consisted of four distinct periods. During the first week of the study, prices in all stores were maintained at the prevailing market level.4 This was followed by a second period of 3-week duration in which each of the five test prices was maintained in 2 of the 10 sample stores. The third period involved a re-establishment and maintenance of the original market price in all stores for two weeks. In the fourth period, each of the five price levels was again established in 2 stores for three weeks.5 'The only difference between the normal store operations during this week and those prior to the initiation of the study consisted of (a) standardizing the pricing system to conform to the procedure to be employed throughout the pricing tests (i.e., pricing frozen orange concentrate in units of two cans), and (b) maintaining normal displays of each type of the product to assure that inadequate supplies would not be a factor influencing sales. " Price treatments for the second and fourth periods were randomly assigned to the individual stores, subject to the restriction that a particular price treatment could not be employed in the same store during both periods.



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Consumer Reaction to Orange Concentrate Prices 19 when the price of a product is relatively low, but rather insensitive to price changes when it is expensive. Or, they might react in an entirely different manner. This demand characteristic, which reflects consumer sensitivity to price change, is best measured in relative terms. Treated in this fashion, consumer response is expressed in terms of the percentage change in purchases associated with a 1 percent change in price. Since this relative measure is independent of the quantitative units involved, it has more general applicability in analyzing marketing problems. The customer response to price changes was relatively small when frozen orange concentrate was sold at high prices. As successively lower prices were introduced, customer purchases reflected an increasingly larger response to price changes (Table 6). Customers were most sensitive to price changes at the lowest price interval of 8.5 to 10.5 cents per can. Within this interval, purchase rates changed approximately 1.55 percent with a 1 percent change in price. TABLE 6.-CUSTOMER RESPONSE TO PRICE CHANGES FOR FROZEN ORANGE CONCENTRATE AT DIFFERENT PRICE LEVELS. Percent Change in Purchases Price Interval Associated with a 1 Percent Price Change * 16.5-20.5 .15 13.5-16.5 .59 10.5-13.5 1.06 8.5-10.5 1.55 * For purposes of representing the nature of the customer responses for the respective price intervals, elasticity was computed at the midpoint of each interval. Since elasticity changed rapidly over the range of prices tested, obviously, the midpoint estimates do not provide correct measures of the demand elasticity within such large price intervals. Demand elasticity would assume a number of values from one price level to the next. The character of the demand for concentrate changed materially within the price interval of 10.5 to 13.5 cents per can. At price intervals above 13.5 cents the customer response to a price change was less than proportionate. (That is, a 1 percent price change resulted in a change in purchase rates of less than 1 percent.) On the other hand, at price intervals below 13.5 cents per can, changes in customer purchase rates were relatively larger than changes in prices. Consequently, at some point between the test prices of 10.5 and 13.5 cents, the demand for concentrate was of such nature that a change in the quantity pur-



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26 Florida Agricultural Experiment Stations a loss of revenue to the concentrate industry.1213 The loss in revenue would occur because the character of the demand for the product is such that gross revenue falls at intermediate price levels but increases in both low and high price ranges. In years of above-normal supply, it appears that the concentrate industry would benefit by arranging cooperative promotional programs with retailers. One approach might involve persuading retailers to "push" concentrate in heavy supply situations while at the same time maintaining a relatively constant percentage mark-up on price. Even though a price reduction were required to move the increase in supply, retailers would realize a higher gross profit. Furthermore, if the increased volume lowered the unit cost of retailing the product, retailers would obtain a higher net profit as well. At the same time, the gross revenue to the concentrate industry would also increase. Any number of alternatives might be pursued should the concentrate industry seek to develop a cooperative program with the retail trade for the purpose of coping with the problem of above-normal supplies. However, specific arrangements mutually beneficial to both interests will be more likely to succeed. Judging from the character of the demand for frozen orange concentrate as determined by this study, an arrangement involving a relatively constant percentage mark-up on selling price could well be favorable to both groups. This pricing method seemingly would be desirable from the standpoint of the concentrate industry, and perhaps acceptable to the retail trade as well. "12 Certainly, it is not meant to imply that the industry should expand concentrate output unduly in periods of long supply without consideration of costs and returns. The shape of the revenue function, however, suggests that an attempt on the part of the industry to stabilize income over time by withholding a part of the supply during long years and disposing of it in short years may well result in a lower income over time. " The terms "concentrate supplier" and "concentrate industry" have been usd synonymously in this section. In many cases frozen food distributors and not concentrators supply the retailer with frozen orange concentrate. Charges for the services of such agencies should be reckoned with in deriving returns to the concentrate industry. However, since little is known regarding the nature of intermediate distributing costs, these costs have been ignored. Although the omission of such costs over-simplifies the analysis, the general principle holds.



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Consumer Reaction to Orange Concentrate Prices 15 TABLE 5.-AVERAGE SALES OF CITRUS AND CITRUS PRODUCTS DURING SELECTED WEEKLY PERIODS, 10 RETAIL FOOD STORES, LOWER DELAWARE VALLEY AREA, 1954. (CONVERTED TO A FRESH FRUIT EQUIVALENT BASIS.) AverI Week Ending age Percent Product I Weekly I of Total June 12 July 10 July 17 Sales I Volume (lbs.) (lbs.) (lbs.) (lbs.) Orange products: Orange juice, single strength .............. 482.7 467.3 469.7 473.2 7.7 Orange juice blended ........ 94.9 70.8 89.2 85.0 1.4 Frozen concentrate .......... 3,227.4 3,111.3 3,782.0 3,373.6 54.9 Hot pack concentrate ....... 62.6 31.2 56.1 49.9 0.8 Fresh oranges ................... 1,690.5 457.0 82.8 823.0 13.4 Frozen blend concentrate. 4.3 8.8 13.7 8.9 0.1 Total ............................ 5,562.4 4,146.4 4,493.5 4,813.6 78.3 Grapefruit products: Grapefruit juice, single strength ............ 600.2 539.8 586.5 575.5 9.4 Grapefruit juice blended. 161.8 120.7 152.1 144.9 2.3 Frozen concentrate ........85.0 75.5 93.5 84.7 1.4 Fresh grapefruit .--........... 665.4 188.3 197.2 381.9 6.2 Frozen blend concentrate.. 8.1 16.5 25.5 16.7 0.3 Total ........................... 1,520.5 940.8 1,054.8 1,203.7 I 19.6 Tangerine products: Tangerine juice, "single strength ........ 95.8 62.4 78.1 78.7 1.3 Frozen concentrate .......... 60.9 49.4 48.6 53.0 0.8 Total .------..................-.. 156.7 111.8 126.7 131.7 2.1 Total all types -7,239.6 5,199.0 5,675.0 6,149.0 100.00



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00 TABLE 1.-PRICING SCHEDULE FOR STORES INVOLVED IN EXPERIMENTAL STUDY OF THE CHARACTERISTICS OF THE DEMAND FOR FLORIDA FROZEN ORANGE CONCENTRATE, DELAWARE VALLEY AREA, JUNE 7-AUGUST 7, 1954. Store _Manner in which Merchandise is Marked Store Number Differential Number (Period II) Private Brand I Nat'l Adv. (Period IV) Pro______It B Packer's Brand Brand 6 oz. 12 oz. 6 oz. 6 oz. 9 -8 2/17 2/29 2/13 2/21 6 10 -8 2/17 2/29 2/13 2/21 1 6 -6 2/21 2/35 2/17 2/25 8 3 -6 2/21 2/35 2/17 2/25 10 S 2 -3 2/27 2/45 2/23 2/31 7 4 -3 2/27 2/45 2/23 2/31 5 8 0 2/33 2/55 2/29 2/37 2 5 0 2/33 2/55 2/29 2/37 3 7 +4 2/41 2/69 2/37 2/45 9 1 +4 2/41 2/69 2/37 2/45 4 ____________.__ -__ I --____ ________________________________ ___________



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10 Florida Agricultural Experiment Stations TABLE 2.-EXPERIMENTAL DESIGN FOR THE STUDY OF THE DEMAND FOR FLORIDA FROZEN ORANGE CONCENTRATE, DELAWARE VALLEY AREA, JUNE 7-AuGusT 7, 1954. Store Period Number I II III IV (______1 week) (3 weeks) (2 weeks) (3 weeks) 1 0 4 0 -8 2 0 -3 0 0 3 0 -6 0 0 4 0 -3 0 4 5 0 0 0 -3 6 0 -6 0 -8 7 0 4 0 -3 8 0 0 0 -6 9 0 -8 0 4 10 0 -8 0 -6 The above differentials represent departures from the base price established for the week of June 7, 1954, and are in terms of 6-ounce cans. Prices for 12-ounce cans were varied proportionately. In order to minimize the disturbing influence of within-store factors that might have affected purchases, a considerable degree of control was exercised over retailing operations pertaining to frozen orange concentrate. The display space devoted to this product was kept comparatively constant throughout the 9-week study. Care was also taken to retain the original space allocation among the various brands and can sizes of orange concentrate that were handled. Furthermore, a special effort was made to see that adequate supplies of each item were on hand at all times in each store. To obviate the necessity for reckoning with the effects of advertising upon customer purchase rates, the cooperating organization refrained from advertising frozen orange concentrate throughout the test period. Since variation in the merchandising policy of different firms (with regard to product assortment, display techniques and pricing practices) could materially affect the results of such a study, the sample units selected were all members of one firm.



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Consumer Reaction to Orange Concentrate Prices 11 THE SETTING FOR THE EXPERIMENTAL TESTS General Description of the Market Area.-The 10 retail food markets employed in the study were located in a relatively small geographic area extending generally along the Delaware River from Trenton, New Jersey, to Philadelphia, Pennsylvania, and frequently referred to as the Lower Delaware Valley. Seven of the 10 stores were located in New Jersey-four in Trenton and one each in Bordentown, Mount Holly and Burlington. The remaining three were located in the Pennsylvania towns of Morrisville, Penndel and Bristol (Fig. 1). Morrisville Bordentown Penndel\ . Bristol / 3 Burlington Mt. Holly Fig. 1.-Geographic area covered by the pricing tests of frozen orange concentrate, June 7-August 7, 1954. In general, the area in which the study was conducted may be characterized as one of intense industrialization. Numerous major manufacturing concerns are located in the metropolitan areas of Philadelphia and Trenton, as well as in Camden, New Jersey. In addition, considerable heavy industry is found along the Delaware River waterway between Trenton and Philadelphia.



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SUMMARY In this study an effort was made to determine the characteristics of the demand for frozen orange concentrate. The basic procedure employed was that of deliberately varying the price of frozen orange concentrate above and below the established market level under carefully controlled conditions. The experimental pricing tests were carried out during the 9-week period June 7 through August 7, 1954. The test prices employed in the study were 8.5, 10.5, 13.5, 16.5 (the prevailing market price at the time of the study) and 20.5 cents per 6-ounce can. The study was conducted in 10 retail food stores in the Lower Delaware Valley area of Pennsylvania and New Jersey. All of the stores involved in the study would be considered large supermarkets by most standards. Total weekly sales per store ranged from $23,827 to $29,134. The weekly sales of produce per store varied from $2,505 to $3,752 during the 10-week period covered by the study. Produce sales averaged 12.2 percent of total store sales. The supermarkets used in the test handled a considerable volume of citrus products. The fresh fruit equivalent of the average weekly sales of these items (excluding lemons and limes) amounted to 6,149 pounds per store. Oranges and orange products accounted for 78.3 percent of the total amount of citrus handled; grapefruit products accounted for 19.6 percent; and tangerine products for the remaining 2.1 percent. Orange concentrate was the single most important citrus item handled. The average weekly volume of this product sold per store was equivalent to 3,374 pounds of fresh fruit and accounted for 54.9 percent of the total volume of citrus handled. Results of the pricing experiment showed marked variation in concentrate purchases over the range of prices tested. At the lowest test price of 8.5 cents for a 6-ounce can, concentrate sold at the rate of 236 ounces for each 100 customers, or the equivalent of 122 pounds of fresh fruit. As the test price was increased, concentrate purchases dropped successively to a low of 111 ounces at the highest test price of 20.5 cents per can. Purchases per 100 customers at this price level amounted to about 57 pounds in terms of fresh fruit. Variations in purchase rates in response to the induced prices indicated that customer sensitivity to price change declined continuously as price was varied from the lowest to the highest test level. Evidently, at the theoretical price of about 12.5 cents, a



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Consumer Reaction to Orange Concentrate Prices 27 ACKNOWLEDGMENTS A study of this type requires the advice, assistance and cooperation of a large number of people. Although space does not permit the mention of all who were helpful, particular recognition is accorded the following individuals whose contributions were of singular importance to the success of the study: MANAGEMENT AND PERSONNEL OF THE AMERICAN STORES COMPANY, PHILADELPHIA, PENNSYLVANIA Mr. H. D. Williamson, manager of produce operations, who evaluated the initial request for the cooperation of his firm and spearheaded the movement to make facilities available. Mr. Paul V. Cupp, then vice-president in charge of sales and now president, who saw the importance of the work to the Florida citrus industry and, in the face of the many adversities anticipated when the study was being planned, gave the final permission for it to be conducted in stores under his jurisdiction. Mr. Earl L. Zeigler, produce supervisor, who was responsible for liaison between the researchers and his company and unfailingly gave the study his enthusiastic support and invaluable assistance. The authors are also most grateful for the courtesy, patience, sympathy and understanding of the following personnel of the retail stores in which the study was conducted: Dominick Gioscio, Thomas Redding, Mrs. Mary Alice Roberts, Louis Colvell, Rudolph Sandhoff, John Szalay, David Maze, Edward Bossio, Robert Irwin, Richard Denney, John McCormack, Harry Burness, George and Clifton Frake and Thomas Clark. OTHERS Dr. R. L. Anderson and Dr. H. L. Lucas, Department of Experimental Statistics, North Carolina State College, developed the experimental design used in the study and rendered valuable advisory assistance in the preliminary phases of the analysis. Mr. W. G. O'Regan, Department of Agricultural Economics, University of Florida, supervised the statistical analysis and gave freely of his excellent advice and assistance during all phases of the work. Dr. H. G. Hamilton, Head, Department of Agricultural Economics, University of Florida, bore the brunt of the administrative burden which the study created. To these, and to many others, the authors are deeply grateful.



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TABLE 7.-REVENUE POSITION OF THE RETAILER ASSUMING A CONSTANT MARGIN OF 20 PERCENT ON SALES. Revenue Price Quantity (per 100 Total Total Per Can Percent (6 oz. cans) customers) Cost Margin Cost Margin Margin 8.5 39.36 $3.35 $2.68 $0.67 6.84 1.74 20 10.5 28.30 2.97 2.38 .59 8.4 2.1 20 13.5 21.59 2.91 2.33 .58 10.8 2.7 20 16.5 19.13 3.16 2.53 .63 13.2 3.3 20 20.5 18.45 3.78 3.02 .76 16.4 4.1 20 S1'+ TABLE 8.-REVENUE POSITION OF THE RETAILER ASSUMING A CONSTANT MARGIN OF 3.3 CENTS PER CAN. S Revenue Price Quantity (per 100 Total Total Per Can Percent S(6 oz. cans) customers) Cost Margin Cost I Margin Margin 8.5 39.36 $3.35 $2.05 $1.30 5.20 3.30 38.8 10.5 28.30 2.97 2.04 .93 7.2 3.3 31.3 13.5 21.59 2.91 2.20 .71 10.2 3.3 24.4 16.5 19.13 3.16 2.53 .63 13.2 3.3 19.9 20.5 18.45 3.78 3.17 .61 17.2 3.3 16.1



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Consumer Reaction to Orange Concentrate Prices 21 REVENUE (Dollars per 100 customers) 4.00 3.78 3.50 3.35 3.16 3.00 -2.97 2.91 2.50 2.00 8.5 10.5 13.5 16.5 20.5 PRICE (Cents per 6-ounce can) Fig. 5.-Total revenue derived from sales of frozen orange concentrate at varying prices, 10 retail food stores, Lower Delaware Valley area, June 7August 7, 1954. The lowest total revenue was obtained at a price of 13.5 cents per can, because customer purchase response to a price change was more nearly proportionate at that price level than at any other test price.9 At 13.5 cents per can a 1 percent price change brought about a change in purchase rates of 0.81 percent. At test prices below this level customers responded to price reductions by increasing their purchases by a more than proportionate amount. Hence, the total revenue (price x quantity) increased as successively lower prices were charged. When higher prices were introduced, consumers failed to reduce their purchases at a rate equal to that of the price increases. Consequently, the total revenue also increased as successively higher prices were charged. The maximum total expenditure of $3.78 per 100 customers was obtained at the highest test price of 20.5 cents per can. "If the elasticity of demand declines as price increases, minimum total revenue from the sale of a product would be obtained at the point of "unitary elasticity". As previously mentioned, this point was estimated to be a price of 12.35 cents per can. When price changes are accompanied by an exactly proportionate change in the quantity taken by consumers, the total revenue (price x quantity) is the same at all prices and for all quantities.



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Consumer Reaction to Orange Concentrate Prices 7 were adopted as a frame of reference for developing a study that would accomplish the desired results. These were: 1. The data should be obtained during a relatively short period in order to avoid the disturbing influence of changing economic conditions arising from such factors as changes in consumer income, taste and preferences and in availability of substitute commodities. 2. The data should reflect customer responses to a wider range of price circumstances than is ordinarily encountered in the existing system of competitive marketing. 3. The data should be obtained under rigidly controlled conditions with regard to pricing and merchandising in order that the effect of price may be isolated from the other variables which may influence the quantity of frozen concentrate that customers buy. Experiences in the previous study of the demand for fresh oranges during the spring of 1952 served as a basis for the development of these criteria. The actual field work for the study involved a measurement of customer response to five predetermined price levels for frozen orange concentrate during a nine-week period extending from June 7 through August 7, 1954. The tests were conducted in 10 retail food stores of one chain located in the Lower Delaware Valley area of Pennsylvania and New Jersey. The price levels tested were: the price in effect at the time the study was initiated; prices 3, 6 and 8 cents per 6-ounce can below the market price; and one, 4 cents higher. Hence, customers in the test stores were subjected to retail prices varying over a range of 12 cents per can.3 All stores included in the sample handled three types of frozen orange concentrate: a nationally advertised brand selling at the highest retail price, a private label 2 cents lower, and a packer's label 4 cents lower than the advertised brand. No distinction was made between brands in applying the various price differentials. For example, if a particular price treatment required a discount of 6 cents per can, the retail price of each brand in 6-ounce containers was lowered by this amount. 3 The price differentials were purposely selected with reference to the market price, so that with the market price included, the series would approximate a geometric progression. With this pricing arrangement, purchases at the different prices would tend to be dispersed uniformly along the derived demand curve and would, therefore, increase the reliability of the estimates based on the extremities of the curve.



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Consumer Reaction to Varying Prices for Frozen Orange Concentrate By MARSHALL R. GODWIN and L. A. POWELL, SR. Associate and Assistant Agricultural Economists INTRODUCTION Within the past two decades the Florida citrus industry has expanded at a spectacular rate. The flow of income into the Florida economy generated by the production, processing and marketing of citrus and citrus products ranks second only to the income derived from tourism. In the three seasons from 1952-53 through 1954-55, Florida produced an annual average of 126 million boxes of citrus fruit, or about 67 percent of the total United States supply. In a comparable three-season period 20 years previously, Florida produced an average of 30 million boxes annually, or about 38 percent of the total U. S. supply. As a result of such phenomenal development, the Florida citrus industry has occasionally experienced "growing pains". From time to time producers have been faced with disastrously low prices resulting from the pressure of the mounting production on the market. Only through vigorous research and promotional programs has it been possible to forestall price depressions that otherwise might have extended over a period of several years and resulted in economic repercussions that would have adversely affected the economy of the entire state. There is little to indicate that the citrus industry in Florida will not continue to expand. In light of past experiences, growers, packers, shippers and processors have shown considerable interest in the accumulation of economic information that will be of assistance in dealing with the future problems arising from increasing production. Through their several industry organizations, various elements of the industry engage in a continuing search for solutions to the problems which they envision in the years ahead. Although the deliberations of industry groups have not been crystallized into a specific course of action, it is evident that the fundamental objectives sought are: (1) a stable market for citrus and citrus products and (2) a price that, in the long run, will yield equitable returns to the producer in relation to other



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16 Florida Agricultural Experiment Stations VARIATION IN CUSTOMER PURCHASES AND EXPENDITURES AT SELECTED PRICES Knowledge that enables predicting customer reaction to various price conditions is the core of an informed pricing policy. This section is devoted to an examination of the relationship between the rate at which frozen orange concentrate is purchased and the price at which this product is sold. It should be helpful in extending the insight of those concerned with the marketing of this product. The measurement of customer reaction to induced prices in terms of purchase rates could not be established without also reckoning with the other forces which influence the sales of frozen orange concentrate in a retail store. Consequently, the mathematical relationship selected to explain concentrate sales took into account not only price, but also several factors to measure effects other than those related to price. However, only the relationship between rates of purchase and prices is dealt with in this report. Since patronage and volume of business varied among the sample stores, the total sales of frozen orange concentrate did not directly reflect the response of individuals to the various test prices. To facilitate interpretation of the results, sales were expressed in terms of quantities purchased per 100 customers.7 Through the use of this procedure, the effect of price upon sales per sales opportunity at the retail level is more readily apparent. Price-Quantity Relationships.-Results of the pricing experiment indicate that concentrate purchases varied markedly over the range of prices tested. The average relationship between prices and customer purchase rates for frozen orange concentrate is shown in Figure 3.8 When the product was sold at 20.5 cents per can, or 4 cents above the prevailing market level, the purchase rate per 100 customers was 111 ounces. As successively lower prices were introduced in the test stores, volume of sales increased. At a test price of 13.5 cents per can, or 3 cents below the prevailing market level, each 100 customers bought an average of 130 ounces of concentrate. At 8.5 cents per can, the lowest SMeasurement of sales in terms of purchases per 100 customers appeared to be an acceptable procedure, because a formal statistical test indicated that the imposed variation in concentrate prices did not significantly affect customer traffic in the sample stores. 8 Interest was centered in the aggregate demand for frozen orange concentrate as a commodity. Since the prices of several brands were involved, the price of the company's private brand was utilized as an index of all concentrate prices.



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Consumer Reaction to Orange Concentrate Prices 17 price level tested, sales were 236 ounces per 100 customers, or more than twice the amount purchased at the highest test price. VOLUME OF PURCHASES (Ozs. per 100 customers) 250 236.2 200 169.8 150 129.6 114.8 111.0 50 8.5 10.5 13.5 16.5 20.5 PRICE (Per 6-ounce can) Fig. 3.-Sales of frozen orange concentrate at varying prices, 10 retail food stores, Lower Delaware Valley area, June 7-August 7, 1954. Many in the Florida citrus industry will be interested in the sales of frozen orange concentrate in terms of the volume of fresh fruit which consumers can be induced to take at different retail prices. The translation of concentrate sales into fresh fruit equivalents for each of the prices tested is given in Figure 4. When concentrate was sold at a test price of 20.5 cents per can (4 cents above the prevailing market level), the fresh equivalent of sales was 57 pounds of fruit per 100 customers. At the prevailing market price of 16.5 cents per can, each 100 customers purchased the product in quantities equivalent to 59 pounds of fresh fruit. At a price 3 cents per can below the prevailing market, sales per 100 customers were equivalent to 67 pounds. As the price was reduced further to 10.5 cents per can, each 100 customers purchased the equivalent of 88 pounds of fresh fruit



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Bulletin 589 August 1957 UNIVERSITY OF FLORIDA AGRICULTURAL EXPERIMENT STATIONS J. R. BECKENBACH, Director GAINESVILLE, FLORIDA Consumer Reaction to Varying Prices for Frozen Orange Concentrate By SMARSHALL R. GODWIN and L. A. POWELL, SR. Associate and Assistant Agricultural Economists FEB 28 1951 Single copies free to Florida residents on AGRICULTURAL EXPERIMENT STAT GAINESVILLE, FLORIDA



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12 Florida Agricultural Experiment Stations Population density and employment opportunities in the Lower Delaware Valley area are fairly typical of northeastern industrial sectors, which are the major market outlets for Florida citrus and citrus products. For this reason the area was deemed an appropriate locale for the study. Characteristics of the Retail Stores.-By any commonly accepted definition, all of the retail stores employed in the study would be regarded as supermarkets.6 All contained three distinct departments-grocery, meat and produce. In all cases, each of these departments was operated essentially on a self-service basis. However, customers frequently received clerical assistance in connection with their purchases of meats and fresh fruits and vegetables, and were at liberty to request special items or services from either of these departments. In each store customer purchases were handled through a central check-out system which served all departments. TABLE 3.-AVERAGE WEEKLY SALES PER STORE AND BY DEPARTMENTS, 10 RETAIL FOOD STORES, LOWER DELAWARE VALLEY AREA, JUNE 7-AUGUST 7, 1954. Week Department Total Beginning Grocery Meat Produce | (dollars) June 7 15,449.15 7,853.66 3,342.81 26,645.62 14 16,353.30 8,429.28 3,419.29 28,201.87 21 15,047.68 7,423.60 3,407.82 25,879.10 28 16,710.67 8,671.82 3,751.64 29,134.13 July 5 14,494.03 7,090.42 2,993.48 24,577.93 12 15,703.74 7,301.75 3,429.16 26,434.65 19 15,101.61 7,234.28 2,936.47 25,272.36 26 14,197.21 6,819.81 2,809.71 23,826.73 Aug. 2 14,688.83 7,062.26 2,504.81 24,255.90 From the standpoint of sales volume, all of the 10 stores were relatively large food retailing operations. Average weekly sales per store ranged from $29,134 during the week beginning June 28 " A commonly accepted definition of a supermarket is: "A complete, departmentalized food store with a minimum volume of $500,000 a year and at least the grocery department fully self-service." The Super-Market Industry Speaks, 6th Annual Report of the Members of the Super-Market Institute, Chicago, Illinois, 1954.



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18 Florida Agricultural Experiment Stations in the form of concentrate, or approximately one box. At the lowest test price of 8.5 cents, sales per 100 customers increased further to the equivalent of 122 pounds of fresh fruit. VOLUME OF PURCHASES (Pounds per 100 customers) 160 140122.1 120 100 87.8 80 67.0 60 yi59.3 57.2 40 200 8.5 10.5 13.5 16.5 20.5 Price (Per 6-ounce can) Fig. 4.-Fresh fruit equivalents of sales of frozen orange concentrate at varying prices, 10 retail food stores, Lower Delaware Valley area, June 7August 7, 1954. Presumably, at low price levels customers can be induced to substantially increase their consumption of oranges in the form of concentrate through the use of price reductions at the retail level. At high price levels, however, it appears that price reductions will have a relatively small effect upon the volume of oranges which consumers can be induced to take in this form. It is characteristic of the economic behavior of individuals that as the price of a product declines their purchases increase. Conversely, as the price increases, their purchases become smaller. The "demand" for a product refers to the quantities of that product consumers will buy at various prices. The nature of the demand for a product may be such that the rate at which customers increase or decrease purchases in response to a change in price differs substantially as prices vary over a wide range. For instance, customers may be quite sensitive to price changes



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6 Florida Agricultural Experiment Stations enterprises requiring comparable resources and involving equal risks. The means of obtaining these objectives are the source of much controversy both within and without the Florida citrus industry. Many regard an industry-wide system of controlled marketing as the only feasible approach. There is considerable need for certain economic information in evaluating the possibilities of a market control program as a means of obtaining the objectives sought by the industry. Of fundamental importance in this connection is information concerning the characteristics of the market demand for each of the major citrus products. The principal objective of this report is to furnish information relating to the retail demand for Florida's most important citrus product-frozen concentrated orange juice. This is the second in a series of research projects being conducted by the Florida Agricultural Experiment Stations for the purpose of establishing demand relationships for the major Florida citrus products. The initial study was undertaken during the spring of 1952 and dealt with the characteristics of demand for fresh oranges.' Both the previous and the present study utilized relatively new and controversial approaches to the problem of studying the nature of the demand for an agricultural commodity. In a sense, each may be regarded as a preliminary venture that will provide a source of methodological information for more comprehensive investigations of the demand for citrus products on an area or a national basis. However, the results may be taken as generally indicative of the response, in terms of consumer purchases, to varying price levels for citrus products. PROCEDURE Prior to the initiation of the field work, much consideration was given to the problem of obtaining data that would be of practical value to the Florida citrus industry in dealing with its economic problems. Special attention was therefore given to the development of a procedure that would exclude some of the more objectionable weaknesses of the usual types of demand analyses.2 In the planning phase of the project, three criteria 1 Marshall R. Godwin, "Customer Response to Varying Prices for Florida Oranges", Florida Experiment Station Bulletin 508, December, 1952. 2 A full explanation of the economic model and the analytical techniques employed in this study is given in Florida Agricultural Experiment Station (Technical) Bulletin 592, Experimental Pricing as an Approach to Demand Analysis (A Study of the Retail Demand for Frozen Orange Concentrate) by L. A. Powell, Sr., William G. O'Regan and Marshall R. Godwin.



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14 Florida Agricultural Experiment Stations Volume of Citrus Products Handled.-When considered in the aggregate, the supermarkets employed in the test handled a considerable volume of citrus and citrus products. The fresh fruit equivalent of the average weekly sales of all citrus products (except lemons and limes) amounted to 6,149 pounds per store (Table 5). Of this amount, 4,814 pounds, or 78.3 percent, consisted of oranges and orange products. The sales of fresh grapefruit and the fresh fruit equivalent of grapefruit products ac(counted for 1,204 pounds, or 19.6 percent of the total volume. The weekly sales of tangerine products were the equivalent of 132 pounds of this fruit and represented 2.1 percent of the total sales of citrus products. TABLE 4.-DISTRIBUTION OF TOTAL CUSTOMER TRAFFIC AMONG DAYS OF THE WEEK -10 RETAIL FOOD STORES, LOWER DELAWARE VALLEY AREA, JUNE 7-AUGUST 7, 1954. Weighted Day of Week Total Number Number per Percent of of Customers Store per Week IWeekly Total Monday 50,230 558.11 10.15 Tuesday 54,863 609.59 11.08 Wednesday 54,461 605.12 11.00 Thursday 99,671 1,107.46 20.14 Friday 132,088 1,467.64 26.69 Saturday 103,654 1,151.71 20.94 Total 494,967 5,499.63 100.00 The single most important citrus item from a sales volume standpoint was frozen orange concentrate. Weekly sales of this product per store averaged the equivalent of 3,374 pounds, or about 37.5 packed boxes of fresh oranges. Frozen orange concentrate accounted for roughly two-thirds of the total sales of oranges and for 55 percent of the total sales of all citrus fruit in these stores. Fresh oranges were second in importance from a volume standpoint. Average weekly sales of this product per store amounted to 823 pounds. Third in importance was single strength grapefruit juice with average sales equivalent to 575 pounds of fresh fruit. Other major items, in order of importance, were single strength orange juice, fresh grapefruit and the grapefruit juice used in the preparation of blended juices.



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4 Florida Agricultural Experiment Stations 1 percent change in price would have been accompanied by a 1 percent change in purchases-increasing by this amount if price decreased and decreasing if price increased. At test prices below this level, demand grew more elastic. That is, consumers became increasingly sensitive to price change as lower test prices were introduced. Changes in the rate of purchase were proportionally larger than changes in price. But at test prices above 12.5 cents per can, a 1 percent change in price resulted in less than a 1 percent change in the purchase rate-with the effect diminishing, the higher the price. Because demand elasticity diminished as price rose, minimum revenue from concentrate sales theoretically should have occurred at the price associated with a demand elasticity of unity, i.e., at about 12.5 cents per can. However, since this price was not among those tested, minimum revenue was realized at the test price of 13.5 cents per can. This occurred because the elasticity figure linked with the price of 13.5 cents approximated unity more closely than did the elasticity related to other test prices. Hence, revenue obtained at the various test prices increased as these prices diverged from 13.5 cents in either direction. The elastic character of the demand for concentrate in low price ranges suggests that it may not be in the interest of the concentrate industry to attempt to increase revenue during periods of long supply by reducing the quantity marketed. Perhaps more could be achieved by arranging cooperative promotional programs with the retail trade as a means of moving above-normal supplies. A desirable arrangement would require a pricing method in the promotional program mutually beneficial to both. the concentrate industry and retailers. If retail handling cost per can declined moderately with the increased volume, an approximately constant percentage mark-up on selling price would appear to meet this requirement. Under these circumstances, net profit to the retail trade as well as gross revenue to the concentrate industry would be maintained.