High Profit Margins on New Products | AQA Q3.1, Paper 2 2019

Here is a suggested answer to the 9-mark question on the factors that help a business achieve high margins on new products.

ANSWER 1

Galin’s large investment in R&D means more process and product innovation that supports high profit margins[Pe]. Galin’s R&D investment of around $1.8bn per year is likely to involve both process innovation and product innovation. R&D investment in process innovation should identify efficiencies such as more automated production of shampoo and sprays which will help reduce the unit costs of all products, including new ones, which in turn should improve the profit margin on all products made using these improved processes. Similarly, investment in product innovation leads directly to new product development. R&D might, for example, identify ways to offer more environmentally-friendly cleaning liquids or recyclable gel containers. Galin’s customers, who are likely to be loyal to one or more of its 50 brands, may then be prepared to pay a higher price for these new, more innovative cleaning and care products, thereby keeping profit margins high.

Galin’s ownership of patents is another way make high profit margins on new products [Pe]. Galin has a substantial number of patents across its diverse consumer product categories and more will be applied for as R&D spending continues. Patents should discourage competitors such as P&G and Unilever from trying to copy or imitate Galin’s most successful products for up to 20 years. It might also help Galin’s patent-protected products if they have a unique selling point such as a patented-method of dispensing toothpaste or a mouthwash formula. If Galin’s new products use these patent protections, then they may be able to charge higher selling prices and achieve higher profit margins for a long period without the risk of competitors copying the product and undercutting Galin’s margins.