Week 9: The Culinarian Cookware case

Culinarian cookware is a successful company with biggest market share in the premium cookware market. The company’s goals in 2006 are to (1) widen its distribution network, (2) increase its market share in premium cookware segment, (3) preserve prestigious image, and (4) continue to grow topline at 15% while maintain pretax earnings margins of 12%.

Would price promotion create value and help the company achieve these goals?

On one hand, price promotion can accelerate customers’ response and awareness. On the other hand, price promotion can lead customers or channel members to be more price sensitive, posing a potential threat to brand equity and profitability.

Donald Janus, the VP of marketing of Culinarian, sees that price promotion devalue the products and is unnecessary to achieve the goals. Victoria Brown, the senior sales manager, however, believes that price promotion would boost overall brand awareness, increase the sales volume, and lead to positive profitability.

Consulting study shows that price promotion during March – May 2004 had a negative impact on the profits. Brown felt that, under the right assumptions, the promotion should make a positive profit contribution.

I think that Brown’s objections are not valid.

First, Brown’s “normal” sales forecast of 24% below the 2003 sales seems too low (see Figure below for the accumulated actual and forecast units). It does not well capture the seasonal impact on the sales which tend to increase around April and May. The 2002 sales increased significantly during this period. The increase rate in 2003 is not as high as that in 2002, but using Brown’s forecast would result in even lower increase rate. The consultant’s forecast, on the other hand, follows the high increase rate achieved in 2002. I think the sales forecast should be in between Brown’s and Consultant’s forecast, following about the same trend line as that in 2003 but with a bit higher slope.

Second, Brown’s assumptions of 59871 units, $38.64 variable cost, and no cannibalization costs result in a negative profit contribution of $82.7K, not a positive profit as she expected (see Table below). The profit contribution would be even more negative if the normal sales were actually higher than what she forecasted.  

From financial perspective, price promotion is clearly not effective in achieving the goals in this case. Moreover, the price promotion is not consistent with the company objectives. It devalues the prestigious image of the brand which is in contrast to the company’s goals.

I think that trade relationship is a key factor to help company meet the goals. The company’s products were sold through multiple distribution channels (see Figure below). When Culinarian executed price promotion in 2004, it was not successful at managing the supply chain and enforcing the price arrangement with the channel partners. Without collaboration from the channel partners, there is no guarantee that the discount is passed along to the consumers and generates consumers’ awareness and response as expected.

Culinarian should not run price promotion, but should consider other ways to promote its products.

For majority of consumers, price is important but not that significantly important. Market research on cookware shows that quality is ranked one and price is ranked three in order of importance, and more than half of consumers have received cookware as a gift or purchased it as a gift. Instead of price promotion, Culinarian should consider other promotion techniques such as providing gift card, offering something extra to enhanced product’s value, or giving retailer financial reasons to support the product. Rather than reducing price, Culinarian should focus on advertising to increase the perceived value. In addition, research shows that 50% of consumers favor a brand of cookware they recognize. So Culinarian should also consider other ways to improve brand awareness, for example by partnering with popular cooking television shows.

Week 8: Firm/Product with Effective Marketing Mix

Seattle is to coffee as Alaska is to snow and New York is to bagels.

In Seattle, you could find a coffee shop almost every corner of the road. Yet, Starbucks makes a difference.

Whether it’s a rainy day or a sunny day, a weekday or a weekend, the original Starbucks is always, always crowded. Picture below is a typical day at the original Starbucks at Pike Place Market, Seattle. No matter how many coffee shops we have here, Seattle’s visitors still go there, take photos, and enjoy being in the original Starbucks. So it seems that Starbucks is not just about coffee after all.

From a small coffee shop founded in 1971, Starbucks Coffee Company has grown into the largest coffeehouse company in the world with more than 17,000 stores in 55 countries worldwide¹. Starbucks holds about one third of the market share for coffee in the US. The company’s primary target audience are men and women aged 25 to 40. They account for almost half of its total business. The secondary target audience are young adults, which account for about 40% of Starbucks’ sales.

Starbucks have their own coffee farms and harvesters, their own roaster, and recipes. The company sells not only coffee, but also hot and cold drinks, coffee beans, salads, sandwiches, snacks, and items like mugs, t-shirts, and tumblers. Starbucks also sells a wide range of products in grocery stores such as bottled Starbucks drinks, Tazo teas, Starbucks ice cream, and Starbucks energy plus coffee drinks. The company also has an entertainment line that sells books, music, and film.

What make Starbucks so successful? I don't think that products alone would do. Starbucks provides not just coffee. But Starbucks has created a “Starbucks lifestyle” that more people continue to embrace in the US and abroad. The primary key to Starbucks’ success is and has always been “people”. The company has set up a business model with core values emanating from and around relationships with people. It is the key that sets Starbucks apart from other companies today.

Starbucks coffee is not cheap. Price is one key factor that could greatly impact the company performance, especially during the economic downturn or when competition is heating up. During economic crisis and increased competition (e.g. when McDonald and Dunkin’s Donut entered the quality coffee market), Starbucks revenues fell significantly. Starbucks’ stock fell from around $40 per share in 2007 to less than $10 in late 2008.

Starbucks is able to contend with the enhanced competition by adjusting its marketing plan to showcase its premium quality and remind loyal customers of other competitive advantages. With a focus on strategic global expansion and providing customers with the “distinctive Starbucks experience”, the company is now able to find its way back to the top and its stock price rise more than three-fold the low point in 2008.

When asked what he saw in Starbucks, Howard Schultz, the company’s CEO said “I see a deep sense of community. We've intended, from day one, to really kind of build a third place between home and work. And really, I think at a time in America where people are hungry for human connection, we're providing that.”²

Starbucks has very effective marketing communications strategies, from consistent branding, creating online and web experience, to integrated communications across multiple channels such as social media, emails, etc. Starbucks website serves as the hub of experience where consumers can share ideas and feedback to the company. Starbucks's loyalty program and mobile app are also very successful. The mobile app creates value to customers by providing enjoyment/entertainment and chances to win a prize, while it increases sales since customers have incentive to buy more items to increase their chances of winning the prize. The in-store and product experince, the mobile and online activities, and the loyalty programs, all are linked together - creating great human connection and making Starbucks different.

Good lessons to learn from Starbuck: http://www.powerhomebiz.com/vol144/starbucks.htm

¹http://en.wikipedia.org/wiki/Starbucks

²http://www.cbsnews.com/stories/2011/03/27/sunday/main20047618.shtml

Week 8: Pricing/Channel and IMC

I am a little late for Week 8 study, but I am going to catch up in Week 9.  This week I have been working on two case memos, Cleopatra for this class and another one for IT management class. I was supposed to finish the Cleopatra case memo last weekend, but the due date moved and I was too enjoyed analyzing the case to stop before the due date. So I ended up working on two case memos this week and haven’t spent enough time on Week 8 materials.

I just finished watching the two Camtasia videos on marketing channels and IMC. I’m so impressed with Zara. I did a case study on Zara early this quarter in the IT management class. Their business model is simple but so powerful.

The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by.

 Jose Maria Castellano Rios, Inditex CEO  

With their ability to intertwine distribution, manufacturing, and customer demand along the supply chain, it is no surprise that Zara has become so successful. They innovated how to use the channel! While most fashion businesses try to increase revenue by better forecasting, Zara  creates value through better management of their VDN. Unlike their competitors, Zara does not have to rely on accurate sales forecasts and try to predict what customers want months ahead. With retailing and manufacturing closely linked together and flexible factories with short lead times, Zara could continuously sense what customers want and just respond on the fly.

Reflection on week 8 materials to be added…

Week 7: Cleopatra Case Study

This week I am doing the individual case memo on Cleopatra. I think the case is very interesting - a successful product launch in one place does not guarantee success in another, even the consumers look the same. I enjoyed the discussion during the breeze. Now I'm trying to consolidate those ideas into the memo. 

Week 6: Product Development Management

According to Kotler, product is composed of three different levels: core, actual, and augmented. The core product is the core benefit that consumer seek, the actual product is tangible product that the target market recognizes as an offer, and the augmented product is supported by additional  consumer benefits and services.

(Ashok Jain, “Principles of Marketing”, page 163)

For example, I have SONY cyber-shot digital camera. The core product is the ability to take pictures and record videos.  The actual product is the camera which has the following characteristics: SONY cyber-shot brand, stylish design, features (9 megapixel result, 20x optical zoom, high speed shooting, advanced image processor, panorama mode, etc), and high quality. The augmented product includes warranty, technical support, and online product support.

Another example is my TOYOTA Camry. The core product is the ability to go anywhere at any time. The actual product is the car which has the characteristics:  TOYOTA Camry brand, luxurious design, features (hands free system, multiple airbags, ABS, etc), and high quality and reliability. The augmented product includes fianance, warranty, and customer service support.

Products are tools that provide consumer benefits and they can be obsolete when there is a better tool that provides the same core benefit.   For instance, cassette tapes and Walkman had been widely used until in the 1980s and lived up to 1990s when the CDs and CD players took their place. The CDs and CD players were widely used in the early 2000s and then headed for decline as MP3s and MP3 players and iPOD came out. Another example is the VHS tapes and VCRs that now almost vanish from the market due to the entry of DVDs and DVD players. As technology advances into HD DVD and Blu-ray and 3D, the old DVD players are replaced by HD-DVD/Blu-ray 3D players.

There are several other products that have become obsolete. Type writers have been replaced by computers and printers. Film cameras were replaced by digital cameras. Pager had been replaced by cell phone, which is now getting replaced by smart phone.

While I am studying Chapter 6 on the product development and product life cycle, I come across the cartoon below in my friend’s facebook. It's about how thinkgs have changed, which somewhat relates to product becoming obsolete that we learn in this chapter :)

New product development process typically comprises 6 to 8 steps including ideation, screening, concept development and testing, marketing strategy development, business analysis, product development, test marketing, and commercialization. The first five steps (from ideation to business analysis) involve relatively low incremental cost. After moving into step 6, the process will involve large cost. So it is expected to see the products that get into step 6 achieve a high chance of success (e.g. at least 60%). 

Following the product development process is the product life cycle of introduction, growth, maturity, and decline. If products have shorter life cycle, company needs to develop new products more frequently to sustain its position in the market. This would incur higher cost of product development which likely to lead to lower profit. It is crucial for the company to make decision about new products and life-cycle movement to minimize cannibalization. The product life cycle also depends on industry. For high-tech industry, the products typically have relatively short life cycle.  For example, the life cycle of PDAs is only within a decade.

Week 6: Value Creation

I did enjoy watching Rory Sutherland’s talk. It is hilarious and it gives me insights on how marketing can create value without changing the product. There are tangible value and intangible value. Creating tangible value requires resources such as raw materials or labor. Creating intangible value, on the other hand, requires only a good idea! I get it now - consumer perception is the key. Value of a product can be added just by changing consumer perception, rather than the product itself. As it is stated in one of the immutable laws of marketing by Ries and Trout - marketing is not about products but about perceptions.  It is very interesting to see how making changes in the mix without changing the product can affect the consumer perception.

Ideation is the first step in the new product development process and it has to be based on customer needs and wants. But as David Bell of Chrysler mentioned in his talk, customer needs and wants are hard to understand since customers don’t know what they need. I totally agree. In my work, we cannot just ask the customers what they need and want either. We need to carefully listen to the customers and use our creativity to anticipate what they need and want and lead them there.

When I read Chapter 2 of the marketing handbook, I was greatly impressed with Apple’s keys to success: design savvy, technological innovation, and brand image. It clearly defines Apple direction in just a few words. Reading the article on Apple and innovation, I am amazed that the keys behind Apple’s success story can be summarized in a handful of bullet points. And they sound simple and intuitive. It looks easy to say than to do though. I’ve tried to apply this in the ideation project assignment, and I found that it is not as simple as it sounds to come up with a great product that is simple and different.  

Week 5: The Fashion Channel Case

This week I am going to apply what I have learned about the STDP on The Fashion Channel (TFC) case.

I’ve started working on the case during the winter break. The TFC slide deck from Prof. Talbott provides very helpful guidance for the case study.

The purpose of this case study is to recommend new segmentation and positioning strategy for TFC. TFC’s marketing approach has been “Fashion for Everyone”, i.e. no segmentation. The company had been highly successful to date since it was a widely available niche network. However, when other big players such as CNN and Lifetime enter the market, TFC suffers some market loss. If TFC wants to secure its position as the market leader, it needs to rethink about its segmentation and positioning strategy.

I investigate the pros and cons of the various segmentation strategies and discuss this with the team. The goal of the TFC is to create strong brand value to protect current and future ad revenues. So the TFC should use segmentation to build brand value. Although focusing on specific segment could risk losing some of current viewers, the TFC could compensate for losses by increasing achieving audiences in the targeted segments and achieving higher CPM.  

Considering financial implications of the TFC, I find that three quarter of the TFC revenue comes from ad revenue and segmentation could increase the ad revenue by around 60%. Although segmentation approaches incur higher expenses, they achieve about three times the net income of the base. In term of margin, segmentation approaches would lead to higher margin than that in 2006, while the broad approaches achieve lower margin. Performing sensitivity analysis, I find that the net income and margin are sensitive to change in average rating and CPM. The impact of a change in incremental programming expense, on the other hand, is insignificant. For 10% change, the low net income of segmentation approaches is still higher than the high income of a broad approach. Also, the margins of the two segmentation approaches (scenarios 2 and 3) are in about the same range.

After considering pros and cons and financial implications, I agree with my team that we should recommend TFC to target the fashionista segment (scenario 2). The TFC has a distinct competitive advantage with the fashionistas since it is the only full time fashion network available. So focusing on developing high quality programming targeted at fashionistas will deliver higher ad revenue and income. This would also enable TFC to build on its currently outstanding reputation and position of fashion programming leadership to propel the company into a sustainably differentiated position.