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Case Overview

The year is 1979, Cumberland Metal Industries(CMI), one of the largest manufacturers of curled metal products in the country has developed a new product. As compared to the hardwood blocks or abestos pads, the new metal cushions developed at CMI had successfully tested for longer durability and passed health safety regulations. CMI realized the potential of the product and the opportunity of becoming industry leaders with this newly developed product of theirs, hence wished to introduce to the product to the market immediately.

Though, since the products success relied heavily on its marketing mix and especially the pricing strategy, CMI faces a challenge. The following report offers an analysis on the critical issues to be dealt with, pricing strategy and recommendations based on the possible marketing mix.

Critical Issues to be dealt with (Write it in the form of multiple questions under various subheadings (refer to syllabus) ) - Philipp

What is the firms price for the curled metal pads? CMI is the first company in the industry to come up with a better product in a somewhat new category. In order to price the curled metal pads, CMI must first make an EVC calculation to defer how much value the customer can get out of the product. How much is one of these pads is worth to a customer (EVC)? The CMI pads are worth significantly more to the contractors than the asbestos due to the time saved on various processes as well as the additional safety it gives to the employees. An EVC is helps calculate the total time saved and the total dollar value of time saved.

Annual demand for pile driving and for CMI pad? Key decision influencers? Pile hammer manufacturers, architectural/consulting engineers, soil consultants, pile hammer distributing/renting companies, engineering/construction contractors, independent pile-driving contractors.

Competitive products and channels of distribution? No manufacturers dominates the business. Most pads came unbranded, having been cut by small, anonymous job shops. C.M.I. should focus on the manufacturers' representatives that sell directly to the supply houses and distributors as the primary distribution channel. How to market these pads? What should be CMIs marketing strategy and marketing mix? High/low expenditures/support? High/low price? While pricing the product too low would prevent CMI from capitalizing on its new innovation in an increasingly difficult market, pricing it too high could also prevent CMI from quickly grabbing market share in this new product category. Obtaining a large market share right away in a new product category has several long term advantages.

Core Analysis: I. Recommendations based on numeric data calculations Two sets of test data confirm that CMI pads provide two main advantages over conventional pads. This section will use the test results obtained by Colerick Foundation company and Fazio Constructions when comparing the use conventional pads against CMI pads on-site.

The numerical results show that CMI pads offer two main advantages, productivity and timeefficiency.

In terms of productivity, CMI pads output of feet of piles driven per hour is 25% and 20% more than conventional pads, respectively for Tests A and B[1]

Driving 20-25% more feet per hour, means less time is required to complete the project which increases time-efficiency.

Time-efficiency is achieved in many other ways as well. Conventional pads accounted for 6.65 hours and 16.67 hours for changing time in the tests, whilst CMI pads took a total changing time of only 0.02 hours in each of the both tests.

This data showed that whilst the changing time appeared volatile and unpredictable in conventional pads, it was constant in both tests for CMI pads at an extremely efficient 0.02

hours each test. It would appear therefore that CMI pads would achieve this same outstanding efficiency in future tests as well.

How much time is saved?

Total time saved in using CMI pads over conventional pads was 31.65 hours in each test.

As each hour is assumed to be worth $238, the corresponding dollar savings due to time saved was $7532 for each test.

As only 6 CMI pads were used to achieve the test result for test A, this would equate to corresponding dollar savings or customer value generated of $1255.45 per pad. For test B it is US$ 1506.54 per pad as only 5 pads were used to achieve the same result.

By comparison tests A and B utilized 20 and 50 sets of conventional pads respectively. The costs of these pads totaled $1,000 (test A) and $2000 (test B).

Six CMI pads used for the same job $1,000 job gives a value of $167 per pad for Test A.

Five CMI pads used for a $2,000 job gives a value of $400 per pad for Test B.

To find the total economic value for the customer (EVC), we add the savings calculated above. Test A, provided $1255 and $167 value per pad giving an approx total value of $1422 per pad.

Test B, provided $1506 and $400 per pad giving an approx total value of $1906 per pad.

Using the tests, the average total EVC is $1664 per pad.

[1] Test A refers to Colerick Foundation Companys test . Test B refers to Fazio Constructions test.

II. Pricing Decisions - Sriram A. Determination of Optimal Price: The company can choose to price the product to suit a certain type of market condition. Pricing the product too high will inhibit C.M.I. from rapidly gaining market share, while pricing it too low will forfeit profits at a time where C.M.I. wants to grow. Strategies addressing different scenarios are:

Strategy I: Obtain a large market share: Because C.M.I. is the first to enter the market, with relatively weak competition, we believe the best course of action is to maximize possible revenue and market penetration. Because curled metal pads are entirely new products for this category, rapid acquisition of market share would catalyze the marketplace acceptance of the new piledriver pads. The differential pricing strategy would also allow C.M.I. to reward early purchasers, build customer loyalty and negotiate distribution deals. However, the prerequisite for this objective is to get a patent to prevent this product from being copied and duplicated. Without a patent a competitor will completely ruin any long-term marketing strategy that the company sets out to achieve. In the short run, patent protection will be effective in preventing second movers from capitalizing on the promotion and research conducted by C.M.I.

The company can sell the C.M.I. pad at $210 per pad to the distributors, with an MSRP of $270. This would allow the distributors to market the product at a 10% price discount over asbestos, as well as the 33% increase in time productivity, and achieve a 40% margin. The price of $210 would provide C.M.I. a margin of 51.5%, which exceeds the requirement of senior management, and would allow the company to invest in future research and development, or perhaps an advertising program should it wish to increase its products price in the future. Table A from the Appendix suggests that even lower pricing than $210 can be achieved with sufficient market penetration especially when sales exceed that of 750 units per month. This would certainly be an additional boost to the companys income.

Strategy II: Maximize short-term profits:

If at all, procuring a patent is not possible, then C.M.I. should follow a high profit strategy. Potential profits are much higher with this strategy than for one in which market share is the goal. With the tremendous cost savings obtained by using the metal pads and the absence of current competition, C.M.I. should be priced as high as possible, up to the EVC. With this strategy they could charge higher premiums on the products and not have to invest for higher capacity. This, however, neglects the huge market opportunity to cater to the larger pile driving market share.

For example, C.M.I. could quote to the Colerick Foundation a price of $800 per pad as a first time customer purchasing directly from C.M.I. This price will be readily accepted because they are familiar with the benefits and the EVC, reducing costs by $600 per pad. Later down the road, pricing strategy should be revised to account for different pad sizes and their performance advantages. Allowing for the traditional 30% margin that a distributor would carry, C.M.I. should sell to them for a price of $900 or more. With the mark-up, the customer would pay $1,170 per pad. The distributor would make $270 per pad, while the customer would realize a benefit of $230 per pad. Both of these profits are reasonable portions of the total EVC.

It is important to note that it would be easier for C.M.I to make price adjustments from a higher price than a lower price; therefore, C.M.I should enter the market with a higher price and manipulate the market until it understands its penetration numbers.

B. Market Analysis If C.M.I. secures a patent then no other competitor can enter the market with the same product. The market for cushion pads is generally not price sensitive. C.M.I. can charge the monopoly profit maximized price, but initially they should give promotional discount of 15% during the introductory phase, that is the first 2 purchases to make customers adopt the new pads because the price might look intimidating to begin with. This will be an effective way for C.M.I. to view the market in the short term. However, this is all assuming that they manage to secure a patent.

From calculated estimates by employees working at C.M.I., there is roughly 290-390 million feet driven annually by all parties involved in this market. At an average of $7 per foot driven, this makes it a 2.38 billion dollar industry, meaning that there is more than enough demand for C.M.Is services. C.M.I.s purchase influences include pile hammer manufacturers, architectural/ consulting engineers, soil consultants, engineering/ construction contractors, pile hammer distributing/ renting companies and independent pile-driving contractors. Channel members include construction-oriented manufacturers, representatives of those manufacturers, and various distribution outlets, including rental

outlets, construction supply houses, and pile manufacturers. With 75% of all pile drivers owned rather than rented, manufacturers deal with a majority of the pile driver users. Therefore, C.M.I. should focus on the manufacturers' representatives that sell directly to the supply houses and distributors as the primary distribution channel. Another thought to ponder over is that even-though the pads would lead to a reduction in equipment rental time, the rental agency could actually take advantage of the faster turnaround, allowing them to supply the same number of contractors with fewer pile drivers. Therefore, the rentals would be able to reach the same number of customers with less equipment.

C. Marketing Strategy In the short term, C.M.I. should take advantage of the existing networks to distribute their pads rather than start from scratch with their own direct distribution. The manufacturers' representatives should be trained by C.M.I. sales teams on how to market the pads. The focus of the training should be the cost savings benefit of the curled metal pads, the potential dangers of the asbestos pads, and the C.M.I. brand and product name. The pads currently in use are generic and not advertised or branded. Establishing a product name is important in promoting the diffusion of the product in the marketplace.

C.M.I should set the objective of this new business to monopolize and to maximize profits. Although small contractors are more money conscious than the larger firms, assuming no suitable substitutes are available ensured by the procurement of a patent, the market will bear any price up to the point of economic value gained through the cost savings of the curled metal pads versus the asbestos pads. Assuming the company holds a patent for atleast a few years, the threat of a new type of pad making the curled metal cushion pads obsolete will not be of immediate concern. However, once the patent expires, the competition will be able to enter the market affecting a rise in markets price sensitivity. If procurement of a patent is not possible, C.M.I could follow a high profit strategy as aforementioned.

Conclusion - Everyone

Appendices: Sriram EVC calculations, data tables, etc.

Data Set 1 - Test A (Colerick Foundation Company) I. Feet driven per hour:

Conventional pads: 300 piles * 50 feet/ 150 feet/hr = 100 hrs C.M.I pads: 300 piles * 50 feet / 200 feet/hr = 75 hrs

Difference in time: 100 75 = 25 hrs II. Changing time: Conventional pads: 20 min. * 20 times / 60 min. = 6.67 hrs C.M.I pads: 1 min. * 1 time / 60 min. = 0.02 hrs

Difference in time = 6.67 0.02 = 6.65 hours Total Time Saved = 25 + 6.65 = 31.65 hrs Corresponding Dollar Savings = $238* 31.65 hrs= $7532.7 Customer Value generated = $7532.7 / 6 pads/set = $1255.45 per pad Total value charged to Colerick Foundation Company = 20 sets * $50 per set = $1000 6 Curled metal cushion pads used for the same job $1,000 job, the price per pad equals $167. Hence, TOTAL EVC = $1255.45 + $167 = $1422 (approx.)

Data Set 2 - Test B (Fazio Construction) I. Feet driven per hour: Conventional Pads: 300 piles * 40 feet/ 160 feet/hr = 75 hrs C.M.I Pads: 300 piles * 40 feet / 200 feet/hr = 60 hrs

Difference in time = 75 60 = 15 hrs II. Changing time: Convenitional Pads: 20 min. * 50 times / 60 min = 16.67 C.M.I Pads: 1 min. * 1 time / 60 min. = 0.02 hrs

Difference in time = 16.67 0.02 = 16.65 hrs Total Time Saved = 15 +16.65 = 31.65 hrs C Corresponding dollar Savings of $238* 31.65 hrs= $7532.7 Customer Value Generated = $7532.7 / 5 pads/set = $1506.54 Total value charged to Fazio Construction = 50 sets * $40 per set = $2000

5 Curled metal cushion pads used for a $2,000 job, price per pad equals $400. Hence, TOTAL EVC = $1506.54 + $ 400 = $1906 (approx.)

Total Manufacturing Costs With and Without $50,000 Tooling Expense (for 11 " Diameter Units Only) Units Produced Total Manufacturing Cost (with existing equipment) 148.12/unit Total Manufacturing Cost (with permanent tooling equipment) at 69.18/unit Additional Capacity Cost Total Cost Total Cost (with Permanent Tooling Expense of $50,000) 250 37,030 17,295 37,030 67,295 500 74,060 34,590 75,000 149,060 159,590 750 111,090 51885 150,000

261,090 251,885 1000 148,120 691,80 225,000 373,120 344,180 1500 222,180 103,770 375,000 587,180 528,770 2500 370,300 172,950 675,000 1,045,300 897,950