12/10/2011

TEAM 303

THE AQUALISA QUARTZ

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Section I: Introduction Aqualisa is the third largest player in the UK shower market, controlling 18% of total market share. It has developed a revolutionary shower called Aqualisa Quartz, which has the potential to disrupt the shower market. However, unit sales of this product have been sluggish and Aqualisa must step back to determine optimal target market segments, brand positioning, marketing mix/spend, distribution and pricing. If Aqualisa gets these parameters correct, it can capitalize on a first-mover advantage and generate significant revenue growth. Ensuring the success of the Quartz is Managing Director Henry Rawlinsons key objective, and the following is our recommendation for achieving that success.

Section II: Current Market Analysis Aqualisa sells products into both customer and business markets. The customer markets are composed of end users in the premium, standard and value price segments. The business market is segmented into plumbers and developers. Customers Premium: Premium customers expect their showers to produce optimal pressure and temperature. They shop at high end showrooms and style is the most important factor in their decision-making process. Plumbers are subcontracted from the showroom to install the product in customers homes, and Premium customers care less about installation time, cost or complexity. The demand of the Premium market is very inelastic.

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Standard: Standard customers typically have a shower system suggested to them by the plumber who is doing their installation. These customers purchase systems that provide both optimal pressure and temperature. Style is not as important to this group. However, they are likely to pick mixer showers which require excavation in order to conceal the mixing mechanism indicating that they do not want an obtrusive box in their bathroom.

Value: Value customers are similar to the Standard customers: a plumber often suggests and installs the shower system for them. However, they normally choose showers that are cheap and do not require excavation, thus minimizing the total overall cost. A subset of value shoppers includes Do It Yourselfers (DIYers), who often install the product themselves. Price and ease of installation are the most important decision factors for DIYers. DIYers care less about the aesthetics of the shower system, which is why they purchase obtrusive electric heating boxes that are visible in the shower area. The demand of these customers is very elastic.

Business Markets Plumbers: Plumber services are in high demand in the UK. The plumbers themselves are highly trained and well-compensated (40-80/hr). Plumbers are interested in dependable, easy to install products that will meet their customers needs for functionality, cost and aesthetic appeal. Thus, they are likely to purchase shower products across all technology groups and all price points. In order to make their job easier from an installation and ongoing service perspective, plumbers can be intensely loyal to one brand. Plumbers are the most important purchaser because they influence 73% of customer

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shower purchases. Their demand is fairly inelastic, because they pass on the cost of the shower to the customer. Developers: Developers buy showers for newly constructed properties. Their purchases must meet minimum standards of dependability, aesthetics, pressure, and temperature control. They buy in bulk and demand heavy discounts. To meet their price and functional needs, Aqualisa markets a stripped down Aquavalve called Showermax to developers. Since new properties are built with high pressure water systems, they do not need premium showers that adjust for pressure. Developers sub-contract the shower installation work to a plumber. They are price sensitive and their demand is moderately elastic.

Competitors The UK shower market is dominated by five brands, two of which belong to Aqualisa. The top five brands account for 77% of the total market share and each one has established a complete product line to cover customers with different needs. Smaller market players focus on a specific shower category.
Exhibit 1 - Market Share by Major Brands Product Category Mixer Showers x x x x x x x x

Brand Triton Mira Gainsborough Aqualisa Masco Ideal Standard Heatrae Sadia Bristan

Electric Showers x x x x x

Power Showers X X x x x

Total Market Share 30% 22% 11% 7% 7% 3% 2% 1%

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Grohe Hansgrohe

x x

1% 1%

The top five shower brands show strengths in different categories. In the electric shower category, Triton is the leader with 44% market share, followed by Aqualisa/Gainsborough (16%) and Mira (14%). In the mixer shower category, Mira holds a commanding 36% market share, followed by Aqualisa (17%). In the power shower category, the four key brands have roughly equivalent market share.

Exhibit 2 - Market Share by Product Segment (by Unit Sales)

Aqualisa should be most concerned about Mira. Having 36% market share in the mixer shower category, Mira is the strongest competitor against Aqualisas existing best seller Aquavalve, and the launch of Quartz may trigger an immediate action from Mira to secure its own market share.

Distribution Partnerships There are several partners in the shower distribution channels: Trade Shops: Trade shops are currently technology and brand agnostic; they simply sell whatever customers (normally plumbers) ask for. Aqualisas products are currently available in only 40% of trade shops.

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Showrooms: There are 20,000 showrooms in the UK, 5,000 of which feature Aqualisa products. Showrooms cater to high end customers and prefer to carry high-end product lines and brands unavailable in other channels.

DIY Sheds: DIY sheds are important partners in the value segment. These stores sell directly to customers and can be incentivized to fill the channel through trade discounts. Currently the Gainsborough brand is available in 70% of DIY sheds.

Company Overview 1. Brand Strategy Aqualisa adopts a multi-branding strategy to separate products for different segments and distribution channels:
Exhibit 3 Aqualisas Brand Portfolio

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Aqualisa is the companys core brand. Five product lines, including Quartz, are branded as Aqualisa products. Aqualisas portfolio spans electric, mixer valve and power shower categories; over 77% of sales come from mixer showers. Aqualisa products are mainly sold through the trade shop and showroom distribution channels. Aqualisa has a strong reputation in the UK shower market; it is perceived as a top quality brand and for providing great service. In 2000, 122,000 units of showers were sold under the Aqualisa brand. Despite selling fewer units than its sister brand Gainsborough, the margins on Aqualisa are much higher. Gainsborough is a low-end brand targeting value customers that is available through large retail outlets and trade shop distribution channels. Most electric showers are sold under this brand. Gainsborough branded products make up 63% of the companys shower sales (excluding ShowerMax). The final brand in the

portfolio, ShowerMax, was developed exclusively for developers and is only available through specialist contract outlets and wholesalers.
Exhibit 4 Aqualisas Sales Performance in 2000

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The multi-branding strategy helps Aqualisa maintain a premium price for its Aqualisa brand, while maximizing revenue from value customers and the niche markets for DIYers and developers with its Gainsborough and Showermax brands. 2. Company Challenges Aqualisa faces many challenges. First, the quality of competing products has improved. Second, the market may perceive Aqualisas products as being overpriced. Third, the quality of service is slipping. And finally, the product maintains a 10% defect rate, which has not been improved for years.

3. Initial Launch of Quartz The launch of Quartz is one of the critical initiatives to address these challenges. Compared to other products available in the market, Quartz has some compelling benefits. First, it is a truly innovative product. Unlike normal mixer showers that require excavation, it uses a remote processor with a built-in mixing valve that can be placed anywhere in the bathroom. Second, it is very easy to install, reducing project time from two days to a half day. Finally, it features a onetouch control mounted on the shower wall to indicate readiness of desired water temperature. Such benefits provide a solid foundation for its value proposition to its customers and channel partners.
Exhibit 5 Quartzs Value Proposition

Value Proposition Custome rs Reliable and efficient water pressure and temperature Easy to use

Supporting Features Remote processor to electronically control the mixing valve

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Safe for kids and elderly people No excavation required for installation Easy installation Dependable, no costly repeat visits for initial installation Profitability

Automatic temperature control with a flashing light to indicate readiness of water temperature Installation time reduced from 2 days to a half day Straightforward installation which can be done by junior plumbers High margin Potentially high volume

Plumber s Retailers

Despite these compelling features, initial sales of Quartz were not successful due to two key issues with its launch. First, the company failed to provide adequate promotion, incentive and education to plumbers given their importance in the purchase process. Second, Quartzs positioning was not clear enough to differentiate it from Aqualisas best seller, the Aquavalve 609. Quartz Standard was priced at 850, a price point very close to Aquavalve 609 at 715. When the sales force tried to sell the Quartz, they found it difficult to differentiate without devaluing other existing products. Such conflicts might demotivate the sales force, further hindering sales of the new product.

Section III: Evaluation of Strategy Options As Managing Director of Aqualisa, Henry Rawlinson is facing the challenge of positioning the Quartz to maximize revenue growth. He must decide whether it will be a niche or mass market product and then the corresponding pricing and distribution channels. In order to accomplish this goal Rawlinson is considering several options: Option 1: Lowering the price of the Quartz Standard and Quartz Pumped

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We do not recommend lowering the price to increase sales momentum. Quartz is an innovative product from a premium brand and can therefore warrant a premium price in the eyes of customers. In addition, launching a product to the Premium segment allows Aqualisa the luxury of lowering the Quartz price in the future, such as when competitors enter the market. Reducing the price of the product now would make it difficult for Quartz to raise prices in the future. Most importantly, lowering the price of the Quartz would cannibalize existing sales of the Aquavalve 609 within the Standard customer segment. Option 2: Target customers directly Targeting consumers directly with a mass marketing campaign could generate enough customer demand to obtain mass market sales for the Quartz. In addition, the key customer selling point, standardized temperature and water pressure at the touch of a button is a compelling differentiator that will make Quartz stand out from the competition in the eyes of customers. Finally, Triton is the only other competitor with consumer brand awareness, making the market wide open for new entrants. Even though the marketplace is uncluttered when it comes to customer advertising for showers, the price of a consumer campaign to build brand and product awareness is an expensive gamble, costing 3 - 4 million over two years to gain an estimated 17 million increase in net income. Despite having a compelling key selling point and differentiator, a customer marketing campaign cannot guarantee that customers will care enough about the Quartz to request it the next time they need a new shower installed. Most importantly, customers are not the key influencers or decision makers when it comes to mixer shower selection. Only in 27% of mixer shower installations does the customer select the shower type 12 | P a g e

and brand without influence from the plumber. Furthermore, most customers cannot afford a premium price point of 850 to 1050 for a shower. While a niche customer marketing campaign for the more affluent might work for the Quartz, marketing dollars would be wasted if allocated towards a mass customer marketing campaign. In sum, targeting customers directly is very costly and potentially ineffective given the significant influence of the plumber in mixer shower selection. Option 3: Target Do-It-Yourselfers Targeting Do-It-Yourselfers is a seductive option for generating sales momentum because DIY sheds represent distribution for over half of the shower market. The sales potential of a quality product like Quartz against electric showers that dominate the DIY market seems promising. Additionally, the Quartz is so easy to install that it would make the perfect fit for DIYers. Aqualisa could also save on marketing budget by partnering with DIY sheds to promote the product using circulars or other in-store marketing, rather than using a more expensive customer advertising campaign. The price point of the Quartz, however, makes it an impossible fit for the DIY market. For comparison, Aqualisas premium electric shower called the Aquastyle has a retail price of 230, which is 620 less than the Quartz Standards retail price of 850. Customers who shop at DIY sheds, Value segment, do not have the willingness to pay this much for a shower. Discounting the Quartz and relaunching Aqualisas most premium product in a discount shop could also damage Aqualisa brand equity and premium brand associations. It may even have a negative halo effect on sales of other Aqualisa products in the portfolio. As Rawlinson noted, once you show up in the DIY sheds, you cant climb back out. 13 | P a g e

Option 4: Target developers Developers are potentially high volume customers depending on the number of new housing projects that are planned. In addition, new installations would allow plumbers who were hired by developers to learn just how easy Quartz installations are and potentially become Quartz converts. Unfortunately, the Quartz would be a tough sell to developers due to the price of the product. Aqualisa was unable to penetrate the market of developers even when they discounted their products by 50%. Developers seem unwilling to pay for the premium they associate with brands like Aqualisa. In addition, new buildings take time to construct creating a lag between selling the showers to developers and installation by plumbers as well as use by customers. This is time that Rawlinson does not have as competitive products are expected on the market within two years at most. We do not recommend pursuing any of the four aforementioned strategies, because they do not focus on the key influencer, the plumber. In 53% of mixer shower installations, plumbers determine both the type and brand of shower, and in an additional 20% of mixer shower installations the plumber influences the type of shower. Only in 27% of mixer shower installations does the customer select the shower type and brand without influence from the plumber, and in these instances showroom consultants are often the key influencers in shower selection.

Section IV: Recommendations 14 | P a g e

Target Based on analysis of the decision making process for mixer showers, we recommend targeting plumbers and showroom consultants instead of end users. Since plumbers have the largest influence in mixer shower selection, our marketing efforts will initially be focused on this group to generate a push for the installation of Quartz to end customers. Once we gain sales momentum, showroom consultants will become a secondary target as they are the next largest group of influencers in mixer shower selection. There are 10,000 master plumbers in the UK. Focusing on this group of key influencers will enable the most effective and targeted use of the Aqualisa budget, as compared to diluting the impact of our limited marketing budget by trying to reach a mass or even targeted customer base with advertising. Showrooms present a huge growth opportunity: Aqualisa has performed well in them before and is currently in only 25% of showrooms. Positioning We recommend positioning Quartz as the flagship product of Aqualisa. The Aqualisa brand is known as a premium brand for having top quality showers and great service. These attributes are highly desirable and should continue to be reinforced to plumbers and showroom consultants in communications for Quartz. Also, these attributes can help overcome the plumbers concerns with having to fix and install low quality products and fulfill plumbers desire for reliable service from shower manufacturers. When speaking to showroom consultants Aqualisa should also continue to highlight the premium nature of Aqualisa products as exemplified in its finest and most elegantly designed product, the Quartz.

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We recommend categorizing the Quartz product not as a mixer shower but as an automatic shower, thereby elevating the Quartz to define its very own premium category as a special type of mixer shower. Automatic implies fast and easy, which is exactly what plumbers and customers want. The word automatic also alludes to the use of innovative digital technology, but only as a means to make life simpler. In essence, the Quartz is automatic perfection. While customer advertising is not recommended, plumbers and showroom consultants should be able to explain the benefits of the Quartz to customers to assist with sell-in. The automatic perfection positioning reinforces the benefits relevant to those who will advise on, install and use the shower. The fast and easy installation will resonate most with plumbers. Customers will be drawn to the promise of an easy button that quickly delivers the perfect temperature and pressure. In addition, the digital innovation that went into the creation of the Quartz push button system will make a good story for showroom consultants to tell their customers and help to justify its premium price point. Moreover, from the perspective of product portfolio management, we recommend lowering the price of Aquavalve 609. This price adjustment will bring two major benefits. First, the positioning of these two products will be clearer, reducing the threat of sales cannibalization. Second, the company can optimize Aquavalves sales potential to increase market share of the Standard segment while maintaining its high-end brand image with Quartz.

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Exhibit 6 Suggested Aqualisa Product Portfolio

P ositioning P ium rem 850-1050

Key Marketing Challenges

While targeting a small group of key decision-makers (the plumbers) is the

most effective means of maximizing impact from our limited marketing budget, this target poses the greatest marketing challenge. Aqualisa needs to incentivize

plumbers to give the Quartz a try, but they are incredibly brand loyal, distrusting of showers involving electronics, and notoriously set in their ways when it comes to shower selection and installation. In essence, Aqualisa must create both a

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perception and behavior change in order to drive trial and encourage plumbers to select the Quartz. Brand loyalty and commitment to specific shower types is driven by the fact that plumbers want to reduce the frequency and time required to fix problems with each shower they install. They also prefer to be familiar with the service they can expect from manufacturers. Distrust of showers involving electronics is a result of poorly designed electronic showers that were marketed in the 1980s. Quartz positioning and marketing therefore needs to help overcome some of these key barriers to trial and usage of Quartz.

Marketing & Sales Tactics The Quartzs ease of installation is the tipping point necessary for plumbers to become converts. Given this, marketing tactics should focus primarily on driving trials and encouraging first-time installations of Quartz showers. 1. Sales Force First, in order to convince plumbers to install a new type of shower, we recommend increasing the Aqualisa sales force by 40% and allocating this force to educating and serving plumbers directly. Rather than just giving a talk about the Quartz (as was done with the initial launch of the product), the new sales force will bring the product directly to the plumber, teach him how to install it, and then participate in his first installation. This type of service, education and handholding from the sales force will enable plumbers to feel more comfortable with taking the risk of trying a new product. Once plumbers see how easy it is to install a Quartz shower, they will become active proponents of the product. Our strategy for 18 | P a g e

recruitment of the new sales force is to hire older plumbers who are close to retirement so that they with have the experience, trust and respect of younger plumbers. The goal of our new Quartz sales force is to steal share from non-Aqualisa accounts. To avoid competing with or cannibalizing sales of the Aquavalve 609, we want to focus on plumbers who are not already loyal to Aqualisa products. If any of our Aqualisa loyal plumbers ask for the Quartz, they will be offered the same service and rewards. The focus, however, is to steal share from the competition in order to help manage the Aqualisa brand portfolio.

2. Warranty & Service Guarantee To allay plumbers and consumers fears about potential electrical problems with the Quartz shower after installation, Aqualisa should offer a lifetime product and service warranty for the product. Since the Quartz is a premium product, we do not expect a significant proportion of warranties to be filled. 3. Rebate We will incentivize plumbers to want to install the Quartz with a 25% rebate for the first Quartz purchase. This will allow the plumber to charge his customer the full retail price, but receive the added benefit of 212.50 - 270.00 cash back after the installation through submission of the rebate. Both master and apprentice plumbers would be eligible, as we want to grow converts among both groups. 4. Incentive Program & Contest To ensure that the plumber continues to install Quartz showers until he is permanent convert, we recommend mailing him a 200 check after the purchase of 19 | P a g e

10 Quartzs. Each year we recommend also rewarding the plumber who installs the most Quartz showers at the annual Plumbers Convention with a trip to an exotic locale. The rebate program, incentive program and contest will be communicated by our sales force. In sum, the marketing mix will focus on trial and conversion among plumbers, the most influential group in mixer shower selection.

Section V: Managerial Takeaways 1. First mover advantage should be a key goal when defining marketing strategy for products that are truly new and innovative. First mover advantages can allow for stronghold on market share, premium pricing, and the creation of a category defining brand or product. 2. Pinpointing the key decisions maker or influencer in a purchase cycle is critical to effective development of a marketing communications target. 3. Dont be afraid to opt for a push versus pull marketing strategy. While business segments are often not viewed as exciting as customer segments, they can be just as effective if not more so in generating sales.

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