Marketing Management

Case study: Cumberland Metal Industries: Engineered Products Division

Primary Problem: Cumberland Metal Industries (CMI), a company specialized in making of curled metal products, has developed a new product innovation in 1979, metal cushion pad with improved long term health safety and long durability. The new pads would help contractors drive piles faster. Because they were the first to market with this superior product and it represented a relatively new product category, they were posed with an opportunity to capitalize in their market segment. Based on successful testing of the new pads, CMI wants to launch this new product to the eagerly awaiting market. The main challenge CMI is facing is to price its new pads. How to properly harness the potential behind CMIs curled metal cushion pads ultimately came down to the pricing decision. The key question to have answered, What pricing point would customers opt for higher-performing metal cushion pads versus the standard asbestos pads? Issues impacting CMI and the new pads: Cushion pads made for pile drivers had been produced using various surplus materials based primarily on availability. The two materials primarily used were wood and asbestos. The wooden blocks needed to be frequently replaced and would sometimes ignite. The asbestos padding, hazardous because of its chemical composition also had a lack of thermal resistance. CMIs curled metal cushion pads were the perfect solution for a variety of reasons, primarily because they proved a longer life and didnt heat up like the other materials. These new curled metal cushion pads appeared to be a superior improvement to a contractors pile driving projects. The product lasts longer than substitutes, is chemically stable, resistant to heating up, and simple to replace so down time is reduced. Contractors praised CMIs cushion performance in two test projects and were anxious to purchase this new product. Primary concerns for the product launch stem from an uncertainty on how the product should be priced and eventually distributed. With regard to price, pricing the product too high will inhibit CMI from rapidly gaining market share, while pricing it too low will forfeit profits in an era where CMI is struggling for

growth. Because this is an entirely new product category, rapid acquisition of market share would catalyze the marketplace acceptance of the new pile driver pads. The key decision makers in the purchasing schema for pile driver pads are pile hammer manufacturers, architectural and consulting engineers, soil consultants, pile hammer leasing companies, engineering and construction contractors, and pile driver contractors. Of the aforementioned groups, the case identified some as being more influential than others. Concern arose when examining the case of pile hammer leasing companieswho typically supply pads when they rent equipment. While this seems like one of the most profitable venues to sell metal pads through, it must be taken into consideration that these companies make more money the longer their equipment is being leased, so accessories that cut production time and increase efficiency on the job site add up to a loss for them. Until it can be determined how pile driver leasing companies will react to CMIs new high-performing product, the company would do best to steer away from marketing through them. Two of the most appealing groups in the purchase decision for pile driver pads are pile hammer manufacturers and architectural and consulting engineers. The pile hammer manufacturers have tremendous leverage when it comes to specifying which pads best compliment their equipment. Better performing pads, like what CMI has to offer, contribute to better performance of the pile driving process as a wholewhich could boost their brand image. Secondly, the architectural and consulting engineers are typically hired to advise builders on the most efficient tactics to ensure that the project is completed correctly and as smoothly as possible. Curled metal cushion pads have the potential to increase productivity and cut piledriving time, which contributes to the bottom line. Though pile driver pads had always been used, this can be considered a new product category because nobody, to date, had taken the initiative to promote a product specifically for the purpose of padding pile drivers. Additionally, because it is a vague product category to start with, distribution channels for pile driver pads also remains ambiguous. CMI decided to contract with construction-oriented independent sales representatives. These intermediaries would focus on key accounts in their respective geographical territories, like major distributors and supply houses. `Recommendations Demand Forecasting & Production Planning

Total industry demand for feet of piles driven is between 290,000,000 and 390,000,000 annually. Because each unit (or set of pads) that CMI produces can last for about 10,000 driven feet, annual demand potential could span from minimum of 29,000 units to a maximum of 39,000 units. Broken down monthly, the chart in Figure 1 describes production needs to meet demand at varying intervals of anticipated market share. Since this is a new product, it would be wise to conservatively forecast a smaller market share in the first quarters the product is on the market. Lets start by estimating a 25% market share in Quarters 1 and 2, followed by a 50% market share in Quarters 3 and 4. This leads us to infer the production forecast provided in Figure 2. The breakeven point for purchasing the additional $50,000 in permanent tooling occurs between 500 and 750 units (Figure 3). It is recommended that CMI purchase the permanent tooling enhancements within the first year to lower total manufacturing cost per unit. The $50,000 cost can easily be distributed over several years with the right loan. It need not be paid in full during the first year. Total costs per unit, despite the aid of the initial tooling expense, does not start falling until production quantity reaches approximately 3,750 units (Figure 4). Contribution Margin Goals CMI sets contribution margin goals between 40% and 50% of the selling price. By calculating contribution margin as net sales (quantity 4500 units for Year 1 * price) less variable costs, we can see that optimal pricing range for the new metal cushion pads is between about $45.45 and $54.60 (for contribution margins of 40% and 50% respectively). However, this methodology doesnt take into account how much value is being left on the table between CMI and the customer. Actual Consumer Value Another way to approach pricing is to calculate the value of CMIs curled metal pads to the consumer. Figure 6 shows the raw data used to compare the performance of asbestos padding versus CMIs new curled metal padding in trials conducted by two contractors: Colerick and Fazio. Cutting the amount of job time for pile driving is where the savings are really going to add up. For example, one hours worth of expenses for pile driving includes the following components: diesel hammer rental ($34), crane ($52), leads ($8), labor ($44) and overhead ($100)totaling approximately $238 per hour of pile driving. The Colerick testing concluded that CMIs pads drove piles 33% faster than asbestos (more piles per hour), bringing cost down

to $157.08 per hour of pile driving. Product Manager, Tom Simpson, feels safer pegging performance advantage at only 20%, which still conservatively accounts for a $190.4 per hour cost, versus the original of $238. If we also factor in the amount of time it takes to change asbestos sets, it contributes significantly to overall cost. In the Colerick case, 20 sets were needed, and for 20 minutes per set changing time, this adds up to an additional 400 minutes (6.7 hours). The Fazio example was even more extreme, adding an additional 16.7 hours to total job time. We will use an average of 11.7 additional hours per job in our following calculations. With both Colerick and Fazio, only one set of CMI curled metal pads was needed for the entire job. If we take our initial calculation of $238 per hour of overall pile driving cost, the added time weighs in heavily. Using asbestos pads, an hourly cost of $238 plus an additional 11.7 hours of added downtime for changing pads, adds up to an additional $2,780 per job. Whereas this cost is completely eliminated using the asbestos pads. Lets examine total cost for a hypothetical 1,000-foot pile-driving contract. At 155 feet per hour (average) using asbestos pads, were looking at about 6.45 hours at $238 each -$1,535. Plus the additional down time to change pad sets (15 piles per set), that comes to 66.66 changes at 20 minutes each, giving us an additional 22.22 hours of time at $238/hour -- $5,289. Using 66.7 sets at about $45/each also contributes another $3,002. The sum cost for a 1,000foot contract is about $9,825. For the same job using CMI curled metal pads, we average 200 feet driven per hour, giving us 5 hours at $190.4/hour -- $952. With 300 driven feet per set, we only use 3.33 sets at an undetermined cost. At 4 minutes per set change (13.3 minutes total) at $190.4/hour, that adds an additional $42 bringing our lump sum to $994 (not including cost for pads). The difference between the two jobs is $8,831, and with 3.33 sets used, this accounts to a real value of $2,651.95 per set of curled metal pads. Pricing Point CMI is now left with a decision on how much value to pass along to the customer. The real value per set of their curled pads is $2651.95, with production cost of about $321 each (at quantity 4500 for Year 1 including tooling expense, see Figure 3). If CMI accepts a 65% profit margin on each set of pads, this puts the price per set to approximately $1500, and still passes

on 35% value to customers, which is an attractive enough margin to undergo the hassles of product/process changes for the savings. There are additional savings not accounted for, like the reduced opportunities for human error and injury (when changing pads). These covert savings have the potential to add up attractively as well. By passing along 35% value ($816), this is definitely a pricing strategy targeted at garnering market share. As more data on CMIs metal pads becomes available, it will be possible to more accurately determine the real value to customers. Because this is a new product, it is important for catalyze adoption by making the price and value transfer as attractive as possible. Pad diameter is still a wild card factor. All calculations in this case were made using the 11 diameter pads. However, the article mentioned that larger pads might not have the same structural integrity, which doesnt add up to equal savings. Later down the road, pricing strategy should be revised to account for different pad sizes and their performance advantages. Marketing & Target Audience One strategy that will significantly contribute to the rapid uptake of curled metal pads is to capitalize on CMIs evolving position as a thought leader in the industry. By solidifying customers perceptions that curled metal pads are the new industry standard, CMI will likely experience a boost in sales generated from this buzz. To effectively position CMI as an industry forerunner, the company should look to use the PR leverage of industry trade associations, field experts, and other organized groups who stand to benefit from more efficient pile driving. For starters, CMI should focus on conducting and releasing more data on the performance metrics of its curled metal pads. From there, it should loan this data, plus free samples, to other experts/groups who insist on doing their own testing. Third party evaluation and approval should win CMI some credibility with skeptics. Once a little bit of buzz has been generated, it is appropriate for CMI to start launching more traditional marketing efforts (tradeshows, direct mailing, print advertising, etc.). Having some third party validation before indulging in traditional marketing activities will greatly enhance consumer acceptance of the productleading to more efficient marketing spending. The target audience for marketing spending should be focused on engineers, consultants, and pile driver manufacturers. Each of these groups has the jurisdiction to recommend specific performance-enhancing products to

direct users. And each group also stands to personally benefit if construction projects get completed quickly, efficiently, and under-budget. From the sales side of things, CMIs independent representatives need to be provided with as much sales collateral and data as possible. Supplying them with the right resources will be critical to successful product distribution. Because this is a new product, it will also be necessary to educate the sales force on every aspect of the product, its use, and its effects. CMI should anticipate the questions theyll be receiving from their consumers and address each of them with the sales force. An educational training seminar would be a great way to for the salespeople to come together and learn about the new curled metal pads. Conclusion With the release of a revolutionary product in a long-neglected product category, CMI sits on the edge of having a major success or a major failure. With such a high price compared to the product substitute, thorough customer education is a must. Yet when customers understand the value theyre receiving in exchange for a higher price, they could catapult CMI and curled metal pads into product innovation ubiquity.

Executive Summary

Perceived Value Pricing strategy for future success

CMI should set the objective of this new business to be the monopoly and to maximize profits. However, the prerequisite for this objective is to get a patent to prevent this product from being copied and imitated. As long as CMI did not get patent for this product, CMI should not sell it as it would invite the entry of competitors because this cushion pad is not a high technology product and easy to be copied. Thus the following pricing strategy will be based on the scenario of getting patent protection.

To price the new product, CMI should apply perceived value pricing method to

deliver its value to customers and CMI must make them perceive this value. CMI also needs to apply several marketing-mix programs such as advertising and roles of influencers to communicate and enhance perceived value in customers minds. The price calculation is as follow:

Normal a price of an 11- inch asbestos pad is $3. A CMIs pad lasts longer than asbestos pads 10 times (conservative estimate: p4). Thus speed and efficiency will be the top priority for marketing and pricing this pad. Based on product life, the pad will only have $30 value. However, based on the data from Colerick test, Corelick spent $1000 for asbestos pads; they use 6 CMIs pads for the same job. So, it took $1000/6 = $166.67 worth of asbestos pads to complete the same work by CMIs pads. From the Fazio test, it took $400 worth of asbestos pads. This has not take efficiency into consideration yet. Assuming that the users do care about speed and efficiency, CMI can charge additional price.

From the Colerick test, the job is to drive 50 feet in to the ground using 300 piles. The asbestos pads spend 20mins (150ft/hrs: p.3) on driving and 400mins on set changing. The CMIs pads spend only 15mins (200ft/hrs: p.3) on driving and 4mins on set changing. We do not need to take the hidden costs into consideration because it is not affected by reducing the driving time or pad changing time. So (42019) min /60min = 6 hrs 41 min time saving. Because the contractors have to spend $100 per hour, Colerick probably save about $668/6 pads =$111.33 on equipment rental, labor and overhead costs for this work by using CMIs pads. So the worth of CMIs pad is $166.67+$111.33 = $278.00

CMI should choose the option to purchase the $50000 permanent tooling, because it will reduce cost per unit by $78.94. By this cost saving alone we can get back the money we invested in the tooling in less than 3 months. This will maximize profit in the long run. The total manufacturing cost will be $69.18/pad. The management wants 40%-50% contributing margin after all manufacturing costs, the price will be about $115 ~ $140 to satisfy the managements profit expectation. Thus CMIs should price the pads at $149.00, as this price will have

50% saving for the contractors.

Each CMIs pad can save a huge among of costs for the contractors. If CMI can get the patent then no competitor can enter the market with the same product. CMI 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 can look intimidating. (Asbestos pad $3, CMI pad $149). Marketing-mix strategy to launch and explore market share for new cushion pads

First, CMI needs to get the patent of this new product to protect from competitor entry. As CMIs objectives is to be monopoly, patent is crucial.

Second, CMI needs to develop distribution channels. Direct channels to contractors who own pile hammers as they contributed high quantity and demand (50% of estimated market share). Also by having direct channels, CMI has more control on the education and monitoring of its clients. After that, CMI should sell to wholesalers and hardware stores to cover the small contractor. CMI should not be too concern about the equipment rental because as CMIs pads gain popularity in the industry, customers will pressure the rental company to use CMIs pads.

Third, CMI needs to develop promotional and advertising programs to make customers perceive the value of new pads. CMI needs to educate its consumers in terms of health benefits (no asbestos) and safety (no heating problem) and to add the brand quality by advertising in professional journals. CMI also needs to make the function and merit of the new product to be known by customers; especially the value the new product can create the aspect of health concern.

Fourth, CMI needs to establish a network of influencers or increase public relations. To do so, CMI needs to established networks in a new industry to the company and key influencers to endorse its product. The result from Professor McCormack will be of high value to gain endorsement from consulting firm. Fifth, CMI needs to do market research, estimate the price elasticity of the new pad and the demand function and then adapt the initial price to the profitmaximized price.

Conclusion

CMIs pads definitely will be the market leader in the industry as it is innovative with high efficiency. Getting patent for this pad will ensure the growth profitability of CMI. In this case, perceived value pricing is used as the pad has more to offer than conventional asbestos. In line with this pricing strategy, marketing mix of advertising, education and distribution play a role in ensuring the success of this product.

Figure 1 Units Needed Monthly to Fulfill Industry Demand at Different Market Shares

Figure 2 Conservative Production Schedule for First Year (11 Inch

Diameter Units Only) Median Units Needed Q1 (25% Market Share) Q2 (25% Market Share) Q3 (50% Market Share) Q4 (50% Market Share) 708.33 708.3 1416.665 1416.665 Minus 250 Units Available Capacity 458.33 458.3 1166.665 1166.665 Additional Production Cost ($75,000/250 Units) $150,000 $150,000 $300,000 $300,000 Total Units Produced 750 750 1500 1500

Totals

4249.96

3249.96

900000

4500

Figure 3 Total Manufacturing Costs With and Without $50,000 Tooling Expense
11 Inch Diameter Units Only

Calculation Chart to Arrive at these Conclusions:

Units Produce d 250 500 Total Manufacturin g Cost 37030 74060 Total Manufacturing Cost (w/ Equipment) 17295 34590 Additional Capacity Cost 75,000 Total Cost 37030 149,060 Total Cost (w/ Permanent Tooling Expense) 67295 159,590

750 1000 1500 2500 5000 7500 10000

111090 148120 222180 370300 740600 1110900 1481200

51885 69180 103770 172950 345900 518850 691800

150,000 225,000 375,000 675,000 1,050,000 1,425,000 1,800,000

261,090 373,120 597,180 1,045,30 0 1,790,60 0 2,535,90 0 3,281,20 0

251,885 344,180 528,770 897,950 1,445,900 1,993,850 2,541,800

Figure 4 Total Cost per Unit (with and without Permanent Tooling Expense)
11 Inch Diameter Units Only

Figure 5 Contribution Margin by Price per Unit

Calculations (done in Excel): Sales - Variable Cost = Contribution Margin

(Qty 4500 units * Price) (4500 * 27.28) = Contribution Margin

Figure 6 Comparison of Performance: Asbestos vs. Curled Metal

Colerick Asbestos CMI Feet Driven Per Hour Piles Driven Per Set Pads Per Set Sets Required Set Changes Time to Change Set Cost 150 15 24 20 20 20 minutes $50 200 300 6 1 1 4 minutes 0 Fazio Asbestos 160 6 12 50 50 20 minutes $40 4 minutes 0 CMI 200 300 5 1 1

Total Variable Costs (250 Units/Month)

Total Variable Costs (w/ $50,000 Permanent Tooling Expense)