Saxonvilles Italian Sausage

This case addresses a sausage companys

attempt to develop optimal positioning for a
national brand of Italian sausage. Be sure to
use the Saxonville spreadsheet to calculate trial
rates, market share, and project contribution;
review the Sales Projections assignment if
youre not sure how to conduct the analyses.
And use the Saxonville worksheet to determine
Saxonvilles (potential) competitive advantage
and develop a brand ladder and positioning
statement for the chosen alternative.
1

You are the product manager for the new Mountain Man Lite beer. Marketing research results are in for the
new positioning strategy, which targets 21-34-year-old, men and women. This demographic represents
30% of the Light Beer market, which is expected to be 20,000,000 barrels per year. The research results
indicate the following response to the new positioning strategy.
Past experience indicates that adjusted trial rates are 80% for respondents indicating they Definitely would
try, 30% for respondents indicating they Probably would try, and zero for all others.
You also worked up numbers for two communications campaigns. The $2,000,000 campaign focuses on a
pull strategy, using advertising to build awareness among the target market. With this campaign, 60% of the
target market will be aware of MM Lite. Using the current sales staff to promote the MM Lite to current retail
customers, you expect to achieve 20% distribution coverage. The $3,000,000 campaign implements the
same pull strategy but also implements a push strategy that includes trade promotions and point-of-sale
merchandising. These efforts will increase distribution coverage to 40% but will likely have little additional
impact on target customer awareness.
Two product concepts have also been tested. One concept remains true to the bitter flavor and slightly
higher-than-average alcohol content that differentiates Mountain Man Lager, the flagship beer. Taste tests
indicate that target customers respond fairly well to this concept and that 50% would retry the product.
Target customers respond more positively to the second concept, which offers a smoother taste and
average alcohol content, suggesting that 60% would retry the product. Pricing for both products will be
around $100 per barrel. The COGS for the Bitter Flavor concept will be $70 per barrel, the same as the
MM Lager COGS. COGS for the Smooth Taste concept would be $74 per barrel, because it requires
different ingredients than those currently used. Product development expenses, which were $2,000,000, are
treated as sunk costs.

Adjusted
Repeat
Research
Trial
Awareness Coverage Trial Rate
Rate
80%
20%
60%
20% = 1.92% 50%
30%
60%
20% = .72%
50%
20%
$2MM

Research

Promotion & Bitter Flavor

Adjusted
Trial
Awareness Coverage Trial Rate

Market
Share
= 0.96%
= 0.36%

Market Share

Repeat
Rate

1.32%
Market
Share

20%

80%

60%

20%

20%

30%

60%

20%

$2MM

Research

Smooth
Promotion & Taste

Adjusted
Trial
Awareness Coverage Trial Rate

Market Share

Repeat
Rate

%
Market
Share

20%

80%

60%

40%

20%

30%

60%

40%

$3MM

Research

Promotion & Bitter Flavor

Adjusted
Trial
Awareness Coverage Trial Rate

Market Share

Repeat
Rate

%
Market
Share

20%

80%

60%

40%

20%

30%

60%

40%

$3MM

Smooth
Promotion & Flavor

Market Share

Adjusted
Repeat
Research
Trial
Awareness Coverage Trial Rate
Rate
80%
20%
60%
20% = 1.92% 50%
30%
60%
20% = .72%
50%
20%
$2MM

Options

$2MM Bitter

Market Share Market Size

1.32%

20,000,0
00

$2MM Smooth

20,000,0
00

$3MM Bitter

20,000,0
00

$3MM Smooth

20,000,0
00

Promotion & Bitter Flavor

Volume
Forecast

264,000

Revenue
Forecast
$100

Market
Share
= 0.96%
= 0.36%

Market Share

1.32%

COGS

Contribution

$70

26,400,000 18,480,000
$74
$70
$74

7,920,000

Sample Final Exam Question: Acquisition Value and Customer

Lifetime Value

As the local Time Warner manager, you are considering two

promotional campaigns, one targeting new students and the other
targeting new faculty at SMU. The promotion includes free
installation and set-up for new accounts. You normally charge $20 for
setting up a new account, which barely covers the variable costs for
installation, regardless of the type of service. To qualify for free
installation, customers have to agree to a 12-month contract.
Most students purchase the basic package at $20 per month but
most faculty purchase the HDTV package for $50 per month. Variable
cost is $10 per month for basic and $20 for HDTV. To encourage
students to upgrade to the HDTV package, you will offer them 3
months of HDTV for just $30, with the price changing to the normal
$50 after the first 3 months. You think that 50% of the new student
accounts will take advantage of this offer.
There are 3,000 new students and 200 new faculty at SMU every
year. The student promotional campaign will yield a 20% acquisition
rate and the faculty promotional campaign will yield a 50%
acquisition rate. To target the 2 groups, you will have to buy mailing
lists and generate a direct mail campaign.

1. Total number of customers targeted

2. Acquisition rate
3. Total # of customers acquired (#1 #2, student split
50-50)
4. First-quarter contribution per month (i.e., Price - VC)
5. Number of purchases per quarter
6. First-quarter gross contribution (#3 #4 #5)
7. Minus installation & set-up costs ($20 #3)
8. First-quarter net contribution (#6 - #7)

StudentStudentBasic
HDTV
3000

Faculty
200

20%

50%

300

300

100

10

10

30

3
$9,000

3
$9,000

3
$9,000

-$6,000

-$6,000

-$2,000

$3,000

$3,000

$7,000

$10

$10

$70

What
is the most
would spend
acquired
customer for the promotional campaign if you
9.
First-quarter
netyou
contribution
per per
acquired
customer
want a three-month payback? Six-month payback?

To promote the campaign, you will spend $10 per targeted student and $20 per targeted faculty.
You want to calculate the lifetime value of each new student and faculty customer using first-year
expected contribution. Expected retention rates and risk factor (associated with students skipping
out without paying and stealing the equipment) for the 3 customer groups are shown below.
10. First-year per-customer gross contribution
$120
$300
$360
3000*$10/600+$20 3000*$10/600+$20

200*$20/100+$20

11. Total per-customer acquisition costs (AC) promotion + install

$70

$70

$60

12. Retention rate (r)

40%

20%

70%

13. Interest rate (i)

10%

10%

10%

14. Risk factor

15. CLVinfinite lifetime = CM/(i*+1-r) - AC
i* = i risk factor
16. Increase in Customer Equity

$120/(.2+1-.4)-$70

$300/(.3+1-.2)-$70

$360/(.1+1-.7)-$60

$80

$203

$840

$24,000

$60,818

$84,000

Is the HDTV upgrade offer worthwhile? What is the total increase in the firms customer equity?

Adjusted
Repeat
Research
Trial
Awareness Coverage Trial Rate
Rate
80%
20%
60%
20% = 1.92% 50%
30%
60%
20% = .72%
50%
20%
$2MM

Research

Promotion & Bitter Flavor

Adjusted
Trial
Awareness Coverage Trial Rate

20%

80%

60%

20%

20%

30%

60%

20%

$2MM

Research

Smooth
Promotion & Taste

Adjusted
Trial
Awareness Coverage Trial Rate

20%

80%

60%

40%

20%

30%

60%

40%

$3MM

Research

1.92%
0.72%

3.84%
1.44%

Promotion & Bitter Flavor

Adjusted
Trial
Awareness Coverage Trial Rate

20%

80%

60%

40%

20%

30%

60%

40%

$3MM

3.84%
1.44%

Smooth
Promotion & Flavor

Market
Share
= 0.96%
= 0.36%

Market Share

Repeat
Rate

60%
60%
Market Share

Repeat
Rate

50%
50%
Market Share

Repeat
Rate

60%
60%
Market Share

1.32%
Market
Share
%
%
%
Market
Share
%
%
%
Market
Share
%
%
%

Options

Market Share Market Size

Volume
Forecast

Revenue
Forecast
$100

$2MM Bitter

1.32%

20,000,0
00

$2MM Smooth

20,000,0
00

$3MM Bitter

20,000,0
00

$3MM Smooth

20,000,0
00

264,000

COGS
$70

26,400,000 18,480,000
$74

$70
$74

Contribution

7,920,000