This report contains analysis carried out by Enigma consulting to identify the marketing strategy for Milchem.
Table of Contents
. Background Page 2
2. Company Objectives Page 3
3. Pre-Market Development Research Page 4
4. The Polyfibron Blanket Page 5
5. Introduction Phase Strategy Page 6
5.1 Segmentation Page 6
5.2 Target Companies size Page 7
5.3 Location of Companies to target Page 7
6. Product positioning Page 9
7. Market share & Profit goals Page 10
8. Pricing Considerations Page 11
9. Pricing Strategy Page 16
0. Distribution Page 17
1. Long Term Marketing Strategy Page 18
11.1 long term distribution strategy Page 20
2. Research and development Page 21
3. Control and Conclusions Page 22
4. Bibliography Page 23
Appendix Page 24
. Background
Milchem, a chemical manufacturing company in Massachusetts, USA has strongly emphasised customer-oriented research during its existence of over twenty years. Fifteen percent of Milchem's 1300 strong work force is involved in research that enables the company to create new products.
The company strives to provide high quality, longer life textile printing blankets with outstanding printing characteristics. Milchem benefits from a strong technical and marketing background gained from the development, manufacturing and sale of a wide range of polymer-fiber combinations and textile blankets. It was this strong background that lead the company's management to suggest lithographic printing blankets would represent a logical extension of its activities.
Scope: The Polyfibron offset press blanket is Milchem's offering to the Lithographic printing industry. The product has been developed in light of pre-development research conducted by the company that identified improvements to existing blankets desired by the industry. In accordance with Milchems' high standards the product aims to provide the industry with a superior longer lasting product that addresses issues identified with existing products. Milchem having developed product has the following issues:
* Identification of drivers of the market and segment identification for positioning of the Polyfibron blanket.
* Development of a customer target strategy for segments identified.
* A marketing strategy for both the short and long term life of the Polyfibron blanket. The introductory phase is considered as the short-term phase for the purpose of this report. The growth, Maturity and Decline phases will be considered as part of the long-term strategy.
* A pricing strategy for both the short and long term product life of the Polyfibron blanket.
Deliverables: This report contains analysis carried out by Enigma consulting to identify the marketing strategy for Milchem. The report is organized in the following format:
* Analysis of current industry blankets versus Milchem's polyfibron blanket.
* Positioning strategy for the Polyfibron blanket in light of company and macro-environment analysis.
* Discussion of pricing and distribution strategy for the Polyfibron blanket during both the short and long term product life cycle.
* Discussion of mechanisms to monitor the marketing plan for the Polyfibron blanket.
2. Company Objectives
Milchem's management have identified their objectives for the Polyfibron blanket as follows:
* The Polyfibron blanket should become self supporting within two years
* The company should be positioned as the leading manufacturer of offset blankets within 3 to 5 years.
To achieve this objective Milchem need to have:
* An appreciation of the features desired in printing blankets by lithographic printers and the ability of the Polyfibron blanket to provide those features.
* Understand product & pricing strategy with respect to Milchem's position in the market.
* A marketing plan that will outline how to achieve objectives based on analysis carried out.
Specifically the marketing plan outlines short, medium and long term plans for the Milchem Polyfibron blanket. The short term plan focuses on activities required for launch and activities that will occur up to the next three years; these are market identification and strategic positioning for the blanket. The medium term plan focuses on strategies required during the maturity phase of the product, segment growth and repositioning over the next 4 years. The long-term strategy deals with the decline phase of the product.
Specifically from the facts presented through various exhibits from Milchem, this report compiled by Enigma consulting presents the dynamics of the lithographic printing sector and distils the findings to identify and develop pricing and positioning strategies for the Polyfibron blanket.
3. Pre-Market Development Research:
Milchem commenced research into the offset printing blanket market ten years ago. This preliminary research prior to development of the Polyfibron blanket identified the following:
* The lithographic industry was generally content with quality and performance of existing blankets.
* Potential improvement was desired in the surface of the printing blanket; smooth surfaces led to clean and
clear images, whilst irregular surfaces affected clarity of the image.
* Company interviews identified a blanket with a tolerance of +/- 0.005 without sacrifice of other features could potentially capture the whole market.
* The rubber coating of exiting blankets (Fig.1) resulted in it being difficult to retain smoothness, as rubber is incompressible. This outer layer was squeezed about 0.002 inches between the plate cylinder and offset cylinder, resulting in a slight bulge from displacement of the rubber layer. The displacement resulted in a distortion in the image being transferred and thereby reduced clarity of the image.
* Embossing - A swelling of the rubber layer caused by absorption of oils and varnish from ink resulting in oxidation of the rubber layer and reduced the expected normal blanket life of 500,000 to 1,000,000 impressions.
* Printers commonly alternated two blankets to minimize embossing and increase the life of blankets. This work around utilized by lithographic printers increased down time as blankets had to be changed frequently.
* Lithographers were also troubled by "smashes", the passing through of foreign matter (paper clips, wood chips, staples & crumbled sheets of paper) through the press resulting in a depression of a portion of the blanket surface. Smashes either significantly diminished life of a blanket or in severe cases resulted in the need of replacement of blankets and caused a down time.
Milchems research prior to development of the Polyfibron blanket concluded that a new product which could minimize smashes, embossing and displacement of the outer rubber layer of current industry blankets whilst increasing surface tolerance to +/- 0.005 without significant sacrifice of other features would be ideal for market entry.
4. The Polyfibron Blanket
Milchem research concluded that the primary reason for blanket failure was the development of depressed spots on existing printing blankets, caused by foreign objects passing through the press. These spots developed on the backing fabric and not the rubber surface.
Driven by the managements' desire to develop a new improved blanket Milchem scientists worked to produce what they believed to be a superior quality blanket.
The main advantage of the developed blanket over current offering was that the synthetic rubber coating face, cemented fabric and rubber impregnated fibres body and pressure sensitive adhesive core were separate entities. The backing, about half the thickness of standard blankets, could be mounted in the normal manner on to an offset cylinder; the face could then be rolled on to the backing under pressure of printing plates. Adhesive was used for binding, therefore enabling the face to be changed by peeling off the backing and replacing it. Importantly the backing of the Polyfibron blanket was developed to last 5 times longer then backing currently used in printing blankets. The advantages offered by Milchem's Polyfibron blanket are therefore:
* Being white in colour the Polyfibron blanket allowed more efficient checking of proofs by printers.
* The Polyfibron blanket could be used for various types of paper and ink, unlike conventional blankets that required printers to use different blankets.
* Minor smashes normally resultant from printing operations could be withstood by the blanket.
* The blanket resisted oil absorption and embossing, therefore it did not require resting. This eliminated the need for alternating printing blankets and the down time associated with the process.
* The body underneath the rubber surface was compressible and hence offered resistance to displacement, leading to less image distortion and wear on image plates.
Milchem's developed Polyfibron blanket tackled displacement, smashing and embossing issues lithographic printers faced with conventional blankets. In addition the Polyfibron blanket provided ability to use different papers and inks and allowed better checking of proofs.
5. Introduction Phase Strategy
5.1 Segmentation
To arrive at their overall Market positioning Milchem need to cater for particular market segments. Milchem's Polyfibron blanket cannot appeal to all buyers in the market place. The lithographic market is widely spread out and varied in their needs and buying practices. Rather then attempt to compete in an entire market against superior competitors, Milchem must identify parts of the market it can best serve profitably.1
Milchem solicited 30 companies to market their product, of these companies blankets were sold to 29 and 60 % of printers gave repeat orders. The 60% repeat order signifies that of the companies targeted, 60% found a usage for the new product. Milchem need to investigate why the remaining 40% did not place repeat orders; if research into this matter indicates these 40% of companies will be using the blanket for a period over 2 months and have hence not had a need to place replace orders Milchem can segment the market based on usage. However if the lack of repeat orders is owed to an issue with the product Milchem need to be aware of the issues and should address them to capture a greater market share. Issues the companies may be facing could include:
* Lack of technical ability to set up the new blankets- Although Milchem did make themselves available on call, perhaps training sessions for the printers could prove more useful.
* Companies may not wish to disturb their current settings and risk their current customer jobs. These customers may need to be convinced of the benefits of the blanket through further promotions, demonstrations and publicity of feed back from satisfied printers in the industry.
The 60% of companies that have placed a repeat order are likely to be companies that have faced issues with smashes or ...
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* Lack of technical ability to set up the new blankets- Although Milchem did make themselves available on call, perhaps training sessions for the printers could prove more useful.
* Companies may not wish to disturb their current settings and risk their current customer jobs. These customers may need to be convinced of the benefits of the blanket through further promotions, demonstrations and publicity of feed back from satisfied printers in the industry.
The 60% of companies that have placed a repeat order are likely to be companies that have faced issues with smashes or to whom better printing quality is a desirable commodity for their business. This would imply Milchem can segment the market based on consumers looking for quality and those looking for cost savings, as a consequence of reduced smashes. Another group of customers, heavy users of blankets, will be attracted to the ease of replacement of the face offered by the Polyfibron blanket to customers; downtime will be a crucial issue to such consumers. An issue that needs mentioning here is that Milchem carried out sales at one backing with two faces, this strategy failed to highlight to consumers the benefit of one backing lasting through five faces, which is one of the Polyfibron blanket's key strengths. Hence in future promotions Milchem need to market one backing with five faces, to ensure the benefit is apparent to consumers. Finally we also note that of the 30 companies Milchem targeted, 29 purchased the product, this confirms that Milchem's chosen market was correct and that these companies ,with greater then two presses, should be targeted.
Milchem's customer targeting is correct; however Milchem need to sell 5 faces with every backing to ensure customers are made fully aware of the Polyfibron blankets' strengths and need to identify why 40% of customers did not place a replace repeat order in two months.
5.2 Target Companies size
Most of the characteristics offered by the Polyfibron blanket will benefit heavy users of printing blankets. Milchem should hence target these companies initially to better understand the product quality under sever usage, establish contacts in the industry and monitor the rate of repeat orders. Milchem were successful in identifying 30 users of this type initially and should continue with the approach used to identify these consumers.
5.3 Location of Companies to target
Data provided by Milchem highlights demand for blankets is concentrated in graphic art centres, 80% of which is concentrated in 10 US states. Given that an average price of $60 per square yard is the average market price and that the total market share of 2,000,000 square yards generates $120M in annuals sales the market size and revenue distribution of the graphic centres is as follows:
Table 1 Market size & Revenue Distribution.
Graphic Art Centre
Distribution
Market Size in square yards
Revenue Distribution in $
Illinois and New York
33%
660000
39600000
California & Ohio
4%
280000
6800000
6 other members of top 10
33%
660000
39600000
Remaining States outside top 10
20%
400000
24000000
Totals
00%
2000000
20000000
Milchem aims to provide its' customers with information and support, therefore it will be easier for the company to focus on graphic art centres close to it. Milchem is situated in Cambridge, Massachusetts therefore states in its vicinity are:
* Close Proximity - Massachusetts, Pennsylvania, New Jersey and New York.
Of the remaining states California is far from Milchem and the others are a similar distance away. Therefore for Milchem to ensure it continues with its high standard of customer service it should initially begin selling to graphic areas in close proximity (Massachusetts, Pennsylvania, New Jersey and New York). This will provide a benefit of low distribution and marketing costs while the product is in its' growth phase. Once the company has built necessary volume from manufacturing efficiencies (economies of scale) and is in a position to support other customers it should then focus on all states other then California (Ohio, Michigan, Wisconsin, Illinois and Missouri). Eventually through growth the company will be in a position to support all states including California.
Milchem should initially concentrate on marketing its Polyfibron blanket to heavy usage printers in close proximity; this will keep initial distribution costs low and confirm strengths of its product under severe usage. Once economies of scale are achieved and a suitable support structure has been established the company should expand to other graphic art centres.
6. Product Positioning
Following the Polyfibron blankets introduction in Boston, The New England Printer and Lithographer, trade journal stated that in their initial experience the Polyfibron blanket had been 'highly encouraging' and confirmed some of the strengths of the Polyfibron blanket stated by Milchem (Section 4 of this report). The article stated the blanket might be a major break through in blanket design that would improve tone reproduction accuracy and extend life of plates. The article confirmed the following benefits:2
* 'The blanket apparently reduced the dot size on the plate over a range of pressure.'
* 'Damaged faces could be quickly stripped off the carcass and new ones rolled on'
* 'Minor smashes did not seem to disturb the compressible face.'
Lithographic printers want to provide their customers with high quality at a low price, therefore their major concerns would be bulges of rubber affecting impressions (i.e. quality) and down time associated with resting or replacement of blankets (i.e. increased costs). The New England article confirmed the ability of the Polyfibron blanket to deal with these issues. Milchem should take advantage of the article and quote it as a source of their positioning statement as follows:
Milchem's innovative Polyfibron blanket offers smash resistance, less down time and better printing as testified by leading industry journals.
The advantages of this product positioning for Milchem would be as follows:
* Milchem will be placed in a different league due to high differentiation of the Polyfibron blanket and its potential value to printers.
* Cost savings received by printers will make them more willing to pay a higher price.
* Publicity of the article will arouse buyer interest in Polfibron technology and provide Milchem with an entry into those companies.
* Competitors are not currently in a position to claim a similar product that reduces down time and can cope with smashes.
* Milchem may be able to patent protect their invention therefore providing them with a competitive advantage for a long time.
7. Market Share and Profit Goals
'The basic product life cycle pattern borrows heavily from the biological model of successive life stages, from gestation and birth, through adolescence, to maturity and eventual demise.'3
* The Introduction Phase - In the immediate post-launch period sales build rather slowly. In this phase a product has not recouped the resources put into its' development. This is strictly a prior stage.3
* Growth phase - During this stage the product takes of and attracts an early majority of consumers, repeat purchasing is encouraged and gaining volume and market share are aims.
* Maturity phase - For many products this is the longest phase. Buyer behaviour and competitor activity are more predictable and eventually market saturation approaches.
* Decline - Products sales decline as new offering enter the market and replace obsolete ones. Profits fall appreciably during this period.
During the introductory phase Milchem will need to focus on creating product awareness and decide how much to spend on promotions. Milchem invested significantly on research and development therefore, its aim must be to recover costs quickly and begin making a profit.
The basic product already exists in the market and Milchem are offering a differentiated product to gain market leadership. It is important to point out that for Milchem to achieve market leadership product differentiation, low price and market expenditure will need to be the focus of the company. In all probability it will not be possible for Milchem to achieve more then 15% of market share in the first year and achieving this percentage will be a significant achievement. The difficulty Milchem will face in achieving a greater market share is that 5 existing competitors cater to 95-98% of the market. To break this hold without counter strategies from the competition affecting Milchem is unlikely, therefore in the short term Milchem should aim for a 15% market share with profits maximised to sustain long term growth.
During the first year of sales, in the introductory phase, Milchem should aim to achieve around 15% of market share and maximise profits to sustain future growth.
8. Pricing Considerations
The drivers of a value-based pricing strategy are the firm's potential to create economic value for customers, its costs to create that value and its competitive advantages in creating value that competitors cannot immediately duplicate at the same cost. The key to greater profitability is to let economic value drive pricing goals and objectives and then manage willingness to pay with marketing and competitive activities that support those goals and objectives.4
A pricing strategy involves establishing cross-functional objectives and synergistic goals to create an organization that can profitably produce and capture value5
Fig. 4 The multiple levels of pricing strategy - Success within each circle is limited by the successful execution of the circles surrounding it.5
Milchem is offering the market a differentiated product with significant benefits to consumers; therefore it is not a price taker. This section deals with the factors considered by Enigma consulting in recommending a price for the Milchem blanket.
Sunk and Variable costs: Milchem data provided overhead costs for 10% of the total market. In the assumptions made by Enigma consulting this cost has been treated as a variable cost. In addition the $500,000 spent by Miclhem on research and development have been treated as a sunk cost.
Costs for Milchem: For the purposes of pricing calculations, Enigma consulting have assumed Milchem will as part of their sales strategy adopt the recommendation of selling 5 faces with each backing and any variation in demand for faces and backing has been ignored. Our calculations on costs to Milchem have therefore brought us to the following conclusions (Appendix A):
* For a 10% market share or 200,000 square yards production of the Polyfibron blanket the direct costs of producing a single face or back will be $11.00 In addition we assume that the overhead and selling costs provided by Milchem will be incurred by them every time a single face or backing is produced. Therefore the cost of these two factors ($14 for Overhead and $4 for Sales) have been accounted for in the total cost of producing a face or back. In addition overhead and sales costs have been considered when calculating marginal cost.
Issues associated with competitor pricing strategy: In Appendix B we have calculated the minimum price at which competition will be willing to sell their blankets, assuming their distributor margin of 22% is in flexible. Competitors will not want to reduce their distributor margins as Milchem have set their distributors margin at 25%, by lowering their 22% margin competitors would provide Milchem with a strategic advantage (Distributors will be keener to sell Milchem products, if a higher margin is paid by Milchem over competitors). Being aware of the fact that the competition incurs cost of $40 per blanket we have concluded:
* The competitions' selling price to distributors is $46.80, which yields a 17% return for them. This calculation has been made on the basis of the average retail price of $60.
* In a price war or during decline of competition sales, should the competition decide to lower price, the lowest retail price of their blankets would be $51.30, assuming the competition do not sell to distributors at a cost below their production costs. Therefore $51.30 is the competitions' minimum band in terms of pricing. Enigma consulting do however wish to point out that selling to distributors at a price below cost may be a strategy employed by the competition to prevent successful entry of Milchem into the market.
Consumer Advantage: Appendix C shows Enigma consulting figures for consumer advantage in purchasing the Polyfibron blanket. Our findings are as follows:
* If Milchem choose to retail its Polyfibron blanket at the industry average of $60, its consumers will gain a 40% advantage of buying its product over that of competitors.
* If Milchem choose to retail their blanket at a price that provides their consumers with no advantage over the competition, Milchem can retail their blanket for $100.
* In the event that a price war occurs with competition, Milchem can still offer their consumers a 30% advantage over competition, provided the competition do not retail their products below the calculated minimum price of $51.30.
* In a price war scenario Milchem will be able to retail their Polyfibron blanket at a price of $85.50
From these findings it can be concluded that if Milchem retail their Polyfibron blanket at a price above $100 (i.e. $50 per face or backing) for both a face and backing they will provide their customers no advantage in purchasing their product over that of competition. Like wise if a price war occurs Milchem should not retail their blanket at a cost above $85.50 for the complete blanket if they wish to provide consumers with a cost advantage of purchasing their product.
Pricing Bands: In calculating our price band figures in Appendix E, Enigma consulting are fully aware of the 25% distributor margin for the Polyfibron blanket. In addition we have calculated marginal cost to be $29 per square yard of blanket. Our calculations have yielded the following information:
* If Milchem sell their Polyfibron blanket at the industry average of $60 per blanket (i.e. $30 per face or back), revenue of $7,200,000 will be generated from 10% market share. The costs associated with this level of production will be $6,960,000 and profit generated will be $240,000.
* If Milchem decide to sell their product at a price that gives their consumers no advantage of purchasing their product over that of competitors and achieve a 10% market share the revenue generated will be $12,000,000. As costs of production will be consistent for this level of production, the profit generated will be $5,040,000.
* In the event of a price war commencing and Milchem being forced to sell their goods at the calculated price of $85.50 per blanket ($42 per face or backing), revenue of $8,400,000 will be generated. The profit achieved in such a scenario would be $3,120,000.
Consideration of appropriate pricing strategy: "The industry consumer is concerned with quality, delivery, price, delivery, support and payment terms'6 In recommending an appropriate pricing strategy for Milchem the competitive advantage, customer reaction and competitive (price) reaction need to be considered.7 Considering these factors and the fact that the Polyfibron blanket will be a differentiated product, we have found the following:
Value of Differential Attribute
Differential Attribute
Approximate Value
Low
Time saved from less frequent need to replace blanket
A competitor's blanket must be wholly replaced each time it wears out. As both the front and back need to be replaced the operation is brought to a complete stop for a long period. In the case of the Polyfibron blanket only once in every five cycles does the backing need to be replaced, normally just the face has to be replaced. The face is simply slipped on to the backing. Therefore time saved in replacement of blankets is an advantage for consumers.
Medium
The Polyfibron blanket can handle various inks and papers.
The Polyfibron blanket will provide consumers with a great advantage in that it can handle various types of printing; currently the industry needs various blankets for different types of printing.
Medium
Savings from shutdowns required for resting
As the Polyfibron blanket is more resilient then conventional blankets it will not require frequent shutdowns for resting.
High
Savings from resistance of Polyfibron blanket to smashes.
This feature is one of the Polyfbron blankets' key strengths. Minimum life expectancy of a conventional printing blanket is 100,000 prints; given that the Polyfibron blanket is more resilient it will have a higher minimum life expectancy and will provide the consumer with significant savings.
High
Improvements in print quality and tone reproduction
The Polyfibron blanket offers significant improvement in this area, as testified by the New England printer journal. As customers of printers value quality of their printing, this feature will be of high value to consumers of the Polfibron blanket.
Table 2 Differential Attributes Value of Polyfibron blanket.
Sensitivity to switching cost: Milchem's customer will perceive the value of the Polyfibron blanket in terms of the performance, efficiency and cost savings it will provide. As printing blankets are core to the business of lithographic printers consumers will need to be convinced of the superior performance and efficiency of the Polyfibron blanket prior to their incurring switching costs.
Consumers will however not be bothered by a higher price for the product, as long as they are convinced of the savings and more importantly quality the blanket can offer to them. Therefore we can conclude that the switching decision of a customer will be based on both performance and price, not just price alone. If we study this quantitatively, we know the average consumption of blanket by a lithographer is $33,000 (556 * 60). Therefore we can conclude that the printing blanket will not be a high value item in terms of cost and the
variation in price can be justified by the value gained from switching to the blanket.8
Enigma consulting recommend that Milchem price the Polyfibron blanket at 20% premium above the maximum price at which no customer advantage is provided; we therefore recommend the Polyfibron blanket be priced at $120. We have arrived at this conclusion after consideration of all factors (which lead us to the conclusion that Polyfibron blanket will be at least 20% better then conventional blankets) and the 'average value of attributes' of the blanket (Fig. 5). Milchems' product is innovative, of superior quality, provides savings in down time and replacement costs and the company strives to provide excellent customer service; hence we are convinced a 20% premium is appropriate. Retailing the blanket at this price will generate a profit of $7,440,000 for Milchem. The break-even point (Appendix G) at this retail price will be 224,517 faces or backs.
Investment Investment
QUANTITY
Fig. 6 The break-even point9
9. Pricing Strategy
In recommending a pricing strategy we remind Milchem that the lowest price is not always the most adequate strategy; it leads to an erosion of profit levels and inability to fund future growth projects; therefore we re-iterate our recommended price of $120. In addition when it comes to low price as a strategy, anyone can give money away, therefore anyone can cut price, but this does not offer sustainable competitive advantage and a competitor is likely to react by cutting prices as well.10
The above argument becomes relevant to Milchem if they decide to take on a penetration pricing approach; they will be forced to introduce the Polyfibron blanket at a price below that of competitors. This strategy will not only lower profits but may also give consumers an incorrect signal that the product is lower in quality than that of competition. In addition as profits are not maximised by this strategy, long-term sustenance could become difficult for Milchem. The only advantage of penetration pricing for Milchem would be the lower price might allow the company to achieve market share easily and possibly leadership position in terms of price. However at what cost these benefits would be realised needs to be carefully considered.
Milchem are new to the lithographic printing market, hence we recommend their focus should be on creating product awareness, highlighting the quality of their product and gaining market acceptance. The company should aim to target high value, high usage customers as potential clients. By retailing at the recommended higher price Milchem will be able to break even sooner and be provided with funds to further innovate and promote their products. Enigma consulting therefore recommends that Milchem adopt a skimming strategy upon entry into the market. This strategy provides another benefit in that it will not provoke the existing market leaders into engaging into a price war upon Milchem's entry into the market. The strategy shall in addition promote to consumers the idea that Milchem's product is of high quality as price is often used as an indicator of quality.
Fig. 7 Price/Quality strategies9
Quality
Low High
Low
Price
High
Therefore to conclude in terms of pricing we, Enigma consulting recommend that Milchem retail the Polyfibron blanket at a retail price of $120 per blanket or $60 per face or back. In addition we highly recommend Milchem sell their product as a composition of 1 back for 5 faces. In addition to clearly demonstrating the strength of the Ployfibron blankets' backing, selling the blanket in such a way will reduce the need of frequent deliveries to customers and thereby reduce delivery costs. Finally customers should be encouraged to orders sets in the ratio of 1:5 once they are content with the product.
0. Distribution
Sales Force
Manageable number of customers
Customers geographically central
Sales process long and complex
Customer requires training and support in use of product
Distributors
Widely spread customers
Customers are dispersed
Consumer buys multiple goods from single distributor
Product requires little technical assistance.
Fig. 8 Sales force vs. Distributors11
With respect to distribution of the Polyfibron blanket, Enigma recommends that Milchem use a sales force and not distributors, are reasons for this approach are:
* Milchem need to establish a personalised relationship with their consumers to gain market share, hence a personal touch will be appropriate.
* As recommended earlier, we suggest Milchem initially sell to consumers in their geographical vicinity. This approach will require Milchem to make personal calls on customers and build long-term relationships, hence the need for a sales force. Selling to the geographical vicinity has economic benefits as well, lower support and distribution costs.
* Using a sales force will enable Milchem to get feed back from consumers directly. As Milchem is new to the industry, this feedback will enable it to timely resolve any critical issues and vary its marketing mix accordingly.
* Once a rapport has been built between the sales force and consumers, Milchem will be provided with information on industry trends and any new products on the horizon, keeping them in touch with consumer requirements and potential threats. Milchem may wish to provide the sales force with incentives for such information.
The above strategy also provides benefits in that it enables Milchem to establish itself in the market place and be selective about which consumers it wishes to target as it grows. In addition once the product is established, Milchem will find that distribution companies will approach it for distribution rights. At that time Milchem will be in a position to negotiate a lower distribution margin to the current agreement of 25%, if nothing else Milchem should be able to renegotiate the figure to the industry standard of 22%.
With respect to distribution of the Polyfibron blanket, Milchem should use a sales force rather then distributors during the short-term phase of the product life cycle.
1. Long Term Marketing Strategy
Once Milchem has established itself in the market place, it will have achieved economies of scale (therefore will be in a position to tackle competition head on) and resolved any production issues. In addition at such time Milchem will have developed strong links with consumers, captured key cliental and be in possession of a product that has met consumer expectations and excels in its performance in comparison to competitor products.
Therefore at the beginning of the Long-term strategy, the growth phase of the product cycle, Milchem will be looking to gain maximum market share. During this phase Milchem will need to focus on heightening product awareness ad need to aggressively market its product. Milchem will need to remember that to achieve market leadership (goal being of 25 - 50% market share) focus on differentiating a product, high marketing expenditure and retailing at a low price will become crucial to the goal.
The single most important factor in Milchem's ability to successfully carry out the recommended long term strategy by Enigma consulting will be its ability to secure patent rights for the Polyfibron blanket. If Milchem fails to achieve this task, it will not be long before its competitors launch a similar innovative product and the whole picture could change within a period of 6 months. In the case of such an event occurring Milchem will need to refocus and develop a new long-term strategy with focus on new price and distribution plans. Enigma's recommendation with respect to the two scenarios are as follows:
If patent is achieved: If the company is successful in obtaining a patent, it can continue to retail at a premium price for the duration of the patent. Milchem will in such a scenario have capitalized on its relationships with key consumers and have a readily available market for its products and source to gain information from.
Milchem's competition will not be in a position to imitate the product and the company will continue to enjoy an advantage in the market. At this stage Milchem should invest in further research and development to create new innovative products and improve its existing product range. The process of identifying what is required will not be too difficult as Milchem will have feed back from consumers and therefore know what is required. By ensuring they continue to innovate and improve their product range Milchem will be to maintain their competitive advantage and by acting on feed back gather greater market share, towards the company goal of 25 - 50% market share.
If patent is not achieved: If Milchem fail to get a patent they should be in a position were fixed costs have been recovered and some profit has been generated. In such a scenario enigma recommend that Milchem adapt their strategy to penetration pricing, i.e. lower prices. This strategy will enable Milchem to capture consumers that are price sensitive and serve as a deterrent to competition that will be in the introductory phase of launching their products and hence need to recover costs.
1.1 Long term distribution strategy
In the growth phase and henceforth Milchem will have established their product and be in a position to negotiate a better deal with distributors. Regardless of having achieved a patent or not Milchem should now involve distributors and negotiate the best possible deal. The advantages of involving a distribution channel at this stage will be:
* Distributors can penetrate the market and reach small-scale producers.
* Distributors will be able to focus on regions far away from Boston, such as California.
* As teething issues with most manufacturers will have been resolved, repeat deliveries a servicing in existing graphic at centres could be assigned to the distributors.
* After training on technical and operational aspects of the blanket distributors could be used to serve as suppliers to existing accounts and customers of Milchem.
Once Milchem's distributors are fully trained and able to cope with demands placed on them, Milchem's existing sales force should become more focused on maintaining customer relations. The roles of the sale force should now become:
* Carry out planned visits to customer sites for feedback and suggestions.
* Management of the distributors and collection of data provided from customers for market analysis.
The role of the sales force will become exceptionally important, if a patent is not achieved and it will be necessary to ensure that customers value Milchem over competitors. Milchem's sales force will need to focus on the fact that the industrial buyers perception of the company and the level of affiliation they feel towards Milchem will govern further purchases. Whilst managing distributors the sales force will need to ensure:
* Adequate inventory levels are maintained by distributors
* Distributors remain focused on sales and are provided incentives to sell Milchem products over those of competitors
* Support and training are provided to the distributors
* Appropriate sales targets are set for the distributors.
Finally other factors that must be considered with respect to the distributors and sales force are:
* To avoid conflict all sales should be credited to distributors and sales should be credited with distributor performance.
* The sales force should also be provided with incentives to ensure key accounts are retained and market data is appropriately collected and analysed.
* Milchem's management will need to involve them with customer management. The benefits of such a action will be dependency on sales people will be reduced, the company shall be able to differentiate itself as open and customer focused and finally by interacting with consumers management will be aware of opportunities available in the market that they could capitalize on.
Once Milchem enter the growth phase of the product life cycle distributors should be deployed. However Milchem's sales force should remain focused on customer relations and the company's management should liase with customers to ensure the image of being a customer focused company is maintained.
2. Research and development and further promotion
Milchem should continue with their research and development activities to further improve existing products and create new innovative products, both of which shall ensure their share of the market is sustained. With respect to the Polyfibron blanket research and development could be focused on:
* Improving tolerance to +/- 0.005 of the irregular surface
* Providing resistance to smashes arising from heavy particles.
* Increasing the life of the faces of Polyfibron blankets
With respect to promotion, Milchem will need to communicate their price and performance to consumers. This should be achieved through use of journals, trade shows and industry magazines. By engaging in such activities not only will Milchem raise customer awareness of their products but will gain industry contacts, maintain knowledge of their product line, develop relations with distributors and get feed back on their products.
Milchem should continue to invest in research and development as improvements to the existing product line and creation of new innovative products will be crucial to Milchem maintaining or increasing its market share.
3. Control & Conclusions
The Polyfibron blanket developed by Milchem is a superior product and Milchem should capitalize on this innovative product by charging a premium price. To monitor the success of the Polyfibron blanket, Enigma consulting recommend Milchem put in place the following administrative controls:
* A monthly audit should be carried out to analyse the external environment, marketing strategy, marketing system and productivity.
* A quarterly survey of consumer satisfaction/dissatisfaction, awareness and perceived quality be carried out. The sales force should carry out this task, as they will have developed a personal relationship with customers.
* A mechanism to ensure the finance division is in touch with all aspects of the business and provides regular feed back to them should be created. Financial data is essential to ensuring the marketing strategy is successful, measurement of anticipated profits, understanding how products are perceived by the market and how the marketing strategy is affecting other parts of the business.
Finally Enigma consulting would like to acknowledge that Milchem's overall marketing strategy rests with the company's management. In addition we have recommended actions to Milchem that are not in line with senior management thoughts; therefore we would like to state that successful implementation of this plan will be dependant on management support.
4. Bibliography
. The Strategy and tactics of pricing by Thomas Nagle and Reed Holden
2. Strategic Management by Garth Saloner and Joel Podolny
3. Marketing - Principles and practice by Dennis Adcock
4. Principles of Marketing by Kotler and Armstrong
5. Marketing course lecture notes and slides by Prof. Gordan Mandry and Prof. Jikyeong Kang
6. How do you know when price is right? by Prof. Robert Dolan
7. Pricing: A value based approach by Prof. Robert Dolan
APPENDIX
Appendix A - Calculation of direct cost to produce a face or back for the Polyfibron blanket :
Cost of Raw material per square yard of Blanket = $14
Other manufacturing costs = $ 8
Total Manufacturing cost for a single face & blanket = $22
Therefore cost of producing either Face or Blanket = $22/2 = $11.00
Appendix B - Minimum competitor retailing price:
Industry average retail price for a printing blanket = $60.00
Distributor margin 22% of retail price = 22/100 * 60 = $13.20
Therefore Competitors retail price to distributors is $60 - $13.20 = $46.80
Therefore Competitor's return % = 6.8 / 40 * 100 = 17%
Min. Competitor Retail Price: Cost of $46.8: Retail price of $60
Cost of $40.0: Retail price = 40 * 60 / 46.8 = $51.30
Appendix C - Calculation of customer advantage:
Scenario 1. Competitor retails to distributors at industry average price
If customer buys from competitor cost of 5 blanket replacements = 60 * 5 = $300
If customer buys from Milchem cost of 5 blanket replacements is cost of 1 blanket and 4 faces therefore at sae costs = 60 + (30 * 4) = $ 180
Therefore customer pays 180/300 * 100 = 60% of what they would pay for competitor blanket. The consumer would save 40% for each 5 blanket replacement cycles by buying the Polyfibron blanket.
Therefore the maximum Milchem can charge for 5 blanket cycles, i.e. give customer no savings is 300/3 (as 4 faces equal 2 blankets plus the original blanket = 3 blankets price) = $100 per blanket.
Scenario 2. Competitor retails to distributors at cost
What happens if competitors lower price to minimum and Milchem does not reduce price?
Cost of buying from competitor is then 51.3 * 5 = $256.50
Therefore customer pays 180/256.50 * 100 = 70.2% of what they would pay for a competitors blanket. The consumer would still save 29.8% for each 5 blanket replacement cycle by buying the Polyfibron blanket.
In such a scenario the maximum Milchem can charge for 5 blanket cycles, i.e. give the customer no advantage is 256.5 / 3 = $85.5 per blanket.
Appendix D - Marginal cost calculation :
Marginal cost of producing a single face or back for the Polyfibron blanket assuming overhead and selling costs are variable costs = $11 + $14 + $4 = $29.00
Appendix E - Profit Calculations :
Scenario 1. Milchem retails blanket at industry average price
If Milchem sells the Polyfibron blanket at industry average of $60 per square yard (i.e $30 per face or backing) with its strategy of 5 faces per backing the profit it will generate will be:
Revenue
* 200,000 faces * $30 = $6,000,000
* 40,000 backs * $30 = $1,200,000
Total revenue = $7,200,000
Cost of Faces and backing
* 200,000 faces * $29 = $5,800,000
* 40,000 backs * $29 = $1,160,000
Total cost of goods = $6,960,000
Therefore Profit = $7,200,000 - $6,960,000 = $240,000.00
Scenario 2. Milchem retails blanket at $100 (i.e. consumer given no advantage)
If Milchem sells Polyfibron blanket at maximum price possible of $100 per square yard (i.e. $50 per face or backing), with its strategy of 5 faces per backing the profit it would generate would be:
Revenue
* 200,000 faces * $50 = $10,000,000
* 40,000 backs * $50 = $2,000,000
Total Revenue = $12,000,000
Cost of faces and backing is still $6,960,000
Therefore Profit = $12,000,000 - $6,960,000 = $5,040,000.00
Scenario 3. A price war
In the scenario that competitors reduce their price to a level where they have no profit and Milchem can only chare $85.5 per square yard (i.e. $42 per face or backing), with its strategy of 5 faces per backing the profit Milchem would generate would be:
Revenue
* 200,000 faces * $42 = $8,400,000
* 40,000 backs * $42 = $1,680,000
Total Revenue = $10,080,000
Cost of faces and backing is still $6,960,000
Therefore Profit = $10,080,000 - $6,960,000 = $3,120,000.00
Appendix F -Profit if price ($120) recommended in light of value of attributes is adopted by Milchem.
If Milchem sell the Polyfibron blanket at a retail price of $120 ($60 per backing), in light of the value of the attributes of the Polyfibron blanket profit will be:
Revenue
* 200,000 faces * $60 = $12000000
* 40,000 backs * $60 = $2400000
Total Revenue = $14,400,000
Cost of faces and backing is still $6,960,000
Therefore Profit = $7,440,000.00
Appendix G - Break-even Calculations:
Calculation of break-even point at retail price of $120 per blanket for development of 200,000 Polyfibron blankets:
Profit per face or backing made by Polyfibron = $7,440,000 / 240,000 = $31
Therefore to break even Milchem will need to sell $6,960,000/$31 = 224,517 faces or backs
Principles of Marketing - Kotler Armstrong
2 Milchem - Polyfibron blanket case study
3 Chapter 20, Marketing- Principles and Practice by Dennis Adcock.
4 The Strategy and Tactics of Pricing - A Guide to profitable decision making by Thomas T. Nagle
5 Strategic Management by Garth Saloner & Andrea Shepard
6 Industrial distribution system by Prof. E.Correy, HBR
7 Lecture Notes 'Developing Pricing Strategy' by Gordon Mandry, Principles of Marketing,
Manchester Business School
8 Lecture Notes 'Developing Pricing Strategy' by Gordon Mandry, Principles of Marketing, Manchester Business School
9 Marketing - Principles & Practice by Dennis Adcock & Caroline Ross
0 The Strategy and tactics of Pricing by Thomas Nagle
1 Principles of Marketing lecture slides by Gordon Mandry, Manchester Business School
