deco line - case study -

A Product of Canty International

DECOLINE

AGENDA

IntroductionProblem

Target MarketSWOT Analysis

Cost Based PricingCompetitor Based Pricing

Value Based PricingAlternatives 1,2,3

SolutionPlan of ActionAssumptionsKey ConceptsReferences


DECOLINE

INTRODUCTIONCanty International is a Canadian company that manufactures woll systems and coverings for business in the hospitality industry.

They have been approached by Diana Cromwell from Bryant Inns, inquiring about a new product that is durable, sound proof, and fire resistant with an extended life

Canty developed the “Decoline”, a techno-fabric and bamboo wall covering in response


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PROBLEM

What pricing strategy should Canty International use to set a selling price for the Decoline? This should reflect the value of the product while still maintaining desired profit levels for target sales of 500 m2 per month.


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TARGET MARKET

•Hospitality businesses such as hotels, conference centers, and spas

•Greater Vancouver Regional District is single most popular tourist destination in BC1

•Downtown core has 53% of regional hotel rooms and 88% of the city’s hotel rooms are located in downtown Vancouver2

•Mid-range to high-end businesses which place importance on creating a quiet ambience and aesthetic appeal


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SWOT ANALYSIS

Strengths• Established company in the hospitality industry• Innovative R and D department; cutting edge• Existing exposure in local industry with customers already

approaching us with RFP’s

Weaknesses• Decrease in total profits by transferring resources from one

product to another• Liability of equipment investment needed to produce

Decoline• Production levels below optimum capacity (77%)


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SWOT ANALYSIS

Opportunities• Build loyal customers like Bryant Inns• Maximize profits with the possibility of high perceived value

of Decoline• Capitalize on the booming hospitality industry in Vancouver (ie

Olympic Games, popular cruise ship port)

Threats• Businesses not perceiving value of the product• Unstable economy may stall the hospitality industry• Competitors may introduce a competitive product


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COST BASED PRICING

Break-Even

(Assumption $5.40 gained in revenue is also $5.40 spent in costs)

@500 m2 Decoline sold

Costs=Revenues 12369.24 + 5.40(500) = 500x + 5.40(500)

x = $24.74/m2

(selling price of Decoline)


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COST BASED PRICING

Floor Price

We are creating a floor price that involves setting a price that achieves 10% markup on costs

Rate of markup=M/costs .10=M/$24.74

M=$2.47

Floor price = $27.21/m2


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Selling Price/m2 $27.21 $35.00 $40.00 $45.00 $76.10

Revenue $13,605 $17,500 $20,000 $22,500 $38,050

Variable costs $6340.49 $6340.49 $6340.49 $6340.49 $6340.49

Contribution $7264.51 $11,159.51 $13,659.51 $16,159.51 $31,709.51

Fixed costs $6028.75 $6028.75 $6028.75 $6028.75 $6028.75

Net income $1235.76 $5130.76 $7630.76 $10,130.76 $25,680.76

Profit-volume ratio 53.4% 63.8% 68.3% 71.8% 83.3%

Sales volume (m2) Cost of materials/m2 Selling price/m2 Revenue Net income/loss

500 $6.50 $11.50 $5750 -$4139.20

1000 $6.50 $11.50 $11,500 -$2292.40

2000 $6.50 $11.50 $23,000 $1401.02

2598 $6.50 $11.50 $29,877 $4391.20

Current product monthly income analysis

Potential selling prices and monthly income analysis for Decoline


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10 year Profit analysis

Wall Panel Sales Volume(m2) Selling price/m2 Monthly income 10 year incomeCurrent product 500 $11.50 -$4139.20 n/aDecoline 500 $40.00 $7630.76 $7630.76Decoline 500 $45.00 $10,130.76 $10,130.76

Current product 1000 $11.50 -$2292.40 n/aDecoline 1000 $40.00 $21,281.25 $21,281.25Decoline 1000 $45.00 $26,281.25 $26,281.25

Current product 2000 $11.50 $1401.20 $7006Decoline 2000 $40.00 $54,620 $54,620Decoline 2000 $45.00 $64,620 $64,200


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COMPETITOR BASED PRICING

Research showed that competitor pricing for high value wall paneling and systems was in the range of $30 to $75 per square meters. A closecompetitor price was $40 per square meter.


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VALUE BASED PRICING

Achieving value perception based on the price point.

Setting price high may resonate high value.

Setting price too high may cause loss of clients.

Setting price low may signify a bargain to the clients.

Setting price too low may signify a weak product.

Consider premium pricing and cost of ownership strategies. (Mentioned later)


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ALTERNATIVESAlternative 1 – Premium Pricing (Competitor-Based Pricing Strategy)Priced deliberately higher than its’ competition. Consumers will perceive Decoline to be a superior product

Advantages•Allows for premium market penetration•Creates an exclusive brand perception and image for Decoline•Maximizes the sales price per unit sold

Disadvantages•High cost may cause decreased demand•Dissatisfied clients if high expectations aren’t met•May be difficult to establish high value and separate itself from competitors


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ALTERNATIVESAlternative 2 – Price Skimming (New Product Pricing Strategy)Clients may be willing to pay a higher price for an innovative new product like Decoline. Once sales decrease, the price of Decoline can be lowered to capture the next most price sensitive market segment

Advantages•A higher sale price will fortify a premium brand image•Consumers will perceive Decoline to be a superior good•Flexibility in price, may create value for more price sensitive clients

Disadvantages•Consumers may not want to pay higher prices for wall coverings•If consumers fail to see the value in a premium wall covering, Decoline will not be profitable•Skimming prices may compromise perception as a premium product


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ALTERNATIVESAlternative 3 – Cost of Ownership Method (Value-Based Pricing Strategy)When compared to its competition, Decoline costs less over time and consumers will actually save money by making a higher initial investment.

Advantages•Consumers will perceive Decoline to be a cost-effective alternative•Positioned to steal market share from its competition quicker•Maximizes profits while commanding higher sales prices

Disadvantages•Requires extensive consumer research to determine value perception•Pricing must take into account possible changes in value perception•Consumers may not be willing to make a high initial investment when buying wall coverings, even though they will save money in the long-run


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SOLUTION

Alternative #3, cost of ownership pricing strategy, will be implemented.

This strategy involves comparing the cost of ownership prices of the current product and the Decoline. This method creates value in the eye of the consumer because the price of Decoline over it’s life time will be less than that of the current product.

We are setting a selling price for Decoline of $45.00/m2

Cost of ownership for Decoline at $5.40/m2 per year compared to $8.15/m2 of current product


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DecolineSelling price/m2 Cost of ownership/m2

$27.21 $3.26$35.00 $4.04$40.00 $4.54$45.00 $5.40$76.10 $8.15

COST OF OWNERSHIPCurrent Product

Selling price/m2 Cost of ownership/m2

$11.50 $8.15


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PLAN of ACTION

Week 1• finalize R and D, cost analysis, concept testing, and order equipment ($5130)• hiring sales representative – budget: $18/hour and 6% sale commission•Purchase business cards for sales representative - $100 •Contact graphic designer to produce brochures: budget: $500

Week 2•Send rep on sales call to Bryant Inns’ purchaser, with proposal•Take brochure design and print off first-run ($1000)•Start pre-fabrication of bamboo backing for first order•Start website update process ($600)•Develop trade magazine advertisement, purchase the quarterly ad space , and purchase search engine optimization ($1200)


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PLAN of ACTION

Week 3• begin production of Decoline (conditional on signed contract by Bryant Inns)• Launch Decoline marketing campaign (website up, brochures complete)•Run booth at BC Hospitality Industry Conference on Nov. 22-24 2009.3 ($1000)

Week 4•Make appointments and send rep on sales calls to downtown hotels - niche marketing•Do research on new developments in the GVRD and approach them•Focus on Ritz-Carlton, Hotel Georgia, Westin Bayshore renovations, and Hotel Indigo among other developments


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PLAN of ACTION

Pricing Tactics•Quantity discount – If client purchases 2000 m 2 we will reduce the price to $40.00/m2 (cannot be combined with early purchase)• Early purchase discount – We will extend a 10% purchase discount to any client that places an order for Decoline within the first quarter of operations• Cash discounts – we will offer 3/10, n/30 terms

Long-run plan• follow up with Bryant Inns and get feedback on Decoline (test marketing)•Continue one-to-one marketing, sales calls, cold calls, internet marketing •Possibly expand the current product into residential market •Consider geographical expansion into developing markets on Vancouver Island and Kelowna


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ASSUMPTIONS

-Variable costs do not decrease with larger purchases

-Everything produced is sold

-Taxes are not taken into account

-Fixed costs for the current product are the same as Decoline

-Cost of installation (labour) is offset by the installation price charged to client

-For the 10 year income comparisons we are assuming that the client would update their paneling every 2 years for the current product

-The cost of materials for the current product is $6.50/m.4, 5


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KEY CONCEPTS-Break-even point

Ch. 12-Value based pricing methodCh. 12-Cost of ownership pricing strategy Ch. 12-Fixed costs and variable costsCh. 12-Premium pricing

Ch. 12-Price skimming

Ch. 12-Pricing tactics

Ch. 12-Quantity discount

Ch. 12-Cash discount

Ch. 12-Beta testing

Ch. 10-Test marketing

Ch. 10-RFP (Request-for-proposal)Ch. 7


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REFERENCESB.C Room Revenue Report. (1996).

1Retrieved October 29th, 2009, from

http://www.bcstats.gov.bc.ca/pubs/tour/trr9607f.pdf

Tourism- Economy Sector. (2005).2

Retrieved October 30th, 2009, fromhttp://vancouver.ca/commsvcs/planning/corejobs/pdf/research/11tourism.pdf

B.C Hospitality Industry, (2009).3 Retrieved

November 1st, 2009, fromhttp://www.hospitality-trade.com/ Portafab. (2009).


http://www.portafab.com/ USA Wallpaper, (2009).


http://www.usawallpaper.com/

http://www.bcstats.gov.bc.ca/pubs/tour/trr9607f.pdf

http://vancouver.ca/commsvcs/planning/corejobs/pdf/research/11tourism.pdf

http://www.hospitality-trade.com/

http://www.hospitality-trade.com/

http://www.portafab.com/

http://www.usawallpaper.com/

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