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To:Donald Janus From:XXX Date:XXX Subject: Advising a price promotion plan for Culinarian cookware [pic] Culinarian is a strong brand that is ready for a successful 2007. We have reviewed the marketing mix of push vs. pull tactics, compared them to the industry, and examined past performance in this area. Most importantly, we have examined 2004’s price promotion and drawn conclusions that have allowed us to make recommendations for this coming year. Outlined below are our findings, with accompanying appendixes.
Culinarian uses an acceptable blend of push and pull tactics; they primarily utilize push for their premium cookware products. This is advantageous for Culinarian because the majority (55%) of consumers with income greater than $75,000 would be more likely to shop for cookware at stores with attractive displays or informed staff. Only 10% would respond to multimedia advertising while 20% would respond to a sale (Appendix 1). According to these results, the majority of the market would respond to measures affected by push tactics (displays and informed sales staff).
Culinarian implements a push strategy by having sales visits (12 per year versus competitors’ 6 visits per year), having a higher retail margin for its products (52% versus competitors’ 48%), and using an incentive program for retail clerks. These factors create more informed retailers and incentivize retailers to create Culinarian displays and sell Culinarian products. Culinarian’s limited pull tactics remain relatively ineffective. These involve a higher than average advertising expenditure (4% of sales versus 3% of premium competitors) and the lowest brand awareness for the high income target market.
They should not focus so much on this tactic, as a low proportion of the target market is responsive to it. Price promotions are beneficial to a pull strategy because a significant proportion of the market would be motivated to buy cookware if on sale. After reviewing the 2004 price promotion, there are two key variables that determine its success and profitability. The first is the expected number of units sold for the 2004 year. The consultants were very optimistic when projecting 119,000 sales of CX1 after only 78,000 units were sold the previous year.
On the other end of the spectrum, Victoria Brown, senior sales manager, believed that sales should be 24% below 2003 numbers because of the January and February units’ slump. This would net just fewer than 60,000 sales in 2004 (Appendix 2). The second variable is variable cost, which has wide disparity between the consultants and Mrs. Brown. The consultants included higher variable costs than Brown ($52. 05 vs. $38. 64 per unit) who incorporated only labor and raw materials in her accounting (Appendix 3).
This leads to less profitability and, ultimately, a negative return of $-469,489 thousands as a result of the promotion in the consultant’s analysis. Brown on her side calculated an increase in revenue of about $2. 4 million (Appendix 4). Our own analysis of the 2004 promotion incorporates a more realistic function of projected unit sales and variable cost. Rather than determine a growth rate for 2004, a sales estimate was determined by using the percentage of sales by month from 2005.
Knowing the units sold in January 2004 without the promotion, sales were estimated at an average of 23. 3% for March through May in relation to the full year. This creates a realistic projection of 99,800 sales of CX1 (Appendix 5). We also made the assumption that variable costs mirrored that of Mrs. Brown’s analysis. Another key factor taken into account for the profitability of the CX1 promotion is the cannibalization it might have caused. DX1 is the closest Culinary Cookware competitor and the effect of the promotions cannibalization is a real threat.
However, judging its exact effect can become subjective so we performed a worst case scenario (Appendix 6). Due to the year over year growth of 20% in DX1, we considered the cannibalization to be minimal. With these projections and assumptions in mind, we confidently determined that the 2004 Price Promotion was not only effective, but grossed an extra $1. 065 million in profit as well. Looking to 2007, a price promotion program would enable Culinarian cookware to: 1. contribute to the minimum 15% revenue growth’s objective set by the firm’s CEO Audrey Roux 2. ncrease its market share on the premium cookware segment and 3. build brand awareness among consumers. We recommend Culinarian to run a 15% price promotion on the CX1 and DX1 categories of products during the high peak seasons (June-July and November-December), and to advertise nationally on this promotion. We feel that a 15% discount rate is more adapted to the brand’s premium identity than the 30% discount rate suggested by Brown. Indeed, it shows more consistency with the high-end pricing strategy of the group ($200 rather $199. 9) and seems fairly adapted to consumers’ expectations since even at a rate of 10% -that half of the retailers ran in 2004- the promotion remained successful. A 15% discount rate should encourage retailers to maintain the suggested discount rate rather than lowering it because Culinarian would request a lower contribution from retailers: from a 4% to a 3% loss in their margin. We believe that the best way to enhance sales and to maintain the premium identity of the brand is to run that price promotion on the two lower priced products: CX1 and DX1.
This would avoid cannibalization between these two products that target high income households rather than professionals. For the price promotion to build the highest awareness and capture the maximum amount of new customers, we believe that the trade should negotiate the peak seasons sales timing with retailers: June/July and November/December. Though these timing slots are already “reserved’ by competitors, trade and account managers have strong negotiation arguments.
Culinarian provides them with the best gross margins, even while running price promotion ???still above one point compared to Le Gourmand and Robusto, which provide a 48% gross margin. Also, account managers should increase visits and enhance retail merchandising incentive programs (push), offering exceptional retail clerks one additional free piece of cookware during price promotion periods. We recommend encouraging the retailers to promote the promotion locally. Since the promotion will be run on peak seasons, this kind of advertising will reach a higher number of customers and favorably ncourage them to make their first purchase of Culinarian’s cookware, while still encouraging existing users to buy additional units of the brand. Culinarian has indeed seen success in the past with??price promotions. The higher revenues generated encourage our team to recommend an annual price promotion. Most importantly, the price promotions will renew a motivation in the sales force to make it better each year, making room for innovation in the promotion process, and satisfying the consumer’s need for “push” advertising. APPENDIXES Appendix 1: Buyer motivation’s factors Appendix 2: CXI Line Trade Orders: 2002-2004 | | |?? |2002 |2003 |2003 (Brown): 24% decrease |2004 | |January |11,661 |46,201 | |26,133 | |February |10,314 |20,267 | |24,711 | |March |14,412 |27,717 |21,064. 2 |47,191 | |April |38,870 |24,982 |18,986. 32 |89,423 | |May |37,965 |26,079 |19,820. 04 |48,373 | |June |21,137 |29,420 | |39,605 | |Total March-May |91,247 |78,778 |59,871. 8 |18,4987 | |Total Spring Season |134,359 |174,666 | |275,436 | |Total Fall Season |131,683 |222,544 | |184,356 | |Total Year |266,042 |397,210 | |459,792 | |Year Index |100 |149 | |173 |
Appendix 3: Pricing and Cost data for Culinarian CXI 2004 Promotion based on Consultant’s (a) and Ms. Brown’s (b) assumptions |(a) | |Per Unit |Nonpromoted |20% Promotion | |Avg retail selling price |$150. 00 |$120. 00 | |Avg manuf selling price |$ 72. 00 |$ 62. 40 | |Variable Costs |$ 52. 05 |$ 52. 5 | |Avg contribution |$ 19. 95 |$ 10. 35 | | | | | | | | | |(b) | |Per Unit |Nonpromoted |20% Promotion | |Avg retail selling price |$ 150. 00 |$ 120. 0 | |Avg manuf selling price |$ 72. 00 |$ 62. 40 | |Variable Costs |$ 38. 64 |$ 38. 64 | |Avg contribution |$ 33. 36 |$ 23. 76 | Appendix 4: Incremental Contribution impact of 2004 Price Promotion |Under Consultant’s assumptions: | | |Normal Sales w/o Promotion (March-May) |$ 119,504. 0 | |Incremental Contribution Impact |$ (469,489. 35) | |Under Ms. Brown’s assumptions: | | |Brown’s Normal Sales w/o Promotion (March-May) |$ 59,871. 28 | |Incremental Contribution Impact |$ 2,397,985. 2 | Appendix 5: Estimated Promotional contribution based on our assumptions. |?? |% of 2005 Total Sales | | |January |6. 1% | | |February |6. % | | |Jan-Feb |12. 8% | | |?? |?? | | |March |6. % | | |April |7. 0% | | |May |9. 4% | | |March-May |23. % | | | | | | |Estimated Nonpromotional Total Sales (2004) |428,410 | | |Estimated Nonpromotional March – May Sales |99,819 | | | | | | |?? |Consultant Variable Cost |Brown Variable Cost | |Estimated Promotional Contribution |$ (76,783. 41) |$ 1,065,312. 7 | Appendix 6: Estimation of Cannibalization due to Price Promotion |Percentage Increase Year to Year |2003-2004 |Average |Non-Promotional Average | |PROX1 |14% |-0. 1% |-7. 2% | |SX1 |0% |6. 9% |-28. 6% | |DX1 |20% |29. 8% |19. % | |CX1 |58% |10. 9% |5. 8% | When considering only non-promotional years, DX1 has an average growth rate of 19. 6%, which is slightly lower than its actual growth rate in 03-04. We would expect cannibalization to result in a growth rate lower than the average. Therefore, we do not believe cannibalization occurred in the price promotion of 2004. Only the DX1 unit was chosen for cannibalization because it is the closest is price and quality. We believe it is unrealistic to consider the growth rate change for other item types during the 2004 price promotion.