Exhibit A provides detailed pro forma income statements prepared from the financial
forecast provided in Exhibit 7 of the report. These income statements also indicate
cannibalization as a percentage of sales for both strategies by computing the cannibalization
costs in dollars per year through the formula: Cannibalization % x Unit Sales x Contribution
Margin per Unit. The average contribution margin per unit for products Pro and Avail are
detailed in the report as $1.76 for razors and $2.80 for cartridges. If a mainstream strategy causes
60% of Clean Edge’s sales to come from Pro and Avail customers, then 60% of the projected
mainstream Clean Edge sales is the number of unit sales that would be cannibalized from
Pro/Avail products. By multiplying the unit sales by the contribution margin for either strategy,
we can project the profit lost from Pro and Avail customers who have transitioned to the new
Clean Edge product.
Paramount's Pro Forma Financial Statements
Niche Strategy
2011
2012
Sales Revenue
Razor
Cartridges
Total Sales
Cost of Goods Sold
Razor
Cartridges
Total Cost of Goods Sold
Gross Profit
Operating Expenses
Advertising
Consumer Promotions
Trade Promotions
Capacity Costs
Total Operating Expenses
Operating Profit
Profit as a % of Sales
Cannibalization %
Mainstream Strategy
2011
2012
$9,090,000
29,400,000
38,490,000
$13,635,000
73,500,000
87,135,000
$25,839,000
61,578,000
87,417,000
$31,320,000
136,218,000
167,538,000
5,000,000
9,720,000
14,720,000
23,770,000
7,500,000
24,300,000
31,800,000
55,335,000
15,642,000
22,176,000
37,818,000
49,599,000
18,960,000
49,056,000
68,016,000
99,522,000
7,000,000
6,000,000
2,000,000
610,000
15,610,000
8,160,000
21.20%
35%
7,000,000
6,000,000
3,000,000
870,000
16,870,000
38,465,000
44%
35%
19,000,000
17,000,000
6,000,000
1,710,000
43,710,000
5,889,000
7%
60%
17,000,000
14,000,000
8,000,000
2,450,000
41,450,000
58,072,000
35%
60%
Cannibalization Cost ($)**
Razors
Cartridges
Total Cannibalization
Profit After Cannibalization
$616,000
3,920,000
4,536,000
3,624,000
$924,000
9,800,000
10,724,000
27,741,000
$3,484,800
16,632,000
20,116,800
(14,227,800)
$4,224,000
36,792,000
41,016,000
17,056,000
**Cannibalization costs computed by the formula:
Cannibalization ($) = Cannibalization % x Unit Sales x Contribution Margin
Per Unit
The projected loss in sales of Pro and Avail in 2011 of the niche strategy is 350,000 units
compared to 1.98 million units for the mainstream product launch. The profit after
cannibalization for the niche strategy over 2011 and 2012 produces profits of $31,365,000, while
the mainstream strategy produces a large net loss in the first year and total cumulative profits of
$2,828,200 following the first two years. After analysis of the effects of Clean Edge’s
cannibalization of Pro and Avail’s sales, it is apparent that a niche strategy will lead Paramount
to a higher degree of success in the super-premium segment. While a broad mainstream approach
leads to higher sales numbers, it also causes higher costs and lower profits. I believe that
Paramount should position the Clean Edge razor as a niche product to effectively complement
their current product portfolio and boost their dominance in the nondisposable market.
Clean Edge’s branding strategy will have a large effect on the product’s perceived
quality, the advertising expense required for a successful launch, and the cannibalization of
existing products’ sales. The company must select a branding strategy that will effectively
promote their niche strategy when advertising the product; these branding considerations are
whether Paramount should focus advertisement on the “Clean Edge” name as a new and
innovative product line or continue to use their brand name equity by concentrating on the
“Paramount” name to allow customers to associate Clean Edge with Paramount’s current Pro and
Avail products. “Paramount Clean Edge” would utilize Paramount’s brand strength to promote
value across all three lines and would allow Paramount to be directly associated with the
innovation Clean Edge offers the market. It would also help Paramount save on marketing
expenses, as the Paramount name would require much less advertising than promoting a new
brand. However, it could lead to increased cannibalization as customers using Pro become
attracted to Clean Edge’s better performance.
On the other hand, branding as “Clean Edge by Paramount” would provide product
differentiation from less advanced products Pro and Avail, making Clean Edge stand out as a
uniquely innovative product. It would also serve to prevent a decrease in sales from Pro, as the
product would be more likely to be viewed as a new and innovative super-premium product than
a refreshed Paramount product model. However, promoting a new brand like Clean Edge could
cause higher marketing expenditures than predicted in order to develop a name in the superpremium segment. In order for consumers to trust Clean Edge’s quality, Paramount would likely
have to spend heavily on media advertising and consumer promotions to attract consumers to the
product, and pay for trade promotions to push for more shelf space in retail outlets.
A mainstream strategy focusing on broadly reaching all three markets by promoting
Clean Edge as the best available product in the market would benefit from utilizing the
Paramount name for product association. However, the niche strategy concentrating on highly
involved users who differentiate between products and are concerned with performance would be
better suited to promote Clean Edge separately in order to take sales away from competitors with
other new innovative products. Paramount should brand their innovative product under a new
“Clean Edge” brand to promote the product apart from the current lines Pro and Avail in attempt
to avoid the high percentage of cannibalization of these lines sales by Clean Edge.