DECOLINE
- CASE STUDY -
Presented by Team B
May Nguyen | Derek Fenton | Tyler Boe | Robin Buntain
Jeremy Flewelling | Elicia Peterson | Dianne Stebner
Team
BumbleBEE
DECOLINE
A Product of Canty International
AGENDA
Introduction
Problem
Target Market
SWOT Analysis
Cost Based Pricing
Competitor Based Pricing
Value Based Pricing
Alternatives 1,2,3
Solution
Plan of Action
Assumptions
Key Concepts
References
DECOLINE
A Product of Canty International
INTRODUCTION
Canty 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
DECOLINE
A Product of Canty International
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.
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
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%)
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
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)
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
Potential selling prices and monthly income analysis for Decoline
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%
Current product monthly income analysis
Sales volume (m2)
Selling price/m2
500
Cost of
materials/m2
$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
Revenue
Net income/loss
DECOLINE
A Product of Canty International
10 year Profit analysis
Wall Panel
Current product
Decoline
Decoline
Sales Volume(m2)
500
500
500
Selling price/m2
$11.50
$40.00
$45.00
Monthly income
-$4139.20
$7630.76
$10,130.76
10 year income
n/a
$7630.76
$10,130.76
Current product
Decoline
Decoline
1000
1000
1000
$11.50
$40.00
$45.00
-$2292.40
$21,281.25
$26,281.25
n/a
$21,281.25
$26,281.25
Current product
Decoline
Decoline
2000
2000
2000
$11.50
$40.00
$45.00
$1401.20
$54,620
$64,620
$7006
$54,620
$64,200
DECOLINE
A Product of Canty International
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 close
competitor price was $40 per square meter.
DECOLINE
A Product of Canty International
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)
DECOLINE
A Product of Canty International
ALTERNATIVES
Alternative 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
DECOLINE
A Product of Canty International
ALTERNATIVES
Alternative 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
DECOLINE
A Product of Canty International
ALTERNATIVES
Alternative 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
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
COST OF OWNERSHIP
Current Product
Selling price/m2
Cost of ownership/m2
$11.50
$8.15
Decoline
Selling price/m2
$27.21
$35.00
$40.00
$45.00
$76.10
Cost of ownership/m2
$3.26
$4.04
$4.54
$5.40
$8.15
DECOLINE
A Product of Canty International
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)
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
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
DECOLINE
A Product of Canty International
KEY CONCEPTS
-Break-even point
-Value based pricing method
-Cost of ownership pricing strategy
-Fixed costs and variable costs
-Premium pricing
-Price skimming
-Pricing tactics
-Quantity discount
-Cash discount
-Beta testing
-Test marketing
-RFP (Request-for-proposal)
Ch. 12
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DECOLINE
A Product of Canty International
REFERENCES
B.C Room Revenue Report. (1996).
Retrieved October 29th, 2009, from
http://www.bcstats.gov.bc.ca/pubs/tour/trr9607f.pdf
1
Tourism- Economy Sector. (2005).
2
Retrieved October 30th, 2009, from
http://vancouver.ca/commsvcs/planning/corejobs/pdf/research/11tourism.pdf
B.C Hospitality Industry, (2009).
Retrieved November 1st, 2009, from
3
http://www.hospitality-trade.com/
Portafab. (2009).
Retrieved October 27th, 2009, from
http://www.portafab.com/
4
USA Wallpaper, (2009).
Retrieved October 26th, 2009, from
http://www.usawallpaper.com/
5