FMGT 1H, Team B
3 November 2009
Canty International
Price Strategies for Decoline
Alex He, Jag Kadel, Yuhang Li, Xiao Hua Lu, Marian Louie,
Darius Tuliao
Introduction
Canty International is a manufacturer of wall systems and coverings for industrial and
commercial use. The company has several divisions within the company that handles various
tasks. Design Lab is the company’s product development group which designs their new
product, Decoline.
Problem
What pricing strategy can Canty International use to increase sales from 500 square meters per
month to 2000 square meters per month over a 6 month period?
Key Findings and Assumptions
Decoline panel is made of innovative techno-fabric material as the surface layer and bamboo
fibre as its core. Extensive testing indicated that this new product has high quality and answers
to customer’s needs. Decoline panel is light weighted, durable, fire resistant, sound proof,
decorative and easy to clean and maintain. Decoline has ten years of life; however, the current
coverings have two. Obviously, it is one of the most important advantages to use Decoline panel
comparing to current coverings. On the other hand, Decoline panel is more expensive than
current coverings and it needs two weeks to prepare after getting the purchase order.
Decoline is a new developed product, and it is in the first phase of the Product Life Cycle.
Decoline’s potential sales are way below the company’s capacity. This is normal when a new
product is launched into the market. Usually, in this stage, the profits are negative or low and
consumers are few. The good thing is that in this stage, Canty International has few competitors
who have the same kind of product. Comparing to the Canty’s current product, our calculation
shows that Decoline panel’s price is almost double the regular price ($11.50) of the current
coverings based on the estimation that potential sales is 500 M². The breakeven price is
$21.82(this calculation is based on the fact that the actually capacity is about 77% of ideal
capacity in assembly production). This is also normal that the users of the new product, also
known as innovators, enjoy taking risks and are less price sensitive. We will discuss our price
strategy later in our alternatives analysis.
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Description
Price ($/M)
Unit Price ($/ M²)
Techno-fibre
0.9 m width
6.55
7.2778
Bamboo backing
0.9 m width
2.97
3.3000
8.3 litres/10 square metres
0.96/litre
Items
Variable Costs
Cement
0.7968
11.3746
Total Variable Cost ($/M²)
Fixed Costs
Supervision
1080.00
Inspection
165.00
84.00
Miscellaneous indirect labour
327.00
Floor-space expense
30.00
Small tools and expense materials
Three building tables
cutting machine
selling and administration fee
advertising,print, trade magazine
3x1550/(10x12)
38.75
480/(10x12)
4.00
4300-1210
3090.00
1210/3
403.33
5222.08
Total Fixed Costs
Production Time
Every 50 M² needs 3 hrs 20 minutes
15M²/hr
15
173 hrs/month
173
Ideal monthly output (M²)
15X173
2595
Actual monthly output (M²)
77% of ideal
1998.15
Monthly working hours
2000 M²
Monthly Capacity
Order Amount
Calculation
Total Cost ($) Breakeven Price ($/M²)
2000 M²
cost=5222.08+2000X11.3746
27971.28
13.9856
1500 M²
cost=5222.08+1500X11.3746
22283.98
14.8560
1000 M²
cost=5222.08+1000X11.3746
16595.68
16.5967
500 M²
cost=5222.08+500X11.3746
10909.38
21.8188
Breakeven Price
Let P(b) = Breakeven price
Y = Sales revenue, X = Number of order, P = Selling price
Function of breakeven price is:
Sales revenue
Total Cost
P(b)=11.3746+5222.08/X
Y=PX
Y=5222.08+11.3746X
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For problems, we have following assumptions:
1.
Huge capacity, low sales



2.
New product is in the introduction phase of the Product Life Cycle
Advertising is not enough
Low customer base
Cannot produce anything in advance


3.
Lead time for materials is two weeks
Cannot produce until receipt of customer requirements
Input high, output is low (work 43.25 hours a week at 77% of ideal capacity)



Production workers are inefficient
Poor management
Procedure to manufacture is difficult
SWOT Analysis



Strengths
Strong product
Manufactured
within company
Stable customer
base



Weaknesses
Demand is lower
than supply
Product cannot
be made in
advance
High input, low
output



Opportunities
Work with a big
hotel firm
No competition
Expand to
different
industries



Threats
Inflation
Price for import
increase for
bamboo
Unstable market
for the product
Strengths
Canty International’s new Decoline is a strong high quality product. They added a newly
designed product called Decoline which has a lifespan of 10 years. Other than that, their other
strengths include their product being manufactured within the company and they have a pretty
stable customer base.
Weaknesses
Having a surplus in product will result in a revenue loss. Canty International only makes it upon
request. As a result, their customer will have to wait approximately two weeks for them to finish
producing the product. Canty International puts a lot into making the product but the final result
is very low in quantity, which is a bad for their monthly cost because they use so much to make
so little.
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Opportunities
Canty International already provide service to one of the biggest hotels firms in Canada, Bryan
Inns, and that’s a very solid customer base as they have over 100 hotels across the nation.
Since Bryan Inns is one of the biggest hotel firms they have a lot of opportunity to open more
and more hotels, therefore it creates more business for Canty international. Having reasonable
price and quality product makes it hard for other companies in the business to compete. Doing
well with the hotel industry gives Canty the opportunity to take a chance and branch out into
other industries, such as real estate development.
Threats
The economy can go up and down every day and it changes the prices of inputs. When prices
go up people will save as much as they can and spend less on luxuries and that includes
construction equipment or products. Canty International uses bamboo in the Decoline product
which needs to be imported from other countries as Canada does not grow them. Import price
can go up and cause the cost to rise and possibly resulting in layoffs or even production
efficiency to decrease. The market for dry wall is unstable for many different reasons; including
weather changes and economic downturn.
Competitive Analysis
Canty International’s potential competitors involve companies that manufacture products are
substitutes or target consumers that would otherwise have been Canty’s consumers. Canty’s
original product was made of wallpaper over foam core panels that were affixed to a track
system. These panels had a short service life that lasted only two years. Decoline, a new
product developed by the Design Lab (Canty’s product development group), is a semi-rigid
decorative fabric panel. This new product consists of a surface layer made from an innovative
techno-fabric covering that is cemented to a lightweight but sturdy bamboo fibre core. The
surface layer of this product is highly abrasion-resistant and soil-proof; it requires very little effort
to clean and maintain. In addition to the products easy maintenance, it is also fire resistant and
it effectively filters sound.
Because the Decoline product is fairly new, other companies would find ways to improve on that
product and sell it at a reasonable cheaper price. This price competition between the products
would tend to make consumers buy the cheaper product.
Companies like Parkland Performance Walls and Ceilings, and Universal Plastics are examples
of competing companies. Both of these companies sell similar products to Canty International.
Parkland Performance Walls and Ceilings sell environmentally friendly products that meet the
“green” demand in the current market. Parklands “Plas-Tex” wall system is a fiberglass-free
panel that is highly resistant to the growth of mold, mildew and bacteria. This covering is
primarily made up of recycled/recyclable materials helping the consumer build green. These
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panels, like Canty’s Decoline, can be custom made according to the customer’s preference.
(Parkland Plastics, 2005)
Universal Plastics, like Parkland and Canty, also provide wall systems and coverings. This
company however consists of four divisions that supply different products to different
consumers. Universal Plastics four different divisions are the commercial consumer, the counter
top division, high-impact wall coverings, and M&M Materials. The main product that Universal
Plastics uses for commercial consumers is their Marlite product. (Universal Plastics, 2009)
Since Parkland Plastics primarily offers environmentally friendly products, it takes away
consumers from Canty International. Parkland is able to sell their products at a lower price
because of their recycled material. By being able to sell their product at a lower price,
consumers would be willing to buy their product compared to Canty.
Universal Parkland is also able to produce a wide variety of consumers because of the wide
range of products they are able to sell. In order for Canty to achieve more customers in
comparison to Universal Parkland, they would have to reduce their price to compete against the
wide array of products that Universal has.
Target Market
There are three markets we are aiming at and they are as follows:
1. Real-estate developers
2. Retail industry (Home Depot, Rona and other possible retailers)
3. Mainstream consumers (open demo store to sell directly to consumers)
Targeting real-estate developers
Real-estate market is one of the most important target market for Canty. In fact, the real-estate
market is on the rise in Vancouver and other parts of country. Numerous commercial and
residential buildings are continually being constructed. Despite the recent recession, real-estate
demand and prices remained strong. (Unknown, 2009) Therefore, it is crucial that we acquire
this market.
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Source: http://www.vancouverreflections.com/2009/10/14/vancouver-real-estate-average-pricegraph-2/
The real-estate market is a well established market and with never ending territory. As long as
they are constructing properties there will be a demand for wall systems and coverings. We will
be providing good customer service and quality products. Therefore, the real-estate market
provides potential long term customers.
One big advantage for the real-estate market is that once we set up deals with major real-estate
developers, we will be able to focus our advertising expenditure towards other sectors. We will
have a consistent margin due to the constant uprising of new properties. Our main focus for
real-estate developers is to keep a continual relationship.
Targeting Retail Industry
Targeting retail stores will promote accelerated growth in sales. Just by having the product on
the shelf of the retail store is a form of advertising. Our targets are Home Depot, Rona, Home
Hardware, and other large home improvement chains. Even though our target is business to
business, if every day consumers are reluctant to buy, our business will suffer. Therefore, we
need to put in efforts to advertise our product outside the retail stores to promote a strong brand
image.
Another advantage to selling to the retail market is that we can produce a larger amount of wall
systems and coverings at a time. The greater the amount of production, the less it costs per unit
basis. Consequently, we will be able to lower prices or keep current prices and attain a higher
margin.
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Targeting Mainstream Consumers Directly
We can open a demo store, where we display all of our designs. In addition to our stock of
designs, we can take custom requests from consumers. Having our own store allows
consumers to customize their needs if the generic stock of designs available at retailers is
inadequate. Also, we can answer any questions directly related to our products at the demo
store. Employees at retail stores will not know the specifics our products, therefore cannot
elaborate on the quality and cost effectiveness of our product.
Alternative 1
One pricing strategy Canty International can take is the cost of ownership method. The cost of
ownership method determines the total cost of owning the product over its useful life. At our
current potential sales amount of 500 square meters per month, our proposed price for one
square meter of Decoline is $ 164.60 per square meter.
Selling Price
Installation Price
Service Life
Yearly Cost
Current Product
$11.50 per M2
$4.80 per M2
2 Years
$17.75 per year
Decoline
$ 164.60 per M2
$5.40 per M2
10 Years
$17.00 per year
Although the cost of the new Decoline appears high, the cost per year is approximately 4.23%
cheaper than the current product.
Our profit margin on the Decoline is $142.78 per square meter.
Unfortunately, this strategy does not hold the most appealing price tag therefore we will need to
stress through our advertisements the cost per year benefit. Value-based pricing strategies can
be quite effective however they also necessitate a great deal of consumer research to be
implemented successfully.
Advantages
1. Large profit margin
2. Cheaper per year cost compared to Canty’s current product
3. Buyers associate high quality with high price
Disadvantages
1. High prices may deter a lot of consumers at first glance
2. Additional advertising cost to stress the fact about low cost per year
3. Research is necessary to test if buyers are willing to spend a large lump sum instead of
small amounts every two years, despite the lower cost per year
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Alternative 2
Another pricing strategy Canty International can use is the cost-based method. The cost-based
pricing method determines the final price to charge by starting with the cost. Due to the
fluctuation of demand on a per month basis, we must estimate the cost ahead of time with
previous cost history to determine the selling price for the coming month. However, Decoline is
a new product therefore it does not have a cost history as of yet, so we must assume the sales
amount will be the same as the current product at 500 square meters per month.
This method fails to take into account the consumers and competitors’ prices. This method
potentially could capture a huge market share or generate very few sales.
We will mark up the product 100% of its cost and in case of low sales we can lower the margin
and use it to our advantage as markdowns.
Quantity
500 M2
1000 M2
1500 M2
2000 M2
Cost
$21.82x500 = $10910
$16.60x1000 = $16600
$14.86x1500 = $22290
$13.99x2000 = $27980
Selling Price
$43.64x500 = $21820
$33.2x1000 = $33200
$29.72x1500 = $44580
$27.98x2000 = $55960
Profit Margin
$10910
$16600
$22290
$27980
Our initial price will be $43.64 until we generate some cost information over a period of time.
Advantages
1. Steady profit margin
2. Never sell below cost
3. Low prices
Disadvantages
1. Doesn’t take into account competitor prices
2. Doesn’t take into account customer’s value of the product
3. If there’s a sharp increase in price, sales will go down
Alternative 3
In today’s world, there’s a lot of competition and consumers tend to choose the product with the
best “bang for the buck”.
The last strategy Canty International can utilize is by setting the initial price low for the
introduction of the new product. When the product starts to slowly pickup in sales, market share,
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and profits, the company can raise the price. The initial price should be $21.82 which is our
breakeven price.
Quantity
500 M2
1000 M2
1500 M2
2000 M2
Cost
$21.82x500 = $10910
$16.60x1000 = $16600
$14.86x1500 = $22290
$13.99x2000 = $27980
Selling Price
$21.82x500 = $10910
$21.82x1000 = $21820
$21.82x1500 = $32730
$21.82x2000 = $43640
Profit Margin
$0
$5220
$10440
$15660
This price should only continue up until we reach our production capacity. Decoline is a high
quality product and consumers will be willing to pay more for the product. When demand has
reached or exceeded our capability to supply we are able increase the price steadily. A steady
increase of 5% profit margin until the demand becomes slightly lower than our production
capabilities. Also, as production increases the cost also drops due to fixed costs. However, we
will not lower the selling cost to reflect the drop in cost of production as our price is already low.
Advantages
1. Attracts more consumers
2. Competition with other companies
3. Puts the product on the market
Disadvantages
1. May not be able to raise prices to desired amount
2. Consumers will attribute low cost with low quality
3. Other product lines will suffer in sales
Solution
Our solution will be the first alternative using the cost of ownership method. The reason we
chose this method is because it generates the highest profit margin and at the same time
customers will attribute higher quality with higher price. We are able to achieve this due to the
fact that the Decoline is infact a high quality product.
Although we will experience higher advertising costs because we need to stress the fact that the
new Decoline has a lower per year cost, this will be made up with the high profit margin.
We will offer large orders with quantity discounts. As our production goes up our cost per unit
basis drops, therefore we will be able to give customers a discount without changing the profit
margin. Consumers will see a further benefit in per year cost as the order amount increases.
This will both encourage customers to buy more and it will benefit us also because we are
retaining the same consistent profit margin.
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Example discounts:
Quantity
500 M2
1000 M2
1500 M2
2000 M2
Cost
$21.82x500 = $10910
$16.60x1000 = $16600
$14.86x1500 = $22290
$13.99x2000 = $27980
Selling Price
$164.60x500 = $82300
$159.38x1000 = $159380
$157.64x1500 = $236460
$156.77x2000 = $313540
Discount
0%
3.17%
4.22%
4.76%
We are able to retain these high prices until we have captured the majority of the inovators/early
adopters. As sales slow down we will lower the price to capture the next most price sensitive
segment.
Implementation Plan
We can initiate our plan by advertising to our target market. For example, we can have a press
release to announce our new product. During the press release we can offer an initial discount
for the attending audience to increase attendance. We can also hand out samples.
We can participate in conventions and have a booth to give out information. Numerous potential
customers attend these conventions looking for specific products.
We need to get in contact with retailers to initiate our contract with them to carry our product. In
retail stores and our demo store we can have sales associates to demonstrate our new product
in a prebuilt showroom.
We need to get into contact with major real-estate developers and convince them to use our
product. Our goal is to sign a long-term contract with these developers to ensure consistent
sales.
We can provide a training service on how to effectively use this new product.
Plan B
We have chosen alternative 3 as our plan B. We are going to use market penetration pricing.
Our initial price will be low to capture as much market share as possible before raising the price.
This method however does not give the customers an initial sense of quality. However, this is
not necessarily a disadvantage because the Decoline is a high quality product and customers
will soon realize they are experiencing the best “bang for the buck”.
Another reason why we chose this as our alternative is because we can use this to gain market
share and release a new more expensive product to generate future revenue. In the case that
we are unable to raise the price on Decoline, we can shift our attention to other products.
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Bibliography
Parkland Plastics. (2005). Plas-Tex Thick Panels from Parkland Plastics. Retrieved Nov 1, 2009, from
ParklandPlastics: http://www.parklandplastics.com/
Universal Plastics. (2009). The Marlite Specialists - Universal Plastics. Retrieved Nov 1, 2009, from
UniPlastics: http://www.uniplastics.com/index.php
Unknown. (2009, August 5). July 2009 home sales better than pre-recession. Retrieved from CIV:
http://www.chineseinvancouver.ca/2009/08/july-2009-home-sales-better-than-pre-recession/
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