Transcript Croft Industries - Lingnan University

Croft Industries
Geng Cui
Dept. of Marketing and Intn’l Business
Lingnan University
February, 2005
I. Problem Definition
When Croft Industries, the price leader in asphalt
shingles, raised its price from $18/sf to $20/sf, the
competitors did not follow, causing Croft's market
share to decline by 20%.
In light of increasing competition, Croft Industries
needs to determine its pricing strategy in the next
year, to ensure its competitive viability and market
leadership.
A Typical Residential House in North America
Asphalt Shingles
Asphalt shingles are currently the most popular type
of residential roof material for a variety of reasons.
They are relatively inexpensive, starting at around
$0.80 per square foot installed and go up from there.
Things that determine cost are geographical location,
slope of the roof, height of the building, ease of
access to the premises, complexity of the project, the
particular type of shingle and numerous other
factors. Asphalt shingles are very simple to install
enabling many homeowners to do the work
themselves. They come in a variety of colors and
styles, are fairly durable (some have been tested and
have achieved a class IV hail rating - the highest
available!), and can be easily repaired and
maintained.
WHAT ARE THEY?
Asphalt shingles come in two basic types: glass
fiber (a.k.a. fiber glass) and organic. Organic
shingles consist of an organic felt material which
is generally paper saturated with asphalt to make it
waterproof. A top coating of adhesive asphalt is
then applied and the ceramic granules are then
embedded. Organic shingles contain around 40%
more asphalt per square (100 sq. ft.) than their
glass fiber counterpart which makes them weigh
more and gives them excellent durability and
blow-off resistance.
II. Scenario Analysis
Firm Background and Strengths:
Regarded as having the highest quality in the market
All major distributors in the region carry the company's
product.
No large competitors in the market
All firms are local operators
Thus, cost of freight is low
Market leader with 60% market share in 1989, and 40%
in 1990
Market Environment:
Mature market and mature product
Slow economy, low housing startup
Consumers tightening up belt
Discretionary re-roofing
Market sales volume decline 6% in 1989 and
17% in 1990
Economic future uncertain
Market may be depressed for a few more years
Competitive Situation:
Oligopoly situation: a few competitors selling
the same product with some differentiation
Croft's share 60%, and five competitors wit
lower shares
Croft has been the price leader and market
leader
Demand relationship:
Typical: prices up, demand/sales do down
Some degree of elasticity
Dealers and installers control retail price
The Price Cut Move -- Causes
Why competitors have not followed Croft in
raising the prices and leading to Croft’s market
share to shrink?
Fear price increase will depress the market further
Fear of Croft's expansion
Challenger A wants to be the price leader
Chance to gain sales and market share
Installers use parity pricing
Charge the same price for all shingles and keep the difference
Discretionary for reroofing that can be postponed:
$20*600 – 1000 sf = $12,000 – 20,000/roof
Lower consumer awareness and knowledge
Financial Analysis:
Only the lowest cost can be the price leader
without lowering profit in the long run.
Financial conditions of Croft and its five
competitors in 1990
Croft is the most profitable and yet not the most
efficient
Competitors would be better off if they raised
their prices as well
Lowering their prices have not helped them
since installers marked prices in parity with
Croft.
Financial Analysis for Croft and Competitors
CROFT
A
B
C
D
E
mkt share %
40%
0.14%
0.14%
0.11%
0.11%
0.04%
Volume in sf
500,000
200,000
190,000
150,000
150,000
60,000
$20
$18
$18
$18
$18
$18
$10,000,000 $3,600,000
$3,420,000
$2,700,000
$2,700,000
$1,080,000
Variable cost
$7,000,000 $3,000,000
$2,945,000
$2,400,000
$2,400,000
$975,000
Contribution
$3,000,000
600,000 $475,000.00
$300,000.00
$300,000.00
$105,000.00
fixed cost
$1,750,000
$500,000
$475,000
$425,000
$425,000
$325,000
profit(loss)
$1,250,000
$100,000
$0
($125,000)
($125,000)
($220,000)
Var cost %
$14/sf
$15/sf
$15.50/sf
$16/sf
$16/sf
$16.25/sf
% fixed cost
0.18%
0.14%
0.14%
0.16%
0.16%
0.30%
Gross Margin
0.30%
0.17%
0.14%
0.11%
0.11%
0.10%
Net Margin
0.13%
$0.03
0
N/A
N/A
N/A
unit price
Sales
Alternative Solutions and Implications
• 1) Further price reduction -- $18.00
• pros: recoup market share, higher volumes, drive
unprofitable competitors out of the market
• cons: loss in profit
• Would installers pass along the savings to customers? No.
• 2) Keep the exiting price -- no change -- $20.00
• pros: keep the same profit level
• cons: lose the role of price leader, further erosion of market
share
• 3) Revert back and raise price -- $22.00
• pros: higher profit
• cons: lose more market share and price leadership
Decision (Tree) Analysis
Croft's Pricing Alternatives
Reduce to $18/sf
Keep at $20/sf
Competitor Reaction
Competitor Reaction
Reduce b/l $18 Keep $18/sf Reduce b/l $18
Croft's Results Keep $18/sf
300,000
600,000
360,000
360,000
Sales Volume
$18
$18
$20
$20
Price
$5,400,000
$7,200,000 $10,800,000
$7,200,000
Sales
$4,200,000
$8,400,000
$5,040,000
$5,040,000
Variable Cost
$1,200,000
$2,400,000
$2,160,000
$2,160,000
Contribution
10%
90%
10%
90%
Probability
$2,280,000
$2,160,000
Results
Recommendation and Justifications
Keep $20 for the time being:
keep the healthy margin and profit
more capital for expansion and other projects
quality reputation will not be compromised
competition is weak and further retaliation unlikely
installers would not pass along savings
Risks
declining sales and market share
lose the market leadership position
III. Marketing Plan and
Programs
Objectives
Increase the market share
Regain the market share lost and the
market leader position
Improving brand awareness and perception
Improving dealer and installer relationship
Possible product innovation and
differentiation
Marketing Strategies
Pull strategy:
advertising directly to consumers
Improving Croft brand awareness and perception
emphasis on value and long-term quality
Push strategy:
Develop a dealer and installer incentives program
Dealers should have the incentive to recommend Croft
because of its lower prices.
Limited quantity discount up to 5% (less than a dollar)
free delivery
Marketing Programs I.
Advertising to consumers (pull strategy)
Awareness – Interest – Decision (AID)
Objective: education to improve awareness about
the quality advantages of Croft shingles
Content: emphasize the value of Croft products,
such as features
Rebate Coupon for choosing Croft
Time table:
spring – summer: housing start
Spring – fall: reroofing
Media plan:
local newspaper, weekend 1/4 page with coupon
local TV: reminder ads
Marketing Programs II.
Dealer and installer marketing:
Solidify quality perception
Promote dealer and installer “loyalty”
Channel management
Apply relationship marketing
Based on volume
Based on installed roofs
Create database to update accounts
Devise a dealer/installer incentives program
Implementation I.
Consumer Advertising
Time table:
spring – summer: housing start
Spring – fall: reroofting
Media plan:
local newspaper, weekend 1/4 page with coupon,
two weeks before high season
Emphasizing features and benefits
Followup with reminder ads in peak season
Implementation II.
Create database to update accounts
Sales Analysis
Based on volume
Based on installed roofs
Apply relationship marketing
Create different levels of dealers/installers
Silver, Gold and Plantinum
Promote Croft as the Preferred Supplier – Win/Win
Devise a dealer/installer incentives program
Cumulative discount
Recognitions
Promotion brochures to dealers/installers
Certificates to dealers and installers
Emphasize the quality and benefits of Croft products
Specify the incentives based on volume and customers
Specify the next level of achievements and incentives
Evaluation and Control.
Measure consumer awareness and
perception
Week-after Ad and brand recall
Monitor dealer/installer status
Monitor sales and market share
quarterly
Revise pricing or promotion if necessary
Budget
For the newspaper ads:
Assuming $1000/week
For 4 weeks per season: 3*4*1000=12,000
Monitor dealer/installer status
Printing and mailing cost minimum
Existing marketing staff will handle the
implementation
Monitor sales and market share quarterly
Revise promotion if necessary
Forecast
Improved awareness and perception of
Croft
Greater dealers/installer participation
and more profitable relationships
Should regain the market share and
leadership by year end.
Thank you!