Canty International

Alex Miljkovic, Sharry Cu, Roger Mao, Naveena Pareek, Johnny RiddleUBAM HammerheadsFMGT 1M & RMGT 1A

MKTG 1102Don Linder

Date: November 5th, 2009

CASE SYNOPSISThe Vice President of Canty International, Bob Sweeny, received a RFP from Bryant Inn’s. The hotel’s purchasing agent, Diana Cromwell describes her dissatisfaction with the current wallpaper coverings Bryant Inns is using. She is unhappy that the service life of the current hotel wall covering is only two years and makes a request for Canty International to design a new wall covering. She would like a wall covering that is: appealing, sound-proof, fire resistant, durable for the hotel environment, stain-resistant, safe, and fair-priced. Bob Sweeny contacts the “Design Lab” and they design a new product that meets the needs of Bryant Inns. The product is named Decoline; it consists of an innovative techno-fabric covering cemented to a lightweight sturdy bamboo fibre core, with an estimated service life of 10 years.

PROBLEM IDENTIFICATIONWhat should Decoline be priced at so that is a fair value to potential consumers, and a profit to Canty International?

KEY FINDINGS Bryant Inns is Canadian Arm of a multinational firm in hospitality industry and

successfully runs and manages 150 inns in Canada; this number is growing Installation costs are $4.80 per square meter for Canty International’s current

products, and $5.40 per square meter for the new Decoline product. The difference is an additional $0.60

Decoline will be custom made because of its color, texture, and design selections; the techno fibre cannot be prepared in advance

Canty International’s maximum optimum capacity is 77% Decoline is used for track systems All raw materials needed to manufacture Decoline produced by at a different

facility; the lead time on materials takes about two weeks

ASSUMPTIONSWe are making calculations based at an estimated volume of 500 square meters a month. We are also assuming that our old product that had a service life of two years was sold at $34.99 per square meter.

SWOT ANALYSISStrengths

High attention to detail when designing new and innovative products to fit customer needs (e.g. fire-resistant, sound proof, customized wallpaper)

Recognized and sought after by other firms (e.g. Bryant Inns) Thorough process of product design including an accurate and detailed operating

expense list Product: Decoline has estimated ten year service life, relative to most products

which have a two year service life

Company has customized designs for each customer – they can cater to different industries (hospitality industry, recreational industry, etc)

Source of raw materials are supplied by a facility – materials are ready to use, no need to spend time manufacturing raw materials

Weaknesses Only has a production capacity of 2598 square meters per month Operates at 77% of its optimum capacity (when producing Decoline) producing

2000 meters square as opposed to 2598 meters square Decoline estimated @ $0.60 per meter more expensive than the similar products

competitors offerOpportunities

Decoline has a service life of ten years; an eight year difference in service life compared to other products which creates many profitable sales opportunities f

If Decoline proves to be effective at Bryant Inns, it may become a well known product there will be an increase in demand from many other firms(track systems could be install in gyms, dance rooms, hotels, hospitals, etc)

If Decoline proves to be effective, they will develop long-term relationships with various customers due to customer satisfaction.

Threats possibility that Decoline may fail as a product Competition will increase because competitors will produce similar products

with better features If Bryant Inns is unhappy about the outcome of the product, other potential

consumers will not be attracted to trying Decoline If Decoline is defective or if customers are unsatisfied, Canty International’s

image will be reflected from Decoline and consumers will perceive all the company’s products as faulty or with few benefits

COMPETITIVE ANALYSISBecause Canty International is not an existing company, we were not able to research who its direct competitors are.

TARGET MARKETWe have used undifferentiated segmentation to determine out target market. Decoline will provide the same benefits for all of our potential customers because track systems are mainly used as a divider. We will use the micromarketing strategy because Decoline is a product that is customized to suit every customer’s needs. We will mainly target B2B consumers, which are other firms in the hospitality and recreational industry because track systems are use a lot in gyms, community centers, hotels, motels, and inns.

CONSIDERATIONSThe base price for Decoline should be $30.00

Break down of Fixed costs Cost per monthSelling and Administration costs $4,300Supervision $1,080Floor-space expense $327Inspection $165Miscellaneous Indirect Labour $84Small tools and expense materials $30Tables (Amortization expense)* $12.92Cutting Machine(Amortization Expense)** $4Total $6,002.92

*Cost of tables are amortized over its useful life per month (Canadian GAAP)1550/(12*10) = 12.92*Cost of cutting machines is amortized over its useful life per month. 480/(12*10) = $4

Break-Even equation:Px = Vcx + FcWhere x is number of products, p is the price per unit, vc is the variable cost per unit, and fc is the fixed cost

So for 500 units:P*500 = 6340.49 + 6002.92 P = $24.69The break-even price for 500 units will be $24.69. (This does not include installation costs)

Break down of Variable costsCost per sq. m For 500 sq. meters

Techno Fibre $6.55 @ 0.9 sq.meter $7.28 per sq. m $3,638.89Bamboo $2.87 @ 0.9 sq.meter $3.33 per sq. m $1,650Cement $0.96 @ 0.83 litres $0.77098 per sq. m $398.40Direct Labour $7.10 @ 0.184 hours $1.30 per sq. m $653.20Total      $12.68098 $6,340.49

Break down of Fixed costs Cost per monthSelling and Administration costs $4,300Supervision $1,080Floor-space expense $327Inspection $165Miscellanous Indirect Labour $84Small tools and expense materials $30Tables (Amortization expense)* $12.92Cutting Machine(Amortization Expense)** $4Total $6,002.92

Units in square metres 0 100 200 300 400 500 600 700

Variable costs $0.00$1,268.

10$2,536.

20$3,804.

29$5,072.3

9$6,340.4

9$7,608.5

9$8,876.6

9

Fixed costs$6,002.

92$6,002.

92$6,002.

92$6,002.

92$6,002.9

2$6,002.9

2$6,002.9

2$6,002.9

2

Total cost$6,002.

92$7,271.

02$8,539.

12$9,807.

21$11,075.

31$12,343.

41$13,611.

51$14,879.

61

Break-Even Graph

$0.00

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

$16,000.00

0 100 200 300 400 500 600 700

Units in square metres

Co

st

Variable cost

Fixed cost

Total cost

Economies of scale: The cost per unit falls as the output increases.The cost per unit at 500 units is $24.69 The cost for 1000 units will be: fc + vcx

= 6002.92 + 12.68098* 1000= $18,683.9

The cost per unit for at 1000 units is $18.6839.

We should consider the economies of scale as the cost per unit falls when the output increases. This means that we will have a higher profit margin when we produce more.

RECOMMENDATIONSAlternative 1Our first alternative is to use the cost-based pricing method. Because we are producing a brand new product, there are many production costs involved. By pricing Decoline without factoring in consumer’s and competitor’s prices, we can set prices based on a per-unit basis.

Because cost-based pricing is set on average costs, our breakeven cost is $24.69, so we are setting the price to $49.99.

Advantages:1. Easy to control – we can track our profits and losses easily because we are pricing

Decoline based on how much it cost to make the product on a per-unit basis. 2. Covers cost – we will have not have to be worried about covering production costs

because we are not recognizing consumer values or competitor price wars3. A healthier company – We know our operating expenses, fixed costs, and variable

costs to determine a reasonable assumption of our potential revenue. We will have sufficient revenue by pricing Decoline using cost-based methods

Disadvantages:1. Customer perception – the price may not represent value to the consumer, they

may not see the benefits of the product because of the price2. Customer satisfaction – the price was not determined to overcome customer

satisfaction so many consumers may not see the product as valuable3. Less consumers – because we aren’t focusing on long-term customer relationships,

we may have less consumers which results in less profits

Alternative #2Our second alternative is to use the improvement value method to determine our pricing strategy. Because we created a product that can be customized, we are setting our prices based on how consumers will compare this product to others in the same market.

Old price and old product: $34.99. New price and new product: $49.99 (per square meters)Improvement value: additional $15 represents the estimate consumers are willing to pay for Decoline.

Advantages:1. Can estimate potential profits – Study of Consumer behavior might prove to be

accurate and therefore forecast how much product consumers might wish to acquire and at what general price (estimate)

2. Maintains good customer relationships – by creating a customized product, consumers will feel like they were a part of the product process

3. Consumers are put first – Product is based on customers needs and wants rather then the companies.

Disadvantages:1. hard to estimate selling price – Because the consumer controls and decides how

much the product’s benefits are worth vs. the sacrifice they need to make to acquire it.

2. possible ethical dilemmas when calculating weighted factors – Because people of power (e.g. Managers) might keep funny books for their own benefit

3. hard to estimate production amount- Because it’s hard to figure out how much product the consumers want (e.g. extensive surveys/researching is required)

Alternative #3Our third alternative is to use the cost of ownership method as one of our pricing strategies. Because the Decoline has a usage life of ten years, consumers will be willing to pay for this product because it will be cheaper long-term than to buy a competitor’s product that has a short service life. Using this value-based method, customers will see the benefits and values of having a track system that is durable for ten years.

$49.99 per square meter+ $ 5.40 installation cost+ $ 2.75 removal cost$ 58.14 every 10 years (per square meters)

Advantages:1. Improves service life by five times – the other products offered by Canty

international only has a useful life of two years.2. It will maintain great customer relationship – having a product that consumers

perceive as valuable will increase customer satisfaction3. Incentives to customer – providing a bundle price will help customers save instead of

listing prices separately; will encourage customers to buy moreDisadvantages:

1. Lose revenue in company long-term – If the service life of Decoline is for ten years, sales may decrease because the product’s usage life is so long.

2. Consumer purchase frequency will decrease – because the service life of Decoline is ten years, consumers will not need to purchase as often

3. High prices – the price set high initially may not appeal to consumers. They may be uneducated about the product information, and the price may not be seen as a benefit to them.

SOLUTIONAfter weighing the alternatives, we chose alternative #3. The price may seem high but if we educate the customers about the increased useful life and other benefits of our product then they are likely to understand the reason behind the high price. We know that the customers will not be buying the product too often as the useful life of the product will be five times. But we also know that a fair price and quality product will help us create a good customer base. If our current customers are satisfied with our services then we will also benefit by goodwill we ear. Our market reputation will increase and that will help us acquire more customers. The reason why we didn’t choose alternative 1 is that it does not consider the price from customer’s point of view. The price will be really high in cost-based pricing strategy as compared to cost of ownership method.

IMPLEMENTATION PLAN1) Product Development: Our product design is already developed. We will produce

coverings enough to conduct market testing.2) Market Testing: We will then do market testing by selling 10% of coverings required by Bryant

Inns. Using feedback from the test, we will make the necessary changes before we

start producing on a normal basis.3) Product Launch: Before launching the product on a larger scale we will educate the potential

customers about the new coverings and their special features. This will help them understand the reason behind the selling price.

We will launch the product on 15th November because the customers would like to change the coverings before the holiday season starts (hotels get busy during holiday season)

The new coverings will be available through special orders as they are not an off-the-shelf item

We will start with a low price and then as the product gets popular, we will increase the price slightly.

PLAN BIf our initial solution does not work, we will implement the cost based pricing method as our plan B. With the cost based pricing method we would be able to easily track operating and production costs of Decoline. The break even price currently sits at $24.69 per meter squared for our product and using the cost based pricing method we would mark this price up to $49.99. Since we do not need to recognize the consumer’s role with this method we are able to mark up our price by ~101%. This could potentially generate high amounts of profit and though some customers would be lost due to its high pricing, the ones that remain could fill and even overfill that gap.

Using cost-based pricing, we will be able to track costs of production clearly. The price will not depend on consumers and we there is potential for high amounts of profit. However, we will have low customer relations who may not want our service again because of the high price.

COURSE CONCEPTSDeveloping a New Product (Chapter 10)

Different types of market testing like pre-market testing and test marketing to introduce and promote a new product – especially since Decoline isn’t sold in stores

Implementing the Marketing mix to determine the product launch

Pricing Strategies and Break-Even Analysis (Chapter 12) Described the main types of strategies and ad different methods to figure out

potentials costs Considered variable costs, fixed costs, and total costs of case and calculated the

break even point which is also market equilibrium Used this information to determine our price for the product

Profile Segments (Chapter 8) helped us determine what category out target market would fall under describes different types of market segmentations to classify and group our

potential customers showed different segmentation strategies which put potential consumers into

groups with similar characteristics and environmental influences

REFERENCES

Dhruv Grewal ,Michael Levy, Ajax Persaud, Shirley LitchiMarketing Canadian editionCanadian editionUnited statesMcGraw-Hill Companies

We did not use any outside resources because there was no history or Canty International on the internet.