Case Study – Clean Edge Razor Section C – Group 11

PGP 2011-13 Page 1

Clean Edge Razor Case Analysis

Section - C

Group – 11

Name Roll Number Aman Srivastava PGP2011532 Deepak Sudhakar PGP2011617

Krishna Bajaj PGP2011696 Prasanna Patange PGP2011770

Richa Singh PGP2011823 Saikiran Pollamarasetty PGP2011843

Vivek Gupta PGP2011944

Case Study – Clean Edge Razor Section C – Group 11

PGP 2011-13 Page 2

Product Characteristics

In 2007 Paramount developed ‘Clean Edge’, a technologically advanced nondisposable razor in

a bid to establish the company as an innovation leader. This new razor had an ultra-thin five-

blade design but its most important characteristic was its vibration technology.

The vibrations stimulate hair follicles and lift the hair from the skin. This facilitates a thorough

clean shave. The vibrations were generated with an AAA battery housed in the handle of the

razor. The handle, therefore had to be large and heavy, and in this in turn provided better grip,

balance and control while shaving.

The advanced ultra-thin blades reduced irritation and was 25% more efficient in hair removal

vis-à-vis other leading non disposable brands. Trials also showed that use of Clean Edge was

beneficial to overall skin condition, tone and texture.

Market Characteristics

Products available in U.S. Razor market are nondisposable razors, refill cartridge, disposable

razors, shaving cream, and depilatories. Nondisposable razors recorded average growth of

about 5% in retail sales during the period 2007 to 2010 whereas refill cartridge and disposable

razors recorded growth of approximately 2% and 3% respectively for the same period.

Innovations and new product introductions are the prime factors for the growth.

Nondisposable razors and refill cartridge market is broadly classified into three

segments namely value, moderate and super premium based on price and quality. Paramount’s

consumer research identified distinct segmentation in terms of product benefits and consumer

behaviour. 39% of nondisposable razor users are segmented as Involved Razor users,

social/emotional shavers; 28% as Involved Razor users, aesthetic shavers and 33% as

Uninvolved Razor users, maintenance shavers. Studies from 2009 showed that the retail sales

of nondisposable razors and refill cartridge came from 25% volume of super-premium, 43% of

moderate and 32% of value segments.

Competition

In the last decade, the industry has experienced significant growth in the super premium

segment. Product innovation and new technology is leading this sector for a number of new

entrants. In 2008-09 the rate of new product innovation lead to 22 new SKUs to be introduced.

Impact Of Competition On Consumers - The consumers have started buying more razors and

cartridges replacement than they had in previous years. The replacement cycle is shortened

due to consumers trying out new products and being more involved through advertising and

sponsored articles and looking for more innovative products in the category.

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On Trade - The retail margins associated with the razors is considerably higher and therefore

with a large number of new entrants the distributors are responding to the growth by

increasing their shelf space for the product category. Distribution is also reaching out from food

and drug stores (42%) to mass merchandisers (21%) and club stores (5%).

On Media Expenditure - As per 2009 data the total media expenditure (excluding trade and

consumer promotion) is $103.6 m while this number is expected to reach $137.7 m in 2010, a

rise of 33% in a year.

Looking at some of the prime competitor’s figures we get- Revenues for PRINCE are $224 m,

operating profit $ 45 m, media expense $27.8 m in 2009 and expected $ 29.2 in 2010. For Benet

and Klein the media expense is $35.2 m in 2009 and expected $36.8 m in 2010. For Paramount

the revenue for 2009 is $170 m, operating profit is $26 m and total media advertisement

expense is $ 44.3 m. Thus the immense competition has lead to over promotion and media

expenditure by the companies which is difficult to maintain given the operating profit margins.

POSITIONING:

Clean Edge’s improved design provided superior performance. Within the super-premium

segment, Clean Edge could be positioned either as Niche product focusing on high involvement,

fastidious groomers looking for a superior shaving experience, or a mainstream product

focusing on the broad advantage of offering the closest possible shave. Each positioning has its

own pros and cons.

Niche positioning:

Pros:

Positioning Clean Edge as niche will complement company’s existing product portfolio perfectly. From the exhibits, it’s visible that it will result in high and consistent profit margins for the company and the risk involved will be less. Apart from that Niche positioning will require $15 million in total marketing expenditures in the first year as opposed to $42 million in mainstream

Cons:

First of all it has a limited consumer base and secondly the company’s current products Pro and

Avail had not introduced any innovations in the last five years. Pro is in the mature phase and

there’s a high probability of its sales declining soon. Therefore by launching in this segment

Paramount will lose their loyal customer base which is there with Pro and Avail.

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Mainstream positioning:

Pros:

Consumers are becoming more and more sophisticated day by day and expect more advanced technology. Paramount’s bread and butter product, Pro was in the mature phase of the product lifecycle so there is a possibility of decline. Positioning Clean Edge as mainstream product will help prevent loyal Paramount customers from being wooed away to more innovative brands.

Main stream razor unit volumes are expected to capture over three times the volumes of the

niche market in the first year. Clean Edge has the potential for true market domination and

would quickly gain mass appeal.

Cons:

Paramount already had product in mainstream positioning -Paramount Pro so launching it as mainstream positioning will dilute the brand power and will lead to cannibalization.

More marketing support will be needed to reach the target masses. The company would

require an extensive advertising campaign, considerable consumer promotions would be

needed and thus the expenses associated with them will be huge. To reach full sales potential

with this positioning, $42 million marketing budget would be needed for year one.

Cost of Cannibalization:

Parameters Niche Mainstream

Year 1 Year 2 Year 1 Year 2

Razor: Planned Capacity (million unit) 1 1.5 3.3 4

Razor: Manufacturer Price 9.09 9.09 7.83 7.83

Razor: Sales 9.09 13.635 25.839 31.32

Cartridge: Planned Capacity (million unit) 4 10 9.9 21.9

Cartridge: Average Manufacturer Price 7.35 7.35 6.22 6.22

Cartridge: Sales 29.4 73.5 61.578 136.218

Total 38.49 87.135 87.417 167.538

Razor: Production per unit cost 5 5 4.74 4.74

Razor: Production Cost 5 7.5 15.642 18.96

Cartridge: Average Production Cost per unit 2.43 2.43 2.24 2.24

Cartridge: Production Cost 9.72 24.3 22.176 49.056

Capacity Cost (million) 0.61 0.87 1.71 2.45

Advertising Cost (million) 7 7 19 17

Consumer Promotion (million) 6 6 17 14

Trade Promotion (million) 2 3 6 8

Total Cost 30.33 48.67 81.528 109.466

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Operating Profit 8.16 38.465 5.889 58.072

Profit as a % of sales 21% 44% 7% 35%

Market Share% 23.40% 21.40% 23.40% 21.40%

Market Size 208 218 208 218

Cannibalisation as a % of sales 35% 35% 60% 60%

Cost of Cannibalization 17.04 16.33 29.20 27.99

Profit after cannibalization -8.88 22.14 -23.31 30.08

Total sales of Paramount for Avail and Pro for first year (2009) and second year (2010) are

calculated using the market size (retail sales) and corresponding market share, both real (2009)

and estimated (2010), of Paramount. The cost of Cannibalization is calculated using total sales

and percentage of cannibalisation given.

Analysing the result, it is evident that launching the product is a profitable venture; however,

the cost of cannibalization may change equations. The cost of cannibalization is lower for the

niche market as compared to mainstream market. Although, cannibalization adjustments give

us losses for the first year in the case of both mainstream and niche, the profit obtained in the

second year for mainstream is larger than niche market.

If we consider profit obtained in both the years, we observe that Profit after cannibalization (in

$ million) for the first year (-8.88 + 22.14 = 13.26) is larger than second year (-23.31 + 30.08 =

6.77). In addition, if we consider advertisement and promotion costs, mainstream involves a

larger spend in this segment. In case this cost has to be increased, the profit may reduce further

if the investments do not translate into revenue. Hence, we can derive that positioning the

product for niche market is profitable in long run.

Branding Strategy

There are two options before Paramount as far as the brand name is concerned, viz. “Clean

Edge by Paramount” and “Paramount Clean Edge”. The former is suitable if the company wants

to emphasize the product as a unique breakthrough/stand-out product.

However given the tight advertising budget it will be wise to consider “Paramount Clean Edge”

because there is greater emphasis on the name “Paramount” and rather than the product

name. This strategy facilitates new product acceptance because potential buyers are already

familiar with the “Paramount” brand. The amount of advertising required to specifically

convince consumers about trying Clean Edge, as a completely new product will be considerably

reduced. Besides, this is consistent with the overall corporate strategy of building the

Paramount brand name equity. Thus, by naming the product “Paramount Clean Edge”, Randall

can leverage the company’s positive image in the consumer’s mind to generate maximum sales.