Know-How Exchange : Strategy

Financial Analysis

This problem sets you up with a very attractive opportunity.

A quick look at the numbers shows the industrial competitors pricing 20kg bags at $35. That is $1.75/kg or $1750 per metric ton.

The consumer competitors sell product at around $5 for a 3kg bag. That works out to about the same range of $1666 per metric ton.

Your product is produced at $390/metric ton. OK, there is a big cost advantage.

For the financial analysis, start with this cost per ton, and gross up the cost by the distribution fees and bagging costs to show a cost-basis comparison.

Now you need to evaluate the economics of industrial vs. consumer. Breaking into both markets will be difficult. However, note that the industrial market is 30,000 tons and the consumer market is 2,700 tons. Therefore, I would focus on the industrial market to start.

To enter the consumer channel, the margins you pay will be higher, and you will need to advertise and so forth.

For price policy, you have some information showing share by price. It's not perfectly aligned - the Castrol product is slightly higher priced then the next highest-share product, but it's close to a price-share relationship.

Thus, you can buy share with low price. I would assume an entry price in the range of $25 per ton. Why? Well, that gives you a price advantage vs. current pricing (which will drop) without completely screwing the industry. If you can get $25 per ton, why sell the stuff at $15?

Now work backwards from the margins, and you get the revenues. Add in the bagging charges and any other cost information you have. You can determine your profitability from here.

Later, as the market reacts to your aggressive pricing, I would start to promote the performance benefits. As the other products attempt to match your price, sell based on performance.

For distribution channel information, you need to identify distributors who sell to the industrial users. As a new product, you may need to offer slightly higher margins, especially since the product will be priced lower - else the distributors will make a lower commission.

I'll try to illustrate you an action plan you should follow and also I will try to prompt with some questions so you can you can check again the documentation case for relevant information you could missed at the moment of doing the summary you presented.

1. Distribution strategy
The main consideration is find a chain structure that can add value to the final customer, a better value in form (how they need it), time (when they need it), location (where they need it) and possession (a risk consideration for non durable goods). Is there an unattended activity like gathering,sorting,storaging,packaging that can perform a dealer to improve the value offered to the customer? Beside transactional activities you should consider too activities like bringing information, usage assistance, credit terms, image of the product all subject to the control (the way the product is going to be handled) coverage (at what extent you are reaching customers) and financial restrictions of the company (. The distribution strategy is a result of matching the customers needs (form, time, location,posession) with the firm´s restrictions.

A conservative approach would be to use the same distribution system used by competitors. You need to compete in the same place your competitors are available for customers.

For Industrial market: Direct (through saleforce and own distribution points) and Indirect channel distribution (through industrial distributor or wholesalers)
For Household Market: Indirect channel distribution through retailers (supermarkets and specialized retailers).

2. Pricing strategy
First you must trace define the objetives to pursue and the their extent : short term or long term.
In the case of a new product the options are: Profits, Sales revenue and Market Share, you decide if you want maximize or reach a targeted value (an example: a 20% ROI)

Second, you have to identify the lower limit you can price, that is your costs. For the information you reveled you can define the unit cost equal to: $ 0.39 per Kg (CIF)*# Kg + package cost+dealers markup. This information is critical because, further in the financial analysis it will revel the mininum volume of sales you have to achieve to keep the production running.

Third, you must choose a strategy pricing approach:
- Cost-based: You add your markup or add a plus to your costs.
- Demand-based: based on the value the client perceive from the product you can choose skimming (you charge the highest price people is willing to pay) or penetration price (lower prices to attain a considerable sales volume). You play here with the value/price combination. Bundle price is a good consideration
- Competion-based: above or below the competition

Because you are entering into a developed market, your price should be consistent with the competition. There are several reasons you should consider a higher price -a little bit- related to competition:
- The product is able to offer more value (is 20% more absorptive)
- The better time to price higher is in the newness stage
- A higher price can communicate higher value/quality

The last reason can be supported from the competitors table, a lower price does not translate to market share leadership, so price is related to quality.

Four, you need to consider strategic adjustments for price: I think quantity disccounts with give you a good way to encourage customers buy larger quantities.

Financial analysis
The base here is information: The expected demmand and costs in a defined time.
1. Are there any insights that can give you a clue about buying intentions, customer tastes? If there is not, define a goal: market share, volumes sale, sales revenues and consider it as an assumption to work with.
2. Work with a the scale of time revealed in the case. Your summary indicates annual values, so the analysis should be year-based.
Define simple assumptions: ceteris paribus. Everything is going to remain constant. Don´t expect change in prices, costs, demand and competition. This last rule is only to give freedom and simplicity to your analysis, in the real world we all know this is a dream!
3. Select an analysis tool: Break-even analysis, Marginal approach.
You want to discover the profit frontier of your sales, what is the bare minimum you should sell to get profits. This frontier is total cost = revenue.
You might also want to know what is your return on investment.

As example:
assumptions:
- You set as a goal to get a 25% of market share for household market
- You decided to sell package of 1.5 Kg
- You set as price $ 2.55 per Kg
- Supermarket has 90% market share

25% Market share= 675 Kg
total cost= 0.39/ Kg *# Kg + package cost+dealers markup
Total cost = 0.39 per/Kg *675kg + (675/1.5)1.05 + (0.6*2.55)(0.9*675)+(0.4*2.55)(0.1*675)
Total cost= $ 1734.075

To get the break-even point
revenue = $ 1734.075
($2.55)*Q = 1734.075
Minimum sales = 680 Kg
At a price of $ 2.55 the minimum sales should be 680 Kg (wheter at s. markets, specialities or both )



To get ROI
(profit/ total costs)*100%
=((685*2.55) - 1734.075)/1734.075
= 0.73%

Accordings to the results you can work backward to tune any component of the total cost formula (price, goal, dealers markup, package costs) to improve financial results. From my example you can see there is a need for a more agressive market share goal, a higher price or a reduced markup for dealers.

I recommend you should check how deep is expected to be the financial analysis:
- Period of time to be analyzed
- Forecasting method
- Method of analysis

I suspect that my proposed analysis is good enough. Any way check it out.

If you have any doubt feel free to contact me.
Good luck!

You wrote in the summary:
feel that they are able to produce this absorbent material at a lower cost than their competitors. attapulgite is approximately 20% more absorptive than crystalline magnesium silicates produced in other parts of the world.
You may be able to produce at up to 20% higher cost and still match margins with the competitor, if you can sell based on volume of fluid absorbed (rather than selling based on volume of product you sell).

Even if they pay the same amount for to absorb liter of fluid with your stuff as a competitors, they get the benefit of needing less material (less storage and transport costs) and having less material in the end to dispose of. These may be great enough benefits that they would be willing to pay more per liter absorbed for your product.

There are opportunities for absorbent minerals in both the New Zealand industrial and household markets.
When I read your post, my first though of the market was for emergency services. Whenever there is a car accident in America, they put down some sort of material to absorb leaking oils, fluids, etc. Do you think this market exists in NZ?

You may want to check out the articles at https://www.nolo.com/resource.cfm/catID/9FA25870-14F1-4657-9778F19FB41FB93D... . This is an organization that ties to make the American legal system easier for non-lawyers to figure out. Ignore the US specific stuff, but the parts on business plans, profitability, etc. all could be useful.

Here is something I wrote on pricing a new product:
https://expandabroad.blogspot.com/2005/08/how-to-price-new-product.html

On Distribution system, you need to figure out how your customers normally buy products like this. Easiest way into the market is to do the same. Creating a new distribution system adds significantly to the risks, but if it works, adds nicely to the rewards.

Following vPeter (henna gaijin) response and checking his article about pricing a new product, there you can see a solid economic approach for pricing, taking cost as baseline and customer benefit as the limit.

Considering that your product is 20% more absorptive, it sounds pretty rational that you can price top 20% higher from current prices, making the assumption that the customers benefit 20% more. From an economic stand customers will be incentivated to buy the improved product as long as they get a marginal benefit, that is the positive difference between the higher price and the the 20% extra benefits.

What great advice from the folks above. Very interesting. As to the consumer market, if higher margins justify pursuing a market with lower volume, you might consider evaluating a store brand approach into the retail channel. Pick a major retail chain. Dig into their store brand strategy. Find out what kind of slotting charge they have to get on the shelf. Work up a promotion dramatizing cat odor. Then move onto another store brand, or learn from the market experience with a mid-term goal of bringing out your own brand.

Just a thought.

Hi Carl

SG&A stands for Sales, General & Administrative expenses.

so far great response from experts especially Iraul. my 2 cents are....

1.Distribution Strategy

i would try to concentrate on the Industrial market. i suggest to use the existing distribution channels being used by competition companies. For retail market You can also think of Gas Stations (Petrol Stations) and Car Repair Shops as well Hardware Stores as your selling point apart from superstores. For this you would need distributors and dealers. you can develop your own distribution set up as well but that should happen after you are established.

to get the margins at every level of the distribution channel, first identify the existing margins given by competitors. this will help you in developing your distribution channel margins when you are fixing the pricing mechanism.

2. Pricing Strategy

I would say that having a premium price will not necessarily ensure a better market share (based on your data).

The ideal price will be a balance of premium and value both. for industrial markets the package size of 25kg is ok. The pricing can be NZ$ 34 for a 25kg bag. You can communicate in the way that "You get 20% more absorbant at less than 10% higher price. This price is more than leader Castrol, Oildry but less than BP and Shell. this will establish the premium-ness of the product as it selivers more and requires less while it will last longer in a bigger pack size.

if you want to go for a penetration pricing strategy then price your 25 kg bag at the same price of Castrol or Oildry. Your communication will be "get 20% more absorb power at the same price of your earlier brand"

3. Financial Analysis

if you target to get 25% market share of Industrial market, then the target is 7500tons. your cost will be 25kg*0.39/kg + 1.05 = $ 10.8 /25kg bag. and you will have to sell 300,000 pcs of 25kg bags. so your total COGS will be 10.8*300,000 = 3,240,000$ while your selling price is as mentioned earlier $34 per bag and you will make a total Gross Profit of $ 6,960,000 (300,000*(34-10.8)).

from the Gross profit you deduct various overheads like Depreciation, SG&A and other expenses, you will get EBIT. then deduct Interest Expense, you get EBT. from there you deduct Income Tax and get Earnings After Tax. viola you get your income statement.

hope this helps.

cheers!!