Saxonville’s Italian Sausage

This case addresses a sausage company’s attempt to develop optimal positioning for a national brand of Italian sausage. Be sure to use the Saxonville spreadsheet to calculate trial rates, market share, and project contribution; review the Sales Projections assignment if you’re not sure how to conduct the analyses. And use the Saxonville worksheet to determine Saxonville’s (potential) competitive advantage and develop a brand ladder and positioning statement for the chosen alternative.

1

Past experience indicates that adjusted trial rates are 80% for respondents indicating they “Definitely would try…,” 30% for respondents indicating they “Probably would try…,” and zero for all others. You also worked up numbers for two communications campaigns. The $2,000,000 campaign focuses on a pull strategy, using advertising to build awareness among the target market. With this campaign, 60% of the target market will be aware of MM Lite. Using the current sales staff to promote the MM Lite to current retail customers, you expect to achieve 20% distribution coverage. The $3,000,000 campaign implements the same pull strategy but also implements a push strategy that includes trade promotions and point-of-sale merchandising. These efforts will increase distribution coverage to 40% but will likely have little additional impact on target customer awareness. Two product concepts have also been tested. One concept remains true to the “bitter flavor and slightly higher-than-average alcohol content” that differentiates Mountain Man Lager, the flagship beer. Taste tests indicate that target customers respond fairly well to this concept and that 50% would retry the product. Target customers respond more positively to the second concept, which offers a smoother taste and average alcohol content, suggesting that 60% would retry the product. Pricing for both products will be around $100 per barrel. The COGS for the “Bitter Flavor” concept will be $70 per barrel, the same as the MM Lager COGS. COGS for the “Smooth Taste” concept would be $74 per barrel, because it requires different ingredients than those currently used. Product development expenses, which were $2,000,000, are treated as sunk costs.

You are the product manager for the new Mountain Man Lite beer. Marketing research results are in for the new positioning strategy, which targets 21-34-year-old, men and women. This demographic represents 30% of the Light Beer market, which is expected to be 20,000,000 barrels per year. The research results indicate the following response to the new positioning strategy.

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 20%20% 30% 60% 20%

$2MM Promotion & Bitter Flavor Market Share

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 20% %20% 30% 60% 20% %

$2MM Promotion & Smooth Taste Market Share %

.72%1.92%×

× ×× =

=××

1.32%50%50%×

×== 0.36%

0.96%

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 40% %20% 30% 60% 40% %

$3MM Promotion & Bitter Flavor Market Share %

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 40% %20% 30% 60% 40% %

$3MM Promotion & Smooth Flavor Market Share %

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 20%20% 30% 60% 20%

$2MM Promotion & Bitter Flavor Market Share

.72%1.92%×

× ×× =

=×× 50%

50%

1.32%

××

== 0.36%

0.96%

Options Market Share Market Size Volume Forecast

Revenue Forecast COGS Contribution

$2MM Bitter 20,000,000

$2MM Smooth 20,000,000

$3MM Bitter 20,000,000

$3MM Smooth 20,000,000

1.32% 264,000

$100

26,400,000 18,480,000 7,920,000$70

$74

$70

$74

Sample Final Exam Question: Acquisition Value and Customer Lifetime Value As the local Time Warner manager, you are considering two promotional campaigns, one targeting new students and the other targeting new faculty at SMU. The promotion includes free installation and set-up for new accounts. You normally charge $20 for setting up a new account, which barely covers the variable costs for installation, regardless of the type of service. To qualify for free installation, customers have to agree to a 12-month contract.Most students purchase the basic package at $20 per month but most faculty purchase the HDTV package for $50 per month. Variable cost is $10 per month for basic and $20 for HDTV. To encourage students to upgrade to the HDTV package, you will offer them 3 months of HDTV for just $30, with the price changing to the normal $50 after the first 3 months. You think that 50% of the new student accounts will take advantage of this offer.There are 3,000 new students and 200 new faculty at SMU every year. The student promotional campaign will yield a 20% acquisition rate and the faculty promotional campaign will yield a 50% acquisition rate. To target the 2 groups, you will have to buy mailing lists and generate a direct mail campaign.

Student-Basic

Student-HDTV Faculty

1. Total number of customers targeted 3000 200

2. Acquisition rate 20% 50%

3. Total # of customers acquired (#1 × #2, student split 50-50)

4. First-quarter contribution per month (i.e., Price - VC)

5. Number of purchases per quarter 3 3 3

6. First-quarter gross contribution (#3 × #4 × #5)

7. Minus installation & set-up costs ($20 × #3)

8. First-quarter net contribution (#6 - #7)

9. First-quarter net contribution per acquired customer (#8/#3)

300 300 100

10 10 30

$9,000 $9,000 $9,000

-$6,000 -$6,000 -$2,000

$3,000 $3,000 $7,000

$10 $10 $70What is the most you would spend per acquired customer for the promotional campaign if you want a three-month payback? Six-month payback?

10. First-year per-customer gross contribution

11. Total per-customer acquisition costs (AC) - promotion + install

12. Retention rate (r) 40% 20% 70%

13. Interest rate (i) 10% 10% 10%

14. Risk factor 2 3 1

15. CLVinfinite lifetime = CM/(i*+1-r) - AC

i* = i × risk factor16. Increase in Customer Equity

To promote the campaign, you will spend $10 per targeted student and $20 per targeted faculty. You want to calculate the lifetime value of each new student and faculty customer using first-year expected contribution. Expected retention rates and risk factor (associated with students skipping out without paying and stealing the equipment) for the 3 customer groups are shown below.

Is the HDTV upgrade offer worthwhile? What is the total increase in the firm’s customer equity?

$120 $300 $360

$70 $70 $603000*$10/600+$20 3000*$10/600+$20 200*$20/100+$20

$80 $203 $840

$24,000 $60,818 $84,000

$120/(.2+1-.4)-$70 $300/(.3+1-.2)-$70 $360/(.1+1-.7)-$60

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 20%20% 30% 60% 20%

$2MM Promotion & Bitter Flavor Market Share

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 20% %20% 30% 60% 20% %

$2MM Promotion & Smooth Taste Market Share %

.72%1.92%×

× ×× =

=×× 50%

50%

1.32%

××

== 0.36%

0.96%

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 40% %20% 30% 60% 40% %

$3MM Promotion & Bitter Flavor Market Share %

Research Adjusted Trial Awareness Coverage Trial Rate Repeat RateMarket Share

20% 80% 60% 40% %20% 30% 60% 40% %

$3MM Promotion & Smooth Flavor Market Share %

1.92%0.72%

3.84%1.44%

3.84%1.44%

50%50%

60%60%

60%60%

Options Market Share Market Size Volume Forecast

Revenue Forecast COGS Contribution

$2MM Bitter 20,000,000

$2MM Smooth 20,000,000

$3MM Bitter 20,000,000

$3MM Smooth 20,000,000

1.32% 264,000

$100

26,400,000 18,480,000 7,920,000$70

$74

$70

$74