Beta Company, Inc. is an established and leading chemical company that manufactures and markets mostly to large industrial companies. With its brand already proven, Beta has developed a new product that would adhere to the small and medium enterprise market segments (SME) of mostly machine shops. The product, which would help expedite the flow and precision of computer numerical control (CNC) machines, was tested and proven to be 10 times more effective than the competing products on the market.
Beta used 15 industrial distributors to assist with routing the chemical for the large companies to nearly 3,000 industrial supply houses (Rangan, 2015). Beta wants to use this same strategy for the small and midsize customer base, which the company estimates have nearly 150,000 consumers. The key goal is to equal or exceed Beta’s large customer business by selling the new chemical through the same 15 industrial distributors and penetrating the SME market within a year.
The main concern for the SME machine shop owners is cost. The new chemical is more expensive than the competition’s product offering. The customer will need to be educated on the value proposition, which includes the ability to increase production and the fact that the new chemical is safe to handle, whereas the competitor’s chemical is not. The customer wants a high-product performance for the price he is paying. He will also need to understand the long-term benefits and revenue he will potentially gain by using Beta’s product.
Beta’s marketing team must decide on a distribution channel that will facilitate the flow of the product from the manufacturer to the end-user, in this case, the SME machine shops. This is a new market for Beta, and for many of these SME businesses, price-point is a big concern. While the 15 industrial distributors worked very well for the large companies, Beta may need to use a direct distribution channel at the onset to offset costs and overhead. The other option is to cut the distribution in half, in which case, an indirect distribution channel with a selective distribution would be the option, which would also help enhance Beta’s brand, quality control, and customer service.
Channel Distribution Strategy
Beta Company, Inc. made a range of chemicals that it successfully marketed and sold to larger industrial institutions. When the competition began to close in on Beta, the company became innovators and market leaders by creating a new product that small machine shops could utilize. Testing proved that the new product was 10 times more effective than the competition’s chemicals for SME.
Beta used distributors to route its product to large industrial retailers. Beta would, ideally, do the same for the smaller markets. The potential to equal or exceed the large market is in place with 150,000 customers in the SME.
The new chemical is being marketed as both a lubricant and cleaning agent for the CNC machines and will help produce an estimated 50 parts per hour. The price-point is higher than the competition, so educating the end-users on the value proposition is vital. Beta’s brand is renown in the industry and its reputation amongst large industrial companies is extraordinarily strong. While many smaller machine shops may have heard of Beta, many do not know or understand the new chemical and its capabilities.
As the supplier, the first decision is deciding how to channel the chemical to the customers. The company can sell direct or indirectly through a distributor or wholesaler, which connects to a retailer to serve the 150,000 customers. Beta could also connect to a retailer or dealer, like cncmachines.com, to sell directly to the customer, or Beta could use its own sales and distribution to sell the chemicals.
Beta’s brand is already very well established in the industry as a leader in the chemical it sold to larger companies, so a retailer could have it on its shelf or on its e-commerce page. However, educating the smaller machine shops about the product who may not know its capabilities might be in order, so Beta would probably best suited for a direct channel, at least at the onset. Plus, Beta can control the distribution and how the product is sold.
Customer Wants and Needs
The owners of small machine shops could use the chemical to help with the precision of the trimming process for their CNC machines and produce more parts per hour. The chemical would help the CNC machine’s speed as well as cut depth, thus cutting back on scrap parts. For the machine shop owners, they would need to understand performance costs and value propositions. Beta’s chemical is more expensive than the competition, but the long-term savings in production would increase. The chemical is safer than the competition, proving to be a disinfectant for workers, who can handle the chemical without personal protective equipment, and is also a cleaning agent for the machines, so the machine shop owners would see the value of Beta’s product from a health point of view. The customers also want logistic support, meaning no hiccups and snafus when they need the product, commercial support, which includes merchandising and promotional allowances, technical support, and to know the ease of product availability, customer service, and transactions.
Per Beta’s existing channels, the company is just meeting the minimum acceptable threshold in education for both economic and health benefits, but the company is at the midway point for product value perception and logistic support, while commercial and technical support are right above the minimum acceptable threshold. Where the competition is really hurting Beta is in price perception. However, the more educated the end user is on the product the more value they will see in Beta’s product offering. Just because the competitor’s price is lower does not mean they top Beta’s product in quality.
First, Beta needs to assess if its current channel partners can meet the customer’s needs. For each need, there needs to be a minimum acceptable level. Anything below that level would lead to a summary swiftly rejected by the customer. There also needs to be a best in class, which can be a measurement for Beta for competitors with similar products and services. After calibrating the customer’s wants and needs, the channel steward needs to measure and assess where Beta stands regarding those demands.
Managers also need to figure out warehouses, transportation, and facilities from supply to final distribution. To make sure the chemical completely meets the customer’s wants and needs by supplying marketing information, services and having enough inventory. In other words, fulfilling customer demand while avoiding incurring costs.
The customer wants and needs: A machine shop owner will want to know the benefits of the chemical to justify the price. Beta will also need to make the shopping experience simple.
Costs: Generating information and promotions and getting the product into the hands of the machine shop owners will incur costs. Inventory levels also need to be at a point where customer demand is met, but lots of products cannot be on the shelves.
Power and Influence: Beta has power and influence over the market because of its unique product and knowledge of the chemical. People who are familiar with Beta’s brand can become part of a sphere of influence. The power lies with those who can influence, in Beta’s case, it could be those who know the brand and can educate the small machine shop owners of the benefits of its products.
Competitive Postures and Actions: Understanding Beta’s competition and what they are doing to fulfill customer demand is vital. In Beta’s case, the competition is undercutting the price and lead time. In response, Beta must show the value of its chemical. This requires the support of other channel partners and must be scrutinized because trying to meet or exceed competition will alter the channel strategy.
Other Opportunities: Technology. As CNC machines are upgraded and updated and more sophisticated and thus, more expensive, the need for Beta’s products could become more in demand to keep the quality of the machine strong. Customer demographics. The younger generation will know and understand technology better than the older crowd.
Other Threats: Regulations. Occupational Health, Safety & Environment (OSHE) putting restrictions on chemicals.
Benchmark Key Competitors
While the competition profile suggests a better marketing strategy and lower prices, Beta’s products are superior in quality.
Armed with this information the channel steward can map out a desirable level when they are competing for the same customers.
Appropriate Channel Options
Beta would be best served using a hybrid arrangement, where formulators and ISHs would be in play but Beta would market directly to end customers and educate them on the economic and health benefits.
Beta’s product is unique for a specific industry, and education of the chemical for the small machine shop owners would be necessary, so Beta should use a hybrid arrangement when delivering its product. End customers would need to understand the benefits of the chemical for their machines and Beta could market and educate directly to them.
Channel Coverage: Because Beta channel stewards want the end customer to purchase its product easily and conveniently, and because it is an innovative technology in the market, the coverage should be intensive. The chemical is a Business to Business product (B2B) and a unique offering, but there still is competition with lower prices.
Channel Structure: In this case, Beta needs to control the entire distribution and retail network, it would need a vertically integrated system for its channel structure. As discussed, the end-user would need education of the product, so Beta would need to steer the behavior of the distribution channel, all the way to the customer.
With an expensive new product in a new market, Beta needs to show the value proposition. The company’s brand and reputation have already been established, but now, as it tries to capture a new market, the small machine shop owners need to understand why the price is higher than the competition. Customer service, technical support, and understanding how the chemical works can improve communication and will help Beta’s customers understand why the price-point is higher. The improvement should be controlling how the customer sees the quality and value proposition. Armed with all of this, ideally, achieving a 20% market penetration following its second year would be a company goal.
Visible customer wants are what potential end-users express as their wants when it comes to their needs. Latent needs are wants and needs that the customer may not be aware that the channel will consider for them, like how a product’s economic value could provide long-term benefits. The market penetration will benefit significantly if Beta can educate the customers on the economic and health benefits of the product. Consider, the SME is not as sophisticated as the large market, so a proper education of the value of the product will give the SME an indication of the quality of the product. The more the latent needs are fulfilled, the better the market penetration for Beta’s product. Many customers are unaware of the latent needs of a product and tend to not focus on that. Providing information on these invisible benefits will change the customer’s validation and desire for the product.
Appropriate Channels and Value Chain
Beta must have a channel system that meets the customer’s wants and needs, and ideally, they should do it at a cost that creates value. If the goal is to have a 20% market penetration in three years, Beta would need help from quantitative models while monitoring costs. Using e-commerce would help cut overhead costs and distribution channels, but it might hurt exposure at the onset. Having intermediaries would help market penetration for the new product but will affect costs. A channel steward needs to find the best solution to reach the customer and meet or exceed their expectations. With a new product that needs time and exposure to reach the market penetration goal, having intermediaries, at least until the product gains more exposure, is the best course of action.
Appropriately motivate channel performance: This is a complicated process because Beta will want the intermediaries to cooperate and coordinate with the marketing process and promotion of the chemical. In this case, Beta’s marketing team would need to understand motivating factors for the intermediaries. It could be a percentage of the sales. For every Machine Shop, the intermediaries get a contract with, they get 5% of the sale.
Logistics functions required to execute Beta’s distribution channel strategy: Beta needs to anticipate the needs of the machine shop owners, while also acquiring capital, material, employees, and marketing collateral to meet those needs and fulfill customer requests. The marketing efforts need to convey the value of the product and differentiate it from the competition. This also means educating the machine shop owners on the value proposition.
Beta also needs to have its order processing dialed in. Once the order is placed, the transaction and flow from sales to the manufacturing process need to be flawless.
Having the warehouse and the space to make the chemical. Because Beta is already an established company with a private warehouse, it has the flexibility to reconfigure its warehouse for a new assembly line.
Inventory management also includes making sure the stockroom has the supplies it needs to create the product. Having too much inventory on the shelves can raise costs. Marketers can use the economic order quantity (EOQ) to determine inventory levels based on sales forecasts.
Material handling and the production process of the chemical will require training for having the proper chemistry. The internal movement of raw materials and semi-finished goods and finished goods are all a part of the manufacturing process.
Packaging and unitization not only arrange products for shipping and handling but also determine how many canisters of the chemicals can fit on a pallet. Shipping logistics are vital because there is a lot of movement and handling during transit. If a pallet tips, the product can be destroyed and that can be detrimental for all parties.
The last piece is transportation. What is the cheapest and best way to move the product? Will it be at a high altitude? Will it be exposed to extreme heat or cold? Transportation modes need to account for reliability, costs, and transit time.
Identify potential channel conflict: One major conflict will be inventory levels. Beta needs to have enough inventory to meet customer demands. Having too much inventory will raise costs. Not having enough means long lead times. Beta needs to have the resources and forecast ahead to meet customer demand and requirements. This also means having enough supplies in the stockroom. The purchasing department needs to communicate with the production floor to make sure there are enough raw materials and goods to make the product. Something like not having enough lids for the jars can push an order back two weeks.
The objective for any company is to have customer value-based pricing and land in the Pricing Power Zone. This is no different for Beta as it breaks into a new market by selling to the SME industrial markets after a successful run in the large markets. The question of setting a price falls on the value of the product and the customer’s willingness to pay. If the customer deems a product valuable, they will pay for it. It is up to the sales and marketing department to place value on the product and to have buy-in from the entire company. Ultimately, the company wants what is best not only for the customer but also for the profit margins.
While the objective is to get as close to the True Economic Value (TEV) as possible for a product, the perceived value (PV) should be relatively close to determine a price that will be profitable for a company. In the case of Beta, the TEV of its new chemical for the small and medium-size machine shops is $132 per unit. When one considers the competition’s price ($100), how the chemical will help the CNC machines produce more parts in an hour, the hours of operation for the machine, and the cost per hour of the operator, the PV comes out to $126.55, which based on calculations, is about a $52.55 profit margin per bottle of chemical that is sold. The fact is, the chemical has been tested and proven to be 10 times more effective than the competition, so the price equates to the value of the product and the economic benefits for the customers. After years of using a cost-based pricing approach, it is time to show the true value of Beta’s product, and it starts with the price.
Beta used a cost-based pricing approach for many years when selling its product. The main reason was that accounting data was easy to factor. Beta marked-up costs to get a return on investment or in some cases broke-even. The company simply ignored customer demand, and their willingness to pay, and even the competitor’s pricing. Beta found itself in a Price Capture Zone. The prices that were set did not reflect the full value of the product. For a product that was one of the best in the market, Beta used a very simplistic price-setting mechanism.
Switching Beta to a customer value-based pricing approach and the benefits of the Pricing Power Zone: Beta’s product is more expensive than the competitors because its chemical is 10 times more effective. The price needs to reflect the value and Beta needs to quantify the customer's willingness to pay. If properly educated on the value and economic long-term benefits, a customer will pay the higher price. Beta needs to have confidence in the product it is selling and charge the customer what it is worth.
How will Beta have to change its pricing process to become a member of the Pricing Power Zone: By understanding the culture of the market and having the tools and understanding of the price elasticities and processes. Everyone at Beta needs to be on board with the value of the product it is selling. Once the personnel is on board and confident with the price-point, the structure and processes will change to a Pricing Power Zone.
Calculate Beta’s True Economic Value (TEV):
$100 + (((2,500/25 pph) - ((2,500/50 pph) - ((9 hours x $17) - (9 hours x $15)
= $100 + 50 - 18 = $132
Calculate Beta’s Perceived Value (PV): If the customer feels the chemical will only allow the CNC machine to produce 45 parts per hour, the calculation for PV would be
$100 + (((2,500/25 pph) - ((2,500/45 pph) - ((9 hours x $17) - (9 hours x $15)
= $100 + 44.55 - 18 = $126.55
Calculate Beta’s Cost of Goods Sold (COGS):
Beta’s Calculation would look like:
Item Cost Expenses
40,000 plastic bottles purchased in January $10 each $400,000
20,000 plastic bottles purchased in March $10 each $200,000
40,000 plastic bottles purchased in August $11 each $440,000
40,000 lids purchased in January $5 each $200,000
20,000 lids purchased in March $6 each $120,000
40,000 lids purchased in August $7 each $280,000
100,000 units of resin purchased in January $55 per unit $2,500,000
100,000 units of resin purchased in March $55 per unit $2,500,000
100,000 units of resin purchased in August $55 per unit $2,500,000
TOTAL COGS $9,140,000
Total annual management compensation: $600,000
Annual utilities cost: $120,000
Annual office rent: $240,000
Annual advertising cost: $400,000
Annual shared admin department costs: $600,000
TOTAL COSTS $11,100,000
TOTAL PRODUCTS: 150,000
COGS PER UNIT: $74
Develop and diagram a Value-Pricing Thermometer for Beta:
Beta needs to do market research before customizing its prices. The customer persona is a machine shop employee/manager who is probably on a budget and doesn’t understand pricing. Chances are high he will need to be educated on the value of the product and how it will impact him and his shop. Each customer will see the economic value differently. Someone who uses the chemical and does see the value and has a high demand might get a different price point than the machine shop owner who uses it less. Quantity breaks, meaning if a customer buys in bulk, will be cheaper per unit, over if he just bought one at a time.
Explain which of the customization tools you would use to customize Beta’s pricing to different markets: Set the price based on transaction characteristics. Again, if the customer is a frequent buyer or if they buy in bulk, the price would be different. Beta could offer discounts to infrequent buyers to prompt them to purchase more often.
Primary Market Price Sensitivity
The price elasticity of demand measures the percentage of change in quantity demanded by consumers as the result of the percentage change in price (Dolan & Gourville, 2012). In other words, if Beta makes a change in the price, it will lead to a change in demand. Offering quantity breaks is one way that the price elasticity of demand works. If purchasing 10 bottles of chemicals is cheaper than one, the buyer will most likely go that route, especially if he is a constant user of the product.
Assess the SME market price sensitivity based on the elasticity chart: Beta’s product falls under will perform as expected. The chemical has been tested and is 10 times more effective than the competition. When the performance can be fully assessed price sensitivity will be high. The product is also not mission-critical, which means the product’s failure is not significant. If it works, it will enhance the CNC machines. If not, the machine will not break down. Price sensitivity will be higher also in this case. There are other products that compare to Beta’s, but testing has shown that Beta’s is far superior, so one cannot really compare it to alternatives unless there is consumer sensitivity to price.
Profit and Margins
Beta’s break-even point:
BEV = $11,100,000/$126.55 per unit = 87,712 units
The profit margin:
Price per unit ($126.55) X Quantity sold (150,000) = $18,982,500 - $11,100,000 = $7,882,500.00
$7,882,500.00 / 150,000 =
$52.55 profit margin per unit
Set the Price
A 10% price cut would make the price 113.90 with just a $39.90 profit margin per unit.
Price per unit ($113.90) X Quantity sold (150,000) = $18,982,500 - $11,100,000 = $5,985,000.00
$5,985,000.00 / 150,000 =
$39.90 profit margin per unit
Dolan, Robert J & Gourville, John T. (June 30, 2014). Pricing Strategy. Retrieved from: https://hbsp.harvard.edu/download?url=%2Fcourses%2F728372%2Fitems%2F8203-PDF-ENG%2Fcontent&metadata=e30%3D
Hinterhuber, Andreas & Liozu, Stephan. (2012). Is It Time to Rethink Your Pricing Strategy? Retrieved from: https://hbsp.harvard.edu/download?url=%2Fcourses%2F728372%2Fitems%2FSMR423-PDF-ENG%2Fcontent&metadata=e30%3D
Rangan, V. Kasturi. (October 16, 2015). Developing and Managing Channels of Distribution. Retrieved from: https://hbsp.harvard.edu/download?url=%2Fcourses%2F728372%2Fitems%2F8149-PDF-ENG%2Fcontent&metadata=e30%3D
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