Problem Statement
The objective of this paper is to present a report on the marketing questions raised by the founder of Celtic Chocolate Company Limited. Mr. Ronald Begg founded Celtic Chocolate Company Limited under which he engineered a new product called Milk Mate. The new product is basically a milk modifier. Milk Mate was introduced into a market largely controlled by large companies, such as Nestle with a market share of 50%, Hersey with a market share of 20%, Cadbury at 10%, and the remaining 20% shared by other smaller players in the region.
Generation of Alternatives
The introduction of the new product into the market was the major problem for the newly founded company. Firstly, Mr. Ronald Begg was concerned about the pricing of the product. Key factors for consideration in the pricing of the product included the profit margins that the company targeted, the competitiveness of the price in comparison to the market leaders in the industry, and the pricing of the product with respect to what the customers were willing to part with. The second major problem regards the approach that the firm ought to adopt in the penetration of the market, as well as the channels of distribution. Key factors of consideration in the determination of the marketing strategy and distribution of Milk Mate include the competitive environment, the access and availability of funds for the marketing campaign, and for the hiring of the sales team. In connection with this, the company must determine whether to use commission-based hiring system for the sales persons or to employ the sales team on a salary-based system. Lastly, the company has to determine how to select the distribution channels and the market segmentation mechanisms based on the available data. In the following sections of the paper, the focus will be on answering some of the questions raised in the Celtic Chocolate Company marketing case.
Situation Analysis
Situation analysis captures the environmental factors influencing the concerns of Celtic Chocolate Company. The analysis focuses on various factors under the external factors, market factors, buyer profile, and the competition.
External Factors
The external factors highlighted in the case study include the fluctuations in the sugar prices. Sugar is a major cost factor for the company. The company’s assessment of the cost factors indicates that the ingredient costs amount to $14.50. Of this amount, 85% is the cost of sugar. Drastic changes in the cost of sugar resulted in the industry losing $2 to $2.50 per cup on the costs of sugar. As the company enters into business, it is important to consider the sensitivity of the price to the changes in the cost of sugar. The importance if this is that sugar and all other ingredients are a direct cost. The company must be able to meet the direct costs for it to be sustainable.
Market
The market is geographically segmented. Analysis of data from the case study indicates that the region roving the largest market share for the milk modifiers is Ontario with a market size of 38%. Quebec contributes 30% to the total market share while Prairies contributes 14%. The last two on the list of the geographically segmented market are British Columbia with 10% and Atlantic Provinces with 8%.
The importance of this data is in the determination of the regions on which the company should spend more in marketing. The analysis of data as herein presented recommends that the geographical segmentation of the market should be used in the allocation of advertising and distribution costs of Milk Mate.
Analysis of the geographical market data in relation to the data on the chains distribution reveals that chains operate in Ontario and across other major regions in Canada. The distribution should be used in approaching the heads of the chains for the product to be listed by the firms. The recommended approach is to begin with Dominion Stores, which has 228 stores in Ontario, 109 stores in Quebec, 14 in Prairies, and 43 in Maritimes. The importance of beginning with Dominion Stores is that it gives the company access to four of the five major markets for the milk modifiers. Other chains that the company should consider includes Mac’s Milk with a network of 432 chains overall and Becker Milk with a network of 411 stores overall. The objective is to get the product as close to the people as possible. However, this will be subject to the conditions offered by each of the chains. The advantages of focusing on the chains is that they already have a strong brand and attract many customers as compared to the voluntary and cooperative groups. If the cost is found to be prohibitive, the company should consider the voluntary and cooperative groups, starting with those that have a large network in Ontario and Quebec.
Buyers
Celtic Chocolate Company Limited conducted a market study in which it tested Milk Mate against a competing brand. The analysis revealed various factors on the buyers in the milk modifiers market. The analysis indicated that 52% of the surveyed market would definitely purchase the product if it was priced the same as leading powder. Only 43% of the surveyed population was ready to purchase the product if the price was raised by $0.1 per pound higher than the leading powder brand. From the pricing data discussed elsewhere in this price, the maximum price acceptable to the market stands at $21.2, considering the base price of $20 for the 12 pound product. The observation indicates that the ease of mixing only makes sense to the customer if the price is equal to that of the competition. Secondly, the buyers are more interested in the taste, flavor, and sweetness of the new product in the market. The observations indicate that the company has the potential to influence the buyers by capitalizing on the sweetness of the liquid mil modifier (64%). The buyer is interest in the taste and flavor of the product and the company can influence the market by focusing on this factor. Other factors, such as color richness, are considerably important as factors of product differentiation and it is for this reason that the company must emphasize on these properties of the product in the presentation. In summing up the observations about the buyers, it would be important to note that they are very sensitive to the price which is basically why the competition has not been able to adjust the prices upwards. The price sensitivity may be a make or break factor in the penetration marketing campaign of the company. As it is in this case, the company must ensure that the price does not exceed $21.20. It is however highly recommended that for penetration purposes, the price should be maintained at the prevailing rate of $20. Combined with the new product factors, the pricing would enable the company to maximize on the marketing campaign and gain economies of scale. This would however need the company to control the selling and general expenses as well as the fixed costs of the company.
Competition
The competition for the company is majorly from established brands as mentioned elsewhere in this report. Product differentiation rather than price is considered the major competition facet. The competition as it currently stands does not focus on the grounds of price. Data from the company indicates that the competition sells at a price of $20.00 per case of 12 one pound packages. The implications are that product differentiation and aggressive marketing practices were the spine of competition in the industry. Additionally, analysis of data also indicates that the competition was not able to quickly adjust the price after the rise in the sugar prices.
The implications of these findings are that the company can only use product differentiation as the major selling point for the company. Milk Mate is in liquid form; hence, highly soluble in milk. The competition offers powdered milk modifiers that exhibit low solubility. The implications are that Celtic Chocolate Company can market Milk Mate as a revolutionary milk modifier that is both sweet and highly soluble. This would combine the interests of the market (highly interested in sweetness) and the strengths of the product (highly soluble). The company’s product is practically different from the competition and this means that the company must emphasize on this property of the product.
SWOT Analysis
SWOT analysis focuses on the strengths, weaknesses, opportunities, and threats facing the company and its new product. The strengths and weaknesses are internal environment factors while the opportunities and threats are external environment factors. These factors are analyzed in the following few paragraphs.
Focusing on the strengths, the company is producing a new product, which is the liquid milk modifier. The product is highly soluble as compared to the products offered by the competition. The company’s leadership is experienced having worked in the same industry for over seven years. Additionally, the company has strong strategic alliances with partners that have helped the company design and produce Milk Mate.
On the weaknesses, the product is new in the market characterized by stiff competition. The company is also suffering from a weak financial base meaning that the company has to consider raising funds through debt capital and other sources of capital. Additionally, the company has not yet managed to hire a competent sales and marketing team.
On the opportunities, the company has the opportunity to create a niche in the production of liquid milk modifiers. It must patent the product to protect its intellectual rights to the new product. Additionally, it has a good relationship with financiers and this provides the opportunity to access funding efficiently.
The threats include high levels of competition in the industry. The implications are that the company has to deal with large multinationals in the industry. The large multinationals have a strong financial base and operate on economies of scale. Additionally, the market is not ready to take up high price increases on the milk modifiers and this indicates that any slight changes in the prices ($0.1 per ounce) is likely to result in mass customer movements to the competition.
Quantitative Analysis
Quantitative market analysis attempts to answer the questions on how the company will make its money. It focuses on the costs of the company vis-à-vis the revenues of the company. The quantitative analysis in this section focuses on the break-even analysis, the potential costs, and the sales price of the company among other facts.
Variable costs
The analysis of costs by the company is as indicated in the table below.
The ingredients are the company’s largest cost. The costs are largely determined by the product requirements and cannot be altered by the company. There are also the packaging and manufacturing costs that are part of the core direct costs that the company must consider. In penetration marketing, the consideration of the variable costs is important as it informs the pricing decision.
Sales Pricing
Pricing should first be informed by the variable costs as indicated above. However, in the case at hand, the company has two options that would be viable as per the market data. The first price is at $20, which is the prevailing market price for the milk modifiers. The second is $21.2 which is the price that 43% of the market surveyed would consider. Both prices are lower than the price that Celtic Chocolate Company has been considering ($23).The analysis indicates that the high price would be prohibitive and is not a good option in penetration marketing. As a rule of general application, penetration marketing should be competitive and it is for this reason that we recommend the price of $20. The buyers are more likely to test the new product if priced at par with the competition. The question is then on how the company can achieve the low price considering other costs indicated in the cost schedule above.
Fixed Costs
The analysis of data indicates that the selling costs, the distribution costs, and the advertising expenses have a fixed cost factor. Selling costs would be $50,000 in case the company employs sales persons. The office expenses would be between $80,000 and $100,000per year while the advertising costs would be between $100,000 and $250,000. These costs will be covered by the contribution margin hence the need to consider the contribution margin and the breakeven units. The Total costs can be given in the best case and worst case scenario as shown below.
Break-even Analysis
At the recommended price of $20, the contribution stands at $3 while at a price of $21.2, the contribution margin would be at $4.2. At a contribution margin of $3, the break-even units stand at $93,333 units while at a price of $21.2 the breakeven units stand at 66,667.
Proforma Income
Make Decision
Based on the analysis presented herein, this case study recommends that the company sells the product at a price of $20, in the penetration marketing campaign. The price would enable the company to gain a market share considering that it’s a new product. Secondly, the analysis recommends the use of an employed force of sales persons. It is safer for the company to begin with a committed sales force as opposed to sales persons hired on commission. The company would lock in lower costs of selling and administration. Thirdly, the analysis recommends marketing Ontario and Quebec through the largest chains in the two regions. Cooperative marketers can be used in other regions in order to lower the marketing costs. The advertising costs are the company’s greatest concern in fixed costs hence the need to consider cheaper advertising and product promotion methods.
