pricing strategy paper
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MarketShare Case
MARKETSHARE
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MarketShare Case Allstar Brands Corporation is one of the leading manufacturers of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies. The company consists of several divisions, among them the Pharmaceuticals Division, which is responsible for the marketing and production of ethical and over-the-counter (OTC) medications. Ethical drugs are available through pharmacies with a physician's prescription, whereas OTC remedies are widely distributed without the need for a prescription. Allround is Allstar’s product in the OTC cold and allergy remedy market. Though reasonably successful in the past, Allround has recently been faced with increased competition. In the last three periods, the industry has seen several product introductions as well as major increases in promotional and advertising expenditures. Though well positioned for growth, Allround has major challenges ahead as well. The management team at the over-the-counter cold medicine (OCM) group of Allstar Brands just completed its third presentation in the past month to the Pharmaceuticals Division manager regarding the status of Allround cold medication. It is apparent from all the attention that the team has received that the Allround brand it manages is of strategic importance to the company. The OCM group is concerned primarily with the marketing activities of the Allround brand and any line extensions or new product introductions that might fall under the same category. You are taking over as a marketing manager in the group, and although all product and marketing decisions are made as a group, each member of the brand management group may take a particular role or specialize in different areas of market analysis. How best to divide up responsibilities among team members is left to the managers.
Allstar Brands
Consumer
Products Pharmaceuticals International
Division Level
OCM Group Allround Brand
Group Level
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Industry Overview Allstar Brands competes with four other firms in the OTC cold and allergy market. These five firms offer a total of 10 brands in five different product categories (cold liquid, cough liquid, allergy capsule, cold capsule, and nasal spray) listed in Exhibit 1.1.
Exhibit 1.1: Company and Brand Summary
Company Name Sales (Millions) Brands on the Market
Allstar Brands $285 Allround, 4-hr multi-symptom cold liquid
B&B Health Care $503 Believe, 4-hr allergy capsule Besthelp, 4-hr cold capsule
Curall Pharmaceuticals $345 Coughcure, 4-hr cough liquid
Driscol Corporation $409
Defogg, 4-hr allergy capsule Dripstop, cold nasal spray Dryup, 4-hr multi-symptom cold capsule
Ethik Incorporated $684 Effective, cold nasal spray End, 4-hr cough liquid Extra, 12-hr cold capsule
Cold remedies are designed to relieve several basic symptoms: aches and fever, nasal congestion, chest congestion, runny nose, and cough. Allergy remedies address many of the same symptoms and are therefore often grouped with cold remedies. However, products formulated specifically for allergy relief are available, and it is common in the industry to consider relief from allergy symptoms as a separate consumer need from cold and flu-like symptom relief. Chronic allergy sufferers tend to have different usage. As a member of the OCM marketing team, you face challenging decisions concerning the existing brand, Allround, and the future launch of a new product. You must consider the four Ps of marketing in managing your brands: product, price, promotion, and place. That is, you must decide what product formulation is best for your target customers, how to distribute (place) your product, what price to charge, and how to promote it.
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Brand Formulations (4Ps = Product) In general, various combinations of six basic types of ingredients (see Exhibit 1.2) are used to formulate OTC brands. Each ingredient targets one of the symptoms listed above, or is used as a base for the other ingredients.
Exhibit 1.2: Ingredients and Purpose
Ingredients Purpose
Analgesics Provide relief for aches and fever. Common analgesics are aspirin and acetaminophen (an aspirin substitute).
Antihistamines Reduce the secretions that cause runny nose and watery eyes.
Decongestants Reduce nasal congestion by shrinking the blood vessels in the nose lining to clear the passages and restore free breathing.
Cough Suppressants Reduce the cough reflex.
Expectorants Provide relief from chest congestion by loosening the phlegm, thereby making each cough more productive.
Alcohol Provides a base for the other ingredients in some products and helps the patient rest.
A brand can be made available in one of three forms: liquid, capsule, or spray. A consumer's choice with regard to form is usually based on personal preference, but some general differences are apparent. Nasal sprays contain only a topical nasal decongestant that provides faster relief from sinus congestion than other forms. Capsule and liquid cold medications might contain any combination of ingredients, although cough medicine is usually found in liquid form to help soothe throat irritation. According to a recent survey, most consumers find that capsule form is somewhat more convenient than liquid. Exhibit 1.3 shows each of the current brand formulations on the market. Product duration is typically either 4-hour or 12-hour. The United States Food and Drug Administration (FDA) regulates the amount of medication for various periods of relief, including the maximum for a 24-hour period without a prescription. The maximum dosage used in 4-hour formulations cannot be taken more than four times each day due to over-medication concerns. Twelve-hour formulations contain half the daily maximum medication. Nasal sprays are considered instant relief products because they act much faster than standard cold medicines, but conversely, they also wear off faster. The duration for each brand is also listed in Exhibit 1.3.
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Side effects have become a greater consideration in recent periods because of the emphasis on healthier lifestyles and concerns about performance under medication. Drowsiness due to antihistamines or alcohol is the most often mentioned negative side effect, especially when these products are used during the day. Other considerations include upset stomach, long-term effects of nasal spray, and excessive medication. As can be seen in Exhibit 1.3, the Allround brand is a 4-hour liquid cold medicine that provides multi-symptom relief. It contains an analgesic, an antihistamine, a decongestant, a cough suppressant, and alcohol. Most consumers use this product for nighttime relief because of the strength of the medication and because the alcohol and antihistamine help the patient rest. Allround is viewed as one of the most effective brands on the market at reducing multiple cold symptoms. However, consumer groups and some physicians have attacked the multi-symptom "shot-gun" approach as providing excessive medication in many circumstances. However, consumers appreciate the convenience of only having one brand in their medicine cabinet that can address several different kinds of cold and flu symptoms.
Exhibit 1.3: Current Brand Formulations
Analgesic Antihist Dcngest Cough Supp
Expect Alcohol Description
Max. Allowed
1000 4 60 30 200 20 (mg/4-hr dose)
Allround 1000 4 60 30 0 20 4-hr multi liquid Believe 0 4 0 0 0 0 4-hr allergy capsule Besthelp 0 4 60 0 0 0 4-hr cold capsule Coughcure 0 0 30 30 0 10 4-hr cough liquid Defogg 0 4 0 0 0 0 4-hr allergy capsule Dripstop 0 0 60 0 0 0 cold spray Dryup 1000 4 60 0 0 0 4-hr multi capsule Effective 0 0 60 0 0 0 cold spray End 0 0 0 0 200 10 4-hr cough liquid Extra 0 0 120 0 0 0 12-hr cold capsule
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The OCM group has important product development and management decisions to make over the next decade and must work closely with the product research and development (R&D) area within Allstar Brands. R&D will provide two major types of product development for the Allround brand group: reformulation of the ingredients in Allround and development of a new brand. The table below shows the options that will be available as a special decision.
Decision Product Decision Decision Options
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2 Allround
Reformulation • drop alcohol • replace cough suppressant with expectorant • keep original formula 3
Allround Reformulation
4 New Product Introduction
• children’s cold medicine • 4-hour cough remedy • non-drowsy allergy product 5
New Product Introduction
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Note that the new product introduction will only be available for the fifth decision if no choice was made in the previous period. The non-drowsy allergy medication is based on a product that is now available by prescription only, but the company is planning on submitting the product for government approval.
Pricing and Promotional Allowances (4Ps = Price) It is industry practice for manufacturers to suggest retail prices to retailers, known as the Manufacturer’s Suggested Retail Price (MSRP), although retailers ultimately set the actual selling price to consumers. Most discounts to the channel are set based on MSRP. There are two primary types of discounts: a volume discount (between 15–40%) and a promotional allowance (typically between 10–20%). Thus, distributors usually pay somewhere in the range of 25–50% off the MSRP depending on the volume discount and promotional allowance passed on to the retailer. Allowances are incentive discounts given to the distribution channel to help promote a product that ultimately impact the product's retail price. Allowances are necessary to gain retail distribution, to obtain desired shelf facings in retail outlets, and to gain support for a brand advertised and promoted by the retailer.
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The current MSRP of Allround is $5.49. Distributors that buy direct receive a volume discount of 30%, so the manufacturer’s selling price (MSP) is $3.84. Distributors also receive a promotion allowance of 13% of MSP. The group noted that Allround’s price was significantly higher than the competition. However, the Brand Manager reminded them that the higher price gives them an above average contribution margin, and that the retailer is able to make more money on each unit sold when compared to competitive products. Nonetheless, they all agreed that the MSRP and overall pricing structure should be reviewed in the coming year.
Exhibit 1.4: MSRP, Volume Discount, Promotional Allowance, and Retail Price
MSRP Vol. Disc. Promo. Allow. Drug-store Grocery Mass Merch.
Allround $ 5.49 30.0% 13.0% $ 5.42 $ 5.16 $ 4.58
Believe 3.99 33.5% 15.6% 3.68 3.55 3.15
Besthelp 4.59 34.5% 13.3% 4.26 4.11 3.65
Coughcure 4.69 28.5% 16.7% 4.62 4.38 3.87
Defogg 4.09 22.5% 11.1% 4.44 4.27 3.75
Dripstop 4.09 21.5% 13.3% 4.42 4.26 3.75
Dryup 4.79 21.5% 15.6% 5.10 4.91 4.33
Effective 4.09 30.0% 14.4% 3.96 3.82 3.38
End 4.49 31.0% 12.5% 4.45 4.20 3.72
Extra 4.09 31.0% 12.5% 3.99 3.83 3.39
Advertising and Promotion (4Ps = Promotion) Advertising and promotion for Allround is one of the more significant decision areas. In addition to creating a general advertising campaign for multiple media outlets, the management group must also make several choices in consumer and trade promotion—important aspects of improving distribution effectiveness. Thus, this part of the management decision process includes elements of both pull (consumer-oriented promotion) and push (trade-oriented promotion). The OCM group must make three basic advertising decisions each period: the amount of dollars allocated to the advertising budget, the content of the advertising message, and, if using the comparison message, the target competitor. Last period, $7 million was spent on Allround's advertising campaign, primarily for commercials aired on network television. Competitive
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advertising budgets for last period ranged from $1.45 million for the Defogg brand to $22.3 million for Coughcure. There are four basic advertising message types that the OCM group considers potentially useful for Allround: (1) a primary demand stimulation to focus the advertising message on increasing overall demand for OTC remedies while increasing Allround's unaided awareness, (2) a benefits approach that states the symptomatic relief properties of Allround, (3) a comparison approach that positions Allround against another brand, and (4) a reminder advertising message to maintain consumer awareness and stimulate the repurchase of Allround. The advertising message used in any period can be a combination of these types. Last period, Allround's advertising was 25% primary demand, 25% benefits, 25% comparison, and 25% reminder. The group wondered if a more effective choice of message might be implemented. Consumer promotions are a significant part of marketing in the OTC cold and allergy remedy market. Allstar Brands spent $3.2 million on consumer promotions for the Allround brand last period, which placed it somewhere in the midrange of its competition.
The purpose of point-of-purchase items, such as sale racks, on-shelf advertisements, or end-of- aisle displays, are to promote a brand to the consumer in the retail outlet. The OCM group believes that these displays promote brand switching when the consumer is purchasing OTC products. Point-of-purchase money is paid to the retailer, but the promotion targets the end consumer. Last period, $0.8 million was spent on point-of-purchase displays for Allround.
Coupons distributed to consumers in special newspaper or magazine supplements offer additional discounts off the retail price when redeemed at the time of purchase. In the last period, $2.4 million was spent on coupon support of the Allround brand. This included money spent on printing, inserts, and mailings.
Exhibit 1.5 provides a summary of last period's promotional activity for the Allround brand.
Exhibit 1.5: Promotional Activity for Allround Brand (in $000s)
Promo $ (Millions)
Promo Allowances 26.5 13.0% of MSP Point of Purchase 0.8 Coupons 2.4
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Retail Channels (4Ps = Place / Distribution) OTC cold and allergy remedies are sold retail in drugstores, grocery stores, and mass merchandisers. A recent study shows that there is some difference in where consumers purchase different types of cold medicine. These are shown in Exhibit 1.6.
Exhibit 1.6: Consumer Purchases by Channel
Gaining the support of the channel is an important part of a brand's success, and shelf space allocation and placement can have a significant effect on brand sales. Because of this importance, the OCM group asked their sales force to query retailers about shelf space allocation among brands. The results from this informal survey showed that retailers considered four basic factors regarding shelf space allocation: product turnover (number of units sold in a given period of time), product profitability, promotional allowances and sales force support. In general, large grocery stores, mass merchandisers, and chain drugstores were more focused on turnover and allowances, whereas independent drugstores paid greater attention to sales force support. The OCM group hoped that this information might prove useful in determining how to allocate their resources across distribution channels. The support of a manufacturer's sales force is critical to the success of a brand in the OTC cold and allergy market. Part of the sales force sells directly to retail outlets. This direct sales force is responsible for maintaining relationships with current retailers and for developing new retail accounts. The direct sales force also presents trade promotions, allowances, and new product introductions to retailers. Manufacturers also maintain an indirect sales force, which includes wholesaler support and merchandisers, designed to sell into and support the indirect distribution system. Wholesalers sell OTC brands to smaller, independent retailers that are not reached by the direct sales force of the manufacturer. Merchandisers provide special support to retailers for their in-store activities, such as shelf location, pricing, and compliance with special promotions. The OCM group determines the total size of the sales force, including the proportion of direct and indirect support. Sales force allocation (# of sales people) for Allstar Brands is listed in Exhibit 1.7.
Retailer Cold Cough Allergy
Drugstores 28.5% 35.1% 44.3%
Grocery Stores 52.6% 44.8% 38.7%
Mass Merchandisers 18.8% 20.1% 17.0%
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Exhibit 1.7: AllStar – Sales Force Allocation
Channel #SF
Drugstores 30 Grocery Stores 40 Mass Merchandisers 10 Indirect Support 30 Total Sales Force 110
Getting your product to where your target customers shop is important to the success of your brand in MarketShare. To allocate marketing resources efficiently, you will need to understand your collaborators in the channel.
Distribution Channel Descriptions
Drug Stores
These retail stores consist of pharmacies selling prescription and OTC medicines, as well as other household items. Independent drug stores tend to order from the manufacturer in smaller volumes or buy product through a wholesaler, while most chain drug stores buy in larger volumes direct from the manufacturer. Markups are from mid-range to high, depending on the retailer.
Grocery Stores
Grocery stores primarily sell food to consumers, but may also sell medicine and household items. Some smaller grocery stores will buy through wholesalers, but most will buy direct in medium to high volumes. Like chain drug stores, sales force support and promotion allowances are important factors in their decision to carry a brand. Markups are in the mid-range for retailers.
Mass Merchandisers
Mass merchandisers are large retail outlets that generally offer discount prices on items and have a high level of sales. Most buy product direct from the manufacturer in medium to high volumes. Mass merchandisers attract customers with low prices, and turnover is important when allocating shelf space.
Wholesalers
Wholesalers do not sell to the end consumer, but buy product from different manufacturers and resell it to retailers. They serve smaller retail outlets and more rural areas, providing their own sales force to sell the many product lines they carry. High volume discounts and promotion allowances are important to wholesalers.
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Market Segmentation The trade typically segments the OTC cold and allergy market on the basis of how the products are labeled. The three standard product categories in the OTC market are cold, cough, and allergy. Colds have a wide range of symptoms, including sore throat, cough, runny nose, sneezing, stuffy nose and head. A slight fever, and some aching or tiredness are also possible. Cold sufferers use a wide range of products for relief, including products not labeled for colds. They may take medication for specific symptoms, for example, an antihistamine for runny nose or a pain reliever for aches, or they may take a multi-cold medicine for relief of a full range of symptoms. Users seek cold products in capsule, liquid, or spray form, depending on the symptoms and how they are used. For example, capsules are easily carried around, and are most convenient for use away from home, while liquids might be fine for home use. Adult formulas are not recommended for children, but some parents may give them a reduced dose of a liquid cold medicine if a children’s product is not available. Some cold suffers may use home remedies, while others may just put up with the symptoms until they get over the cold. A cough can occur with a cold or other infectious diseases, or it may be in response to environmental conditions. Sufferers may take a cough medicine by itself, or along with a cold product. Some may prefer a multi-symptom product to relieve cough and cold symptoms. For a dry cough, users may prefer a cough suppressant. If a cough is accompanied by a buildup of mucous, users may prefer an expectorant to help relieve the congestion. Expectorants may also be preferable for children for a more productive cough, and reduced risk of side effects. Allergies are caused by a wide range of environmental factors, including foods, pets, and pollens. Symptoms include sneezing, runny nose, and itchy, watery eyes. Symptoms may also include congestion. Most sufferers look for an antihistamine, though it may cause drowsiness, which is an issue for use when working or driving. There may be some cross-usage of cold medicines, especially if allergy medicines are priced high and lower priced cold medicines with similar formulas are available. The brand management group often uses the information presented in Exhibit 1.8 as a basis for determining the brand’s direct competition, but also realizes that the report fails to account for the cross-usage of brands (e.g., using a cold medicine to relieve allergy symptoms).
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Exhibit 1.8: Market Share by Product Category
Cold Cough Allergy Total
Mfr Sales ($M) $ 999.8 $ 517.2 $ 160.4 $ 1,677.3
Growth 7.7% 7.0% 0.6% 6.7%
Allround 21.4% 0.0% 0.0% 12.8%
Believe 0.0% 0.0% 64.6% 6.2%
Besthelp 27.0% 0.0% 0.0% 16.1%
Coughcure 0.0% 51.4% 0.0% 15.8%
Defogg 0.0% 0.0% 35.4% 3.4%
Dripstop 7.7% 0.0% 0.0% 4.6%
Dryup 18.0% 0.0% 0.0% 10.8%
Effective 15.3% 0.0% 0.0% 9.1%
End 0.0% 48.6% 0.0% 15.0%
Extra 10.5% 0.0% 0.0% 6.2%
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Market Survey A major marketing research firm offers a nationwide survey of OTC cold and allergy consumers. This firm claims that the survey provides a great deal more information on how consumers perceive and use cold and allergy products than can be found in other reports. The survey is conducted every year. A sample questionnaire is provided following the case. The consumer survey consists of the following reports: (1) awareness, purchases and satisfaction, (2) purchase decision-making criteria used by consumers, and (3) brand comparison based on consumers' perceptions of their ability to relieve symptoms. Sample data for awareness, purchases, and satisfaction are presented in Exhibit 1.9.
Exhibit 1.9: Market Survey – Awareness, Purchase, Satisfaction
Brand Awareness Purchases Satisfaction
Allround 68.1% 10.6% 50.6% Believe 35.7% 7.4% 36.0% Besthelp 76.8% 17.1% 47.0% Coughcure 67.0% 15.1% 40.6% Defogg 28.0% 3.4% 35.4% Dripstop 36.3% 4.6% 37.6% Dryup 62.9% 9.1% 47.5% Effective 42.5% 10.2% 38.6% End 69.8% 15.5% 40.2% Extra 61.4% 7.1% 38.0%
The table shows results for all respondents, but when you buy the survey, you will be able to view data for a cross-section of consumers: cold, cough, or allergy sufferers, or any combination of these. How products are labeled and how they are used by consumers is not always the same. By viewing a cross-section, you will be able to get a better idea of how consumers are actually using the brands, compared to how the brands are labeled.
Other Marketing Research
In addition to the survey data, other information about the market is available. Market trade publications, similar to Exhibit 1.8, are free to your team and provide data for industry outlook
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on population, industry growth rate, and inflation. Other data concerning competition and distribution are available for a fee.
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Financial Situation
Allround is a successful and profitable brand with sales of $214.3 million at the manufacturer's level last period. The gross margin was $132.5 million, and the contribution after all marketing expenditures, including advertising, promotion, sales force, and administrative costs, was $106.7 million. The Allround brand also carries its share of fixed costs, including the plant where Allround is produced, and a share of corporate overhead charges. These charges were $56.0 million, leaving a net income of $50.7 million. Senior management of Allstar Brands expects your team to make even greater contributions in the future. A detailed income statement is presented in Exhibit 1.10.
Exhibit 1.10: OCM Group Income Statement
Manufacturer Sales $214.3 100.0% Promotion Allowance $27.9 13.0% Cost of Goods Sold $54.0 25.2% Gross Margin $132.5 61.8% Promotion $3.2 1.6% Advertising $7.0 3.3% Sales Force $8.5 4.0% Administrative $7.1 3.3% Total Marketing $ 25.8 12.0% Contribution After Marketing $106.7 49.8% Fixed Costs $56.0 26.2% Net Income $50.7 23.6% Next Period Budget $28.3 13.2%
The OCM group has received a budget to make marketing decisions for the Allround brand. The marketing budget must cover all sales force, advertising, and promotion expenditures. In addition, any marketing research purchased is a budget expense. Promotion allowance, however, is treated as a price discount and is not charged against the budget. Each year, the marketing budget is adjusted up or down based on sales and net contribution performance. If a new product is introduced, the group will receive additional budget funds to help with the launch. Unused budget will not be carried forward to the next year, and budget deficits are not permitted. The brand management group must determine the best way to allocate the available funds, and can use the marketing efficiency index (ratio of net income divided by marketing expenditures) to track performance.
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The Marketing Task The task of the Allround brand management team is to increase market share and profitability in an increasingly competitive and changing environment. With great enthusiasm the OCM group sets out to do the job. Each member has separate assignments, but all are concerned with the performance of Allround and potentially, a new brand introduction. The group will use the information presented in the exhibits and other marketing research studies to assess Allround’s situation. After completing its analysis of the situation, the group will then make decisions in the areas of product, distribution, promotion, and pricing. The group must keep in mind that all decisions are interrelated, and must be considered in context. This process will be repeated over the coming 6 periods as they attempt to establish AllStar Brands as the leader in both profitability and market share in OTC cold medication. Good luck managing your brands in the world of MarketShare!
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Decision Summary
Decision Description Value Ranges
Direct Sales Force
The direct sales force sells directly to retail channels. Enter the number of sales force for each of the three channels: drug stores, grocery stores, and mass merchandisers.
0-999
Indirect Sales Force
The indirect sales force engages in merchandising and supports wholesalers.
0-999
Product MSRP Each product has a Manufacturer Suggested Retail Price. Actual retail prices will depend on discounts and retailer markup.
1-50
Volume Discount
Discount on MSRP given to retailers and wholesalers.
10-40
Advertising Budget
Total to spend on advertising media for a product. 0-999
Ad Message
Ads can have a primary message (create awareness, stimulate demand), promote benefits (select specific benefits), compare with another product (select product), and/or remind consumers of the brand (maintains awareness, stimulates repurchase).
0-100 for each message type. Must add to 100%.
Promotion Allowance
An allowance given to the channel to promote the product. Enter a percent of discounted price.
10-20
Point of Purchase Budget
Point-of-purchase displays promote your product at retail outlets.
0-999
Newspaper Coupons Budget
Coupons encourage shoppers to try your product, and stimulate repurchase.
0-999
Creative Design
This option allows you to embed a link to a logo and ad you have designed. Your professor may evaluate your designs and have them affect the simulation results.
URL linking to a public site.
Incident Each period you may have to respond to issues raised by an “incident” (mini-case).
Choices vary by incident.
Market Research
Reports include freely available industry reports, more detailed competitive information that can be purchased, and a survey of consumers available from a marketing research firm.
Purchase or not. Note that a report purchase cannot be reversed in a period.
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Sample Market Survey Questionnaire This market survey questionnaire was designed to be asked to consumers at the retail point of purchase (drugstore, grocery store, convenience store).
PURCHASE INFORMATION
1. Did you purchase any cold medicine? YES NO -If you answered “NO” above, go to question 5-
2. What illness are you suffering from? Cold Cough Allergy 3. Which brand of cold medicine did you purchase? __________________________________
SATISFACTION
4. Overall, are you satisfied with the product you just purchase? YES NO 5. Which brands of cold medicine have you heard of? Surveyor circles response(s).
Allround Besthelp Believe Coldcure Coughcure Dripstop Defogg Effective Extra End Other
6. Please rank the following product attributes in order of importance in you decision to
purchase cold medicine: ____Product Effectiveness ____Side Effects ____Price ____Form ____Duration
7. Of the brands you mentioned you have heard of (from Question 5), how effective would
you rate the ____________ brand of cold medicine in relieving the following symptoms?
Not at all Effective Extremely Effective Aches 1 2 3 4 5
Nasal Congestion 1 2 3 4 5
Chest 1 2 3 4 5 Runny Nose 1 2 3 4 5
Cough 1 2 3 4 5 Allergy 1 2 3 4 5
8. What is your perception of the price of ____________ brand?
Inexpensive Affordable Expensive Price 1 2 3 4 5