marketing case study
MKT 210 SP 21 – QUIZ #2 – Hard Knocks Locks, Inc.
For ten years, Aida Santos had grown her business, Hard Knocks Locks, based in Boston, Massachusetts. An urban cycling enthusiast since her years as an engineering student in college, Aida knew that securing one’s bike against theft was a multiple-times-per-day activity for many cyclists all over the world. Unsatisfied with the choices available to her (after having had two bikes stolen!) she partnered with her friends Harry, An, Bobbie and Morgan to design and build a nearly un-breakable bicycle lock.
Aida and her partners started Hard Knocks Locks with their own money. After a few years in business, Hard Knocks received a major $10M investment from a local venture capital firm in exchange for 51% of the firm’s equity. That investment meant that the venture capital firm had a lot of control over Hard Knocks’ decision-making, but it allowed the company to grow to where it was now – $18 million in sales last year, with a very positive reputation, and product in independent cycling shops all over the United States, and now even in some stores in Canada, the UK and Italy. And, even with all that growth – now up to 80 employees between headquarters and factory – Aida loved that Hard Knocks had become more and more like a big family, with high loyalty and low employee turnover.
The Hard Knocks SuperLock, a “u-shape” style lock, uses an incredibly strong steel alloy (a mix of high-carbon steel, tungsten and titanium) and a proprietary, patented locking mechanism of Aida’s own design. Promoting the lock on social media & YouTube, using videos showing various power tools having tremendous difficulty trying to cut through or break the lock, has been hugely successful. Further, Hard Knocks guarantees the locks against breakage for ten years; the company’s “We’ll Buy You A New Bike!” promise is well-known in the cycling community. Aida has never once had to buy a customer a new bike as a result of lock breakage. The brand has a very strong reputation among bike commuters, bike messengers, urban delivery riders, and cycling enthusiasts.
Aida is very proud of the brand equity that her team has earned. The SuperLock has always been made in the USA, using only US-sourced materials, at the Hard Knocks factory in Boston. The ability to say that SuperLocks are entirely “Made In The USA” has been a big part of their promotional and positioning strategy.
The SuperLock has an MSRP of $100. Typically, Hard Knocks sells the locks to the retailers in their marketing channels for about $80 per unit. The materials and labor costs for each lock amount to $40, and when packaging and shipping are factored in, the break-even point for a shelf-ready lock delivered to a retailer is $50.
Sales were projected to grow about 4% this year. Not bad, but not as strong as the investors were hoping, and she’d been hearing about it from them. The investors had hinted at forcing “some management changes” if growth did not improve. Still, Aida was optimistic for the current year.
A Major Growth Opportunity
For the last several weeks, Aida had been in talks with SuperBigMart, a huge national chain of big box stores, to get Hard Knocks Locks on to their shelves. This would be a major opportunity – it would mean increasing their sales from approximately 225,000 locks per year to about 400,000. This could be huge. At their current pricing, this deal could almost double the firm’s revenues, and likely profits too, in one shot. That would be a heck of a lot better than the 4% her marketing team had been projecting.
Earlier this week, Aida had told Louis Graham, the representative of the venture capital firm who held 51% of Hard Knocks equity, about the opportunity at SuperBigMart. He was very enthusiastic about the opportunity, as this could mean a huge reward for the investors. “A contract for 175,000 units? Nationwide exposure in the nation’s largest retailer? That would be amazing, Aida! The long-term growth prospects are tremendous!”
Aida could hear Louis typing on his computer. “Have you ever heard of MegaBits, the power drill company?” he asked. “They made a deal with SuperBigMart in 2016. The drills sold like hotcakes. Then in 2017, SuperBigMart quadrupled their order. That could be us, Aida! You have the best bike lock on the market. They’re going to fly off the shelves.”
Aida had to admit that it was a very exciting prospect. “You have to do this, Aida,” Louis said breathlessly into the phone, “the team here is 100% in favor of you doing this. Make it happen!”
However, Aida’s next conversation, with Suzanne DeTomaso, SuperBigMart’s Director of Purchasing for Sporting Goods, had left her feeling worried and anxious.
“These locks are fantastic,” Suzanne had said. “We’re really excited about having them in our stores. But, as you know, our customers may not be as enthusiastic about your product at your current MSRP of $100. I mean... a hundred dollars... for a bike lock? That is an absurdly high price for our main customer segments, it’s far outside their comfort level for that kind of product.”
Aida had said, “Well, of course, for the type of volume you’re talking about, we could lower our unit selling price to you from the usual $80 per unit to, say, $70 per unit, a drop of 12.5%. Would that work?”
“Goodness, no!” Suzanne said with a laugh. “We’d want to sell this product to the customer for about $60, and even at that price, it’d be well above the usual price for locks in our stores.” Well of course, thought Aida, that’s because the locks you sell are cheap garbage. “Realistically,” Suzanne continued, “we’d need the unit price you charge to be around $40 per lock delivered, shelf-ready. That’s our final offer. So, if you can do that, we’ll get started. And if they sell like we think we’re going to, the sky is the limit – you know we like to scale up aggressively!”
Aida brought this news to her team. An Nguyen, Hard Knocks’ Director of Marketing, was horrified. “$40? That’s what it costs us just to make the lock, forget getting it packaged and shipped!” he said. “We can’t do that, Aida... we’d go broke. Our minimum break-even price for a shipped, packaged, shelf-ready lock is $50.”
Aida told the team that the investors were quite insistent about getting a deal with SuperBigMart. And she herself was excited about seeing Hard Knocks Locks becoming a household name. “There has to be a way. Put your thinking caps on and come back with some options. We need to move fast.”
Potential Solutions
A few days later, Aida held a meeting of her team to discuss four possible options. The team didn’t look happy.
“Option 1,” said An Nguyen, “is to just take a loss on the units we send to SuperBigMart. We’d lose about $10 per unit sold, altogether. Our overall gross profit margin, the profits before any operating expenses, would drop from 37% to 13%. That would have a pretty harsh effect on our bottom line. Instead of almost $3M in net profits, our bottom line would be around $1M in net profits. We’d still be profitable overall, but in my opinion, national exposure is not worth the negative effects on our finances. It’s too risky over the long term. What if they increase their order to the point where we end up losing money on the bottom line?”
“Option 2 might work,” said Roberta “Bobbie” Faxon, Director of Production. “We could produce a lock that has the same gross profit margin if we change the materials we use. We could switch from our current alloy to one that’s cheaper and sourced outside the US. There’s great deals out there for metal alloys, if you don’t need our exact strength specifications and don’t mind buying from Asia.” She paused, frowning. “Of course, you’d have to remove the “Made in USA” label. Also, the locks made from cheaper alloys would be pretty strong, but not nearly as strong as our current ones. We could be profitable, but we’d have to stop offering the ‘New Bike’ guarantee.”
“Option 3 could be a way to split the difference,” said Morgan Li, Director of Human Resources. “I hate to even suggest it, but...” She looked down at her papers. “If we shut down the factory here, and moved production overseas, we could ship our locks at the price of $40 per unit and still be profitable due to reduced labor costs. Quality would be roughly similar to our current locks. We could keep the guarantee because we’re not changing the materials we use, the locks would still be just as strong. But it would mean we weren’t ‘Made in the USA.’ And, of course, it would mean saying goodbye to 49 of our employees.” Morgan never looked up from her papers. It was plain to see that she did not like this particular option, even though it was her suggestion.
“There is an option 4,” said Harry “Bones” McGee, the Chief Financial Officer and Aida’s best friend from college. “We keep making our locks the way we always have, but we don’t sell those locks to SuperBigmart. Instead, we hire an overseas factory like Morgan talked about. We get some of these cheap alloys that Bobbie mentioned. Then we have this new cheap factory use the cheap metals to make a special lock, that is just for sale in SuperBigMart. Same name and package, but with no guarantee and no “Made in the USA” label. Heck, with the cheaper factory and metals, we might still make a profit on the $40 price. Everyone’s happy, no one’s the wiser.”
Bobbie looked at Harry with crinkled eyebrows. “So, wait... let me understand your idea. The customers would think they’re getting a Hard Knocks SuperLock. The only way they’d know that it’s actually not a guaranteed SuperLock is if they read the fine print? You want to fool our customers? That feels very wrong to me,” she said.
An chimed in: “And, if everyone rushes to SuperBigMart to get one of these cheap versions, doesn’t that put our other retail partners, the independent cycle shops selling the expensive version, at risk? They’ve supported us from day one, and this could hurt them. I’m not sure it feels right to me, either.”
Harry frowned. “I guess I didn’t think of all that. Those are good points. Still, it’s an option, isn’t it? Do we want the amazing brand exposure and the huge increase in sales, or not? I’m thinking of the growth opportunity here, and the investors.”
After the meeting, Aida sat in her office, considering her options, trying to figure out what to do:
1. She could sell some of her locks at a loss to get national brand exposure and dramatically increase this year’s sales. This could very well put the firm in financial risk over the long term, however.
2. She could change her production methods for all the locks and ship a product that she felt was inferior. This would maintain profit margin and her employees, but she’d be putting her customers at risk of stolen bikes; and she couldn’t offer the New Bike guarantee anymore, to any of her customers.
3. She could sacrifice all of her American factory workers, people she’d come to think of as family. This would preserve the guarantee and brand equity, and maintain her profit margin, but at what cost?
4. She could make a cheap version of the lock that wasn’t as good as the original to sell only in SuperBigMart stores, and just not tell anyone. As long as the package didn’t have a “Made in the USA” label and had fine print that said the lock wasn’t covered by the New Bike guarantee, it should be fine, even if customers could feel fooled.
Or, she realized, there was an Option 5: do nothing. She could just tell SuperBigMart to forget the whole idea, and then be ready to deal with an angry Louis. She knew the investors were not pleased with the idea of only 4% sales growth and might force some “management changes.” Those changes might very well include her and/or members of her senior team, the friends who helped her found the business, being forced out of the company.
There were lot of factors for Aida to consider: ethics, revenue, profits, brand equity, people’s jobs. This was not going to be an easy decision. Put yourself in Aida’s shoes. What would you choose to do?
Your response should be 1-2 pages (it’s okay if you go over). Make the best decision you can with the information available. Be sure to use the rubric as a guide, and be sure to include:
• Who the major stakeholders are, and what responsibility Aida has to them • What choice you would make if you were in Aida’s position • A discussion of all of the factors Aida should consider in her decision making • The rationale for your choice – why do you believe this is the most ethical thing to do?
Please include a filled-out version of the “Decision Making Metric” spreadsheet to your response. Note that you should make the decision that you believe and feel is the best decision, which might very well be different than the one with the best “score” from the evaluation work sheet.