Cumberland Metal Industries new product, the CMI Cushion Pad, is ready for the market. Thomas Simpson has to quote prices by the end of the week so

Transcription

1 Cumberland Metal Industries new product, the CMI Cushion Pad, is ready for the market. Thomas Simpson has to quote prices by the end of the week so that CMI can get the Cushion Pads to its first buyer and into the market. This analysis is meant to determine the right price to introduce the pads into the market. To do this, the market, competitors, and promotion opportunities will also be discussed. Market There are approximately 19,500 to 26,000 hammers that need cushion pads in the industry. Since CMI pads last more than 13 times longer than current pads in the market, one hammer would only go through 1.5 pad sets per year rather than 20 to 62 sets (Figure 1A). This leaves a possible 39,000 pad sets the market could hold, instead of the 1,000,000 pad sets it holds currently (Figure 1B). Competitors Since CMI pads reduce the need to replace cushion pads, if CMI is successful, competitors will see a huge reduction in their market share. In the time it takes to change the pads alone, contractors save 10 hours of labor each year by using CMI pads instead of Asbestos (Figure 2A). With labor prices, this saves contractors $9,747 per year (Figure 2B). Pad makers are not well known, so consumer loyalty is likely very weak. With all of CMI benefits from the project tests (Figure 3), contractors willingness to pay and change brands should be very high. Colerick Foundation Company s eagerness after experiencing CMI pads benefits, was a prime example. If other companies and contractors are comparable to Choleric Foundation, then to get the pads into the market, CMI just needs communicate the benefits of the pads to the consumers. Promotion Communicating CMI Cushion Pads benefits to the consumer is not straight forward, since there are not many ways to communicate to large section of the market at a time. There are two ways to reach the consumer: directly, or by indirectly by influencers. With six influencers, four seem essential, and two seem important if CMI wants bigger jobs (Figure 4). If CMI increased sales spending by about 30% to reach the influencers, CMI could expect to sell 7,800 pad sets over the next 5 years (Figure 5A). This fixed cost would spread out to be nearly $90 per set. At the same time, CMI could sell to companies and contractors directly. CMI could pitch the!1

2 CMI cushion pads to consumers, but the seemingly high price, though actually much cheaper for consumers, would likely produce a small return from sales spending. However, CMI could offer consumers their first set of pads free as a test product. This would cost the company $69 per set in manufacturing plus a sales cost. After a testing the pads, however, if 33% were convinced by CMI s cushion pads benefits, CMI s costs would only amount to $86 per pad (Figure 5B). Both strategies together would result in 5,590 sets sold per year. To get this return on the personal selling, the consumer would need to see that the benefit of the pads outweighed the price. Pricing CMI cushion pads save consumers $9,741 on labor per pad set (Figure 2B), plus other costs that are not easily calculated. Since the average consumer pays around $45 per Asbestos set, and goes through between 20 and 60 sets sets per year, the consumer pays around $1,800 for pads per year (Figure 2C). This means that a CMI cushion pad sets value is actually $11,547 (Figure 2D). The likelihood of a consumer paying over $10,000 more for pads each year is not likely without a consumer s total understanding and trust of the benefits the new pads bring. Even if consumer were willing to spend so much, since the pads are quite cheap to make, an overpriced pad could threaten CMI to rising competition. Confirmers will already be used to expensive capital into a one time purchase, however, so $1,800 per set my not seem unreasonable. The $1,800 per set would be $900 more per year than other pads (since 1.5 pad sets are used per year), but the added benefit would be more than beneficial. Selling a set of 6 pads for $1,800 each would give a 90% contribution margin, and require 844 sets sold to break even (Figure 6A). Though this is 40% more margin than Simpson expected, a pad set for $218 does not translate the added benefit to the consumers, or give a likely return to break even (Figure 6B). Recommendations CMI should charge $1,800 per set of 11.5 cushion pads. To advertise the product s benefit, CMI should offer new users their first set of cushion pads for free. CMI also needs to reach out to the major influencers in the industry by increasing the personal selling budget by $700,000. If CMI does this, it will see a profit of $8,542,800 (Figure 7) from the this new product per year.!2

3 Figure 1 Pad Market Range units Owned hammers 13,000 13,000 hammers leased 6,500 13,000 hammers total 19,500 26,000 hammers operated 25 weeks/year used 30 hours/week Operated per year 750 hours/year actual driving figure 20 feet/hour Actual driving figure 15,000 feet/year CMI pad lifetime 10,000 ft / 1 set sets needed per hammer each year (CMI) A 1.5 sets/year total market of sets to sell (CMI) If 50% market were 11 1/2 pads 29,250 39,000 sets/market (If B everyone had CMI pads) 14,625 19,500 sets/ market of 11 1/2 pads Competitor sets lifetime ft / 1 set Number of sets per hammer sets/year B Current pad market 1,625, ,000 Sets/market (before CMI pads) Figure 2 Added Value Sets needed per year CMI 1.5 Sets needed per year from Asbestos pads (approximate) 40 cost per set $5/pad approximate $45 cost per year if bought by competitor $1,800 time spent spread over feet for competitor!3 15 minutes wasted /ft time saved per year (15*40) minutes 600 time saved per year (hours) 10 Labor costs per hour (aprox) Figure 9 $1,462 labor saved per year $14,620 Since only need 1.5 CMI pads per year, added value for 1 CMI pad set is $9,747 total value of CMI pad set $11,547 total value added / 2 $5,773 C A B D

4 Figure 3 Figure 3 Feet driven per hour while pile driver was at work (does not consider down time) Test results with with savings from CMI pads Test 2 Test 2 Test 1 Test 1 Test 2 12,000 (300*40) feet required Test 1 15,000 (300*50) feet required CMI Asbestos Asbestos CMI Benefit/savings Asbestos Asbestos CMI Benefits/savings 160 would take 75 hours 60 hours 15 hours Piles driven per set of pads Number of pads per set would take 100 hours 3d 3h 25 hours of working labor go through 12.5 sets 1 set of pads 6 go through 50 sets 1 set of pads 49 sets Number of sets required sets = 250 pads 6 pads 12 6 pads Number of set changes pads 6 pads 394 pads pads 6 pads 594 pads Time required for change per set (Min.) 1 20 go through 12 pads 50 go through 12 pads Choleric Cost per set ($) 1994 minutes saved (33.23 hours) Fazio Cost per set ($) costs 4 minutes * 1 change = 4 minutes 1/3 costs 20 minutes * 50 changes = 1,000 minutes 1996 minutes saved (33.23 hours) costs 4 minutes * 1 change = 4 minutes 4 5/6 costs 50 minutes * 20 changes = 1,000 minutes $0.00 $ *20 sets = $1,000 NA $0.00 $ *50 = $2500!4

5 Figure 4 Figure 4 Purchase Influencers Influencers Purchasers? Method of influence Influence Important? Order of importance 3 yes Pile hammer manufacturers No Recommendations could be Very Influential in Recommendations 1 yes Architectural/consulting engineers No Frequently mentions pads One of the most important purchase influences Depending 5 One of the most important purchase influences for extraordinary jobs Soil consultants No frequently mentions pads but only for extraordinary conditions!5 yes 2 important influence - hesitant to provide pads that enable a contractor to return equipment faster provides pads to the contractor (Often includes first set of pads free) Rather handle pads that could most easily sell pile hammer distributing/renting companies Depending 6 For the bigger jobs, they are influencers engineering/construction contractor Maybe designed jobs, specified material, and even manufactured their own equipment 4 Frontline buying influence yes Independent pile-driving contractors yes Very knowledgable about the practical aspects of pile driving

6 Figure 5 Marketing/selling costs for 11 1/2 pad users Try a set for free Personal sales to influencers spending allocation Cost with Manufacturing cost 1(MC1) Cost With Manufacturing cost 2 (MC2) $ Pile hammer manufacturers $140,000 20% $69.00 Architectural/consulting engineers $210,000 30% Value for tester $11,547 Soil consultants $17, % Likely Benefits Likely takers in 11 1/2 market 1.5 sets purchased per Following year pile hammer distributing/renting companies 33% engineering/construction contractor free sets given away 4290 Independent pile-driving contractors $175,000 25% $17, % $140,000 20% Cost with MC1 $634,920 Total sales spending $700, % Cost With MC2 $296,010 Expected return in number of sets purchased year 1 Number of sets likely sold in 5 years 6,435 year of advertising plus 5 following years A 1,300 10% of hammers using 11 1/2 pads 7,800 Advertising / set with MC2 $46.00 Advertising / Set sold $89.74 Plus sales costs B $86.00!6

7 Figure 6 Costs per product If purchased tool that cost $50,000 Price Testing 11 1/ /2 19 3/ ,000 50,000 50,000 50,000 50,000 50,000 Variable Material Labor Total Variable * 6 (cost / set) First set trial free (0.33 of variable costs) $55 $72 $107 $135 $167 $304 New total VC $218 $287 $429 $539 $670 $1,214 Price per set Price #1 (P1) $5,773 Calculated by estimating added value CM/unit for P1 $5,609 CM % 97.16% Price #2 (P2) $ Calculated by aiming for a 50% CM CM/unit for P2 $ Margin for P2 50% Price #3 (P3) $1,800 Calculated by charging same as competitors CM/unit for P1 $1, CM % 90.91% Fixed direct labor / pad assuming 250 pads per month Multiplied by 250 weeks 250 add 500,000 cost $500,000 Figure 8 shows CMI s break even point per units for buying this equipment New sales costs (700, *40) $871,600 real fixed cost $1,382,075 $13,725 $19,665 $24,255 $27,513 $50,480 Break even for P B Break even for P Break even for P3 A !7

8 Figure 7 Recommendation Price $1,800 Break even 844 expected to sell from direct sales 4290 Expected sales from indirect sales 1,300 Over break even by 4,746 profit $8,542,800 Figure 8 Manufacturing costs Costs per product 11 1/ /2 19 3/ Variable Material Labor Total Variable Fixed direct labor Total manufacturing cost If purchased tool that cost $50,000 50,000 50,000 50,000 50,000 50,000 50,000 Variable Material Labor Total Variable Fixed direct labor Total manufacturing cost Savings number of pads to manufacture that will spread the costs of the tool such that any more pads made would save on costs number of sets (6 pads / set) Total sets made to save If each product were made equally !8

9 Figure 9 Figure 9 Labor and equipment costs Month week per hour Average cost per If saving hours Diesel hammer ($) $4,500 to $7,200 $1,5000 to $2,400 $62.5 to $100 $34 $1130 Crane 8000 to to to 140 $52 $1728 Leads $8 $266 $6-8 per hour each 18 to 24 $21 $698 1 crane operator 8 to 12 $10 $332 1 foreman 12 to 14 $13 $432 $138 $4586 Total average costs per real hour Total average cost in labor $1462!9

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