Case Analysis: Alma Products, Inc.

 

- Statement of Problem -

                Alma Products was ready to debut in the barbecue business market with its simple but ingenious two products, called Easy Embers Charcoal Starter.  One model, ED-12, was designed for sale through retailer shop such as home centers and discount department stores, and another model, ER-12, was designed for sale through mail-order retailers such as L.L. Bean and Williams-Sonoma.  The fundamental problem, Alma Products was facing, was what strategy Alma should take to price these two products.  More specifically, whether Alma should employ a skimming or a penetration pricing strategy was the problem.  Furthermore, how Alma can be put on the map with a solid position in the barbecue niche market was the problem as well as its goal. 

 

- SWOT Analysis -

Strength

• Solid determination, motivation and aspiration to get involved in the barbecue business.
• Product superiority to lighter fluid method.
• Connections to the retail buyers through the contract with well-established agency, Davis & Davis, and the cost reduction driven by that contract. 
• Strong knowledge of retail marketing and understanding of retailer and consumer needs.

Weakness

·         Lack of brand or product recognition in the market since Alma is a start-up company.

·         Lack of experience in the barbecue business.

·         Very limited capital backup.

·         Pressure derived from the time limit to the presentation day. 

Opportunity

• Huge consumer spending on barbecue-related items, which amounted to $4.35 billion.
• Growing sales in charcoal briquette sales, which have direct relation to Alma’s sale of charcoal starter products.
• High rate of owning barbecue grills among households.
• Relatively low competition in the niche market of charcoal starter that only two direct competitors can be recognized.

Threat

• Declining sales in number of charcoal barbecue grills.
• Growing trend among households to own gas and electric grills rather than charcoal grills. 
• Low entrance barrier in the niche market of charcoal starter. 

 

- Alternatives -

                The first alternative is to take a skimming strategy for both products.  By taking this strategy, the most advantage Alma will be able to appreciate is the high profit margin on its sales.  According to the data provided by Barbecue Industry Association, the total number of households in California is 10,381,000 and 62 percent of them have charcoal grills, which means approximately 6.4 million households own charcoal grills.  Since Alma is initially going to target its ED-12 model for retailers mainly inside the California, this number of households is large enough, taking into account its drawback of expected small sales due to the high price.  Another advantage comes from the buyers or consumers side that Alma might be able to communicate and convey the image of a superior product by taking this strategy.  As a matter of fact, Alma’s product has superiority that it enables to start barbecue charcoal twice as fast as the most prevalent method, which is by using lighter fluid.  Once buyers and consumers realize this product superiority, they will easily accept the premium price. 

                The primary disadvantage is the expected low volume of sales due to the high price and the buyers�Enon-acceptance of the products.  Since consumers are willing to pay higher prices for known products than for unknown products, Alma is likely to suffer from the low volume of sales, given the lack of its brand or product recognition in the market.  Another major disadvantage associated with this strategy is the slow penetration in the market.  In general, products that are priced relatively high have a slow penetration rate, moreover, the fact that Alma’s products will not be bought frequently by buyers or consumers accelerates the slow penetration rate.  With regard to the substitutes, Alma will incur another disadvantage.  Buyers and customers, who are price sensitive, will buy competitor’s charcoal starter, which is priced at $9.95 or replace the charcoal grills with electric grills whose starters are sold for about $5.95 in most stores. 

                The second alternative is to take penetration strategy for both products.  Obviously, the advantage here is that Alma will be able to penetrate in the market rapidly by offering low price on its products.  Brand or product recognition is what Alma really wants to acquire since it is a start-up company and this strategy will allow Alma to acquire the recognition in the market.  In the meantime, Alma can expect to have cost reduction by producing more volume of products, following the production experience and the learning curve.  By offering the low price, Alma might be able to change the consumers�Ebehavior toward the barbecue that they might have barbecue more frequently, resulting in a more volume of sales.   In addition, consumers who are currently using gas or electric grills might replace them with charcoal grills.  Overall, these advantages will lead to a high market share in the target niche market. 

                On the other hand, Alma will expect to have increase in costs associated with the large volume of sales.  This increase in costs will be somehow offset by the expected decrease in production costs in a certain extent, however, the increase in costs might exceed the benefit from the decrease in production costs.  In order to handle a large amount of volume, Alma may have to hire full-time secretary, move to another large office, and buy some computer equipments, resulting in higher fixed and overhead costs.  Another disadvantage is that potential competitor may enter to the market because the low price attracts more competitors to the market.  Once the large companies enter to the market, Alma will definitely have a difficult time to deal with these large companies due to the very limited capital backup.  As a final disadvantage to Alma, a relatively high promotional expenditure must be spent to further gain the buyers�Eand consumers�Eawareness. 

                The third alternative is to take a skimming strategy for ED-12 and take a penetration strategy for ER-12.  Although, basic advantages and disadvantages associated with taking a skimming and a penetration strategy are presented above, some additional points deserve mentioning here.  Since the sales from the retailer shops are expected to be dominant for Alma from the fact that retailer shops sell most barbecue grills, this strategy will slow Alma’s market penetration and brand recognition by consumers.  Furthermore, the sales will not grow as fast as the second alternative.  A unique advantage is that Alma will be able to have different market position in each retailer shop and mail-order retailer by taking this strategy.  This will give Alma some flexibility in terms of its next product launch in the future.

                Finally, the fourth alternative is to take a penetration strategy for ED-12 and take a skimming strategy for ER-12.  Again, basic advantages and disadvantages are presented above, though, one additional advantage is that Alma may be able to penetrate the retailer shop market and incidentally penetrate the mail-order retailer market as well, using that momentum with some profitable sales driven by mail-order sales.  Since the penetration in retailer shops is expected to be smooth, some of customers will order through the mail-order retailers when they do not have retailers near from their place or speak good things about Alma’s product to those who do not live in California.  Not surprisingly, a unique disadvantage is that buyers and consumers concentrate on retailer shop purchase of Alma’s products, which stems from the difference in the price between ED-12 and ER-12.  This disadvantage will not be affected heavily in the third alternative because the main buyers and customers are the retailer shops.

 

- Recommendation -

                The recommendation I would suggest to Alma is to take the second alternative, which is a penetration pricing strategy for both products.

 

- Implementation -

                In terms of marketing 4Ps elements, Alma has broadly decided Product and Place (Channel or Distribution) elements so far, therefore, Alma needs to take a deep consideration into deciding the rest of two elements.  Alma’s product, charcoal starter, is in the introduction stage in the product life cycle, hence, taking a penetration pricing strategy makes sense from several factors.  For example, some of the factors are that the market is large, there is potential competition, and the unit manufacturing costs fall with the scale of production.  Since two direct competitors have not penetrated in the market thoroughly yet, and they both do not have initiative, Alma needs to promote its products to penetrate in the market as fast as possible before two direct competitors penetrate in the market or potential competitors enter the market.  Advertisement in outdoor magazines, camper’s magazines or local newspapers will enhance the product recognition among the consumers, which will lead to more orders from buyers of retailer shops.  Even though Alma does not have much capital to spend on the advertisement, low prices will support the product recognition.  Another way to promote is to conduct demonstration in front of the retailer shops during the barbecue season to let the consumers know the product and its superiority. 

                The actual price Alma needs to offer must take the direct competitors�Eprices into account, which is $9.95 for ED-12 and $16 for ER-12.  From the Alma’s cost structure, presented in the following Table, Alma can price well below the competitors�Eprices on both products respectively.

 

*Fixed cost includes the initial one-time cost of $10,000 plus monthly fixed cost of $500 times 12

 

If Alma were going to price at the same level with its competitors, Alma could price $7.11 for ED-12 and $10.00 for ER-12, taking the retailer shops gross margin of 40 percent and mail-order gross margin of 60 percent.  Those two prices are not going to be used because of the penetration pricing strategy, however, these prices give the idea of the ceiling prices that Alma can offer.  Suppose the final price that the end consumers pay are going to be set 15 percent below the competitors�Eprices, then, Alma should price each product as the following:

 

 

Further suppose Alma’s sale consists 90 percent from retailer shops and the rest of 10 percent from mail-order retailers, the target break-even volume would be 5,734 units if Alma prices ED-12 at $6.04 and ER-12 at $8.50.  Apparently, Alma should change these prices depending upon the market situation, season, and the expected market demand.

                Alma should also employ a couple of price discount options as its products get to know buyers and consumers.  Some of the examples will be cash discounts for those buyers who pay early, quantity discounts for those buyers who purchase large volume, and seasonal discounts for those buyers who buy products out of the season.  In response to the expected growing sales, Alma needs to develop another channel distribution other than Builders Emporium and Williams-Sonoma to make products widely available and accessible to the target market.  The faster Alma puts products in retailer shops and catalogs of mail-order retailers, the more market share Alma can build and the faster Alma can penetrate in the niche market of charcoal starter further.  All these implementations will allow Alma to be able to build a solid market position in the target market and accelerate the future growth.