Canty International

CANTY INTERNATIONAL Case Study #2 – Pricing Strategies 1 02/11/2009

• Problem Iden1ﬁca1on • Facts • Assump1ons • Research • Target Market • SWOT Analysis • Alterna1ve Pricing Strategies • Solu1ons and Plan of Ac1on • Course Concepts • References 2 02/11/2009

Problem IdenAﬁcaAon In order for Canty Interna1onal to remain compe11ve in the wall covering industry, maximize proﬁt margins and sales, and aMract B2B customers, what pricing strategy is vital for its new product to succeed? 3 02/11/2009

Facts • Current wall covering products have a short product life cycle of two years • Our current and new customers will need to replace their current wall coverings and will be looking for more durable, eco‐friendly products to follow the green trend • The hotel industry is forecasted to grow • Even with the economic downturn over the last year, markets are expected to recover • Hotels will forego the required installa1on costs every two years • Canty Interna1onal can alter new products to meet changing demand in industry 4 02/11/2009

AssumpAons • New product is eco‐friendly and will be aMrac1ve to customers that will be replacing their wall‐coverings • Our target market has old, worn or non exis1ng wall coverings • Canty Interna1onal is adhering to environmental regula1on policies • This product will be aMrac1ve to the hotel industry, crea1ng short and long‐ term growth for Canty Interna1onal 5 02/11/2009

Research a) Trends in the Market Place Forecast Travel AccommodaAon Sales by • Canada’s travel accommoda1on Sector within Canada: industry is likely to record stable growth over the forecasted Sector Year 2009 Year 2010 Year 2013 period. per million • Growth in sales is expected to be Hotels 10, 616.60 11,189.10 12,028.60 above 5% in 2010 and a show modest growth in 2011 of 2‐3% Chained 7,103.90 7,426.70 7,954.00 Hotels • Hotel supply has slightly grown during 2009, and remained marginally posi1ve Independent 3,512.80 3,762.40 4,074.60 Hotels • Trends indicate that hotels will be spending more in the forecasted period 02/11/2009 6

Research (con’t) b) Pricing • Decoline product is derived from the cost of produc1on, the perceived value of the • Total monthly fixed costs = $6,028.75 product, as well as our compe1tors pricing • Total monthly variable costs = $12.69/m² Cost of producAon • Fixed and variable costs calculated at maximum produc1on (2000m²) • C = $6,028.75 + $12.69x • Break‐even selling price per m² is $62.82. Cost & Revenue • R = S x 500m² FuncAons • Our floor price is established at $69.89 (450m² sold) • S x 500m² = $6,028.75 + $12.69x • Ceiling price we have determined to be Break‐even selling • S = $62.82/m² $200.00 based on compe1tors’ price strategies price (R=C) • Decoline will be priced under ceiling offering customers with incen1ves to buy 7

Target Market Primary target market for Canty InternaAonal is the hotel industry within Canada Psychographics/Buying Demographics Geographic Behaviours Customer Snapshot Hotel Outlets Sales per Avg. Outlet daily Customers in the hotel (million) room rate industry want services and Wall covering industry is Best 182 3.9 $113.00 products that are Western expected to grow in environmentally friendly, as Delta 234 18.6 $234.00 Canada Hotels hotels recognize this they will Holiday 136 6.4 $136.00 have to change their buying Inn behavior and cater to their Renaissance 169 13.7 $169.00 greener consumers. Long Term Goal: Market Development within the development and government industries 02/11/2009 8

SWOT Analysis: Canty InternaAonal Internal Strengths: Weaknesses: ‐ Interna1onally established business ‐ roduc1on capacity is at 77% P ‐ strong research and development group ‐Produc1on relies on assembly line ‐ produces its own raw materials ‐ Ability to develop innova1ve products to suit customer needs ‐Materials are produced in an adjacent building resul1ng in no transporta1on costs ‐Lead 1mes for materials are maximum of 2 weeks ‐Design Lab division maintains quality standards ‐No markups on materials within inter‐divisional goods transfers External OpportuniAes: Threats: ‐Forecasted growth in Hotel Industry ‐Derived demand and inelas1c demand ‐Cater to new consumer segments and expand into the ‐Compe1tors are introducing cheaper subs1tutes into the corporate hospitality, government, and commercial real‐ market place estate industry ‐Price of raw materials are increasing ‐Customers currently served, will be replacing wall ‐Canadian dollar forecasted to increase in value, making coverings do to 2 year lifespan of current product products more expensive for Americans ‐Customer loyalty ‐Demand for products with a longer lifespan and greener technology ‐Introduce automated technology in produc1on to increase eﬃciency ‐Develop social responsibility by implemen1ng greener business prac1ces ‐Patents on Technology 9 02/11/2009

SWOT – Strengths and Weaknesses Strengths Weaknesses • Established business • Produc1on capacity is at 77% • Strong R&D group • Produc1on relies on assembly line • Produces its own raw materials • Ability to develop innova1ve products to suit customer needs • No transporta1on costs • Lead 1me on materials is to be maximum of 2 weeks • Design Lab division maintains quality standards • No markups on materials within inter divisional goods transfers 10 02/11/2009

SWOT – OpportuniAes and Threats OpportuniAes Threats • Forecasted growth in Hotel Industry • Derived demand and inelas1c demand • Cater to new consumer segments and expand into the development and • Compe1tors are introducing cheaper government industries subs1tutes into the market place • Customers currently served will be replacing wall coverings due to 2 year lifespan of • Price of raw materials are increasing current product • Canadian dollar forecasted to increase in • Customer rebuys value, making products more expensive • Demand for products with a longer lifespan for Americans and greener technology • Introduce automated technology in produc1on to increase eﬃciency • Develop social responsibility by implemen1ng greener business prac1ces • Patents on Technology 11

Pricing Skimming Our product is a new specialty item with new features, from this we gather we can charge a high price of $150.00/m² and slowly skim down to $89.99/m² over 10 years Based on 500m² sold per month: Revenue $75,000.00/month Net Income $40,891.25/month Gross Proﬁt $43,591.25/month Proﬁt Margin 58.12% 12 02/11/2009

Pricing Skimming Advantages Disadvantages • Compe1tors are unable to enter • If prices are set too low, the the market as price compe11on product quality is diminished and will force prices to lower, it is not possible to raise prices compromising the price skimming without consumer resistance. strategy. • Consumers who purchase early • Long term pricing strategy that and pay a higher price may feel will ul1mately allow Canty cheated when the prices drop. Interna1onal to gain a large proﬁt margin. • Consumers will likely wait for prices to drop rather than buying • Higher ini1al price allows for a immediately. price quality rela1onship for our customers (psychological pricing eﬀect). 02/11/2009 13

Market PenetraAon Pricing Price set at $74.99/m², Canty Interna1onal will capture market share early on and monopolize the market, while genera1ng profit through volume. Based on 500m² sold per month: Revenue $37,495.00/month Net Income $3086.00/month Gross Profit $6086.00/month Profit Margin 16.2% 02/11/2009 14

Market PenetraAon Pricing Advantages Disadvantages • Selng a lower price for the introduc1on • Low prices does not signal high of a new product on the market, allows quality to the consumers. Canty Interna1onal to build sales, market share and proﬁts quickly. • If segments in the market are willing to pay more for Decoline, • Encourages consumers to purchase the selng a low price is like 'leaving money on the table’. product immediately rather than wai1ng for the pricing to drop • Canty must have the capacity to sa1sfy a rapid rise in demand. • Discourages compe1tors from entering the market because the proﬁt margin is rela1vely low. 02/11/2009 15

Price Skimming and Market PenetraAon Pricing Mix Set the selling price at $89.99/m². In the future as demand increases for our product and produc1on costs decrease, the price will skim down to $64.99/m². Based on 500m² sold per month: Revenue $44,995.00/month Net Income $10,886.00/month Gross Proﬁt $13,586.00/month Proﬁt Margin 32.2% 02/11/2009 16

Price Skimming and Market PenetraAon Pricing Mix Advantages Disadvantages • Lower price allows Canty • Leaving money on the table Interna1onal to dominate market share • Lose the high quality image of the Decoline product with • Lower price strategy would this lower pricing strategy allow Canty to saturate the market and obtain a quick rise in proﬁt • Demand may exceed our supply and the value of the company and the Decoline • Builds a large, long‐las1ng, brand will plummet loyal customer base 02/11/2009 17

SoluAon and Plan of AcAon • Using the price skimming strategy, we will price the Decoline at $150.00/m2  A higher ini1al price allows for a price quality rela1onship with our customers • Analyzing our produc1on costs closely, we will introduce automa1on in the manufacturing process • Increase capacity of produc1on from 2000 m2/month to 4000 m2/month • Aoer the high‐price market is gradually saturated over 1me, price will decrease to $89.99 m2  We expect increased sales by sustaining a high proﬁt margin of 79% 18 02/11/2009

• Cash Discounts – will reduce invoice costs if the buyer or customer pays prior to the end of the discount period ( i.e. payment terms 2/15, n/60) • Quan1ty Discounts ‐ employ quan1ty discounts which would give B2B customers incen1ve to purchase a greater volume of Decoline which would provide a greater beneﬁt over associated cost 100 m2 at 5.0% 200 m2 at 7.5% 300 m2 at 8.75% 400 m2 at 9.375% 500 m2 at 10.0% 02/11/2009 19

Product Development Strategy • Highly abrasion‐resistant and soil‐proof • Requires very liMle effort to clean and maintain • The bamboo backing is specially treated for fire resistance and imparts a cushioning effect to effec1vely filter sound • Custom specifica1ons such as colour, designs and textures • Fits current track systems commonly in use in commercial buildings • Es1mated service life is ten years. 02/11/2009 20

• We will use excellent sales representa1ves to directly promote the benefits and specifica1ons of Decoline • 2010 Wall Coverings Associa1on Spring Mee1ng • Posi1ve word of mouth throughout • Embassy Suites Tampa ‐ Downtown the hotel industry which will Conven1on Centre in Tampa, Florida increase brand awareness. from January 1 to February 2, 2010 • Connect with peers, strengthen our • Design a website that will promote the network of industry contacts, and share product by specifying materials used business solu1ons and ideas and the benefits of our Decoline product • Sales representa1ves will give out samples of Decoline • Increase brand loyalty. 02/11/2009 21

• Primary focus is North America • Direct approach selling: Internet • Conduct e‐commerce • Reach a wider market segment more efficiently and cost‐effec1vely • Decreases cost Sales force • Par1cipate at tradeshows / conven1ons • Open up more regional sales offices in Canada and U.S. 02/11/2009 22

Course Concepts • Product Life Cycle • Pricing Strategies: – Price Skimming – Market Price Penetra1on – Cost‐based – Compe1tor‐based – Value‐based • Pricing TacAcs: – Quan1ty Discounts – Cash Discounts • Target Market SegmentaAon: – Demographics – Psychographics – Geographics • B2B markeAng • Break‐even analysis 23 02/11/2009

References Davis, Ted. Future Forecast Feeling Fuzzy! (2008). EBSCOhost. Retrieved October 2009, from Business Source Complete. Graci, Sonya. Dodds, Rachel. Why Go Green? The Business Case for Environmental Commitment in the Canadian Hotel Industry? (2008). Anatolia: An Interna1onal Journal of Tourism and Hospitality Research, 19, (2), pg. 251‐270. Retrieved October 2009, from Business Source Complete. Grunlingh, Werner. Tourism Sector Monitor. (2009). BCStats, 09‐05. Retrieved October 2009, from Business Source Complete. Parker, Philip. The 2006‐2011 World Outlook for Wallcoverings. (2008). Retrieved October 2009, from Business Source Complete. Second‐Look Recycled Wallcoverings. (2009, October 29). Retrieved October 29, 2009, from odysseywallcoverings.com: hMp://www.odysseywallcoverings.com Spring Mee1ng. (229). Retrieved October 30, 2009, from Wallcoverings Assoca1on: hMp:// www.wallcoverings.org/Events/SpringMee1ng/tabid/86/Default.aspx Types of Commercial Wallcoverings. (2009, October 28). Retrieved October 28, 2009, from DoItYourself.com: hMp://www.doityourself.com/stry/commercialwallcovers Warnock, J. (2008, October 7). EBSCOhost: Despite economy, green hospitality ready to take oﬀ. Retrieved October 28, 2009, from EBSCOhost: hMp://0‐search.ebscohost.com.innopac.lib.bcit.ca/ login.aspx?direct=true&db=hjh&AN=34795860&site=ehost‐live 24 02/11/2009

Canty International

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