Marketing Campaign Proposal - Ecoflex

November 2011

Upstream Marketing

Eco-Flex Gekko Pricing Strategy

This is a concise analysis of Eco-Flex’s proposed “Gekko” gymnasium flooring product line. Focus of the document is on a pricing strategy that will support the intended goals of the product as a whole, as well as how it fits in against competition and within the existing Eco-Flex flooring range.

Upstream Marketing MKTG Set 1D 2011; Ann Marie Webb Hughes Earl Alikpala; Ramneek Chandi; Daniel Tagulao; Erin Vance; Viktor Vasilkyv; Kevin Willemse

CONTENTS Objective ......................................................................................................................................................................... 2 Problem Statement (Goal) .............................................................................................................................................. 2 Key Findings .................................................................................................................................................................... 2 SWOT Analysis................................................................................................................................................................. 2 Competitive Analysis ....................................................................................................................................................... 3 Target Market ................................................................................................................................................................. 5 Behavioural ................................................................................................................................................................. 5 Demographic ............................................................................................................................................................... 5 Geographic .................................................................................................................................................................. 5 Potential Market Segments......................................................................................................................................... 6 Alternatives ..................................................................................................................................................................... 6 Penetration Pricing...................................................................................................................................................... 6 Advantages .............................................................................................................................................................. 6 Disadvantages ......................................................................................................................................................... 6 Target Profit Pricing .................................................................................................................................................... 7 Advantages .............................................................................................................................................................. 7 Disadvantages ......................................................................................................................................................... 7 Yield Management Pricing with Quantity Discounts .................................................................................................. 7 Advantages .............................................................................................................................................................. 7 Disadvantages ......................................................................................................................................................... 7 Solution ........................................................................................................................................................................... 8 Implementation .............................................................................................................................................................. 8 Price............................................................................................................................................................................. 8 Product ........................................................................................................................................................................ 8 Promotion ................................................................................................................................................................... 9 Place ............................................................................................................................................................................ 9 Conclusion ....................................................................................................................................................................... 9

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OBJECTIVE The objective of this report is to analyze the current positioning of Eco-Flex and provide various pricing strategies for the introduction of their new gymnasium flooring product, codenamed “Gekko”.

PROBLEM STATEMENT (GOAL) What pricing strategy (supported by an appropriate market strategy) should Eco-Flex use Gekko, to generate a minimum of $300,000.00 profit in its first year in the market, sell at least 10,000m2 of product, and capturing a 12% market spend share during its first year?

KEY FINDINGS Eco-Flex, an Alberta, Canadian manufacturer of rubber based products derived from recycled rubber tires, has proposed the feasible development of a new product code-named, “Gekko”, based on a Request for Proposal as well as analysis of potential markets.

This new product combines a rubber techno-material with a bamboo backing to produce a flooring piece. Bamboo flooring products are increasing in North America as they are more dimensionally stable compared to red oak flooring and laboratory-made laminated bamboo lumber (Lee & Liu, 2003). In addition, bamboo-based flooring is more environmentally sustainable because it can be harvested earlier i.e. - within 5 years as compared to decades for hardwood trees (Kaiser, 2004) . If the product is manufactured under the proper guidelines, it can obtain LEED certification, the international standard for green building designs, as per the bulk of Eco-Flex’s other product lines.

Increased corporate sustainability practices have been placed in the spotlight in the past few years, as 93% of CEOs surveyed recognize this need for the future success of their companies (Singh, 2011) Eco-Flex’s Gekko flooring is the first of its kind and can tap into the growing market for sustainable business products and practices.

Gekko’s cost of production is composed of a variable cost of $18.97/m 2 and monthly fixed costs of $8,799/month (Refer Appendix: Table of Fixed & Variable Costs vs. Profit). Sophie’s conservative estimate sales forecast for Gekko is 500m2, requiring a retail price of $36.57/m2 to break-even. If the quantity demanded for Gekko reaches Eco-Flex’s production capacity of 2000/m2, a retail price of $23.37/m2 is needed to reach the break-even point.

With a predicted demand of 500m2, the calculated manufacturing break-even price is $36.58m2 (Refer to Appendix “Table 1: Break Even Analysis”).

Taking into consideration all calculations of Eco-Flex’s production capacities with price of $45.00, the estimated break-even volume is 338 units.

SWOT ANALYSIS Eco-Flex is in a very niche product market, and as such careful attention must be paid to the changing landscape it offers. It must constantly be aware of its own strengths and leverage these to counter weaknesses. The current social climate favours innovative, sustainable companies such as Eco-Flex which presents massive opportunity, but growing competition and keeping up with new innovations, all while balancing costs and consumer demand, is not to be taken lightly.

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Strengths  Existing rubber flooring product R&D, manufacturing & marketing expertise  Established dealer network  Broad existing customer base as potential new product market  Growing brand & product awareness (Vancouver games, media coverage)  LEED Accreditation  Healthy holding company turnover with various product lines and markets

Opportunities  Growing favour towards eco-aware products and companies in all organizational markets (esp.

B.C./Canada)  Growing awareness of recycled-rubber-based industrial products  No existing similar product  Product visibility (esp. in large public installations) easily creates interest

Weaknesses  Low production capacity  Limited experience in composite (dual core) product development  No patents or unique/specialty products make them open to competitor attack and imitation products  Poor brand awareness, disjointed campaign (through resellers)

Threats    

Reddening competition ocean Imitation (inferior or improved) product emergence Long term product performance still to be evaluated Raw material costs may rise with elevated demand (tires and bamboo)

From the above, it is noted that Eco-Flex is presented with many opportunities, and each one of these must be investigated to maximise profits. Balancing these against threats highlights the fact that in order to capitalise on these opportunities, while eradicating weaknesses, will require a conscious, well thought-out and swift strategy to protect itself from competition and subsequent losses. This must also be applied to the Gekko product, to ensure its success and grow Eco-Flex’s overall market share.

COMPETITIVE ANALYSIS When comparing Eco-Flex to its notable competitors, there are many similarities in terms of market and product, with the notable exception of a wood-faced gymnasium product such as Gekko. These competitors therefore have the ability to not only compete with Eco-Flex’s current products, but also to create a product that can be comparable to Gekko. Legal/patent considerations aside, this is a critical element that Eco-Flex must consider should they move forward with Gekko production and its associated market launch.

Another important factor is that Eco-Flex uses a dealer and reseller network to resale and install product – these resellers have a diverse, non-exclusive bouquet of products which actually compete with Eco-Flex’s products. While this is a normal, accepted practice, Eco-Flex and Gekko must compete within this scenario. It also makes competitive analysis (in terms of manufacturing competition vs. product competition) difficult to easily assess.

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Eco-Flex

Average Years

Location Produced

Approx. Product Range

Approx. Tires Recycled P/A

Over 30 years

Near Edmonton, Alberta

25

12 million tires P/A.

Over 50 years (1960)

Mumbai, India

Under 10

6 million tires P/A.

4, 5

Over 25 years (1985)

McMinnville, OR

Over 30

Over a millions pounds P/A

6, 7, 8

Over 40 years (1989)

Lancaster, Pennsylvania

16

4 million tires P/A

9

Over 10 years (1997)

Toronto, Ontario

Over 30

Not Available

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1.) Ecoflex Safety Flooring 2, 3 (India) 2.) RB Rubber Products

3.) Ecore International

4.) Zebra Mats (Canada)

References: 1. (Graphos, 2011); 2. (EcoFlex); 3. (Ride4ever, 2010); 4. (Incorporated, 2011); 5. (Consulting); 6. (Flooring, 2011); 7. (Businessweek); 8.

(International, Sport and Recreation Surfacing); 9. (Canada Z. M., 2009)

While the above chart looks at rubber flooring manufacturers, it is clear that Gekko will compete against producers and installers of “traditional” wooden gymnasium flooring. These are usually solid wood or parquet installations installed only in higher-end sports facilities due to high price and maintenance costs, and not in free-weight areas or harsh environments due to their weaker surface properties. However they offer the lateral and vertical flex required by gymnasium sports persons (dancers, basketball, gymnastics etc.)

With this in mind, Eco-flex’s Gekko will have several advantages over its competitors (standard wood flooring products):    

Improved life span (15 years before replacement or refurbishing vs. 3-5 years on wooden floors) Bamboo backing with rubber substrate is unique, combines attractive design with durability and comfort Has a competitive advantage thanks to Eco-Flex’s large existing client base Is inexpensive and easy to install, even by home users (end consumers) and replace panels

The chart below exhibits indicative pricing in regards to vinyl, synthetic, and wood flooring. Eco-Flex is competing to replace wood flooring in places such as gyms and the chart below demonstrates how much it currently costs and how long the flooring is expected to last.

The inserted chart is indicative pricing of a large competitor, a producer and installer of wooden gymnasium/sporting flooring (GROUP, 1997). The above chart shows how a 465m2 floor has an initial outlay cost of $65,000.00, and is quoted as lasting up to 50 years. However, one must remember that this floor wood require stripping, sanding, repainting and refinishing every 3 years at a cost of approximately $8,000.00 (GROUP, 1997). If we extrapolate this into a comparative cost against Gekko’s 15 year life span, the total cost of ownership would be approximately $105,000.00. This further equates to a price of approximately $225.00 per square metre of wooden flooring.

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As one can see, this is a very high price for a premium floor, and Gekko is far more competitive and should perform as well with less downtime due to maintenance. It is also a more sustainable product, not only upon installation, but also no harsh chemicals or resins etc. are required for refinishing and repair.

TARGET MARKET BEHAVIOURAL Eco-Flex’s product offers quality and a low price compared to other flooring. It benefits business consumers who are looking for eco-friendly products, primarily for indoor sporting facilities, but may even include outdoor flooring applications. Eco-Flex, an ecologically aware manufacturer, has the opportunity to target the “green market” movement, to further cater towards their existing loyal client base.

DEMOGRAPHIC Demonstrating the product and its uniqueness to sporting facilities, real estate developers and large private installations will help Eco-flex build up an initial sales volume. Sporting facilities (e.g. North American fitness chain GoodLife) has 123 gyms across Canada; of the 123 gyms, 11 of them are franchised (Magnan, 2007), which demonstrates an opportunity to sell the product into franchise chains and increase volumes. The exposure that public gymnasiums create for private consumers as well as potential business decision makers can create a potential relationship and revenue stream for Eco-Flex.

We also investigated approaching Real Estate developers and having them promote Gekko flooring over other alternatives, and even targeting government; with their 15,500 elementary schools, 163 private and public universities, and 183 public colleges and institutions, the amount of gymnasium and sporting facilities they install and maintain is lucrative. (The Council of Ministers of Education, 2011).

Eco-Flex has established itself (including Gekko and most of its rubber mats) in the NAICS category 44221 (floor covering stores) (Canada I. , 2011); resellers and buyers the company conducts business with will be in the same NAICS category.

GEOGRAPHIC There is a growing trend in North America for entire cities to become more environmentally friendly. Proposed green city capitals, such as San Francisco, Vancouver, New York, Seattle, and Denver (SIEMENS, 2011) will be ideal urban areas for Gekko’s distribution and segmentation. By targeting these cities with an overall green standard performance of 73% and greater, Gekko can further improve their environmentally friendly credentials.

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POTENTIAL MARKET SEGMENTS In terms of actually labelling potential markets, Gekko could segment and target the following: 





Sporting Facilities The core market for Gekko – not only can Eco-Flex actively approach sports facilities and gymnasiums, dance studios and the like, they can leverage off existing Government projects (e.g. sidewalk and Vancouver 2010 project) to propose installations in public school sports facilities. Franchise gymnasiums and fitness clubs can also be approached for large-scale, volume-discounted long term supply and install partnerships and contracts.

Commercial / residential Building Developers Gekko’s attractive appearance, low cost, insulating properties, comfortable feel and durable nature makes it a potential fit for developers looking for premium flooring for both offices and high rise apartments. The noise dampening characteristics and soft touch of Gekko will appeal to executive suite buyers, and the fireproof, sustainable credentials make it even more appealing Direct to Consumer Gekko’s easy-to-install nature makes it a potential candidate for selling directly to consumers for home installation, or by appointed contractors (using channels such as Home Depot, Roma etc.). Many affluent Canadians and Americans install home gymnasiums that must be attractive, removable and durable, and Gekko meets these demands.

ALTERNATIVES PENETRATION PRICING With this strategy, the company can expect to receive profits of $208,000 within Gekko’s first year, and $461,000 in second year, based on a continuing volume growth rate. This strategy allows the company an increase in production capacity and creates a stable cash flow. As we are looking for rapid penetration, we are adopting a low profit margin which still supports a profitable model. It also carries the various flexibility and scaling models as discussed in this document.

Our penetration entry price is proposed at $40.50 ADVANTAGES   

Rapidly captures a new market, which is important to thwart competitor entry Price of $40.50 delivers profit, even with predictable demand of 500m2, which will likely be far surpassed Allows for scaling of prices as market, demand and exclusivity grows, to further increase profits.

DISADVANTAGES   

Long term profit orientation (Will not achieve profits when just launched, requires fair volume) Cannot rapidly maximize profits by changing the price (move from Penetration to Prestige is limited) Rapid demand beyond current capacity will require major production, operations and management overhaul to meet these

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TARGET PROFIT PRICING This pricing strategy provides a specific annual target of a specific dollar volume of profit.

The proposed Target Profit Price is $65.00 ADVANTAGES  Stable profit markup margin of 77% (based on minimum 500m2)  This model still delivers a $270,000 profit within the first year, based on the minimum projected order quantities  Same price for all customers makes managing sales, profits and projections/analysis simple DISADVANTAGES  Inflexible model – adjustments can have major effect on targets  The higher markup will make the market attractive to competitors  Hard to manage/create the demand based on specific market value perceptions  No rapid growth; market penetration could be slower Refer to Appendix 3: Profit Target Pricing Chart for a full breakdown of how this strategy demonstrates its various advantages and disadvantages.

YIELD MANAGEMENT PRICING WITH QUANTITY DISCOUNTS This alternative could be used in combination with the first two alternatives (it is suggested that Eco-Flex investigate a homogenous approach towards their product pricing overall). This option strategically prices the Gekko product depending on the quantity demanded and supplied. To ensure a greater quantity purchased by buyers, a quantity discount is coupled with the yield management pricing strategy.

ADVANTAGES   

Persuades clients to buy more, thus meeting Gekko’s main aim of increasing quantity Large dollar amount profit margin calculated into each price break Control of production is much more regulated

DISADVANTAGES   

Eliminates small quantity buyers Complex model of quantity/price Hard to generate demand due to different pricing models

Refer to Appendix 4: Table 4: Yield Management Pricing Chart for a full breakdown of anticipated volumes and pricing related to this model.

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SOLUTION The alternative that will be the most beneficial for the introduction of the Gekko product is penetration pricing.

This option will allow Eco-Flex to introduce their product at a low price while supporting the need to rapidly grow market share (before competition products enter; processed Bamboo flooring products are rapidly being developed and released to the market (Lee & Liu, 2003)) as well as the need to maximise volumes to meet the target profit. The sales they will produce from the low cost appeal will give them a chance to gain a positive reputation and large customer base for their product.

Once demand increases, Eco-Flex will then be able to subtly raise Gekko prices, thanks to a large existing customer base and proven product. Furthermore, this adds to the exponential profits created by covering fixed costs.   

By offering the product at a very low profit margin, Gekko has the greatest chance of capturing the 12% market share Eco-Flex are aiming for, and still meet the overall profit targets The company’s research shows that conservative demand estimates support these targets, boosted by the penetration strategy which should further increase the ability to meet set goals Based on these projections and annual achievable sales using the penetration strategy, Eco-Flex should achieve these targets by the end of its first year of selling Gekko.

If penetration pricing is not chosen by Eco-Flex, our second choice would be target for profit pricing. This would allow for full consistency in the price given to customers, and would launch the product with an opportunity to gain workable profit margins. Eco-Flex should investigate an integrated model of pricing strategies as well (i.e., combining all strategies to maximise market yield).

IMPLEMENTATION The pricing strategy of Gekko is critical to its success; however it must be bolstered by a comprehensive marketing strategy which supports the chosen pricing models. This must encompass how we will leverage the pricing model into the market, where, and how it will be presented to the market as a whole.

PRICE The price of $40.50 is an excellent entry point as a vehicle for initial market launch and rapid penetration, which should guarantee profits even given a low anticipated initial demand. The lower price point breaks down potential entry barriers and accomplishes our main aim of rapidly growing and protecting a new market share during its first year. Considering buyer retention and loyalty on products such as Gekko is high, getting that initial share is critical, and the chosen price must support achieving this. As market share is established, Eco-Flex could leverage this market share during its second (and future) years by slowly raising prices and further growing volumes.

PRODUCT The Gekko product will have many unique properties and a definite market position. It is worthy of a strategy that ensures the product is a success. It fits in well with Eco-Flex’s range (and ecological statement) and can utilise the company’s existing sales and manufacturing abilities and reseller/customer networks.

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PROMOTION Since Eco-Flex depends on its resellers and distributors to promote and sell its products, an intense reseller education program must be implemented. This will be focussed initially on larger volume resellers who have established partnerships and large strategic customer relationships.

This will mean the Eco-Flex sales force will immediately start setting up meetings with these contractors and partners, to provide promotional materials, samples and interactive training as to how best market the product to potential buyers. Furthermore, Eco-Flex will have to educate the contractors regarding installation procedures. EcoFlex’s sales team can also approach actual business buying organizations for bulk purchase opportunities (e.g. long term government contracts or franchise sporting complexes). Eco-Flex must aggressively promote Gekko at trade shows, expos, trade magazines and on their website.

These promotional campaigns must be prepared and launched at the same time Gekko first rolls off the production line.

PLACE Eco-Flex has representation and resellers across Canada and North America, which are used to bring the current range of products to market. For Gekko, Eco-Flex will utilise these same channels. If demand grows sufficiently, Eco-Flex can expand Gekko’s geographic visibility by approaching the over 10,000 flooring stores and contractors (Co, 2009) to broaden their distribution channels further into both regions, and even look at global exports through overseas partnerships.

CONCLUSION Eco-Flex has an excellent opportunity to enter the marketplace with an innovative flooring concept that can compete well against existing markets as a unique, eco-friendly product.

As demonstrated in this document, volume and rapid presentation must be attained to ensure Gekko captures the market share and ongoing profits as defined in our overall goal.

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