Soren Chemicals: Product Development

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Table of Contents

Soren Case Study
Situation Analysis
New pricing structure
Recommendation

Soren Case Study

Company and Jen Moritz Introduction

The company’s full name is Water Treatment Group. It developed various chemicals for treating water. Jen Moritz was the Marketing Manager for The Water Treatment Group of Companies. She was responsible for the development of chemicals for treating drinking water and for maintaining pools. In this case, her tasks included developing a relatively cheap product for cleaning pools called Kailan.

Estimation of the Market Potential for Residential Pool Clarifiers

The following is the overall outlook of the market and the product, among others, it will compete.

There are 300,000 commercial pools,
One thousand water parks,
$ 30 Million in revenue generated from selling such chemicals,
The market for the chemicals is projected to grow by 7% to $32.1 Million in 2007,
Water treatment Group enjoyed $ 6.1 M / $ 30 M = 20% market share in 2006.

The residential Market Size at Retailer Prices is as follows.

There are 9 Million Residential Pools x $ 50 (Annual Treatment Cost per Pool) = $ 112.5 Million at Retail. Since manufacturers buy at 60% of Retail Prices, the $ 67.5 Million is the potential of the market for the manufacturer. The company’s products are for residential pools. The company also aims to have a footing in the market to launch other products. However, competitors are eager to launch their version of the product to counter Water Treatment Group’s Kailan MW and Coracle.

Reasonability of $1.5M Market Size potential

Soren’s target of $1.5 Million in the first year (which is $1.5/$67.5 Million = 2.2%), is an extremely reasonable and realizable market share to target at launch. The pricing of the product is quite reasonable too, as indicated by the following analysis.

The retail price of a container of 0.5 Gallons was estimated at $25 using a manufacturer price of $14.88. At that manufacturer price, Soren estimated a 35% gross margin. The following is the breakdown.

Breakdown

Selling Price = Cost Price + percentage margin x Selling Price
Selling Price (1 – percentage margin) = Cost Price
Selling Price = Cost Price / (1 – %margin)
Distributor Cost Price = $14.88
Distributor Margin = 30%
Distributor Selling Price = 14.88 / (1-0.3) = $21.25
Distributor Margin = $6.375
Retailer Cost Price = $21.25
Retailer Margin = 15%
Retailer Selling Price = 21.25 / (1-0.15) = $25.00
Retailer Margin = $ 3.75

The breakdown was also quite reasonable. Hence, failure of success was unlikely to emanate from the costing and pricing. Conversely, it would lead to loss of income for the major players.

Situation Analysis

Product description briefly

Research conducted by Soren concluded that residential pool owners – 80% take care of their pools – are not technical. Soren did not explain the benefits of the product to them in a way they would easily understand. The benefits include lower costs hence a significant annual saving, better performance, and a cleaner pool.

Promotion description

Residential pool owners buying behavior follows this pattern:

They buy from mass retailers
They also buy from Specialty Pool Retailers
They get maintenance services from professionals in the field
They are not deeply aware of the details of pool chemicals
They rely on counsel from professionals, retailers, and promotions for information

Soren failed to study the market and the buying behavior well leading to a catastrophic performance of coracle.

Price and distribution description

Distributors did not support the product because they could sell an adulterated version of Kailan or comparable products at significantly lower prices. Players in the supply chain discovered it would lead to lower revenue because they sell other chemicals too. The packaging of Coracle even made this fact known. The offsetting of earnings and the fact that there were other products in the market dented coracle.

New pricing structure

To get distributors’ support for Coracle’s success requires massive spending in branding. The change in route may not be a good idea from Soren’s earnings. Since the company is major, a B2B company the change will require a different experience. Therefore, margins will have to be re-adjusted to get supply chain support. The following presents a preliminary analysis.

Preliminary analysis

Distributor Cost = $2.32 (equal to factory price)
Distributor Profit/Loss = $1.28
Distributor Selling Price = $3.6
Retailer Cost = $3.6
Retailer Profit/Loss = $1.13
Retailer Selling Price = $ 4.73
Annual Cost of Coracle Clarifiers for the customer = $47.3
A lesser product from competition averages an annual spend of $50

At the price of $4.73, the distributor and retailer get similar margins from chemical sales of the competitors’ products. Hence, the distributors and retailers are naturally indifferent to Coracle since it is not adding or deleting to their profitability. The implication is that Soren must raise the distributor profits by adjusting the price of Coracle upwards.

Normally, customers spend $50 annually on clarifiers and $300 annually on various chemicals totaling $350. Spending $47.3 in Coracle and spending $225, which is 75% of the $300, on supporting chemicals, they will spend $272.3. That figure is considerably smaller than the initial $350. Hence, Soren can increase the price by $7.7 for more profitability. Additionally, the extra money will attract more distributors as it will increase profitability.

Recommendation

Soren should rethink its approach in many departments through reengineering. Reengineering of business processes is one of the most radical and effective methods of dealing with change. Reengineering is also effective in reducing costs and improving the quality of service. A far-reaching method requires a thorough evaluation before a firm embarks on it to refine its processes. Many firms have tried and failed to carry out Business Process Reengineering successfully. The reason is that the process requires a lot of time, resources, and knowledge for successful implementation. At Soren, there needs to be changed to the processes carried out by management in the past. These changes must be informed by previous needs and market assessment.

Advantages and Disadvantages of BPR

Currently, the economic environment is quite competitive and unpredictably dynamic. A firm has to review its operations, processes, and policies continue to align them with contemporary methods of doing business. Because of the dynamic nature of the business environment, a firm must embrace change if it is to survive or even maintain the same influence that it has in the industry. The need to meet changing and somewhat sophisticated consumer needs and to find cost-effective ways of operation has made Business Process Reengineering a necessity.

The advantages of this process are far-reaching and quite essential. Business Process Reengineering is the essential rethinking and revamps of processes in a business to achieve an enhancement in current measures of operations strategy performance and strength such as cost, quality, and delivery.

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