Colgate-Palmolive Company: The Precision Toothbrush
...panding super-premium segment. Enter the technically innovative Colgate Precision. With its triple-action brushing effect, it achieved an average 35% increase in plaque removal, compared with other leading toothbrushes. At the gum line and between teeth, the brush was even more effective, achieving double the plaque removal scores of competitor brushes. With the Precision, Colgate was ready to enter the highly competitive and quickly expanding super-premium segment. ALTERNATIVES Economic and Qualitative Evaluations With Premium’s product segment determined, CP had to decide how to position this super-premium brush. It was believed that with a niche positioning, Precision retail sales would represent 3% volume share of the toothbrush market in year 1 and 5% in year 2, equating to 8 million and 15 million retail units, respectively. With a mainstream positioning, these volume shares would be 10% in year 1 and 14.7% in year 2, or 27 million and 44 million retail units each year. Certainly these forecasts were quite appealing to CP executives. However, such market gains would not come without a cost. It was estimated that anywhere from 35% to 60% of the volumes indicated above could come from Colgate Classic and Colgate Plus. Thus, to determine the profitability of replacing such a high percentage of their current sales with new product sales, CP must first compare the products’ profit margins. As described in Table A, the release of Colgate Precision using either a mainstream or niche positioning strategy would create a higher profit margin for CP than either the Classic or Plus product lines. Although the Mainstream-1993 profit margin for Precision is lower than the current Plus profit margin, the capacity costs that drive Precision’s Mainstream-1993 costs to $0.09 below its selling price will be greatly lowered in 1994, thus creating a net profit margin for Precision Mainstream well above the Plus product line. Thus, although 35% to 60% cannibalization may occur through Precision’s release, it would mean the replacement of a less profitable product for a more profitable product, and would be in Colgate’s best interests to promote the Precision product line. However, the question of Precision’s placement still remains. To determine this, CP must analyze the profit implications of the niche versus mainstream positioning strategies (see Tables B and C). As mentioned earlier, 35% to 60% cannibalization may occur in the Plus and Classic lines as a result of Precision’s release. Furthermore, branding is a serious question in the economic considerations for Precision. Executives debated whether the brush should be known as “Colgate Precision” and thus abide by CP’s stated corporate strategy to build on the Colgate brand equity, or as “Precision by Colgate” and allow the product to stand alone. Stressing Precision as opposed to Colgate would, it was argued, limit the extent of cannibalization of Colgate Plus. It was estimated, both under the mainstream and niche positioning scenarios that cannibalization figures for Colgate Plus would increase by 20% if the Colgate brand name was stressed, but remains unchanged if the Precision brand name was stressed. Thus, with the label “Colgate Precision,” maximum cannibalization would reach 80%. Given the figures in Tables B and C, it is clear that much of CP’s product segment strategy must depend upon their estimated level of cannibalization. Given 35% cannibalization for 1993 and 1994, the mainstream position would prove $24,144.93 more profitable than niche positioning (($19,691.93+49,335.13)-(15,332.33 + 29,549.80)). Given 60% cannibalization, the mainstream position would again prove $7,084.93 more profitable over two years, despite lower profits in 1993. Given 80% cannibalization, however, CP would actually suffer a net loss for 1993, and over the two years would lose $6,563.07 by choosing mainstream over niche positioning. Thus, to ensure profit, CP must assume an 80% cannibalization rate. Marketing Implications Under a niche positioning, Precision would be priced at a small premium above the Oral-B Indicator. Positioned as mainstream, Precision’s price would be at parity with Oral-B regular and Aquafresh Flex (see Table D). Advertising and promotion expenses would also greatly vary between the two strategies. Given a niche positioning, CP would increase total category spending by $11.2 million and allocate this to the Precision launch. With a mainstream positioning, CP would plan for an 80% increase in CP category spending in 1993, with fully 75% assigned to Precision and 25% to Plus. Such a strategy would be very costly for overall profits and increase cannibalization. Finally, placement would be effected by the two strategies. Through the niche positioning, the main distribution would be food and drug stores (74% of total retail toothbrush sales-1992) where involved oral health consumers most often purchase their brushes. Under the mainstream position, the greater proportion of sales would occur through mass merchandisers and club stores (24% retail toothbrush sales). Also, if Precision is positioned as a niche product, with 4 SKUs, it is unlikely that any existing SKUs would be dropped. However, positioning Precision as a mainstream product, with 7 SKUs, would probably require dropping one or more existing SKUs such as a children’s brush from the Plus line. RECOMMENDATIONS Branding Although stressing the Colgate brand name may increase the cannibalization figures for Colgate Plus by an extra 20%, we recommend that CP uphold its stated corporate strategy of building upon its brand equity and name the brush “Colgate Precision.” This is clear for many reasons. First, the name “Colgate Precision” was consistently viewed more favorably in consumer concept tests than “Precision by Colgate.” Second, Colgate would benefit through brand loyalty, as new customers and increased market share gained through Precision would increase new purchases across CP’s oral health products. Finally, Precision would benefit from increased brand awareness and perceived quality. As mentioned earlier, a brush’s physical appearance has a significant impact upon consumer purchasing. In consumer tests, Precision was labeled “unusual” in appearance and received “mixed first impressions.” Thus, emphasizing the Colgate brand name will help to overcome this unfamiliarity and grant the product a greater perceived quality. Positioning According to the profit margins found in Table A, it is increasingly more profitable per unit to sell the Precision through a niche positioning with charging a significant premium. Furthermore, according to the pro-forma income statements found in Tables B and C, under 80% cannibalization CP would receive overall greater profits through a niche positioning. This 80% must be assumed given the conservative 60% cannibalization estimation combined with the increased 20% cannibalization realized through the “Colgate” branding previously described. Furthermore, problems in production possibilities would arise, as the mainstream positioning would require 10 months lead time. This could result in inadequate supply of product, issues with quality control, and increased costs of equipment. As a new entrant into the super-premium market, CP should first establish a consumer base, maintain a steady supply, consolidate its market share, and then proceed with expansion. Finally, for CP to maintain broad customer satisfaction, it must establish a niche positioning. As mentioned earlier, such a positioning would only increase Colgate’s total SKUs, while a mainstream positioning would require dropping existing SKUs from its children’s line, a portion of the market which it currently leads but could easily lose. PLAN OF ACTION Price Under the niche positioning strategy, Precision’s recommended retail price is $2.89. In sales to dental professionals, 80% will be priced at $0.79, and the remainder will be sold at $0.95. Although Precision’s retail price is at a 15% premium to its closest expected competitor, the Oral-B Indicator, CP’s research indicates that its targeted involved oral health consumers are willing to pay a premium for functionally superior products. Moreover, a higher retail price may earn Precision an increased perception of quality, and thus profit Precision’s market share. Communicating to Consum...