Solution to the Colgate Precision Case
...to brand it (stress Precision or Colgate) and 3: How much to spend on communication both on “Precision” as well as on the other products. To answer the first and most important question, we have to consider several factors. First of all, there are different revenue and profit expectations when choosing the one or the other alternative. Taking into account all the information given in the case, the following pro-forma income statement can be set up: as a Niche Product as a Mainstream Product Estimated Revenues $19.190.000 $33.330.000 $54.560.000 $84.480.000 Manufacturing price $6.930.000 $11.550.000 $22.080.000 $32.960.000 Gross Profit $12.260.000 $21.780.000 $32.480.000 $51.520.000 Other Expenses (investment in capacity, depreciation, promotion) $ 14.766.667 $ 13.450.000 $ 43.086.667 $ 33.370.000 Net Income before taxes -$2.506.667 $8.330.000 -$10.606.667 $18.150.000 Cumulative over 2 years $5.823.333 $7.543.333 Judging based on expected profit figures, the niche strategy is the less risky, but in the long-term also less profitable one. However, in addition to monetary considerations, there are several other factors that should be taken into account. Using the Ansoff-Matrix as analysis-tool, we can see that with the launch of “Precision”, a new product in a known market, CP is following the product development strategy, the classical way to develop new sales sources. With both options available, CP is running the risk of cannibalization, that is gaining somewhat between 35-60% of “Precision” sales at the expense of “Classic” and “Plus”. However, considering value instead of volume-percentages, the mainstream-scenario cannibalizes a larger part of Colgate plus and classic revenues in absolute figures. In this case, the total Net Income of all toothbrush products is smaller. In addition to that, the potential dropping of SKUs in case of a mass marketing will further increase the damage to the other products. Yet on the other side launching “Precision” will also considerably capture sales from competitors as the premium segment is so far dominated by Oral-B. Thus having more sales means also a higher damage to competitors. In addition to that, the new product gives the possibility of hedging risk in case “Classic” and/or “Plus” don’t perform well. In this context, distribution channels play an important role. Cannibalization can be minimized and damage to competitors increased by choosing the right distribution chain. So far, CP toothbrush products are mostly sold WHERE. The niche option aims mainly at smaller and food retailers, whereas the mass approach implies a distribution through a variety of channels including big mass-merchandisers. Hence the niche strategy s...