by **RohithCG** » February 7th, 2013, 12:53 pm

Thank you for your feedback Amit. To maintain the flow of this conversation, I will give you the detailed analysis of the first question followed by my response to your feedback for the second question.

Question 1

Now that you have given me two objectives (in other words, I just shot myself in the foot :D ), I will give my estimate for the sales, and then I will answer the second part of your question by describing how would things change if the objective was to maximize profitability instead.

Part 1.a - Target Segment

For the first part, since this is a market estimation question I am going to assume that the population of India is 1.2 billion. As our product is a premium fountain pen, my hypothesis is that our target segment is the affluent upper class. In any economy, the upper class comprises of about 2% of the entire population. That gives us (1.2 bn * 2%), which is 24 million out of the total population.

This is the sum of all the people in the upper class segment. India is a young population, which means that there are more people living in the working age (18 to 45). I will assume that 60% of this population is in the working age. Therefore we get (24 mn * 60%), which is 14.4 million. I will round this down to 14 million.

My hypothesis is that our target segment can be narrowed down to focus only on the white-collar segment (the ones who are actually working) as they are the ones who are most likely to buy and use our pens. I will assume that they make up 60% of the upper-class segment. This is because I am considering 40% households will have dependents like housewives and students. Thus we get the total number of our white-collar segment to be (14 mn & 60%), and that is 8.4 million. We will take this figure to be 8.5 million.

As our marketing resources are limited, it is not possible to reach out to all the 8.5 million white collar workers. For the first year, let us limit our marketing activities to the top-tier cities alone. To calculate how many potential customers live in these cities, I will assume the following break-up of the target segment population, based on locations -

Tier 1 Cities - 50%

Tier 2 Cities - 30%

Towns - 15%

Villages - 5%

My reason is that some of the upper-class segments do live in villages, towns and tier 2 cities. They are usually the politicians, rich landlords or the business people. Since we are focussing only on the tier 1 cities for the first year, our potential customers will be (8.5 mn * 50%), which is 4.25 million. To make our calculations easier, we will round this down to 4 million.

Therefore, to answer part (a) of your question - Based on my initial analysis, our target segment is about 4 million. They have been segmented based on four factors - income group, age, profession and location. Firstly, we have considered only the upper class population, which is about 24 million. Secondly, we have looked at those who are in the working age of 18-45. They are about 14 million. Thirdly, we have focussed on the white-collar professionals, and they number about 8.5 million. Finally, we have considered those who are living in tier 1 cities and that gives us our target segment of 4 million people.

Two key issues that I would like to point are two of my assumptions - the income group and the location. If we include the upper-middle classes, then our target segment would expand. Also, if we decide to focus on other locations, then we will have a bigger number.

Part 1.b - Marketing Mix

Now, I will move on to part (b) of your question - to suggest the appropriate mix of marketing channels to employ, given a budget of Rs. 50 lakhs. I will first state the channels I am considering, and then give my reasons for the same. We should use three channels for marketing our product - in-store advertisements, in-flight magazines and the internet. Firstly, we should look at advertising in premium pen stores. These stores are usually located in airports and in malls which house premium brands and they attract a lot of our target segment. For advertising in these stores, we need to invest in posters and in visual merchandising. That way we can convert many shoppers into prospective buyers. Secondly, in-flight magazines can be considered because a considerable proportion of our target customers will travel by air for either business or personal reasons. If we choose the right airline magazine and the right route, we can create maximum awareness, and thereby generate more sales. Finally, I will also consider the internet since internet-sales are growing annually and many in the younger age-groups use the internet a lot.

Now, we need to consider if each of these options are viable and if so, how much do we need to invest in them. I would like to first consider in-store advertising. My knowledge is limited but I am assuming that we have two costs - cost for putting up posters and buying merchandise space. Also, I understand that the cost for advertising in stores in malls and in airports are different, and they also differ by location. I would like to assume that the costs are same for all tier 1 cities. Hence I will consider an average cost for a mall-based store and an airport-shopping centre.

A mall-based store has the following costs -

* A poster of 3' x 2' (i.e. 3 feet high by 2 feet wide) is Rs. 30,000

* Shelf-space in higher visibility area is Rs. 10,000 per sq. ft.

* Shelf-space in lower visibility (i.e. towards the back of the store) is Rs. 5,000 per sq. ft.

An airport-shopping centre would charge higher -

* A poster of 3' x 2' is Rs. 60,000

* Shelf-space in a highly visible area is Rs. 25,000 per sq. ft.

* Shelf-space in a less visible area is Rs. 15,000 per sq. ft.

I will consider that there are 5 tier-1 cities each having 1 premium pen store in a high-end shopping mall.

Each store will have 1 poster (3' x 2') = 30,000 x 1 x 5 = Rs. 1,50,000

Shelf-space in high-visible area (20 sq. ft.) = 10,000 x 20 x 5 = Rs. 10,00,000

Each airport shopping centre will have 1 poster (3' x 2') = 60,000 x 1 x 5 = Rs. 3,00,000

Shelf-space in high visible area (20 sq. ft.) = 25,000 x 20 x 5 = Rs. 25,00,000

Total spend = Rs. 39,50,000/- That will leave us with Rs. 10,50,000 to spend for the other two categories.

Next, we will consider advertising in airline magazines. I will allocate a budget of Rs. 8,00,000/-. Although I am not aware of the costs for ad-space in these magazines, I feel that this figure is a little low for advertising in all routes and airlines. Hence, I suggest that we look at only a few routes or only one airline, whichever fits the budget. Should it still be expensive, we can drop this alternative and consider dividing this amount between the 5 premium pen stores as our marketing budget. This would work out to Rs. 1,60,000 and the stores can spend this amount on buying advertising in newspapers or in fashion magazines. This means that our allocated fund for option 1 will now be revised to Rs. 47,50,000.

For the last channel, the Internet, I think a budget of Rs. 2,50,000 will be sufficient. I will assume a one-time cost of Rs. 1,50,000 for designing and creating a website. Using adwords and other social-media marketing tools will cost us about Rs. 80,000 and we will have to spend Rs. 20,000 on an annual contract for maintaining the website.

Thus to summarize my answer to part (b) of your question, although there were 3 options initally, I think we should look at only two of them, given that our marketing budget is only Rs. 50 lakhs. The two options are - in-store advertising and social media marketing. For in-store advertising, our estimated budget is Rs. 47,50,000. This will cover 5 premium pen stores and 5 airport-shopping centres. Next, I feel that we should spend Rs. 2,50,000 towards social media marketing. This would involve creating and maintaining a website and using efficient marketing tools.

Part 1.c - Estimated sales in 2013

I would like to close my answer by estimating the sales in 2013. Assuming that we have gone ahead with my recommendations for marketing, I will proceed with my estimation. In a year, there are two shopping seasons - Jan to Feb and July to August. I will assume that the average monthly sales during the shopping season will be twice the average monthly sales in the non-shopping season. That means, the total sales will be 4(2x) + 8(x) = 16(x). I will explain this - the shopping season extends for 4 months in a year, and the sales are twice that of the non-shopping season. 'x' is the average monthly sales, which we will calculate next.

To calculate the average monthly sales, I will assume that all our sales has happened only through the stores. My reasoning is that, given that this is the first year of launch our customers will not purchase through the Internet. Next, I will estimate that the stores in shopping malls will sell 1 pen on average daily. Also, the airport-shopping centres will sell 2 pens on average daily. Before I calculate, I understand that what you meant by 'each pen costing Rs. 5,000' is that each pen is priced at Rs. 5,000. That means, the average monthly sales at all premium pen stores will be = Rs. 5,000 x 1 x 30 x 5 = Rs. 750,000. The average monthly stores at all airport-shopping centres will be = Rs. 5,000 x 2 x 30 x 5 = Rs. 1,500,000. The total average monthly sales is Rs. 2,250,000. This is the 'x' that we wanted.

Substituting this in the earlier equation we get, 16 (x) = 16 x 2,250,000 = Rs. 22.5 million + 13.5 million = Rs. 36 million approximately. This is the estimated total sales in the year 2013.

Finally, to summarize my answer to part (c) of your question, I have estimated our total sales in 2013 to be Rs. 36 million. I would like to point out that this figure will change if we use other distribution channels.

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Part 2 - Maximizing profitability

If our objective was to maximize profitability, we have two options - maximize revenue or minimize cost. Given that we can only generate a maximum of Rs. 36 lakhs in the first year, we have to look at minimizing our costs to achieve maximum profitability.

For this, we will use the value chain model to analyse where we can cut costs. There are 5 components to it - Inbound logistics, operations, outbound logistics, marketing and servicing. Here are some suggestions that are worth considering -

* As we manufacture our pens, we should consider our operations costs. I would like to look at our P&L statement. Are there any areas where we are costlier than the competition? Could we outsource those areas?

* Although the internet advertisements hardly generate any sales in the current year, we should not drop them. This is because we will lose out on the opportunity to generate sales for the future years through this channel. I think the value of lost-sales in the future will be higher than the Rs. 2,50,000 that we have allocated for this channel. So I will not recommend dropping this channel even though it may not contribute much to this year's sales.

* How about servicing? How much do we spend on after-sales support and attending to service complaints? How much are our competition spending on the same? Can we outsource any part of this component to further minimze our costs?

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Kindly give me your feedback on this answer. I will respond to your feedback on the second question in a new post.

- Rohith.