HO Craftsman Rolling-stock Marketing Plan
Keller Graduate School of Management – Online MM522
John Superb Student
July 2011

Final Draft

Executive Summary HO Craftsman Rolling stock is an Internet based company that will develop, manufacture, and distribute kits of model railroad rolling-stock whose prime component is scale wood. The company mission statement is: HO Craftsman Rolling-stock will supply top quality, wooden, craftsman level kits of HO scale rolling-stock that appeals to the existing model railroad craftsman, and which will be uniquely appealing to first time crafters. HO Craftsman Rolling-stock will offer unparalleled support to their customers and will improve and develop their offerings based primarily on customer input.

These wooden kits will be considered craftsman level because of the tools, skill-set, and time involved. Significant effort will be expended to reduce the intimidation level of this kind of kit. This will be the only offering of its type, although kits like these were available until 10 years ago. It is believed that poor marketing was the primary reason for the disappearance of those kits. HO Craftsman Rolling-stock believes that leveraging the strength of the Internet, a well targeted advertising campaign, and development of comprehensive customer assistance will allow these types of kits to become popular again. There is considerable market inertia to be overcome. The mantra of the past 20 years has been fast, cheap, and easy when it comes to model railroad rolling-stock. By emphasizing quality, realism, and pride of ownership in its messaging, HO Craftsman Rolling-stock expects to overcome those entry barriers into this market. The model railroad market is currently estimated at 500,000 participants who spend approximately $550,000,000.00 per year on their hobby. The market trend is that the participants are getting older and their numbers are shrinking at the rate of 2% per year. With the average model railroader approaching retirement, it is believed that the active participants will have even more time to spend engaging in their hobby. There is also a significant portion of the market that is considered inactive. This is defined to mean that they do not have, or have access to, a working model railroad layout. One of HO Craftsman Rolling-stock’s prime goals will be to entice this portion of the market to become a bit more active by building a display quality rolling-stock kit. Because there are no direct competitors for the products that HO Craftsman Rolling stock will bring to market, it is highly unlikely that there will be any short-term reaction from the existing model railroad companies HO Craftsman Rolling stock will distribute its products primarily through direct means. All integrated marketing communications will direct customers to the website where kit pictures, descriptions, help options, and customer feedback mechanisms are located. This is also the prime location for ordering and payment. HO Craftsman Rolling-stock has one distribution agreement in place with Walther’s. This distribution channel will serve to broaden the reach and legitimize the marketing message. HO Craftsman Rolling-stock products will be priced on the high end of the scale for the model railroading industry. This is intended to reflect the quality and uniqueness of the product. Startup costs and the first years’ marketing costs are major components of the estimated $100,000.00 initial investment. Estimated sales volume and the associated profit per unit will yield a payback period within the first 12 months, with gross revenues projected at $325,000. HO Craftsman Rolling stock will enthusiastically utilize an integrated marketing communications approach via hobby-focused print media and trade show participation, as well as the Internet, to communicate a robust message to our target market. Sales volume and customer feedback will be the main indicators of the success of this marketing plan. HO Craftsman Rolling-stock will monitor all performance indicators on a continuous basis and will make adjustments accordingly. The overall goal is to provide customers with a valuable and rewarding experience while reaching profitability within two years. First year sales goals are projected at $325,000. If that is accomplished, it will allow for growth factors to be applied and success to be sustained for the long term.

Product Description and Situational Analysis HO Craftsman Rolling-stock will produce and market a line of model railroad rolling-stock kits that will appeal to those consumers interested in high quality craftsman level modeling in HO scale. The basic kit will consist of detailed plans, diagrams, and construction photos; all necessary hardwood forms and scale lumber; wire, metal, and plastic detail pieces; and finishing tips. These finishing tips will include cross reference tables for popular rail lines. They will also include source lists for paint, decals, trucks, and couplers. An advanced kit can be customized by the consumer to include the appropriate paint, decals, trucks, and couplers. Services offered in support of the modeler include an instructional DVD for first time modelers, personalized help via e-mail, and a listing of products used in construction of the kits. HO Craftsman Rolling-stock will actively solicit customer feedback and suggestions for improving existing products and services as well as developing future offerings. Kit re-fills, consisting of only the wood and detail parts will be offered for those modelers wanting to craft multiple copies of a particular model. Through its marketing efforts, HO Craftsman Rolling-stock will appeal to the many active craftsman modelers who presently can only purchase models of buildings and structures. HO Craftsman Rolling-stock will also actively target the large number of model railroaders who are considered to be in-active or idle. The most prevalent reason for this condition is the lack of space for an active layout. By offering a high quality model that yields outstanding detail and an excellent level of realism that can be proudly displayed on a desk, mantel, or shelf; HO Craftsman Rolling-stock will seek to add more numbers to the list of active model railroaders. Through cross-promotion on supplier’s websites, HO Craftsman Rolling-stock will also gain exposure to those craftsman presently modeling ships, aircraft, and structures not related to model railroading. Appealing to both experienced and beginner level modelers, HO Craftsman Rolling-stock will fill the need for high quality, finely detailed, presentation and display worthy rolling-stock that is presently only being addressed by brass models. Plastic model manufacturers claim to address this need, but their offerings pale in comparison to wood and brass models. Neither plastic nor brass can offer the level and depth of craftsmanship required for modeling in wood. HO Craftsman Rolling-stock will counter the ready-to-run and simple kit manufacturers by highlighting the sense of pride and accomplishment that comes with the completion of an HO Craftsman Rolling-stock kit. To counter the perceived level of complexity and difficulty, the various forms of customer assistance will be highlighted along with the company’s commitment to customer support, success, and satisfaction. The current market situation is that the model railroad industry as a whole is getting both smaller and older (National Model Railroad Association librarian, October 2005). The majority of losses are occurring in active modelers with idle modelers remaining relatively constant (Kalmbach Publishing market data, October 2005). Idle modelers are those who read industry publications and, otherwise, remain current on industry happenings but do not have a working layout or belong to a club that does. The total market is estimated at 500,000 persons, 68% of those are active, and it is shrinking at the rate of 2% per year. 78% of active modelers model HO scale and 67% of those focus on the late steam/early diesel era on which HO Craftsman Rolling-stock will concentrate. The demographics for the industry are 99% male, average age of 53, 73% are married, and 54% have a college degree or higher education. The Great Lake states and the Atlantic Coast states are home to 62% of model railroaders. The average model railroader spends $1,555 per year on their hobby and the total industry is estimated at $500M per year. Home computers are owned by 83% of model railroaders and 62% report researching and purchasing hobby products online (Kalmbach Publishing market data, October 2005). Websites offering scale wood and HO scale wooden structures report at least 5000 website hits per month and hint at approximately 750 purchases (e-mail from Northeastern Scale Lumber). There are presently no suppliers of craftsman level wooden rolling-stock kits, although well established manufacturers of all necessary components do exist and appear to be stable. There are several manufacturers of scale wooden structure kits. Most rolling-stock available today is of the ready-to-run variety or snap-together kits in plastic. Several of the plastic kit manufacturers offer higher cost kits consisting of more detailed molded side panels and some amount of separate pieces to be glued on for a higher level of three dimensional details. Outside of the wooden structure kits, there is little opportunity for a modeler to spend a significant amount of time and craftsmanship producing a quality piece of rolling-stock that they can display with a true sense of pride and accomplishment.

SWOT Analysis: Strengths: - Company consists of passionate employees who are knowledgeable and experienced in building craftsman level wooden rolling-stock kits. - All employees are technology and internet savvy and believe that the advantages and benefits of the internet and e-business are key factors in making the company successful - Excellent relationship with supplier of wood parts, and former supplier of kits- Northeastern Scale Lumber and their distribution company, Northeastern Scale Models – a possible distributor - Good relationship with Walther's - the #1 distributor in model railroading Weaknesses: - Start up company, employees have no previous entrepreneurial experience - Lack of funding and cash flow, no other existing business for support - Untested product, existed but disappeared before the internet came along - No company brand awareness

Opportunities: - No one is targeting idle model railroaders - No one is trying to reach craftsman modelers in other hobbies - No one else offers DVD and online help to encourage first timers - Possible alliance with Walthers - International alliances with European and Chinese manufacturers of HO model railroad kits.

Threats: - There is only one supplier for scale wood and wood forms. If they go out of business, HO Craftsman Rolling-stock will cease to exist. - Market has been trained to expect convenience, buy it today and use it today, and not pride and accomplishment when considering rolling-stock. - Manufacturers of high quality plastic kits may counter-attack - Economic downturn may limit discretionary spending, significantly affecting model railroading hobbyists - Shrinking market, active modelers entrenched in their present form of modeling; idle modelers have never been enticed to join the active ranks.

Target Market The target market for HO Craftsman Rolling-stock models is those interested in HO scale model railroading equipment from the 1920 to 1950 timeframe. This target market is estimated at more than 150,000 modelers, primarily male, ages, 35 to 75. There will be three sub-markets within this target market. The first of these is active modelers who are presently scratch-builders of plastic rolling-stock and plastic or wooden structures. This group comprises approximately 60% of the total target market and has the tools and the skills necessary to successfully build a craftsman level wooden rolling-stock model. HO Craftsman Rolling-stock will target these modelers with quality and customization options. The second sub-market is those active modelers who do not utilize craftsman level skills in any way. They comprise about 5% of the total market. HO Craftsman Rolling-stock will appeal to them through the customer service and modeling assistance features of the company. The final sub-market is comprised of inactive model railroaders. They are inactive for a variety of reasons. The most common is lack of space. In general, this sub-market is constantly looking for a way to become active in the hobby. They mostly read industry publications and dream about what they will do when they get the space necessary for their layout. HO Craftsman Rolling-stock will appeal to them by showing them how easy it is to start making their dreams come true. In addition, HO Craftsman Rolling-stock will put their brand in front of wood craftsman in other hobby groups by having their website link posted on the web page of suppliers who market to multiple hobby groups. For this group, and in all marketing, the main messages will be the initial quality of the product in unfinished form, the realism and quality of the finished model, and the assistance available to get from one to the other. From a marketing perspective, the market is attractive. Model railroading, as a hobby, is expected to grow. Quality kits are in demand and the company can expand its product offerings to grow its revenues and profitability. International opportunities also exist.

Competitors and Substitutes There exist no direct competitors to the products that HO Craftsman Rolling-stock will bring to the market. There are, however, a large number of substitutes. The most numerous, with 12 major manufacturers and 85% of the market, offer plastic ready-to-run or simple snap together rolling-stock models. Their market strategy is cheap, simple, and easy. Buy their product, take it home, take it out of the box, put it on the layout, and you are done. HO Craftsman Rolling-stock will not compete on those terms, but will accentuate the opposite attributes. There are also six main manufacturers of high end plastic kits that make up 10% of the total market. These kits consist of highly detailed, molded panels that are glued together and a few separate detail pieces are glued on for a more three dimensional effect. HO Craftsman Rolling-stock will compete with these manufacturers by offering more detail, higher quality finished product, more customization, and a higher level of pride and satisfaction in the finished piece. For both of these substitutes, price and convenience will be the major hurdles to overcome. It is unlikely that these manufacturers will consider HO Craftsman Rolling-stock a threat. HO Craftsman Rolling-stock will be thrilled, and very successful, if they achieve a 1% total market share. The percentage of HO Craftsman Rolling-stock’s market share that will be converted from the lower priced detailed plastic kit market is not significant enough to concern those manufacturers. There is one company (Raven Hobbies) that combines the convenience of plastic for the main body construction and the detail of wood for the external walls. This company has about 1% of the market. They only offer passenger car kits and will only be a competitor in that portion of the market. HO Craftsman Rolling-stock will compete for their customers by offering many more options than they presently have at a slightly higher level of complexity and at a comparable price. Raven Hobbies advertises in Model Railroader magazine. HO Craftsman Rolling-stock does not intend to venture into the passenger car market at this time and will not be seen as a threat by this manufacturer. It is possible that the successful introduction of HO Craftsman Rolling-stock kits will entice this manufacturer to offer competing products. If that happens, HO Craftsman Rolling-stock will continue to emphasize the quality of all wood construction, the sense of accomplishment, and the pride of ownership. Offering a wooden passenger car kit will be considered as a counter-strategy. There is also one other manufacturer (Trains of Yesteryear) with 1% of the market that offers wooden craftsman level rolling-stock kits, but only for the era of the early 1800’s. HO Craftsman Rolling-stock will offer models from a much later era and will not compete with this company. It is possible that this company would choose to compete with HO Craftsman Rolling-stock in the more current era, but it is highly unlikely. All of this company’s products, and even their name, are associated with the earlier era. The remaining 3% of the market are scratch builders that purchase components and build rolling-stock to their own specifications. HO Craftsman Rolling-stock will aggressively court this group with a message of convenience and helpful responsiveness. This will result in their obtaining the rolling-stock they want with much less research, a whole lot less trial and error, the option to easily build multiples of any model, all at a fair price. It is possible that an expansion of the model railroad market, or some other factor, could cause a new or existing company to compete directly with HO Craftsman Rolling-stock and its products. If that happens, they will be late to market and will most likely compete on price. HO Craftsman Rolling-stock will continue to market and expand its customization and customer service advantage. HO Craftsman Rolling-stock may also have to look at volume discounts, seasonal coupons and promotions, bundling, or free tools and accessories as counterstrikes in such a situation. A close watch will be kept on the marketplace and any possible competitors.

Pricing HO Craftsman Rolling-stock will price its offerings to return a reasonable profit margin on materials and a significant profit margin on intellectual property. The basic model offering will be priced at $49.95. The costs involved with a basic kit include an average of $4.00 in wooden parts, $2.25 in detail pieces, $1.15 in packaging, and $. 60 in instruction sheets. A kit can be assembled and prepared for shipping in less than 15 minutes at a cost of $2.00. Thus, the actual cost of a kit represents 20% of the retail price. Depending on volume, the remaining 80% will be split appropriately among G&A costs, operational costs, marketing costs, and profit. Shipping costs and taxes will be added to each order based upon destination and shipping preference. Customized kits will be sold at $64.95 and represent an additional $9.00 in parts and an additional $1.00 in preparation costs. Instructional DVD’s for beginners will be priced at $19.95 and cost an average of $5.00 to produce. Existing high quality rolling-stock kits of any material range from $25.00 to $65.00. Wooden railroad structure kits range from $20.00 to $35.00 for small structures and $45.00 to over $100.00 for large structures. High quality wooden kits in the model ship and aircraft areas are all in excess of $75.00. The promotional cost of HO Craftsman Rolling-stock products will not be considered on a per unit basis for two reasons. First is the uncertainty of product volume. The second, and most important, is that most promotion costs are covered either in reciprocal agreements with suppliers and distributors or are covered in fixed operational costs. Most of the cost to have the HO Craftsman Rolling-stock brand and website listed on suppliers websites is covered through reciprocal listings. The cost of having HO Craftsman Rolling-stock listed in distributors catalogues is covered in the discount afforded to those distributors. The cost of magazine advertisements, trade shows, industry group dues, and the website are all fixed costs in the budget. In summary, prices for HO Craftsman Rolling-stock kits will be set at the high end of the scale due to their uniqueness in the industry and to convey their quality and desirability. This is not intended to be a price skimming approach, but rather an effort to right-price the product and to achieve a reasonable return on investment. The pricing strategy will be continuously reviewed in regards to volume, profit, and competition. Gross Revenues of $325,000 are projected in the first year of operation.

Channels of Distribution HO Craftsman Rolling-stock is organized as an internet company. Through its web site, it will take orders directly from customers and distribute product directly to those customers. HO Craftsman Rolling-stock will also support telephone and mail order, but the emphasis will be on the website. Access to HO Craftsman Rolling-stock, namely its website, will also be available through the websites of industry organizations, industry publications, and select suppliers. Walther’s, Inc. is the pre-eminent catalogue company in the model railroading business. Their catalogues are both in print form and electronic via their web site. HO Craftsman Rolling-stock will have their products listed in the Walther’s catalogues. Walther’s will act as a sales agent and will be responsible for taking orders and collecting payment. HO Craftsman Rolling-stock will accept orders from Walther’s and ship directly to their customers, thus acting as a warehouse and shipping facility. Only the basic kits will be offered. The customized and value added products will only be available from HO Craftsman Rolling-stock. Walther’s will receive $7.00 per order and will be responsible for shipping costs. Personal visits and communications continue to enhance this relationship. Assuming the success of this arrangement, plans are being made for phase two and three. In phase two, kit designs that are exclusively offered by Walther’s will be developed and offered for sale. In phase three, Walther’s will put their brand on these exclusive kits. HO Craftsman Rolling-stock will continue to act as manufacturer, warehouse, and shipper for products sold by Walther’s. Northeastern Scale Lumber/Models is the main component supplier to HO Craftsman Rolling-stock. They are also the last company to produce a kit like HO Craftsman Rolling-stock’s and are the initial source for kit plans and other intellectual property. While they are skeptical of the success of these kits, they reserve the right to distribute them in the future. Should they choose to distribute HO Craftsman Rolling-stock product, a model similar to that of the Walther’s distribution channel will be used. Web hot links to and from any and all suppliers and distributors will be leveraged to increase the reach of HO Craftsman Rolling-stock through cross promotion. Personal selling by employees of HO Craftsman Rolling-stock will primarily be through the use of telephone assistance, e-mail helpline, and participation in industry chat rooms and message boards. This will be supplemented by being present at industry tradeshows and through personal visits to influential model railroad clubs. Developing personal contacts at Kalmbach Publishing, Model Railroader, Railroad Model Craftsman, and the various suppliers is another way to personally communicate the passion and dedication that HO Craftsman Rolling-stock employees have for the hobby, the product, and the success of the company.

Promotion The Promotion plan and strategy will be to convey HO Craftsman Rolling stock’s mission statement to the target markets via a skillful integrated marketing communications (IMC) approach. HO Craftsman Rolling-stock will supply top quality, wooden, craftsman level kits of HO scale rolling-stock that appeals to the existing model railroad craftsman, and which will be uniquely appealing to first time crafters. HO Craftsman Rolling-stock will offer unparalleled support to their customers and will improve and develop their offerings based primarily on customer input. HO Craftsman Rolling-stock will supply top quality, wooden, craftsman level kits of HO scale rolling-stock. The primary means to convey this message are threefold. The message will be loud and clear on HO Craftsman Rolling-stock’s website. Advertisement space will be utilized in the industry magazines that serve the target markets. Awareness of HO Craftsman Rolling-stock will be increased through descriptive web links on the websites of chosen suppliers and in registries maintained by industry trade groups. HO Craftsman Rolling-stock will create a buzz for their products by manning booths at industry trade shows in the Great Lakes and Atlantic Coast regions. While this approach is expensive, it is a good way to put the product in the hands of potential consumers. In the first year or two of operation, exposure to the market is critical to the success of HO Craftsman Rolling-stock. For this reason, the expense of $5,000 per show will be allocated for the three major trade shows in the targeted geographic regions, each with a 6x10 table booth. Associates of the company will also demonstrate the products on various HO club layouts. The product beta testers are spread throughout the target geographical area and will be encouraged to demonstrate and promote the products at local club events through a commission promotion of $5.00 for each kit that they sell. The message to existing, experienced craftsman will be: You are already crafting structures in wood, why not rolling-stock? You have the tools and the skill set, we have the rolling-stock kit for which you have been waiting. We offer kit customization and we support your need for multiple copies of a rolling-stock model. If there is a particular car or road you would like to see modeled and we do not offer it, let us know. We want to expand our offerings to meet your needs. The message for first time modelers will be: You love model railroading but do not have the space? Would you love to have a few examples of model railroading on display? Is brass too expensive? Does plastic not satisfy the need? Why not try a wooden model of your favorite piece of rolling-stock? You will get the piece you want, quality of which you can be proud, a price you can afford, all with the satisfaction of having crafted it yourself. Don’t think you can build a kit like that? You can. HO Craftsman Rolling-stock is committed to supplying you all of the tools and assistance that you need to be successful. Go ahead, see for yourself. Visit our website. HO Craftsman Rolling-stock will also passively communicate to ship, aircraft, and structure modelers through links on the websites of scale wood manufacturers and modeling tool manufacturers. The message to them will be: You are good at working with wood. You make wonderful ships, planes, and buildings. Why not try something different? Why not railroad rolling-stock? The above messages are intended to be descriptive of the tone of communications only. Specific and targeted marketing messages will developed for advertisement in Model Railroader and Railroad Model Craftsman magazines. Monthly advertisements of 1/6 page size and in full color will be utilized. HO Craftsman Rolling-stock will encourage and support articles about the company, its products, and its employees in these publications. The marketing message will also be present in the Walther’s catalogue listing and in promotional materials packaged in each kit. The HO Craftsman Rolling-stock website will be segmented to target the particular type of consumer and the feel and content of each segment will be tailored to fit the intended target audience. The web links that will be added to the websites of major suppliers will be mostly visual in nature, but will highlight as much as possible the features of the products that will appeal most to the targeted user and integrated marketing communications will be used to insure a consistent message. The cost for overall promotion will be estimated at about $5,450.00 per month. The volume of orders experienced over time will determine whether that number will need to be increased or decreased. The integrated and consistent message is: we are here to help you achieve . . . highly detailed and accurate end product, a sense of accomplishment upon completion, and pride of ownership. To gain a mailing list, the company will establish a quarterly newsletter, "The Rolling-Stock Roster," using a "permission marketing" approach to ensure an ongoing integrated message that complements and reinforces promotional activities.

Promotion BUDGET

Brand and Logo Development $ 1,000.00 Website Development for Internet site $ 2,000.00

Advertisement Development with ad Agency Logo and Ad Design Work $ 4,000.00

Advertisement/Marketing Communications $ Model Railroader Magazine (monthly $2K) 24,000.00 Hobbyist Magazine (bi-monthly $1.6K) 9,600.00 Miscellaneous Advertising 1,000.00

Public Relations 2,400.00 Sales Promotion Trade Show Expenses Railroading 2007 - Chicago Model Railroader Trade Show in Milwaukee Hobbyist 2007 in Detroit 15,000.00 Box Car Key Chain giveaways 1,000.00

Direct Marketing Initial Direct Mailing to 5,000 Hobbyists 3,200.00 Mail List purchase from Model Railroader 500.00 Rolling-Stock Roster with design work by ad agency 1,200.00 $ Industry Organization Membership Dues 500.00 Total Promotion Budget $65,400.00

Operational notes: - HO Craftsman Rolling-stock will begin as a residence based business utilizing existing space. Projected growth represents the company space requirements utilizing 100% of available space by the end of Year Three. It also represents the labor requirements of the three founding employees becoming 100% utilized by the end of Year Three. Any increase in projected growth will require the consideration of space and manpower expansion prior to the end of Year Three. - Basic kit components are chosen from a selection of 14 wooden forms and dimensions, and 19 different detail pieces. All 33 pieces will be stocked in quantity and kits assembled per order. Kit specific components are the instruction sheets and drawings, and the package labeling. - HO Craftsman Rolling-stock employees will make use of existing technology to offer telephone support Monday through Saturday from 9 AM to 6 PM Eastern time. E-mail support will be covered on a schedule that approximates a 7x16 support structure. - Orders will be assembled daily and shipped six (6) days per week depending on shipment method chosen. - Customer data will be collected from the web-site through visitor surveys, suggestion box, e-mail conversations, and order information. This data will be reviewed on a bi- weekly basis and revisions to the products, services, and marketing efforts made accordingly. - Product revisions and improvements will be alpha tested by HO Craftsman Rolling- stock employees. A beta testing group has been assembled and is representative of the target markets. Beta testers will receive kits at no cost and their feedback will be utilized for quality improvements.

Sources Cited
Kalmbach Publishing. Media Guide. Milwaukee: Kalmbach, 2007.
Oriol, Nancy. Northeastern Scale Lumber. Re: Request for Information. E-mail to the author, 18 July 2007.
Algase, Peter -- Head Librarian/Researcher for National Model Railroad Association. Telephone Interview. 25 July 2007.
Ruffing, Lori. Kalmbach Publishing Marketing Specialist. Telephone Interview. 9 July 2007.