Parvaderm has been a successful company in the past with their line of Silky Shaving Gel. However, their sales numbers are dropping and are forecasted to drop even further. There have been solutions proposed by the Soft and Silky brand assistant, Heather Courtwright. However, it is up to Phoebe Masters, the newly appointed product manager, to make the call on the new solutions to help get Parvaderm back on track from their past few years of disappointing sales.
There are two decisions to be made by Parvaderm Corporation. The first is whether to get rid of their current tube packaging or introduce a 5.5-ounce or a 10-ounce aerosol container to the current product line. The second is to see if it was necessary to add additional funds for a market test. This is all part of the bigger question of introducing a new package design for the Soft and Silky Shaving Gel. The Soft Silky barnd was introduced in 1991, when aerosol packaging wasn’t widely known, however: since 1999 aerosol has become the dominate packaging for women’s shaving cream.
Analysis and Evaluation
Since Pavaderm's Soft and Silky Shaving Gel sales had not risen but instead have declined over the past few years, there was definitely room for improvement. Courtwright proposed the new package plans and as the newly appointed manager, Phoebe Masters ultimately had the final call on the new packaging and the spending of additional funds. Masters approved Courtwright to spend $35,000 to conduct the marketing research tests on customer responses.
Courtwright hired a marketing research firm to conduct four focus-group studies. Two groups consisted of current Soft and Silky users, and the other two consisted of users of shaving cream, users other than Soft and Silky, and users of soap and water. The six principal findings were:
1. Customers and non-customers we unanimously in favor of the aerosol can, with the 10-ounce as the favorite.
2. 20% of Soft and Silky customers said they would convert to the 10-ounce, and 25% said they would convert to the 5.5-ounce can.
3. 1/4 of the non-customers said they would switch over to the aerosol can no matter the size. these customers’ preference for the aerosol over the tube packaging was their main reason for not buying Soft and Silky Shaving Cream.
4. Customers expected to find the aerosol can next to the tube container. Non-customers expect to find the aerosol can stocked with women’s toiletries.
5. The pricing was acceptable and actually favored by current customers. Non-customers thought the suggested retail price was some what high, but liked the value-added features and would try the product.
6. Current Soft and Silky customers are extremely loyal to the brand. none of the brand’s current customers had used a competing brand in the past two years. There was no evidence of such loyal customers among non-customers.
Given the fact that most of the woman population shaves unwanted hair year round, there will always be a need for a shaving gel product. Since 2004, aerosol containers have been the dominant packaging for women’s shaving cream/ gels, the Soft and Silky shaving gel tube sales wouldn’t decrease. The only way that the tube sales would decrease is if no new packaging was introduced to the market. Although the new packaging design would bring more customers and maintain the Soft and Silky Shaving Gel brand loyal customers, introducing the aerosol container would create a hassle, mainly with costs, volume, and pollutants. However, the company was able to find a supplier that would deliver a propellant with no chlorofluorocarbons to appeal to those ‘eco-friendly’ customers. The company was also able to discover a way to insure the costumer that the container will not leave a rust ring when wet, unlike other products.
Upon the conclusion of the market research, several things were brought to light that most in the Parvaderm Corporation had not known previously. While the findings of the study speak for themselves, the actions proposed by Heather Courtwright are another matter entirely. Following a detailed summarization of the research findings to the Product Manager, Phoebe Masters, it was deemed necessary that a market test be conducted to determine the optimal package size. Courtwright's test-market recommendation included a proposal to introduce the new package design in a limited cross-section of drug and food-and-drug stores. In her proposal there are many pros and cons.
Pros
Introducing the new package design in a limited cross-selection of drug and food-and-drug stores, including heavy-volume and low-volume stores, which presently carried Soft and Silky Shaving Gel. The test would include full complements of promotional aids, including newspaper ads and point-of-purchase, and would approximate a full-scale introduction. Courtwright also negotiated a 20,000 unit minimum order for each package size for the test market.
Cons
20% of Soft and Silky Shaving Gel customers said they would convert to 10-ounce can but twenty-five percent said they would convert to the 5.5-ounce can. Stores would be isolated geographically from non-test stores. Only three months to test the market. One-half of the stores would carry the 5.5-ounce container, and the other half would carry the 10-ounce container. Sales and marketing efforts for the existing tube package would remain unchanged during the course of the test.
The Plan
It was projected that the 10-ounce can would help produce higher sales and volume for that year even with the cannibalism effect in action. Courtwright planned to make a three month test trial in stores. Half a store would carry the 5.5-ounce can and the other part of the store would carry the 10-ounce can. There would be point-of-purchase displays, ads in newspapers and other promotional aids. She estimated that the test market would be $30,000, which included the costs of gathering marketing research data on the incremental sales growth and the cannibalization rate.
There is a personal issue also to be considered in this case. Masters felt it was unwise to release both sizes and also questioned if Courtwright's proposal should be adopted. Masters also understood that if no new package came about then Soft and Silky Shaving Gel would be down 32 percent in sales from the year 2004. She noticed that this had become Courtwright's pet project and had also heard that Courtwright felt that she deserved the promotion and not Masters. Therefore, Masters felt that the handling of this decision would affect her professional relationship with Courtwright.
Options
When considering production issues, if the aerosol production moves forward, the company would be at a disadvantage because the manufacturing capacity would have to be expanded. Prior to the aerosol idea, the growth in sales burdened production capacity and scheduling causing the company to be unable to meet the previous quantities requested from retailers.
Another advantage along with the expansion would be that the product would be produced and shipped directly from the manufacturing facility at a lower per unit cost. The price per ounce for the aerosol container was estimated to be lower than the average price per ounce for the tube. With these lower prices, the premium image, compared against the industry competitors, will be withheld; even with the lower price difference. According to the sales graph, the sales and unit volume increases yearly. Cannibalizing the existing package with the new package will generate incremental unit volume.
A disadvantage would be the production the 5.5ounce cans of shaving gel. According to the focus group, customers aren’t as willing to purchase the 5.5-ounce cans compared to the 10-ounce cans. The focus group also mentioned that they would not know the correct section the product would be stocked in. The existing customers thought the product would be located next to the company’s version of the gel, while the new customers expected to find the aerosol product next to women toiletries. The cost to test this market would be $30,000 in addition to the $10,000 supplier set up charge. The overall decision to move forward with the aerosol container would also affect the working relationship between Master and Courtwright.
Calculations
Although the 10-ounce aerosol can is the biggest size offered and is sold at the highest price, it returns the lowest contribution per unit. The 10-ounce aerosol has a variable cost of $0.29 per can yet only returns $0.18 per ounce. The smaller package, the 5.5-ounce aerosol container, has a variable cost of $0.24 per can and yields a return of $0.26 per ounce. The 5.5-ounce tube container has the highest return per unit. The variable cost for the tube is $0.40 per container while returning $0.27 per ounce. The variable costs shown below require a minimum order of 100,000 aerosol cans.
The calculations of the wholesale price are also illustrated below. The price to rack jobbers (wholesale price) reflects the 20% off the sale to retailers and the 40% off the price to consumers that the retailers collect.
Below are the contributions per unit for all three packaging considerations.
CPU Wholesale Price Variable Cost Contribution (P-VC) Contribution Per Unit
10 oz Aerosol Can $2.04 $0.29 $1.75 $0.18
5.5 oz Aerosol Can $1.68 $0.24 $1.44 $0.26
5.5 oz Tube Container $1.90 $0.40 $1.50 $0.27
Calculations Price To Consumer (Less 40%) Price To Retailer (Less 20%) Wholesale Price
10 oz Aerosol Can $4.25 $1.70 $2.55 $0.51 $2.04
5.5 oz Aerosol Can $3.50 $1.40 $2.10 $0.42 $1.68
5.5 oz Tube Container $3.95 $1.58 $2.37 $0.47 $1.90
Below are the forecasted sales for the 5.5 oz. can and the 10 oz. can of aerosol.
Forecast A: Low estimate for 5.5 oz aerosol addition
(8,600,000)(.273)= 2,347,800
(2,145,174)(.262)= 562,036
(300,000)(.262)= 78,600 62) = 78,600
New Contribution = 2,988,436
Current Contribution=
(10,745,174)(.273) = 2,933,433
Incremental Contribution= 2,988,436
-2,933,433
IC= 55,003
Forecast B: High estimate for 5.5 oz aerosol addition
(8,400,000)(.273)= 2,293,200
(2,345,174)(.262)= 614,436
(500,000)(.262)= 62)= 131,000
New Contribution = 3,038,636
Current Contribution=
(10,745,174)(.273) = 2,933,433
Incremental Contribution= 3,038,636
-2,933,433
IC= 105,203
Forecast C: Low estimate for 10 oz aerosol addition
(9,000,000)(,273)= 2,457,000
(1,745,174)(.175)= 305,405
(800,000)(.175)= 140,000
New Contribution = 2,902,405
Current Contribution=
(10,745,174)(.273)= 2,933,433
Incremental Contribution= 2,902,405
-2,933,433
IC= -31,028
Forecast D: High estimate for 10 oz aerosol addition
(9,600,000)(.273)= 2,620,800
(1,145,174)(.175)= 200,405
(1,500,000)(.175)= 262,500
New Contribution= 3,083,705
Current Contribution=
(10,745,174)(.273)= 2,933,433
Incremental Contribution= 3,083,705
-2,933,433
IC=150,272
Summaries and explanation of Forecasts
• Forecast A:
When adding the 5.5-ounce aerosol can to the current 5.5-ounce tube, and using the low volume estimates, we will have a positive incremental contribution of $55,003.
• Forecast B:
When adding the 5.5-ounce aerosol can to the current 5.5-ounce tube, and using the high volume estimates, we will have a positive incremental contribution of $105,203.
• Forecast C:
When adding the 10-ounce aerosol can to the current 5.5-ounce tube, and using the low volume estimates, we will have a negative incremental contribution of $-31,028.
• Forecast D:
When adding the 10-ounce aerosol can to the current 5.5-ounce tube, using the high volume estimates, we will have a positive incremental contribution of $150,272.
Decision Tree
P(Low) P(High)
(5.5-ounce) 55,033 105,203
(10-ounce) -31,028 150,272
Summaries and explanation of Decision Tree
The Expected Value for the 5.5-ounce can:
= .30(55,003) + .70(105,203)
= (16,500.9) + (73,642.1)
Expected Value = $90,143
To explain the expected value, the low of $55,003 is multiplied that by 30 %, which is then added on to the expected high of $105,203, which is multiplied by 70%. Summed together gives an EV of $90,143.
The Expected Value for the 10-ounce can:
= .30(-31,028) + .70(150,272)
= (-9,308.4) + (105,190.4)
Expected Value= $140,882
Expected Value
To explain the expected value, the low of $-31,028 and multiply that by 30%, which is then added to the expected high of $150,272, which is multiplied by 70%. Summed together gives an EV of $140,882.
The Decision
After looking at the forecasted numbers it would be beneficial to go forward with the test market. The test market will allow Parvaderm to determine whether to undertake a new extension to their line of products, and see if the new product will be successful. It’s essential that Parvaderm perform this test market considering that they have lost over 30 percent of their sales in the past year. With our expected values, we can conclude that adding the 10-ounce aerosol can will be favorable, positive, and will help regain Parvaderm’s sales volume. We decided to go with the 10-ounce aerosol can to test market due to the expected value being $49,452 higher than the expected value of the 5.5-ounce aerosol can.
Recommendations
Upon analysis of all of the data, it has been decided to keep the current 5.5-ounce tube packaging. In addition to the current packaging, it has also been decided to introduce a
10-ounce aerosol package.
The reasons for this decision are as follows:
• The 10-ounce package provides the least level of cannibalization of the current product.
• Additionally, it will generate new sales from current customers put off by the tube purchase. • Aerosol is the direction that nearly all competitors use, and is the norm in the industry.
• Introduction of the aerosol packaging would free up plant capacity for production of other Paravaderm products.
• 10-ounce cans have a higher margin than the 5.5-ounce aerosol cans, yet provide more customer value.
• Customers prefer the 10-ounce size on account of the fact it is more convenient.
• When questioned, both current customers and noncustomers were unanimously in favor of the aerosol can, with the 10-ounce can being the favorite.
• Having both packages would keep the current customers base, as well as expand the customer base.
Additionally, it has been decided that the test market is unnecessary. The research obtained from the market research firm hired, indicated positive interest in the aerosol can.
Conducting a test market would be costly up front, as well as in lost sales by delaying product introduction. The information gained from the research already in hand indicates that Parvaderm will at least break even if the 10-ounce aerosol can is introduced. While market acceptance of a new package is never guaranteed, it is extremely likely that the new package will be accepted.