Contents
1. 2.
3.
4.
5. 6.
Abbreviations........................................................................................................................... 0 Introduction.......................................................................................................................... 1 Market Analysis ................................................................................................................... 1
2.1. Methodology................................................................................................................. 1
2.2. Industry ......................................................................................................................... 2
Market Entry ........................................................................................................................ 9
3.1. Marketing Strategy ....................................................................................................... 9
3.2. Marketing Mix ............................................................................................................ 12
3.3. Financials and Scenarios ............................................................................................ 17
Discussion .......................................................................................................................... 19
4.1. Recommendations ...................................................................................................... 19
4.2. Limitations.................................................................................................................. 19
References ................................................................................................................................ I Appendix............................................................................................................................ IV
Abbreviations
ICT..............................................Information and Communication Technology IoT...............................................Internet of Things IT.................................................Information Technology NPV............................................Net Present Value R&D............................................Research and Development SK................................................Slovakia
TKS..............................................Telekom Slovakia OECD...........................................Organization for Economic Co-operation and Development
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1. Introduction
The purpose of the present report is to provide a market entry strategy for Flatout’s Smart Home Solution into the Slovak market.
Flatout Technologies is a Viennese startup offering a Smart Home Solution to utilities and telecommunication companies. Flatout acts as a single point of contact for its clients, providing both the necessary software and the hardware.
As Slovak Telekom has shown interest in becoming a customer of Flatout, the present report shows a potential entry to the market. The report analyzes certain aspects from Flatout’s perspective, and others from Slovak Telekom’s point of view. This is due to the overall business model of B2B2C. Accordingly, Flatout provides the solution to Slovak Telekom, which in turn sells the Smart Home packages to individual users.
Starting with the analysis of the macroeconomic and competitive environments, the report details a market entry strategy for Flatout and Slovak Telekom. The go-to-market strategy includes three main pillars, namely marketing strategy, marketing mix and a financial and scenario analysis. A series of recommendations will be provided at the end of the analysis.
2. Market Analysis
The following chapter will briefly describe the methodology that was applied to assess the market potential of Slovakia. A detailed overview of the Smart Home industry in Slovakia will then be provided.
2.1. Methodology
In order to assess the market potential of Slovakia for Flatout and derive concrete suggestions for their market entry, both secondary and primary sources were used. Secondary sources, such as macroeconomic databases and industry reports were used for the analysis of the macroeconomic environment, the industry and competition. The market research conducted by Flatout was also integrated into the analysis. Furthermore, the Austrian Chamber of Commerce in Slovakia provided additional information on Slovak market specifics.
Smart Homes are a new product, not yet established on the Slovak market. Thus, it was hard to gather information about customer preferences from secondary sources. A survey was therefore conducted to find out more about expectations, needs and willingness to pay of Slovak customers. For the compilation of the questionnaire, the questions of a survey which Flatout had conducted
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in Austria were taken as a basis. The number of questions was reduced to 30 and translated into Slovak. The English version of the questionnaire can be found in Appendix I. The survey was physically distributed in major shopping centers in Bratislava and online, where it was posted in Slovak groups in the tech and home improvement area. In total, 124 responses were gathered for the analysis. 60% of respondents were women, 85% in the age group of below 35 years and 55% living in Bratislava. Despite the bias given by the young age of most respondents, the survey yielded valuable insights into Slovak consumer preferences, which could be used for deriving concrete recommendations for Flatout’s market entry.
2.2. Industry
A PESTLE analysis, set in relation with the findings derived from the survey, will be conducted in order to assess the Slovak macroeconomic environment. Furthermore, competitive dynamics will be analyzed along Porter’s Five Forces.
2.2.1. PESTLE Analysis and Survey Results
Political Dimension
Slovakia enjoys high political stability (MarketLine, 2014). In 2012, a New Energy Act was adopted as a means to achieve market liberalization and enhance customer rights (Schonherr, 2012). Slovakia is nonetheless confronted with a series of challenges, following the appointment of a one-party left orientation government in 2012. Consequently, the business environment has deteriorated severely in recent years. Changes in the labor code reduced employers’ freedom, while corporate taxes increased from 19% to 22% (IHS, 2014). Moreover, Slovakia faces widespread bribery and corruption (The PRS Group, 2013).
Economic Dimension
Except for a negative figure in 2009, the Slovak economy has consistently recorded positive growth (Eurostat, n.d.a; The PRS Group, 2013). However, the annual rate of expansion has slowed down in the last three years, due to the Euro crisis and subdued internal and external demand (MarketLine, 2014). A positive sign regarding economic recovery is conveyed by the declining inflation levels, which plummeted to 1.5% in 2013 (Eurostat, n.d.b). The decrease of inflation, doubled by a slight increase in real income and improved consumer confidence triggered a recovery in private consumption in 2014, after three years of decline (OECD, 2013;
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IHS, 2014). Notwithstanding, overall domestic demand remains low and the recovery in private consumption is contingent upon developments in the labor market (OECD, 2013).
Although wages follow a general upward trend, the yearly increase was only around 2-3%, between 2009 and 2013 (The PRS Group, 2013). Average wages reached a level of €887 in the last quarter of 2013 and correspondingly 52% of survey respondents appear to be in the €350- €1,400 income range (Statistical Office of the Slovak Republic, n.d.).
A study conducted by OECD reveals that Slovaks spend approximately 25% of their disposable income on housing expenditures, including rent, gas, electricity and water (OECD Better Life Index, n.d.). Electricity and gas expenses appear to take a high share of Slovaks’ budget. This becomes straightforward when comparing the increase of salaries and energy prices from 2010 to 2013. While wages registered an average increase of 7.18%, electricity and gas prices increased by 8.38% and respectively, 13.4% (Statistical Office of the Slovak Republic, n.d.; Eurostat, n.d.c; Eurostat, n.d.d). In total, energy prices appear to have grown by 15.9% during this 3 years interval (OECD, 2014). Furthermore, when adjusted for purchasing power parity, it seems that in 2011, Slovak consumers paid the highest prices for electricity within the EU (European Commission, 2012). This is also underlined by survey responses, where the majority of respondents (55%) showed a clear preference for Flatout’s Energy package.
Mobile phone and Internet subscription fees are also particularly expensive. The Network Readiness Index 2013 ranked Slovakia 113th out of 144 countries in terms of the affordability of ICT (Bilbao-Osorio et al., 2013). Survey results show that 48% of respondents pay a monthly subscription fee between €20 and €40.
The relatively slow development of wages, as well as high costs associated with gas, electricity and ICT portray an image of money-conscious consumers. In this regard, survey respondents (75%) cite prices as the major reason preventing them from investing in a Smart Home. Survey results also highlight the preference for a one-time fee (58%), as opposed to a monthly fee (42%), signaling consumers’ reluctance to increase monthly expenses. Finally, when asked about their willingness to pay for the various packages, most consumers indicated a clear preference for the lowest price range, respectively €100 - €150.
Social Dimension
Slovakia has a population of 5.49 million, 55% living in urban areas (MarketLine, 2014; The
PRS Group, 2013). According to Eurostat, 38.2% of the population is in the age group 25-49
(Eurostat, n.d.f). The population is well-educated and statistics show that 75% of Slovaks
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possesses computer skills (MarketLine, 2014; European Commission, 2013). In addition, the household ownership rate in Slovakia is very high, approximately 85% (Statistical Office of the Slovak Republic, 2013), which may indicate a higher willingness of people to make investments in improving their homes.
The consistently high unemployment levels represent a worrisome aspect though. Despite a slight improvement in Q4 of 2013, unemployment in Slovakia remains high, at a level of 14.2% (IHS, 2014; Eurostat, n.d.e). An interesting finding conveyed by the Gini coefficient (25.3%) is that income and wealth inequality in Slovakia is rather low compared to other OECD countries (MarketLine, 2014). However, there seems to be serious regional disparities within Slovakia, with poorer households concentrated in the East and high-income earners residing in the Bratislava region (OECD, 2012).
Technological Dimension
The ICT sector has rapidly grown in recent years (MarketLine, 2014). Nowadays, Slovakia is an attractive outsourcing center and has started developing a start-up and innovation ecosystem in the CEE region (Slovak Investment and Trade Development Agency, n.d.).
Slovakia possesses a well-developed ICT infrastructure (Bilbao-Osorio et al, 2013), favorable to the introduction of the Smart Home offer. Slovakia has one of the highest Internet penetration rates in CEE countries, reaching 80% of the population (MarketLine, 2014). Moreover, 79% of the population owned a personal computer in 2012 (International Telecommunication Unit, 2013). Slovakia also scores very highly in terms of the mobile penetration rate, respectively 120% (Sagmeister, 2014). Finally, 38% of the population had access to Internet via mobile devices in 2012, above the EU average of 36% (European Commission, 2013).
Those findings are also confirmed through survey results, where 91% of respondents own a smartphone, 78% have a tablet and 42% possess a notebook. As far as Internet access is concerned, 67% of respondents have access to Internet both at home and at work, while 51% have access to mobile Internet.
Legal Dimension
Intellectual property rights seem to be adequately enforced in Slovakia (Bilbao-Osorio et al., 2013). As far as data protection legislation is concerned, an important aspect to emphasize is that transfer of personal data is allowed in the European Union (BakerHostetler, 2014). Moreover, administrative burdens for complying with data protection legislation have been diminished,
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starting from April 2014 (Schonherr, 2014). However, the legal system generally seems to be slow, non-transparent and rather ineffective, leading to relatively poor law enforcement and a lack of transparency in various industries (The PRS Group, 2013).
A legal development of particular interest for Flatout concerns the introduction of smart meters, as of 2014. Electricity distributors are thus obliged to install smart meters in small companies and households with an annual electricity consumption of 4MWh. Distribution companies will financially support this project, the target being to achieve 80% market penetration by 2020 (Liptáková, 2014; Janíček et al., 2013).
Environmental Dimension
Slovakia has a varied portfolio of electricity generation, successfully reducing CO2 emissions in the past years (European Commission, 2011; World Energy, 2013). However, Slovakia remains a high energy and carbon intensive economy (OECD, 2011). This triggers a need to increase energy efficiency, by shifting focus from heavy industry to a more diversified production portfolio and reducing the energy consumption of buildings (World Energy, 2013).
2.2.2. Slovak Competitive Dynamics – Applying Porter’s Five Forces
Threat of New Entrants
The threat of new entrants comes mostly from the following companies: Gigaset Elements, AlertMe, Green Pocket & Qivicon, AT&T and Mios.
Gigaset Elements and AT&T sell directly to end users. Gigaset Elements does so via their online shop or third party vendors, such as Amazon and Cyberport. AT&T sells only through their online shop or in their outlets, but is present exclusively in the United States. Both companies, however, are planning to adapt their business model and are contacting European telecommunication and utility companies in order to offer white-label Smart Home solutions. From the two, AT&T constitutes the biggest threat, due to its large pools of resources and very good reviews from end users. However, the company lacks experience in the European market. AlertMe, Green Pocket & Qivicon and Mios have a very similar B2B business model to that of Flatout. Moreover, these companies are already cooperating with either large telecommunication or utility companies. In light of these aspects, threat of new entrants seems to be high.
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Bargaining Power of Buyers
Smart Homes are a new business, thus the range of choices for the end users is limited. At the moment, Slovak customers can either buy solutions online or they can turn to the only Slovak Smart Home solution provider, TapHome. However, the company has a very expensive solution, much above the level which can be afforded by the average Slovak customer. The solutions which can be purchased online are usually not appealing to consumers, due to the lack of support and general distrust towards new technology that does not include technical maintenance. Consequently, currently available solutions are expensive and consumers have a limited amount of disposable income, rendering their bargaining power medium (TapHome Offer, 2014).
Bargaining Power of Suppliers
From TKS’s perspective, their suppliers are the Smart Home solution providers, which act as a single point of contact between the telecommunication company and the hardware manufacturers. Suppliers can also be split into software and hardware providers. In both cases, their bargaining power is low, but for different reasons. As far as software is concerned, the smart home solution providers have an untested market and very similar products. Thus, they depend more on the approval of the telecommunication company, rather than the other way around. Hardware manufacturers on the other hand, are plentiful, thus the telecommunication company has more choices.
From Flatout’s point of view, their suppliers are the hardware manufacturers, which can be split in two categories: gateway and device manufacturers. As Flatout’s Smart Home Solution is hardware independent, the pool of suppliers becomes large, rendering their bargaining power low.
Threat of Substitutes
Thus far one possible local product substitute has been identified for Flatout’s Smart Home solution, namely TapHome. The company is based in Slovakia and offers wired Smart Home solutions, based on a customized offer designed after individual inquiries. Consequently, TapHome’s solutions are very expensive. Wired solutions are the basis for home automation. Although TapHome provides wired solutions with many features, after purchase, upgrading is limited. This is not the case with a cloud-based Smart Home Solution such as Flatout’s, where the devices can also learn from the user’s behavior. iNels and AvIntegra have also been identified as possible substitutes in the category home automation, but, just as TapHome, they are not in the smart home field and provide very expensive solutions. iNels and Avintegra are
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also not local companies, and have a handful of clients in Slovakia. Taking all of this into account, the threat of substitutions has been deemed to be medium.
Competitive Rivalry within the Industry
The home automation market in Slovakia is in development. The telecommunication companies and utilities seem to be slowly entering this market, although they need proper solution providers. These solution providers prove essential for making the transition from mere home automation to Smart Home. Companies such as TapHome, the only Slovak based home automation provider, are becoming outdated, as they have overcomplicated solutions at very high prices. All in all, the competitive rivalry is deemed to be low. In this context, Flatout can truly establish itself as a single point of contact for businesses entering the Smart Home market and thus take advantage of a first mover advantage.
2.2.3 Other Possible Clients for Flatout in Slovakia
Telecommunication Companies
In general the ICT market is very well developed in Slovakia with large IT companies, like IBM, DELL, HP or AT&T, having their Shared Service Centers in the country in so-called 'hot-spots'. The telecommunication sector is a triopoly, the major players being: Orange Slovensko (2.8 million users), Slovak Telekom (2.3 million users) and Telefonica Slovakia (1.4 million users). In 2012, the market shares looked as follows: 39.4% ST, 32% OS, 9% O2, 20% others (WKO, 2014). All three companies are owned by international conglomerates, namely Orange, T-Mobile Germany and Telefonica (Telecommunications Regulatory Authority of the Slovak Republic, 2014).
Slovak Telekom
Slovak Telekom has an offering of voice and data services through fixed and mobile networks. The network covers most of the territory of Slovakia. The firm is also the largest provider of broadband in the country. Slovak Telekom is a member of the Deutsche Telekom Group, which is the majority shareholder (51%). The Ministry of Economy of the Slovak Republic owns 34%, while the National Property Fund of the Slovak Republic owns the remaining 15% (Slovak Telekom Website, 2014).
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Orange Slovensko
Since 2012, Orange Slovensko has been providing its services under the Orange brand name, being 100% owned by Orange SA. The telecommunication company provides a complete offering of internet, digital TV, fixed phone lines to its customers (Orange, 2014). Orange already collaborated with Mios in 2013, when they entered the connected living market, using Poland as a test market. After this successful test phase, Orange France will launch their Intelligent Home product in France and re-launch it in Poland. Thus, a possible collaboration with Orange can be hindered by their partnership with Mios.
Telefonica Slovakia
Telefonica Slovakia started its operations in Slovakia in 2007. It is a subsidiary of Telefonica Czech Republic, part of the Spanish group Telefonica Europe. Offering mobile services under the O2 brand, Telefonica Slovakia has been voted the Operator of the Year five years in a row by Slovaks. Their reputation and customer focus would constitute an advantage for any smaller firm wanting to start a partnership with them. Being the youngest mobile operator in Slovakia, innovation would perfectly suit the O2 brand. Thus, a Smart Home product would possibly be a natural next offering. Besides Telekom Slovakia, a possible partner for Flatout would also be Telefonica and not only it Slovak subsidiary.
Electricity and Gas Providers
Electricity
Slovenska Elektrane (SE) is the main generation company, with a share of production close to 84%. The three distributors/suppliers are ZSE, VSE and SSE, which are partially owned (49%) by E.ON, RWE and EDF, with the remaining share being held by the Slovak government. The three companies source electricity on negotiated terms from SE, each having a regional distribution area. Recently, competition has started to develop between them for industrial and business customers. Supply licenses have also been awarded to 18 other companies. Several companies from the Czech Republic have entered the market, including CEZ, while suppliers are also able to source electricity from the Czech, Austrian and German wholesale markets. (European energy and electricity benchmarking, 2014)
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Gas
The gas market in Slovakia is characterized by high level of dependence on a single source (Russia) and the dominance of a predominantly state-owned vertically integrated company. Slovakia is also an important transit country for gas, its transmission network forming a significant part of the European gas network and representing an important route for transporting natural gas to the countries of Central and Western Europe.
Slovensky Plynarensky Priemysel (SPP) is currently entirely responsible for the supply of gas in Slovakia, importing gas on the basis of contracts with Russia’s Gazprom. SPP is also the owner of the transmission and distribution networks. Following the legal unbundling of the networks, access is available to other potential suppliers. However, so far there has been no penetration by other new entrants and therefore no customer switching. Approximately two-thirds of the gas consumed in Slovakia is by large industrial users and it is expected that this market will rapidly develop in the future. (European energy and electricity benchmarking, 2014)
3. Market Entry
The following section will deal more concretely with the introduction of Flatout’s product to Slovakia by TKS. It will offer recommendations regarding the marketing strategy, the concrete marketing mix and conclude with several financial scenarios.
3.1. Marketing Strategy
3.1.1. Segmentation
The market has been segmented according to demographic, behavioral and psychographic variables (Kotler and Armstrong, 2012). From a demographic perspective, Flatout product’s users are young working adults from urban areas, aged 19-44, with an above average income (€700-€1400).
The behavioral segmentation revealed that the main benefits sought by those customers are functionality, simplicity, savings and esthetics. Survey results further showed a high awareness rate, as 78% of respondents declared having heard about the Smart Home concept. However, respondents do not seem well informed about Smart Home offers, citing high prices (75%), privacy concerns (42%) and technical complexity (40%) as the main reasons preventing them from investing in Smart Homes. Moreover, customers appear to have an indifferent attitude
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towards the product, as 58% of survey respondents admit never thinking about buying a Smart Home solution.
According to the psychographic segmentation, Smart Home customers are curious and trendy people, with dynamic lifestyles and an appetite for novelty. These technology enthusiasts and active Internet users possess multiple gadgets and like being connected. Customers also exhibit a money-conscious attitude, referring to price considerations as their main concern.
Three customer segments have thus emerged. The first segment entails customers aged 19-24, predominantly students, with an income lower than €700. These customers seem to have the highest usage of smartphones and to be the most active users of mobile Internet from all groups. This segment is well-aware of Smart Homes and has the highest interest in controlling devices remotely. Since customers are highly interested in the Smart Home solution, but seem to lack financial resources, this group has been coined “Influencers”.
„Early Adopters” constitute the second group of customers. These are people with an age of 25- 34, working mostly in the private sector and having an income in the range €700 - €1400 (and even higher). This segment includes high Internet users, customers primarily browsing the web from home and work. Ownership of gadgets is high and an interesting observation concerns the large number of tablets, which may correlate with income levels. Finally, customers’ awareness is high, doubled by a great interest in controlling devices remotely.
The final group, „Early Majority” was the least represented group in the survey. Customers are aged 35-44 and seem to be either self-employed or working in the private sector. No clear observations could be derived regarding their income levels. These customers are active Internet users and have a good ownership of gadgets. Overall, there seems to be a good awareness of Smart Homes and a medium to high interest in controlling devices remotely.
3.1.2. Market Sizing
In addition to the qualitative description of the customer, a market sizing exercise was performed to better capture the potential of the Slovak market. The purpose of the analysis was to increase the scope and reliability of the market entry strategy, but not to determine the exact amount of Smart Home customers in Slovakia. Hence, the results have to be treated with great caution and only as an estimate. Values included in the calculation date back to 2012, as various sources of secondary information were used and it was impossible to obtain the desired level of analysis using 2013 data. The population of Slovakia was equal to 5,410,267 in 2012 (World Bank).
P a g e | 10 According to the Statistical Office of Slovak Republic, the average household size in Slovakia equaled 2.83. 55% of population lived in urban areas and 80% had access to Internet (World Bank). Median income of €6,927 yearly (Eurostat, 2012) was used as a cut-off point. The rationale behind the decision to deduct half of the households is that Smart Homes are not a commodity. Although the solution offered by Flatout is rather affordable (the price is going to be discussed later in the report), it has to be taken into account that only part of the entire population will be interested in it. Using the information presented above, 418,512 households were identified. Given 0.4% penetration rate in 2012 (ProQuest, 2013) and the assumption that the penetration is going to increase by 1.1% on a yearly basis (ProQuest, 2013), the corresponding percentage of households was deducted from the above mentioned number in order to account for the fact that some individuals might already have a Smart Home solution implemented. Although the penetration rate suggested by the Smart Home penetration report is an average for the entire European Union, it was taken as a proxy for Slovakia, as no better data was found. Finally, 407,718 households were identified as potential users of Flatout’s Smart Home Solution.
3.1.3. Targeting
TKS should focus its efforts firstly on the “Early Adopters” segment, as these customers have an elevated interest in Smart Homes, doubled by high purchasing power. In the beginning, the company should target its key customer segment with the Energy package and introduce products in Bratislava stores, where purchasing power is highest. The company would thus pursue a niche strategy, consistent with what the theory identified as the best approach for companies introducing new products (Kotler and Armstrong, 2012). However, special mention should be made of the commonalities between the three customer groups, as survey results reveal a shared interest in saving and controlling energy, changing room temperature and controlling lights. By introducing the Energy package, the company could thus reach the highest number of customers.
3.1.4. Differentiation and Positioning
Flatout’s main points of differentiation are the possibility to expand functionality through Apps, interoperability and competitive pricing. Special mention should also be made of the user- friendly, beautifully designed software interface and the minimalistic design of devices. As highlighted by the survey, these criteria correspond to what customers appreciate the most when
P a g e | 11 considering buying a Smart Home: functionality, price, design and simplicity. Accordingly, the company should pursue a “good value for money” positioning strategy.
3.2. Marketing Mix
3.2.1. Product
TKS should firstly introduce the Energy Package, as survey results emphasize respondents’ clear preference for this package (55%). Moreover, macroeconomic research indicates a unique opportunity for the company to address the issue of high energy expenses, by allowing energy monitoring and saving. At a later stage, the company could diversify into the Security package, ranked second in terms of customers’ preferences (40%).
The starter package entails three pillars: base, devices and software. The base includes either a gateway or a Z-Wave USB Dongle and router. As far as devices are concerned, the underlying rationale is to offer plug and play devices only, empowering customers to take control over the installation process and gradually discover the advantages offered by Smart Homes. Three devices will thus be included in the starter package: switch, dimmer and multi sensor.
Two add-on packages focusing on heating and electricity will be offered as an upgrade alternative. The devices offered in these packages should be limited to avoid confusing consumers and prevent logistical complications. As far as the Heating add-on package is concerned, survey results show that changing room temperature was constantly rated by consumers among their three preferred features. Moreover, it seems that people interested in the Energy package prefer the thermostat as an add-on. The Heating add-on package will thus include a thermostat and a gas reader. In terms of the Electricity add-on package, the higher prices for electricity than gas on the Slovak market could indicate a potentially higher demand for this package (American Chamber of Commerce in the Slovak Republic, 2013). The devices offered in the Electricity add-on include a wall plug, a smart strip and an energy meter.
The add-on approach presents various advantages. Consumers could gradually build their Smart Homes by spreading investments over a longer period of time and adding devices to their Smart Homes at any point, without incurring hidden fees. Another advantage concerns the high flexibility, as consumers could buy as many devices from the add-on packages as needed. From TKS’s perspective, an important aspect to emphasize is that add-on devices are more complex, in most cases requiring technical installation. Add-on packages could thus provide an additional stream of revenues, giving work to field services. By continuously advising clients in the
P a g e | 12 decision process and offering support in installation, TKS could also establish a closer, long-term relationship with customers. Finally, the add-on approach could serve as a means to inform customers about the wide range of opportunities entailed by the Smart Home concept.
3.2.2. Promotion
Merchandise
The main selling points of the product are: low price, interoperability, plug-&-play and customization. Competitive offerings being very expensive and difficult to install, it is recommended to emphasize Flatout’s affordable price and easy installation. As the starter package will focus on energy, another key benefit is the energy optimization, by monitoring and eventually reducing energy.
Market
The households to be targeted at first are urban, customers belonging to the “Early Adopters” segment. The campaign will focus on ‘simplifying one’s life’, by creating a comfort zone in one’s home.
Motive
The motive should emphasize why TKS’s product is better than that of competitors. The main reasons to be emphasized in this case are: PRICE – SIMPLICITY – SAVINGS. The customers can ‘manufacture’ and ‘customize’ their own home, so even though each starter kit is the same, the end user can adjust functionality individually through the add-on packages.
Media
A pilot project with 50 households is recommended as a starting point, based on a contest. The pilot project will be made exclusive, yet TKS will be able to gather information from users, which will benefit both Flatout and TKS when rolling out the product. The competition will be carried out on Facebook where people will be able to sign up until a specific number (200-500) and 50 will be selected to be part of the project. The pilot project allows gathering information through a small questionnaire about the reasons users signed up, while also enabling to monitor customers’ usage patterns after they received the starter packages and devices.
It is moreover recommended to employ gamification strategies. For example, when buying a starter kit, the end user receives a list of possible add-on devices and a form with stickers, which allows them to mark the devices they buy with certain stickers. When they fill the entire sheet
P a g e | 13 with stickers, one for each possible device, they can win a smartphone to be able to control their home, or another starter kit.
For the roll-out, the first recommended channel is zoznam.sk (Zoznam Portal, 2014), the portal owned by TKS, where they can target ads to potential end users. This channel would be accompanied by a Google AdWords campaign to target users who are in the target group and who have either visited this portal or have accessed TKS’s general website.
Even though the starter kit devices are plug-&-play, short installation videos should be made available on the TKS YouTube channel, in which the installation of each device is briefly explained. These videos can then be shared on social media. The videos will have an interactive feature, where the video stops right before the person pulls out one of the devices from the package, and the viewer can then click which device is going to be installed.
For offline marketing, the product will be installed in several stores in Bratislava, but specifically in TKS’s flagship store, where users can try it out and interact with it. In accordance, the staff would have to be properly trained to be able to answer customers’ questions. The endorsement of a celebrity ambassador, whose house is automated, is also highly suggested. This celebrity ambassador would speak about the benefits of the product and how it positively impacted their life. The campaign could also involve the automation of certain cinemas with a QR/bar code with access to the controls. The first person to scan it and take over control wins a starter package. Furthermore, TV, radio and online advertising with pay per click ads would also be employed. The minimum monthly budget is €260,000 for a run of 30 days, out of which 10 working days and 9 weekend days. The ads will run twice each Saturday and Sunday and each day on the radio. As the commercial will add extra costs, it will not run on each week day. The viewership and the rating levels during weekend days are higher, thus the ad will run twice during these days (WKO, 2014). The budget is based on the prices of the ad spaces of the main five TV channels in Slovakia, which are Channel 1 and 2 of RTVS and the three channels of JOJ Media Channel (WKO, 2014). Moreover, the three main Radio Channels available in Bratislava, which are included in the analysis are FM, Regina and Patria (WKO, 2014).
Measurement
Each idea from the campaign must have a specific budget and should be measured with the proper analytical tools. Constant follow-ups are essential and the campaign’s efficiency needs to be measured periodically, for instance monthly. The measurement tools will first of all include website (for example introduce a heat map to visualize the most clicked areas of the pages and
P a g e | 14 the most frequently accessed content) and social media tracking, as well as user engagement (number of re-shares, number of mentions online). TV ratings on channels will also be compared to assess the best channels to advertise on. Finally, price per possible customer across the platforms will be computed (each gained click or website visit costs TKS money, thus the investment per each channels is adjusted accordingly).
Message
Even though the product is being sold through TKS, it has been developed by Flatout, thus the core message stays the same as the company’s vision: ‘Connect things, simplify life’. The message can be easily integrated into TKS’s current image of connecting people, being flexible and allowing the end users to customize the products they purchase from the telecommunication company. The message should be clearly communicated and it should be consistent through all the various channels. The main message has certain key points and it is recommended that these key points should be conveyed by a specific channel. For example, Youtube interactivity could be used to communicate flexibility, while the pilot project feedback could communicate ease of installation.
3.2.3. Place
Flatout’s Smart Home products will be distributed through the established channels of TKS. Those are the stores owned by TKS as well as partner stores and the companies’ website. After the pilot phase is completed, products will be sold through all of TKS channels.
Distribution through TKS stores
During the pilot phase, Flatout’s products will only be sold in the most frequented TKS stores in Bratislava. This way, the roll out in the next stores can be adapted to the experiences and findings during the pilot phase. During both the pilot and the roll out phase, special attention has to be paid to appropriately training the sales force. Furthermore, marketing activities have to be conducted at the point of sale to spike customers’ interest and educate them about the products.
Online Distribution
The online distribution of Flatout’s products should be started at the same time as the piloting phase of the physical distribution. The website should be used as an education center about the devices and different use cases. This should be done through videos (links to the TKS Youtube channel) and easy-to-understand written explanations. The website should furthermore provide a
P a g e | 15 forum for customers to post questions and share experiences, which should be maintained by an expert of TKS. Additionally, TKS has to clearly state which devices are not plug-and-play and offer installation services for them. Installation services should also be available to all online customers (at a price premium) if they wish so.
3.2.4. Price
For the derivation of pricing suggestions for Flatout’s products in Slovakia, a market based pricing approach was taken. Market based pricing is linked to customers’ willingness to pay, which is the most viable approach in the short term. In the longer term, a value based pricing system, which requires defining a clear value proposition is advisable (Frost & Sullivan, 2013). Given the newness of the concept of Smart Homes, customers are unlikely to fully understand its value yet, which is why the following recommendations will only focus on market based pricing. The pricing of Flatout’s products was split into firstly, a one-time fee for the starter- as well as the add-on packages and secondly, a monthly fee. The monthly fee serves as a regular revenue stream for both Flatout and TKS and covers regular software updates and functionality expansions when customers add new devices to their homes. The fee does not increase when devices are added in order to prevent unpleasant surprises for the customer. The recommendation and reasoning for both price categories will be elaborated on in the following.
Monthly Fee
For the market based pricing of the monthly fee, it was first inquired what customers would expect to pay for a Smart Home and second, what they could realistically afford. Customer expectations were directly tested in the survey. 75% of respondents indicated an expectation of above €20, 50% even above €50 (n=78). Those expectations however, cannot directly be translated into pricing opportunities and have to be treated with caution for two reasons. Firstly, customers’ price expectation does not equal their willingness to pay. Secondly, customers are subject to a high price bias due to current expensive Smart Home offerings on the market. This conclusion leads to the second pricing consideration, which aims at testing affordability. For testing what customers could potentially afford on a monthly basis, a benchmarking of smart phone tariffs in Slovakia was conducted. The rationale behind this benchmarking was the fact that the Smart Home fee will be charged on top of the fee customers already pay for their phones. The smart phone tariff is a representative proxy for the monthly fee because firstly, a Smart
P a g e | 16 Home yields the most value when its owner possesses a smart phone and secondly the Smart Home will be sold by a telecom provider (in Flatout’s case TKS), putting it into a comparable product category. From the survey as well as the benchmarking of tariffs, it could be concluded that the typical Slovak in Flatout’s target group pays around €30 to €40 in mobile phone fees. This finding leads to two conclusions. First, customers are used to high monthly communication fees, which is why a high price will not take them by surprise. Secondly however, since the Smart Home fee will be charged on-top, it has to be substantially lower than the phone fee for customers to be able and willing to afford it. Those findings lead to the conclusion that TKS should not charge customers a price of above €10, as setting it in relation with the Smart Home fees, a third of the monthly phone fee on top seems to be the cut-off line of reasonability. How this fee impacts the overall profit of TKS and Flatout will be analyzed in chapter 3.3.
Starter and Add-On Packages
For the pricing of the starter package, the survey tested customer’s willingness to pay for the different options of packages (energy, security and comfort). 84% of respondents indicated a willingness to pay between €100 to €150 for both the energy and the comfort package. For the security package, willingness to pay was slightly higher, with only 70% between €100 and €150 (n=91). Those findings lead to two recommendations. Firstly, pricing the starter package at around €150 is feasible as it matches customers’ willingness to pay. Secondly, since it already was established that the first starter package to be introduced on the market will be the energy package, the higher willingness to pay for security leads to the suggestion to introduce it in the next step.
The prices for the add-on packages will be based on the cost for the hardware on which both Flatout and TKS will add a margin which seems appropriate for them (approx. 5-10%).
3.3. Financials and Scenarios
As a final part of the market entry strategy, a scenario analysis was performed. In order to determine whether the assumptions that were made about the market and the price are enough for Flatout to be profitable, a break-even and NPV calculation was conducted. The cost structure was provided by the CFO of Flatout. Since the total costs relate to Flatout’s sales in all markets that the company expects to enter, they were adjusted to represent the share of sales that occur in Slovakia. The projections include assumptions about units sold, package price and the monthly
P a g e | 17 fee. All assumptions were drawn based on survey results, pricing analysis and Flatout’s preferences. Although they remain in line with our analysis, it is crucial to remember that Flatout is a start-up, which has not proven its business model yet. Moreover, given the fact that the Smart Home industry is young and direct competitors in the European market are very limited in number, it is rather difficult to establish a reliable proxy for the number of units sold and the growth rate. Hence, it is suggested to treat the entire exercise as an estimate and not a verified model. Nevertheless, the analysis is a good indicator for the potential profitability of Flatout and therefore yields great value for the company.
The sensitivity analysis shows how the break-even point moves when two main sources of revenue, i.e. margin on package price and the monthly fee, are changed. Flatout, having the privilege of being a single point of sales for Telekom Slovakia, is planning on selling the devices with a 5-10% margin. Additionally, its main source of income will be the share of monthly fee from each subscription. Flatout is most likely going to charge €2.5 for each subscription. However, a final decision has not been made yet. Hence, how the change of monthly fee from €1.5 to €4 a month is going to affect the break-even point was chosen for examination. The starter package price and an average price of an add-on from a long list of potential additional devices were used for analysis. The results are summarized in the table below.
Table 1: Financial Scenarios
As the table above suggests, all scenarios yielded a positive Net Present Value and Flatout is expected to break-even rather quickly. It is not a far-fetched assumption, as technology start-ups tend to be profitable early after inception (Oviatt and McDougall, 2005). Moreover, Flatout will most likely enjoy a first-mover advantage in Slovakia, as its solution is very innovative and sold at competitive prices. The incremental nature of variable costs and the exponentially growing revenues (resulting from the subscriptions that generate revenues for several months) cause the profits to rise on an exponential basis. The break-even time is most sensitive to changes in the share of monthly fee required by Flatout and is the main component of the revenues.
P a g e | 18 Margin Subscription Break-even quantity (units) Break-even time Scenario 1 5% €2.5 1,412 Dec. 2015 Scenario 2 10% €2.5 877 Jul. 2015 Scenario 3 10% €1.5 1,787 Mar. 2016 Scenario 4 10% €4.0 691 May 2015 4. Discussion
4.1. Recommendations
For the summary of the above analysis, recommendations to Telekom Slovakia, the company actually introducing the product, will be given. The company should introduce the Energy Efficiency starter package, as well as two add-on packages focusing on Heating and Electricity. As the product offer is rather new on the Slovak market, the company should focus its promotion efforts mostly on increasing customer awareness and educating its potential clientele. Equally important is to generate customer enthusiasm through promotional tools such as contests, automating flagship stores, celebrity endorsements or gamification strategies. As far as pricing is concerned, starter packages should be positioned in the €100-€150 price range, while a monthly subscription fee of less than €10 should be charged. The Smart Home solution should be initially introduced in selected TKS stores in Bratislava. In parallel, the offer should be made available nationally through TKS’ website, which will also serve as a customer education center.
On a longer-term perspective, TKS should introduce its Smart Home products in other big cities in Slovakia. A possible date in this regard would be June 2015, when it is expected that TKS has generated sufficient product interest on a national level. Finally, the security package should be considered a viable diversification option in the future, as survey results indicate the security package ranks second in terms of customer preferences. The Security package should also trigger a change in the company’s positioning strategy. Therefore, this package should be positioned as an upper-class product, in line with customers’ higher willingness to pay.
4.2. Limitations
Although the entire analysis has been carried out with great caution and it brings value added to the company, it has to be taken into account that the market entry strategy that is proposed is not free from limitations. Hence, the biggest of them are acknowledged in the following.
First of all, the survey results are a good representative sample only to a certain extent. Not all customer groups were well-represented throughout the survey. A bigger sample would have been better to capture the customer profile and preferences, although 124 responses are statistically valid. Furthermore, the definition of Smart Home might have been confusing for some of the respondents. Despite the fact that the description of the product was included in the survey, some of the customers still claimed to possess a Smart Home solution, even if for them it meant having a remote for their gates or garage doors. Additionally, the price preferences might have been
P a g e | 19 structured differently, as the price range choices started with €100-150 and typically the respondents tend to choose the lowest option. Hence, the willingness to pay assumption was confirmed by the major part of the survey participants however it is not clear how many of them chose this option simply because it represented the lowest price. Last but not least, it has not been examined by the survey whether respondents declared to be interested in the Energy Package because of their willingness to save, or whether the decision was dictated by other reasons (e.g. environmental friendliness). The causality was thus assumed.
Second, it has to be stressed that the financial analysis is a result of several underlying assumptions. In order to calculate the break-even point costs, units sold, preferences for starter package and add-ons, as well as growth rate had to be assumed. Given the fact that there is very limited data on direct competitors and the industry’s growth, an attempt was made to establish a base for analysis. The Smart Home industry has an enormous potential and is definitely going to grow on a fast pace within the upcoming years, thus it is assumed that the break-even quantities and times included in our analysis, although not 100% accurate, are a good estimate. Nevertheless, the underlying assumptions are strong and likely to vary, which has to be kept in mind when interpreting the results. P a g e | 20
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