Croft Industries Geng Cui Dept. of Marketing and Intn ’ l Business Lingnan University February, 2005.

Croft Industries

Geng Cui

Dept. of Marketing and Intn’l Business

Lingnan University

February, 2005

I. Problem DefinitionWhen Croft Industries, the price leader in

asphalt shingles, raised its price from $18/sf to $20/sf, the competitors did not follow, causing Croft's market share to decline by 20%.

In light of increasing competition, Croft Industries needs to determine its pricing strategy in the next year, to ensure its competitive viability and market leadership.

A Typical Residential House in North America

Asphalt ShinglesAsphalt shingles are currently the most popular type of residential roof material for a variety of reasons. They are relatively inexpensive, starting at around $0.80 per square foot installed and go up from there. Things that determine cost are geographical location, slope of the roof, height of the building, ease of access to the premises, complexity of the project, the particular type of shingle and numerous other factors. Asphalt shingles are very simple to install enabling many homeowners to do the work themselves. They come in a variety of colors and styles, are fairly durable (some have been tested and have achieved a class IV hail rating - the highest available!), and can be easily repaired and maintained.

WHAT ARE THEY?

Asphalt shingles come in two basic types: glass fiber (a.k.a. fiber glass) and organic. Organic shingles consist of an organic felt material which is generally paper saturated with asphalt to make it waterproof. A top coating of adhesive asphalt is then applied and the ceramic granules are then embedded. Organic shingles contain around 40% more asphalt per square (100 sq. ft.) than their glass fiber counterpart which makes them weigh more and gives them excellent durability and blow-off resistance.

II. Scenario AnalysisFirm Background and Strengths:

Regarded as having the highest quality in the marketAll major distributors in the region carry the company's product.No large competitors in the marketAll firms are local operatorsThus, cost of freight is lowMarket leader with 60% market share in 1989, and 40% in 1990

Market Environment:Mature market and mature productSlow economy, low housing startupConsumers tightening up beltDiscretionary re-roofingMarket sales volume decline 6% in 1989 and 17% in 1990Economic future uncertainMarket may be depressed for a few more years

Competitive Situation:Oligopoly situation: a few competitors selling the same product with some differentiationCroft's share 60%, and five competitors wit lower sharesCroft has been the price leader and market leader

Demand relationship: Typical: prices up, demand/sales do down

Some degree of elasticity

Dealers and installers control retail price

Why competitors have not followed Croft in raising the prices and leading to Croft’s market share to shrink?

Fear price increase will depress the market furtherFear of Croft's expansionChallenger A wants to be the price leaderChance to gain sales and market shareInstallers use parity pricing

Charge the same price for all shingles and keep the difference

Discretionary for reroofing that can be postponed:

$20*600 – 1000 sf = $12,000 – 20,000/roof

Lower consumer awareness and knowledge

The Price Cut Move -- Causes

Financial Analysis:Only the lowest cost can be the

price leader without lowering profit in the long run.Financial conditions of Croft and its five competitors in 1990Croft is the most profitable and yet not the most efficientCompetitors would be better off if they raised their prices as wellLowering their prices have not helped them since installers marked prices in parity with Croft.

Financial Analysis for Croft and Competitors

CROFT A B C D E

mkt share % 40% 0.14% 0.14% 0.11% 0.11% 0.04%

Volume in sf 500,000 200,000 190,000 150,000 150,000 60,000

unit price $20 $18 $18 $18 $18 $18

Sales $10,000,000 $3,600,000 $3,420,000 $2,700,000 $2,700,000 $1,080,000

Variable cost $7,000,000 $3,000,000 $2,945,000 $2,400,000 $2,400,000 $975,000

Contribution $3,000,000 600,000 $475,000.00 $300,000.00 $300,000.00 $105,000.00

fixed cost $1,750,000 $500,000 $475,000 $425,000 $425,000 $325,000

profit(loss) $1,250,000 $100,000 $0 ($125,000) ($125,000) ($220,000)

Var cost % $14/sf $15/sf $15.50/sf $16/sf $16/sf $16.25/sf

% fixed cost 0.18% 0.14% 0.14% 0.16% 0.16% 0.30%

Gross Margin 0.30% 0.17% 0.14% 0.11% 0.11% 0.10%

Net Margin 0.13% $0.03 0 N/A N/A N/A

Alternative Solutions and Implications

• 1) Further price reduction -- $18.00• pros: recoup market share, higher volumes,

drive unprofitable competitors out of the market

• cons: loss in profit• Would installers pass along the savings to

customers? No.

• 2) Keep the exiting price -- no change -- $20.00• pros: keep the same profit level• cons: lose the role of price leader, further

erosion of market share

• 3) Revert back and raise price -- $22.00• pros: higher profit• cons: lose more market share and price

leadership

Decision (Tree) Analysis

Croft's Pricing AlternativesKeep at $20/sf Reduce to $18/sf

Competitor Reaction Competitor ReactionCroft's Results Keep $18/sf Reduce b/l $18 Keep $18/sf Reduce b/l $18Sales Volume 360,000 360,000 600,000 300,000Price $20 $20 $18 $18Sales $7,200,000 $7,200,000 $10,800,000 $5,400,000Variable Cost $5,040,000 $5,040,000 $8,400,000 $4,200,000Contribution $2,160,000 $2,160,000 $2,400,000 $1,200,000Probability 90% 10% 90% 10%Results $2,160,000 $2,280,000

Recommendation and Justifications

Keep $20 for the time being: keep the healthy margin and profitmore capital for expansion and other projectsquality reputation will not be compromisedcompetition is weak and further retaliation unlikelyinstallers would not pass along savings

Risksdeclining sales and market sharelose the market leadership position

III. Marketing Plan and Programs

ObjectivesIncrease the market shareRegain the market share lost and the market leader positionImproving brand awareness and perceptionImproving dealer and installer relationshipPossible product innovation and differentiation

Marketing StrategiesPull strategy:

advertising directly to consumersImproving Croft brand awareness and perceptionemphasis on value and long-term quality

Push strategy: Develop a dealer and installer incentives program

Dealers should have the incentive to recommend Croft because of its lower prices.Limited quantity discount up to 5% (less than a dollar)free delivery

Marketing Programs I.Advertising to consumers (pull strategy)Awareness – Interest – Decision (AID)

Objective: education to improve awareness about the quality advantages of Croft shinglesContent: emphasize the value of Croft products, such as featuresRebate Coupon for choosing Croft

Time table: spring – summer: housing startSpring – fall: reroofing

Media plan: local newspaper, weekend 1/4 page with couponlocal TV: reminder ads

Marketing Programs II.Dealer and installer marketing:

Solidify quality perceptionPromote dealer and installer “loyalty”

Channel management Apply relationship marketing

Based on volumeBased on installed roofs

Create database to update accounts Devise a dealer/installer incentives program

Implementation I.Consumer AdvertisingTime table:

spring – summer: housing startSpring – fall: reroofting

Media plan: local newspaper, weekend 1/4 page with coupon, two weeks before high seasonEmphasizing features and benefitsFollowup with reminder ads in peak season

Implementation II.Create database to update accounts

Sales AnalysisBased on volumeBased on installed roofs

Apply relationship marketingCreate different levels of dealers/installers

Silver, Gold and Plantinum

Promote Croft as the Preferred Supplier – Win/Win

Devise a dealer/installer incentives programCumulative discountRecognitions

Promotion brochures to dealers/installersCertificates to dealers and installersEmphasize the quality and benefits of Croft productsSpecify the incentives based on volume and customersSpecify the next level of achievements and incentives

Evaluation and Control.Measure consumer awareness and perception

Week-after Ad and brand recall

Monitor dealer/installer statusMonitor sales and market share quarterlyRevise pricing or promotion if necessary

BudgetFor the newspaper ads:

Assuming $1000/weekFor 4 weeks per season: 3*4*1000=12,000

Monitor dealer/installer statusPrinting and mailing cost minimumExisting marketing staff will handle the implementation

Monitor sales and market share quarterlyRevise promotion if necessary

ForecastImproved awareness and perception of CroftGreater dealers/installer participation and more profitable relationshipsShould regain the market share and leadership by year end.

Thank you!