DYNAMIC 6

2010

Zeus Textiles Ltd Case Study

Cassy Murphy: A00788566

Jerry Chen: A00760057

Lisa Debi: A00759101

Marisa Forsythe: A00791901

Ryota Niitsuma: A00786356

Willie Chik: A00773580

M K T G S E T E , G R O U P D , A N N E M A R I E W E B B H U G H E S , M K T G 1 1 0 2

Table of Contents

Introduction ............................................................................................................... 3

Problem ..................................................................................................................... 4

Facts .......................................................................................................................... 4

Assumptions .............................................................................................................. 4

Research .................................................................................................................... 4

SWOT ......................................................................................................................... 6

Competitive Analysis .................................................................................................. 8

Target Market ............................................................................................................ 8 Geographic ................................................................................................................................................................... 8 Psychographics ............................................................................................................................................................ 8 Buying Behaviour ........................................................................................................................................................ 9

Alternative 1: Value Based ........................................................................................ 10 Advantages ................................................................................................................................................................ 10 Disadvantages ........................................................................................................................................................... 10

Alternative 2: Cost Based .......................................................................................... 10 Advantages ................................................................................................................................................................ 11 Disadvantages ........................................................................................................................................................... 11

Alternative 3: Price Skimming ................................................................................... 12 Advantages ................................................................................................................................................................ 12 Disadvantages ........................................................................................................................................................... 12

Solution ................................................................................................................... 13 The 5 Cs ....................................................................................................................................................................... 13

Consumers ..................................................................................................................................................................... 13 Competition .................................................................................................................................................................. 13 Channel members ...................................................................................................................................................... 14 Company objectives .................................................................................................................................................. 14 Costs ................................................................................................................................................................................. 14

Plan of Action: Step-by-Step ..................................................................................... 15

Contingency Plan ...................................................................................................... 16

Course Concepts ....................................................................................................... 17

Appendix .................................................................................................................. 20

Bibliography ............................................................................................................. 24

Introduction Zeus Textiles Ltd is a Canadian speciality textile and yarn manufacturer which focuses its sales in

the business to business sector, with an emphasis on commercial and industrial use. Zeus

Textiles Ltd has recently received a request for proposal from an important airline that is looking

to replace their current textiles. The airline requested a product with a long service life able to

withstand daily use and aesthetically pleasing options. Zeus Textiles Ltd devolved an innovative

product called Aerotex to meet the needs of the airline. Zeus Textiles Ltd now has the task of

deciding on a pricing strategy that will help finalize this business-to-business transaction. The

pricing strategy will be assessed with business growth strategies in mind. Although Aerotex was

tailored for the specific airline company described in the case, it will be on the market to all

customers once it is priced. Different options for pricing strategies, along with their tactics,

benefits, and disadvantages, will be reviewed in this case study.

Problem What pricing strategy should Zeus Textiles Ltd apply to Aerotex in order to achieve a 5-10% net profit?

Facts An airline customer has expressed a dissatisfaction of their current coverings. He has requested a

product with a longer service life, the ability to withstand normal traffic on their planes that is

aesthetically appealing, and competitive in price. Zeus Textiles Ltd has created called Aerotex, which

fully meets the needs of the airline. Aerotex has a service life of 10 years; it is durable and will withstand

the regular traffic on planes. Also, it comes in a multitude of colours. Aerotex is a flexible fabric that is

made with a bamboo fiber core and an innovated techno fabric is cemented on top. The cost of

manufacturing the product is relatively high considering it is a new product and is made of raw materials

(see: Formulas in Appendix).

Assumptions We are under the assumption that Zeus Textiles Ltd sells their products across North America and are

competing in a competitive market. We also believe that the raw materials are delivered from across

North America. Orders for Aerotex must be placed in advance to ensure production is underway in order

to deliver on time. Additionally, we are under the assumption that Aerotex is reviewing different pricing

strategies while keeping growth strategies such as market development and market penetration in

mind.

Research Zeus Textiles Ltd is competing in a competitive market; their product is new which puts them in a

vulnerable position. According to the graphs in the Appendix, we know that Zeus Textiles Ltd is

competing with growing companies who are increasing their net income each year. With their new

product Aerotex, Zeus Textiles Ltd is in a very good position to make a net profit increase of 5-10%. They

need to price their innovated product effectively in order to keep up with and surpass their competitors.

If they do not price appropriately, Zeus Textiles Ltd will lose revenue and an opportunity for their

company to grow.

SWOT

External Internal

Opportunities Strengths

Rise in demand for green materials

Aerotex can suit a multitude of indoor

environments, which can lead to market

expansion in retail, residential, hotel, and

other transportation industries.

Partnerships with bigger companies,

expanding distribution.

A strong internal product development

group capable of creating a product

(Aerotex) that no competitors have yet to

match.

Product development has the power to

reject materials deemed unacceptable,

which maintains a high quality standard.

Raw materials are produced in an adjacent

building, eliminating transportation costs

and shortening the channel of distribution.

No profit is included in inter-divisional

finished goods transactions.

Business is very personalized. With a

successful track record, clients maintain a

strong loyal relationship and come back as

repeat customers.

External Internal

Threats Weaknesses

Cheaper alternatives and faster production

time offered by competitors

Competitors can quickly duplicate Aerotex

after it's entry into the market.

There is potential for legal disputes if

Aerotex has undiscovered safety hazards.

Economic downturn decreases spending,

slowing down overall business.

There are production limits. It is calculated

that a maximum of only 77% optimum

capacity can be achieved, declining the

potential production of 2589m2 to 2000m2

per month.

Lead time on materials can be as long as two

weeks. Clients may want it faster than that.

Current clients are dissatisfied with the

current product due to its short service life.

Lack of pre-existing manufacturing machines

means new, expensive purchases must be

made before the production of Aerotex can

begin

Product is new and has not undergone

extensive testing, so there is a possibility of

a product recall due to safety concerns.

Competitive Analysis As a result of the major recession in 2008, the drop in profit margin during this year can be disregarded.

Prior to the recession, Mohawk's profit margin ranged from 5% to 10%. We chose this percentage range

of marginal profit for our problem and objective because we believe Zeus Textiles Ltd should directly

reflect the same profit margin as their competitors. We can assume that their profit margins in 2009 and

2010 are relatively close to 5%-10%. (See: Figure 1 in Appendix)

Target Market Demographic

Currently, Zeus Textiles Ltd functions mainly in the business-to-business sector. This means that they

are targeting businesses that are in need of textiles for commercial and industrial use. Zeus Textiles Ltd

targets a wide range of businesses such as hospitals, contractors, and schools. They are able to meet the

needs of this wide range of customers because of their seemingly unlimited options and customization

features. In this case specifically, Zeus Textiles Ltd has recently received a request for proposal from an

important airline company. This airline operates a fleet of passenger jets, which are used by both

private and commercial customers.

Geographic Business is concentrated mainly in North America, however the opportunity to expand into global

markets is viable.

Psychographics As highlighted in the case, Zeus Textiles Ltd is able to position themselves to environmentally conscious

businesses that seek products made from renewable sources. This target market also includes

businesses that value high quality fabrics and a variety of customizable design options.

Buying Behavior Quality is important to Zeus Textiles Ltd’s customers. They seek products that are durable, maintainable,

and easy to keep clean. Zeus Textiles Ltd encourages customers to change the designs of their fabrics

often in order to keep up with current trends while maintaining a focus on preserving customer loyalty

and satisfaction.

Alternative 1: Value Based The value-based pricing strategy is centered on customer orientation and the overall value of a product

as perceived by the customer. In this alternative, finding the price through the improvement value

method is ideal. Improvement value is determined by comparing Aerotex to the current panel product.

A major discrepancy between the two is durability, an important value to many consumers. While the

current panel product has an average lifespan of 2 years, it is fitting to say that Aerotex is 4 to 5 times

more valuable with an extended average lifespan of 10 years. So, since the current panel is valued at

$11.50 per m2, we multiply that by an estimated 4.5, and get $51.75 as the appropriate price.

Advantages When comparing Aerotex to inferior products on the market, it is presented in a positive and

enhanced manner

It is simple to justify a price to a customer by comparing it to a similar product. This price

rationale can be easily communicated to foreign markets as well

The more you improve the product, the higher the price you are capable of charging

Disadvantages Customers have differing determinant attributes and varying views of improvement values

High currency rates in foreign markets can deflate an initial high value-based pricing

If new, similar products are released rapidly, improvement value comparisons might have to be

constantly updated.

Alternative 2: Cost Based Using a cost-based pricing method, price is determined by taking the total cost of producing a product

and applying a net profit to it. For Zeus Textiles Ltd, we set the net profit at 7.5% with an estimate of 500

m2 sold per month. This would equate to a price of $25.33 per m2. This sales oriented pricing

alternative especially appeals to customers that buy the products in large quantities. Zeus Textiles Ltd

can further enhance this appeal by offering a cumulative quantity discount to customers and in turn,

sustain loyal business relationships.

Advantages A lower selling price can attract big commercial businesses looking to buy in large quantities

Lower prices can lead to lower taxes/tariffs if the product is exported to other countries

Prices are determined quickly and consistently by unit basis

Disadvantages Cost-based method does not take competitors’ and customers’ price perception into account

Adopting a lower price point can leave Aerotex to be perceived as an inferior or lower quality

product by customers

Foreign transactions must be recalculated with new costs (shipping, taxes, packaging, etc.)

Alternative 3: Price Skimming Zeus Textiles Ltd should set the initial price of Aerotex relatively high, especially in comparison to the

price offered in our cost-based alternative. In this case, we decided through the price skimming method

that a reasonable price point is around $80 - $100 per m2. By doing so, value is created in regards to the

product's quality. Because this is a new product, any major costs that come along with creating a

customizable product should be covered. Considering that the product is expensive, allowances can also

be applicable in order to allow the company to invest in advertising. If net profits are as high as

expected, opportunities for market development will become more appealing to global customers as

delivery costs could be lowered in lieu of the higher price. This alternative should focus on successful

market penetration, specifically targeting businesses that are interested in buying luxury materials.

Advantages

High price point will build brand equity and create a brand image of luxury, quality, value and

originality

High price point means a possibility for high net profits, which open many doors for the company in

terms of delivery, different discount strategies, etc.

The break-even point is much easier to achieve, meaning they can produce small quantities and still

generate net net profits without the fixed cost weighing it down.

Disadvantages

Possibility of price discrimination exists

Success with higher prices might encourage more competition from competitors

Limited target segments could subsequently limit Aerotex's potential revenue

Solution As a solution for Zeus Textiles Ltd, we have decided to choose alternative 3, Price Skimming. Aerotex is

a new product and it is currently in the introduction stage of the product life cycle. This means that the

product is just entering the market and its image is still being established. Setting an initially high price

will create value and consumers will perceive Aerotex to be of high quality. The high price will not only

cover the cost of production, but also the customization for each client and promotions such as

advertising.

The 5 Cs

Consumers Consumers will receive a product of high quality with the option of customization to meet their varying

needs. The demand for Aerotex is inelastic, which means small changes in price will not affect the

demand. Aerotex is a unique product with no close substitutes.

Competition The high price will discourage competitors from entering the market. However, as Aerotex enters the

growth and maturity stages of the product life cycle, the price of Aerotex will decrease and competitors

may enter the market with similar products.

Channel members Zeus Textiles Ltd operates mainly in the business-to-business sector; therefore price skimming will not

have a large effect on channel members. Business will continue to run as normal. With price skimming,

Zeus Textiles Ltd has the option of targeting a larger market by expanding globally and reaching areas

such as Asia and Europe that currently dominate the textiles industry (refer to Target Market).

Company objectives Zeus Textiles Ltd's main objective is to effectively price Aerotex to achieve a 5 -10% net profit. This can

be easily achieved by using price skimming and setting the initial price at around $80 to $100 USD.

Costs Price skimming will allow Zeus Textiles Ltd. to not only cover costs of production but have additional

profits. The profits could be then used for promoting Aerotex, or developing additional products. Setting

an initially high price will also help to cover distribution costs, making it easier for Zeus Textiles Ltd to

expand and sell Aerotex globally.

Plan of Action: Step-by-Step Set price of Aerotex at $80 to $100 per square meter

Implement the following discount strategies:

o Quantity-based discount, 10% off for 100 m2 and 30% off for 500 m2

Allowances, trade current low cost textiles for high cost advertisements

Expand target market by allowing global distribution

Focus on other parts of the world such as Asia and Europe

Create an online e-store/category

Opening an online e-store would open many new opportunities for advertisement

Increase product depth and product breadth

Price increases accordingly with more customization

Different products for different industries ie. Hotels and Malls etc.

Brand the product as luxurious and top tier, while marketing its image with the premise that the

benefits outweigh the higher price of the product

Contingency Plan If our solution of price skimming turns out to not be successful, we have decided Zeus Textiles Ltd can

fall back on the value-based alternative. It is more conservatively priced, so it is less risky for them and

more realistic for many target markets. Using the value-based method will increase the number of

target markets as it will appeal to a broader range in the diffusion of innovation. While using the value-

based pricing system, Zeus will make a net profit that will cover the costs of production. Although, the

net profits from a price skimming system would bring in a substantially higher net profit, which is why

we originally chose it.

Course Concepts

Term How we used it

Demographic By assessing the target market (B2B) and establishing exactly who the

demographics are in this particular case, we are able to build on the current

demographics and possibly expand them within our alternatives

Geographic We know that Zeus Textiles Ltd. is producing their products (including Aerotex) in

Canada and we’ve assumed they are distributing them across North America. By

establishing what regions the company is working within, we can figure out how to

properly distribute Aerotex and form a general consensus of what North American

companies are looking for

Psychographic The case presented an issue with Zeus Textiles’ current product. The problem

allowed us to see what a particular company was dissatisfied with and what their

new expectations were. Traits of psychographics include renewable resources,

ability to withstand everyday traffic, and high quality. These allow us to determine

the kind of value and expectations the consumer holds to a particular product

Buying Behaviour By documenting a particular pattern of buying behavior, we can establish how

companies think about buying. In this case, we are able to use the terms above to

help us determine what different companies are expecting and how they decide

they want to purchase things. This enables Zeus Textiles to keep up with the

growing trends

SWOT Analysis Used to help assess the internal and external environmental factors that affect a

business. It is specifically useful for determining which alternative would be the

most beneficial for Zeus Textiles and where they would earn the most efficient

profit

Comparative Analysis We used comparative analysis to decide which pricing strategy would work best in

such a large geographic. This way, we could see successful companies and their

pricing strategies

Pricing Tactics:

Business-to-Business (B2B)

Zeus Textiles Ltd sells their products to other large firms – such as hotels, airlines,

and contracting companies for condominiums. It allowed us to establish who we

are setting the pricing for

Pricing Strategies:

Value-Based Methods

In alternative 1, we used this strategy to formulate a pricing tactic to show the

customers the overall value of the product

Pricing Strategies:

Cost-Based Methods

In alternative 2, we used this strategy as a way to show the customers the actual

cost. It allowed them to see the actual cost of producing the Aerotex. It also

allowed the company to break even

New Product Pricing:

Price Skimming

Alternative 3 uses the idea of price skimming to establish an image for the brand

Aerotex. By setting a higher price, the rarity and originality of the product is

portrayed, as well as quality

5 Cs of Pricing By assessing how each alternative was affected the 5 Cs, we were able to

determine which would be affected in the most profitable and beneficial way.

Companies Objectives Listed Zeus’ objectives allowed us to see how we should strategically price their

product

Customers They distribute across North America and therefore we know who we are

marketing to

Costs This fluctuates, depending on which pricing strategy we apply

Competition Depends on which strategy we apply. In alternative 3, Price Skimming allows us to

be a top competitor, however, setting higher pricing will cause interest in other

companies

Channel Members In all of our alternative Zeus Textiles Ltd work in the business-to-business sector

Appendix The Appendix includes graphs and charts referred to throughout the case

Figure 1: Mohawk’s graph and info chart displays their Revenue, Net Income, and Profit Margin – used in comparative analysis

Figure 2: Global Textiles Graphs, Pie Charts and Info Tables displays the growth if the company, the size of the company, market segmentation of what they produce and market segmentation of where they distribute

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