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ODI Case: Key Points

ODI Case: Key Points. Understanding Customers: -Quantifying customer benefits:Economic Value Analysis -Understanding perceived benefits that customers seek for new products -Do these benefits vary across customers -Logic of estimating demand -Break-even calculations -Sensitivity analysis

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ODI Case: Key Points

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  1. ODI Case: Key Points Understanding Customers: -Quantifying customer benefits:Economic Value Analysis -Understanding perceived benefits that customers seek for new products -Do these benefits vary across customers -Logic of estimating demand -Break-even calculations -Sensitivity analysis -Key problems facing a start-up company like ODI

  2. Economic Value Economic Value Risk,education +(2) Your value above that product (3)Perceived Value (1) Reference product (the next best substitute)

  3. Economic Value Analysis It helps you determine the maximum customers are willing to pay for your product, based on the perceived benefits they associate with your product. We will revisit economic value analysis again when we discuss pricing since it is a critical component in the pricing process. Specifically, a “customer- oriented” view of pricing.

  4. Factors That Influence Perceived Customer Benefits When Assessing New Products In the early stage of a product (i.e.,when a new product is being introduced customers seek certain benefits that will enhance their acceptance of the new product) These benefits are -Comparative advantage of the new product relative to existing substitutes: EVA analysis helps us to assess this -Perceived Complexity: How easy is it to explain the sources of this advantage -Compatibility:How compatible is the new product to current users relative to existing substitutes -Observability of Advantages:Can the customers easily observe the comparative advantages -Risk:Physical, Financial and/or Social

  5. Segmentation • Based on the factors that influence perceived customer benefits: Will large or small farms be more receptive to this idea ? • Farm size in this example is a surrogate for differences in perceived benefits

  6. Logic of Demand Estimation • When assessing attractiveness of different markets often marketing managers have to provide estimates of demand and develop a logic for it. • One can build a persuasive case for why ODI should first focus on the large farms-based on our earlier customer analysis • Then it is important to make some key assumptions in order to estimate the demand (it is important to be explicit about assumptions, so that other managers can assess clearly how the demand is estimated)

  7. Key Assumptions Demand estimation has two parts: - Demand estimation for trial - Demand estimation for adoption Demand estimation for Trials 1. 50% of farms in California with 50,000 or more chickens will try the product by the end of the second year. So use the total number (201) of such firms from exhibit 3, p.g. 8. 2. 1% increase in number of chickens per year starting with 1969 chicken figures. Thus, in 1975 the number of chickens will be (32,236,961)the number of chickens in 1969 multiplied by 1.06. The 1.06 comes by adding 1% chickens every year for 6 years (1969-1975). 3. Trial starts at 2% and increase every quarter of the 1st year. It climbs to 8% by the beginning of of second year and stays there till year end.

  8. Key Assumptions (continued) Demand estimation for adopters 1. 75% of farms that try adopt giving us the number of farms adopting. 2. Large farms buy chickens every quarter (p.g 3, column2).So using the average number of chickens for 1975 and dividing it by four we get quarterly replacement of chicken for each farm. Multiplying that number by the number of farms adopting will give us 1st year 1st quarter figures for number of chickens adopting. For the second year start with 1976 figures. 3. Adding the purchases of adopter and farmers who try we get total sales in units = demand. Check spreadsheet DEMODI.xls .

  9. Break-Even Analysis • Break-even volume gives the firm an assessment of the volume that has to be sold in order to cover costs • Break-Even Volume = (Fixed cost/unit contribution) • Unit Contribution = Unit price - unit variable cost • Excel spread sheet ODIBEV.xls shows formulae and details. • With price at $0.08 and two levels of fixed costs - bargain and case plans.

  10. Sensitivity Analysis • Excel spread sheet FORODI.xls will show all the formulae and details. • Notice the two plans: • a bargain plan cheap with no money spent on headquarters or R&D • a case plan • The BEV numbers change as you change the price per pair from $0.08 to $0.12. • Another spread sheet ODIFree.xls shows how gross contributions change if ODI decides to let farmers try the lens for free.

  11. What are biggest problems that ODI faces ? Difficulties encountered by a start-up company in introducing a new to the world product -Company reputation/viability - will it be around ? -Source credibility -how believable are these enhanced economic benefits

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