Keurig at Home-Managing a New Product Launch

Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

KEURIG AT HOME-MANAGING A NEW PRODUCT LAUNCH (KEL021)

Q.1) Discuss Keurig’s pricing and channel strategies for its “at-home” venture. Assess whether the company was making the right choice of strategy. A.1) Kuerig, Inc. had observed that consumers were paying in upwards of $1.50 for a cup of gourmet coffee at various coffee chains through the US. This indicated there was a viable market with consumer demand. In turn, Keurig, Inc. began offering coffee in a single-cup proportion size to offices with notable success. Single cup sales increased dramatically at the turn of the millennium with Keurig enjoying a commanding 23% share in the OCS market for 2002/03. Following such success Keurig, Inc. wanted to develop an at-home single cup coffee brewer, the B100 for the residential market. In doing so, Keurig would target consumers in both office environments and homes Channel Strategies

Keurig Authorized Distributors (KADs) provide a variety of coffees to offices for their Keurig Office Coffee System (OCS). Each KAD has entered into direct relationships with one or more roasters to purchase K-Cups and subsequently sell them to office managers. As stated in the case, Keurig does not yet have the resources to sell either their brewer or coffee in mass retail outlets. Instead, a controlled distribution strategy must be utilized. Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs) markets. KADs will, in turn, sell the cups directly to OCS employees owning an at-home system. Keurig‟s rapid penetration into the OCS market and the use of many reliable distributors and KADs has given the company a good reputation. This, in turn, makes entering the at-home market on the coattails of the office market a viable business opportunity. I believe that the distribution channel that Keurig is proposing for the two-cup approach is logical, yet problems arise when dealing with the roasters‟ concerns about its complexity. We agree with GMCR that it appears the two-cup approach would be inefficient when the goal is to keep production and inventory costs down. Keurig‟s competition is already pricing below the K-Cup prices at which KADs sell to the OCS market. If production and inventory costs were to increase, the cost of the K-Cups would also likely increase, causing concern for a potential decrease in cup sales. Another major distribution problem that Keurig faces is in their lack of existence in retail channels. Keurig needs to quickly find a viable means through which to launch the sale of the B100 into retail outlets. The only current option is direct “e-commerce-enabled” Web sites.

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Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

However, a direct channel approach has a potential of creating a significant channel conflict that could undermine Keurig‟s existing relationship with its KADs It is important to maintain both direct and indirect channels in the at-home market. One reason is that the KADs have established relationships with office managers and will initially push the brewer sales to office workers. According the Bob Spangler, a KAD through Purefact, the OCS market is a very valuable source of at-home sales because the customers have already experienced the benefits of a Keurig coffee system. After the KADs sell to the workers, those new Keurig buyers will continue the promotion. Their positive experiences with the B100 will prompt the new owners to spread the word of the product to friends, family, and neighbors in order to get the benefits of any referral program. A key factor to Keurig‟s at- home success will be based on retailer relationships whilst being aware of K-Cup pricing considerations.

Pricing Strategies

K-Cup (or Keurig-Cup) When looking at the results of Keurig‟s market research, it is evident that those coffee drinkers consuming two or more cups per weekday are more willing to pay a higher price for each cup of coffee than those coffee drinkers consuming only one cup per weekday. The same is reflected in the exhibit 7c of the case. This exhibit suggests that those 2+ cups per weekday coffee drinkers, who are more willing to pay a higher ($130+) price for a brewer, are also more willing to pay a higher price for their cups of coffee. From these analyses and the results of the K-Cup (or Keurig-Cup) pricing based on consumption survey, it seems like the ideal price for a K-Cup (or Keurig-Cup) in the at-home market is $0.55 per cup. This price would benefit Keurig, the KADs, and the office managers regardless of whether a one-cup or two-cup approach is used. Currently KADs are able to buy K-Cups from the roasters at a price of $0.25 and sell the K-Cups to office managers for $0.40 -$0.50 per K-Cup. From the $0.25 paid to the roasters, Keurig is paid a $0.04 royalty on each cup sold. If the at-home KCups (or Keurig-Cups) are sold at a price of $0.55 to the at-home users through either the roasters or Keurig, the incentive to office managers to buy K-Cups from the roasters or Keurig is eliminated because they can buy more cheaply through the KADs. This pricing strategy gives the KADs pricing power in their OCS market.

B100 Brewer The pricing of the brewer is a great concern for Keurig executives. Early market research has shown that consumers will pay greater attention to the pricing of the brewer and will have direct 2

Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

impact on consumers‟ willingness to buy into the Keurig system. In price testing of the brewer, various prices were tested and also recommended by participants. During this test, an acceptable price range for the brewer was found to be in the $129-$199 range. A price exceeding $200 was found to be a price point at which consumers began to view the brewer as a luxury purchase, requiring more consideration prior to purchasing. On the other hand, even with the knowledge gained from past mistakes and problems with the B1000, the most recent costs reported for the B100 from the manufacturing partner were projected to be $220 per brewer. However, Keurig and the B100 manufacturing partner are hopeful that, with additional engineering efforts, the production costs can be reduced to $200.00 The price point of $199 is below the $220 (or hopefully $200) production costs of the brewer. If the B100 is sold at a price of $199, the loss on the brewer would be expected to be made up through K-Cup or Keurig-Cup sales. If Keurig relies on the sale of cups to make up for pricing the brewer below cost, the B100 would become a loss leader. The benefits of an investment in the B100 brewing system are great for the gourmet coffee lovers who flock to Starbucks, Dunkin‟ Donuts, Seattle‟s Best, and Caribou Coffee to satisfy their cravings before work every morning. The average gourmet coffee drinker, who drinks 2.25 cups of coffee per weekday, assuming a price difference of $ 1 between a cup of Starbucks and Keurig Coffee, would recover his investment of $249 in under 5 months. Therefore, while the Keurig brewing system may appear to be a pricey investment, it is clear that the consumer would be saving money by making his/her own cup-by-cup gourmet coffee instead of traveling to a gourmet coffee provider such as Starbucks. A lower price of $199 for the brewer does appear to be appealing to consumers. A price below $200 does not trigger a luxury purchase mentality in the consumer. However, we feel the price of $199 is not ideal because Keurig would be relying on the sales of K-Cups (or Keurig-Cups) to cover the expenses for manufacturing the B100. This is a very risky decision. If the sale of KCups (or Keurig- Cups) does not live up to the expected levels, Keurig‟s profits will decrease. Also, if the demand for the at-home system is lower than expected and Keurig must lower the price of the brewer to move the product, a decrease in the selling price would put the brewer at an even larger loss for the company and shareholders. It appears to be Keurig‟s best option to price higher than their manufacturing costs so, after meeting their breakeven quantities, all additional sales contribute to the profits of the company. While Keurig‟s management is concerned that they may not have enough time to lower the price of the brewer once it is out in the market, it seems that this is a risk that is worth taking. By pricing the brewer at $249, all profits can be put toward research and development efforts to lower the production costs of the B100 and to develop subsequent one-cup brewers at a lower price to appeal to other markets.

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Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

The profits of the B100 will give Keurig the opportunity to draw in a broader consumer base and hopefully will enable Keurig to develop new target markets with lower-priced one-cup brewers. On the other hand, pricing above $200 forces consumers to think harder about making a B100 brewer purchase. It is important for Keurig to use price as an indicator of superiority without putting themselves out of the market entirely. We feel that Keurig‟s at-home brewer will be a luxury item for most consumers willing and able to invest, so a $200 luxury-indicator can be considered irrelevant to our target consumers.

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Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

Q.2) Critically Analyze Keurig’s Marketing plan for its brewing system targeting the at home market. What are the factors that the management would have to consider to select appropriate strategy to succeed in the new business? All companies need a marketing plan upon entering a new market. In Keurig‟s case, they had a successful marketing strategy for the OCS market already in place by the time they decided to break into the at-home market. Below, we will discuss Keurig‟s approach to marketing their B100 brewer. As Keurig decided whether or not to launch their product into the at-home market, they looked at the statistics for the United States retail at-home coffee market. The results were very promising. In 1996, gourmet coffee sales were at $2,200 million. Four years later, in 2000, the gourmet coffee sales had increased by 40 percent to $3,100 million. Also, in 2000, approximately 320 million pounds of gourmet coffee were sold in the United States, a 25.5 percent increase in pound consumption by volume from 1996. These large boosts in the market‟s gourmet coffee area proved to Keurig that this market was and would continue to quickly expand. Keurig needed to find out if their single-cup brewer would be accepted by gourmet coffee consumers From 1999 to 2001, Keurig carried out market research studies to determine the acceptability of their product to the at-home consumer. The research was conducted in several different formats. There were intercept and internet surveys, surveys of current OCS users, and focus groups of athome test users. The results of the intercept surveys, whose respondents had to drink at least one cup of gourmet coffee per day, showed that over 75 percent would consider purchasing a system like Keurig‟s. The internet survey also proved that a demonstration of the Keurig model increased the likelihood of a sale from 75 to 90 percent. The same people, who saw the demonstration, indicated that they would pay $0.55 for a K-Cup and $130 for the B100 brewer. Through intercept, internet, and home use surveys, Keurig was able to determine the key factors in marketing their brewer and K-Cups. Key elements identified through demonstration during the intercept surveys included quick brewing time and minimal clean-up. The same key elements were identified during the internet-based survey. The home use testers, who had a commercial brewer placed in their home, not only identified speed and clean-up as key attributes but also taste consistency, coffee variety, and cleanliness of preparation. The market research commissioned by Keurig shows that the best way to gain interest in the system is through demonstrations; 90% of those surveyed indicated that the demonstration increased their likelihood of buying the product. The key factors of interest to promote include convenience, quick brewing, ease of use, and minimal clean- up, all of which are sources of dissatisfaction with at-home users‟ current systems. Through the internet-based survey, it has been shown that the B100‟s core customers are younger males. The key elements Keurig must implement into its marketing strategy for the B100 include being one of the first entrants into the

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Subject Name: Strategic Marketing Student Name: Ritu Girotra Enrollment Number: 6010091104133

at-home market, being portrayed as a single-cup pioneer, and enhancing its visibility in the upscale market. Keurig‟s B100 system has the potential to seize a large portion of their target market if it is marketed well. One strength of Keurig‟s marketing strategy is that they are aiming to be the first entrant into the at-home gourmet coffee market. They believe that being the single-cup pioneer will enhance the system‟s visibility in the up-scale market. Another strength of Keurig‟s promotional strategy is that by partnering with five different roasters, they can offer the largest variety of coffees and teas in the at-home market. While these factors strongly support Keurig‟s marketing strategy, there are several weaknesses with the rest of the plan. One such weakness is that they do not use their slogan or the origin of their company name to their advantage. “Deliciously Simple” is a great slogan that emphasizes the two major themes of coffee advertising: „good taste‟ and „positive stimulation‟. The slogan also touches on the fact that the system is very easy to use. In addition, the word „Keurig‟ is Dutch for „excellence.‟ Having your company‟s name associated with excellence can be another great marketing tool. Keurig is currently not doing everything it can to target its core customers. Promotion needs to be geared toward these younger males. One way to achieve this would be to buy advertising space on various Web sites, from sports to stock and financial sites. Since market research has shown that demonstrations are a significant way to increase system interest and purchasing potential, Keurig needs to utilize this avenue. Although it is stated in the case that Keurig does not currently have resources to sell through retail chains, which are prime locations for demonstrations, perhaps they should set up demonstrations at professional conventions, airports, affluent shopping malls, and high-end appliance shows. There are also promotional activities that Keurig can offer to their buyers in order to increase their customer base like referral program & free K Cups on the 1st purchase of the B100.

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