Problem
Your client is a Swiss manufacturer of premier chocolate products. You have been assigned the task of bringing their products to market here in the United States. How would you go about achieving this task?
Solution
(Note: The client's / interviewer's words are in italics, and the consulant's words are in bold.)
Consultant: What is the company goal?
Interviewer: To achieve an additional revenue of 25% from the US market, over and above its overall revenues in Europe. They have a two year time frame to achieve this.
Consultant: What is the basis of this goal? I mean, why 25%, and not 50%?
Interviewer: The client built an overcapacity of 20% two years back, to deter entry of smaller competitors. They want to utilize this overcapacity now by selling in United States. Once they achieve this goal of extra 25% revenue, they might build more plants, with the strategic intent of doubling the US revenue.
Sounds good. Let’s identify the key market factors and participants in relation to this offering. Who are the target customers?
The ultimate consumer of the chocolate bar will be the average American consumer. This includes both adults and children. Both these segments equally love the company’s chocolate bars in Europe. They hope to achieve the same objective here in US. So, they don’t necessarily want to target Americans who only consume Swiss or French chocolate, even though this segment is the primary target.
So, the primary target is the American customer who likes Swiss chocolate. Typically, Americans who buy foreign candy like Toblerone associate a higher value to these products vis-à-vis American products in terms of quality and taste. If I may ask, what is the company’s value proposition in Europe? Do they want to communicate the same value proposition in USA?
The key value proposition of the client in Europe have been superior products in terms of distinctly superior taste and quality. They have a well recognized brand name by virtue of this; this also helps them charge a slightly higher price compared to the competition like Toblerone in Europe. They are aware that Toblerone is a well recognized brand in US, where as they are not. So, their pricing strategy in US will be different, may be, to match the competitor’s price.
So, they expect to take some customers away from Toblerone in US.
Ultimately, that seems to be a business objective here in US. What else would you look at, prior to formulating a marketing plan to penetrate the US market?
I would like to understand the core competencies of the client a little better. Does the company have any strategic assets that will enable the company’s offering to satisfy the needs of the target customers better than established Swiss players like Toblerone and established American players like Hershey?
The client, being a Swiss manufacturer of chocolates and candy, already has a good reputation in Europe as a premier chocolate manufacturer. After all, in Switzerland, their products are showcased in the famous Chocolate Museum. This image as a premier Swiss choclolate maker can itself be considered to be a core competency.
In Europe, their biggest strategic assets are their production overcapacity to deter entry, their brand name, the perceived higher quality of their candy vis-à-vis the competition, and well developed distribution channels. For the US market, their production overcapacity will help. They also know who to approach to create profitable distribution channels in US. However, the challenge will be to create a good brand image in US, through which to communicate the superior value of their products vis-à-vis the other European candy makers. They also want to communicate the distinctness of their candy taste compared to American candy.
It is great to hear that they have already identified key collaborators to help them with product distribution? Are these distributors or retailers? Can I know their names?
Yes. They are talking to specialty retailers who specialize in bringing European products to market in US. An example would be Trader’s Joe.
Great. The next logical question to ask would be this: why would Trader’s Joe support our client? How does this offering help Trader’s Joe achieve its goals?
Excellent! Trader’s Joe is always looking to expand its business, and has created a name for itself in key market geographies by offering organic solutions to a demographic segment which is focused on consuming healthy, organic, and higher quality food at affordable prices. Trader’s Joe has also found it profitable to serve this demographic segment with not so healthy offerings like French and California wine, Swiss chocolates etc. So, there are synergies between Trader’s Joe’s goals and our client’s market expansion strategy in the Continental United States.
Now, I would like to understand what the competition is doing? What do we know about key competitive offerings from the likes of Toblerone, which offer similar benefits to the same target customers? Does our client have any data on that?
Yes, Toblerone sells chocolate bars which are triangular in shape, distinctly packaged, with their name prominently labeled on the package. They sell these bars through specialty candy stores, Trader’s Joe stores, etc. Our client has its own specialized packaging of circular candy bars which it sells throughout Europe. The client wants to sell the same products in US, through the same distribution channels: specialty candy stores, airports, Trader’s Joe, etc.
How is the competition’s pricing in Europe and US?
OK, let’s take the example of Toblerone. In Europe, they price their products slightly lower than our client. Both the brands are perceived as high quality brands in Europe. However, in US, the client is considering pricing its products lower to undercut the competition, since it does not have an established brand name. What do you think the client should do?
I agree on the initial pricing strategy of undercutting the competition. The client has to be a price taker and follow the “perfect competition” model for as long as it takes to establish a brand name. Once the brand name is established, the client can wield some market power, and will have a choice of increasing prices, or even going for price discrimination to distinguish its brand from Swiss and American competitors on one hand, and also to extract the consumer surplus from different customer segments with differing price sensitivities.
Yes, their pricing strategy makes sense. However, they have not frozen their branding strategy. Do you have any concrete ideas on how our client should go about establishing its brand here in US?
Sure. Since the client does not have a market presence in US, they will have to think of every aspect of the brand in detail. While they can use their European brand name, logo, and packaging, the advertising jingle / slogan and the overall character of the brand has to be targeted towards the American consumer. Depending on the advertising budget they have, they can hire an ad agency here in US for the task at hand.
The branding strategy will go together with the pricing strategy of undercutting the competition, so that consumers get a chance to buy the product, and see its superior quality vis-à-vis the American candy products. They will also not appreciate the products’ distinctiveness vis-à-vis the Swiss competition like Toblerone.
As the product gets more and more accepted in the market, the branding strategy will evolve to create an image in the customer mind as a superior candy product line, and somewhat distinct from other European products like Toblerone. In tandem with that image, the client can raise its price levels, or even go for price discrimination as we discussed a little while ago.
OK. Since you are suggesting that the pricing should evolve with time, can you articulate more clearly how price discrimination will work in practice, say a year from the initial product introduction in the US?
Initially, the client will be a price taker. This is similar to firms facing a horizontal demand curve with infinite elasticity, which means that consumers will switch to substitutes if the price changes slightly. However, once the brand is established, consumers will be willing to pay more for the product, and the demand curve the client will face will not be infinitely elastic any more, and consequently, it will be downward sloping, as shown in the diagram below.
As per the economic theory that profit is maximized where MR (Marginal Revenue) equals MC (Marginal Cost), the client will have to price at P0 to maximize profits. However, this will weed out customers who will pay only P1. If the client can think of charging both P0 and P1, it will make even more profit, since it will get these extra customers.
Extending this analysis further, the client can price discriminate and charge prices like P2 and P3 for consumers sitting at these differing points on the demand curve, and make even more profits than what it can by charging just P0 to all customers.
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