Colgate-Palmolive Company: The Precision Toothbrush
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SWOT analysis for Colgate-Palmolive Precision:
Strengths: Colgate-Palmolive is a global leader in personal care and household products with 43% of the world’s toothpaste market and 16% of the world’s toothbrush market. CP’s international sales, which account for 64% and 67% of profit (by volume and dollars respectively), showcase their brand image worldwide. Precision launched by CP is a technical innovation, which has a triple-action brushing effect that increases plaque removal by 35% more, as compared to other brands. Concept tests revealed that 77% found precision much more effective than their current toothbrush. Weakness: Since 33% of adults were uninvolved oral health consumers it will be difficult to educate them about the importance of Precision as a toothbrush that prevents gum disease. CP is not yet into the superpremium toothbrush category while CP’s main competitor Oral-B has professional endorsements as dentist’s toothbrush.
Opportunities: CP’s consumer research revealed that 46% of adult consumers are concerned about the health of their gums and are willing to pay premium for new products addressing the issue. Also consumers are willing to experiment with new toothbrushes. Threats: Competitors are offering incentives such as buy-one-get-one-free, mail in refund coupon deals and toothbrush on pack with toothpaste. Moreover, competitors are planning to launch their products with added features. Johnson & Johnson is coming up with reach between features like angled neck and rippled bristles. Procter & Gamble are preparing to launch Crest Complete with features like long, rippled bristles. Smith Kline Beecham by expanding AquaFresh Flex line to include two adult compact heads and one child brush. Changes in the Toothbrush Category
Traditionally, toothbrush was largely perceived to be a commodity and was purchased primarily on the basis of price. During the 1980s, several product innovations introduced some tangible benefits and since then these benefits have become significant purchase criteria.
Gillette owned Oral B was the first to introduce some extent of product differentiation by introducing a soft-bristle brush, which was better for gums. Following Oral B’s lead, several other companies began introducing certain variations so as to develop recognition of their products amongst consumers. Broxodent had introduced the first electric toothbrush, which was closely pursued by other companies introducing variations in the design, length and bristle quality of toothbrushes. During the period 1985 and 1992, these innovations were introduced rapidly within brands such as Oral-B, Johnson and Johnson, Colgate, Pepsodent, Aquafresh, Crest and Pfizer, as they competed to grab significant market share.
Over the years, the U.S. Oral Care market had registered an approximate growth rate of 6% to reach $2.9 billion in 1991. Sales of toothbrushes had increased at 9.3% per annum, since 1983 and in 1992, sales increased by an impressive 21% per annum in value and 18% in volume, with the introduction of several new products and line extensions. The new products were at one hand placed in high price niche segment offering aesthetic, therapeutic and cosmetic value, while others were placed in the mainstream segment for the masses. Competitive Analysis
There is considerable fragmentation in the market and hence, there is severe competition amongst the players. In order to get an edge, competitors, Johnson & Johnson, Oral-B, Procter & Gamble, and Smithkline Beecham, are offering promotions in the form of coupons, mail-in refunds and discounts. The
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Colgate-Palmolive Company: The Precision Toothbrush
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company’s competition may be analyses on the basis of stock keeping units (SKUs) and on the basis of the price segments. The company faces tough competition in super premium segment from companies such as Oral-B, Reach Advanced Design, Crest and Aquafresh Flex. In addition, all companies spend a sizeable share of their revenues on advertisement, which adds up to the competition. Also, the players have been fairly lenient in allowing other players to enter into the market, fostering competition. Players have exhibited some slackness on their parts, by remaining ignorant to some of the technological advancements and shift in consumer behavior. As an instance, in 1988, Johnson & Johnson introduced “new brush technology” only to phase it out by 1992. Hence there are healthy competitions in the market. Product Segmentation:
On basis of Price: Toothbrush industry is divided into mainly three segments on the basis of price: Value, Professional and Super Premium. Value brushes priced average at $1.29 accounted for 24% of unit volume and 12% of dollar sales on the other hand Professional brushes, priced between $1.59 and $2.09, account for corresponding 41% and 42%. Super Premium brushes category emerged in late 1980s and by 1992, its retail prices were between $2.29 and $ 2.89 and it accounted for 35% of unit volume and 46% of dollar sales. On the basis of attributes: In this, toothbrush differed by bristle type (firm, medium, soft, and extra soft) and by head size( full/adult, compact , and child/youth) Demographic Segmentation:
In this market is divided into groups on the basis of variables such as age, family size, family life cycle etc. They are often associated with consumer needs and wants and are easy to measure. In 1980s, toothbrush industry had market on the basis of adult and child aesthetic. The children segment had variety of new products like brushes with sparkling handles, bugs and bunny etc. and later new products mainly focused on technical performance improvements. Psychographic Segmentation:
Psychographic is the science of using psychology and demographics to better understand consumers. In this buyers are divided into different groups on the basis of psychological/personality traits, lifestyle, or values. In toothbrush industry, buyers are divided in mainly three categories: Therapeutic, Cosmetic and Uninvolved.
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Colgate-Palmolive Company: The Precision Toothbrush
593-064
Arguments for launching precision as (a) a niche product and (b) a mainstream brand:
CP had the option of either launching Colgate Precision as a niche product or as a mainstream product. Both these options had advantages and disadvantages and hence, this made it difficult for the management to decide which route to choose.
Niche Product: Precision could be positioned as a niche product to be targeted at consumers concerned about gum diseases and thus could be charged at a super-premium price. It would be command a 15% price premium over Oral-B, its nearest competitor, and would be expected to capture 3% of the US market at the end of the first year following its launch. Moreover, the retails sales were expected to increase from 3% volume share of the toothbrush market in the first year to about 5% in the second year. Precision would be expected to earn roughly 35% volume share and 46% value share. Precision as a niche product would not only give Colgate enough time to build up a stock of the product but would also be able to avoid taking the Children’s Plus model off store shelves. With the Precision toothbrush, CP could finally introduce a super-premium product into the mix and give the therapeutic consumer segment some much needed attention.
Mainstream Product: CP hoped to position Precision as a mainstream product using the broader appeal of being the most effective brush available on the market. It was estimated that this positioning would capture 10% of the market at the end of the first year. This volume share was expected to increase to 14.7% in the second year. Suggestions:
The manufacture ring cost per unit for Precision as a niche product is $0.66 per piece. In the 1st year, a total of 13 million brushes would be manufactured, resulting in a total manufacturing cost of $8.58 million. The total expenditure for advertisement, consumer and trade promotions would be $11.2 million, thus putting the total cost to the company at $19.78 million. Assuming capital expenditure of $3.25 million and depreciation costs of $316,667, the net cost at yearend would be $23.35 million. According to Steinberg if Precision were positioned as a niche product, about 8 million brushes would be sold through the retail channel in the first year and thus accounting for an income of $16.16 million, considering manufacturer’s price of $2.02 per piece. In the second year, expenditure would come out to be approximately $26.65 million and considering sales of 15 million brushes through retail channels, income would stand at $30.3 million. Considering no more capital expenditure from the third year, stagnant demand and similar promotional expenditure as that in the 2nd year breakeven would occur in the 33rd month, followed by yearly profits of $4.95 million. At the end of 5 years, the net profit would stand at $11.14. The manufacture ring cost per unit for Precision as a mainstream product is $0.64 per piece. A total of 42 million brushes would be manufactured, resulting in a total manufacturing cost of $26.88 million. The total expenditure for advertisement, consumer and trade promotions would be $32.8 million, thus putting the total cost to the company at $59.68 million. Assuming capital expenditure of $9.1 million and depreciation costs of $886,667, the net cost at year-end would be about $69.68 million. According to Steinberg if Precision were positioned as a mainstream product, about 26.8 million brushes would be sold through the retail channel in the first year and thus accounting for an income of $47.17 million, considering manufacturer’s price of $1.76 per piece. In the second year, expenditure would come out to be approximately $71.93 million and considering sales of 44.1 million brushes through retail channels, income would stand at $77.62 million. Considering no more capital expenditure from the third year, stagnant demand and similar promotional expenditure as that in the 2nd year breakeven would occur
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Colgate-Palmolive Company: The Precision Toothbrush
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in the 46th month, followed by yearly profits of $9.59 million. At the end of 5 years, the net profit would stand at $ 11.18 million.
As it can be seen, both the strategies give an almost equal total profit at the end of 5 years. From the 6th year onwards, positioning the toothbrush in the mainstream category would give more profits than in the niche category. However, the assumption made is that the demand will remain constant in both the categories from the 2nd to the 5th year. It must be remembered however, that toothbrush as a product is prone to technological innovation and competition. Due to this, it becomes increasingly difficult to imagine a product life of greater than 5 years. Therefore, assuming a product life of less than 5 years, it makes sense to position the toothbrush in the niche segment rather than in the mainstream, which will give more profit for a period less than 5 years.
Also, by setting up Precision retail shelves close to the super-premium toothbrushes of the competitors, Colgate hopes to make consumers aware about the additional benefits of Precision as compared to the competitor’s niche brands. Furthermore, none of the 4 SKUs would be dropped if Precision were launched as a niche product. A negative result of channelling the Precision toothbrush through the mainstream market is that the Children’s Plus model would need to be dropped in order to make room for another product on shelf among the other professional models. As a result, CP would also go another year without any super-premium SKU on the market. Moreover, production capacity would require 10 months lead time and this sudden switch would also cause a shortage in supply.
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