Product Design and Sales Predictions (45 points)

CleanAir Controls is evaluating the opportunity to enter the US air pollution control system market with one or more offerings. Tighter environmental regulations have created this opportunity. There are currently three major competitors in the US that differentiate themselves along four major attributes: efficiency, delivery time, price, and delivery terms (see Table 3). The challenge for CleanAir is to determine what new product(s) to offer, to which market segment(s), and with what selling proposition(s), in order to achieve success in the US market. You will need to justify the recommended entry strategy by demonstrating forecasted marginal contributions in excess of $4 million per year to support the new offering(s).

Through other divisions, the firm has good access to US distribution channels. Most importantly, through some closely related divisions, it has an extensive network of US-based service representatives who can be called upon to provide a higher level of service to their customers and prospects in this marketplace. CleanAir also has reason to believe that its product is less likely to need costly service than those of competitors. In fact, some of its product development engineers and managers have been urging CleanAir to consider a warranty of up to 2 years. However, the company has little understanding of how much customers would be willing to pay for such a warranty (60 days was industry standard).

The most popular size and capacity for a system is 50,000 SCFM (Standard Cubic Feet per Minute); it is a basic design decision across all offerings. Market research indicated that there would be annual demand for about 300 units of that size in the US over the next decade or so. Thanks to new technical developments in Germany, CleanAir is able to credibly offer a system that exceeds regulation specification by up to 9%.

Initially, it was thought that a “Base Model” was the best way to begin understanding how the US market operated. Some team members, however, argued that an even more rudimentary product but with a 2-Year warranty (Servair DX) could be more profitable. It would also open the possibility for a product to compete with Thermatrix, using CleanAir’s service network (Premier LX). This option would be considerably more expensive and launching more than one product would result in an additional fixed cost of $3 million. In the end, CleanAir settled on three options for consideration to be launched in the US market (see Table 4).

To help guide its market entry decisions, the company decided to conduct a conjoint analysis study to understand the important tradeoffs that potential customers make in purchasing such air cleaning systems. The objective of the conjoint study was to identify attractive target segments and the kinds of features that customers in those segments would prefer to have in the new system. It was to be a main source of information support for the business case that the team was asked to make (see Table 5 for the different attribute levels used in the study). The estimated cost implications of different attribute options relative to the base option of the “Base model”, which was estimated to cost $500,000, are shown in Table 6.

The conjoint study collected data from 31 companies, a representative sample of the target industries for the offering, focusing heavily on the food and energy sectors. Their responses could be used to make volume and profit estimates. Table 7 shows the part-worth estimates for the entire sample. Tables 8 to 10 show the predicted market shares for different options based on the conjoint analysis results.

Using the individual part-worths, the market research company segmented the respondents and identified two clear segments. Most firms in Segment 1 are in the Energy industry (35% of customers); many of those in Segment 2 are in the Food industry (65% of customers). Segment 1 firms are much larger (in terms of sales and number of employees), and more profitable, with the purchasing decision process dominated by Finance and Purchasing. In contrast, Segment 2 firms are faster growing, and the purchasing decision process is dominated by Top Management and by Engineering. The part-worths for the two segments in Table 11 show shows that Segment 2 firms seek a system that clearly exceeds EPA requirements and values having it installed quickly. Segment 1 firms are far more concerned about financial issues. The predicted market share for a targeted approach with different products for the two segments are shown in Table 12.

Questions

1. What are the contribution margins for the three different options shown in Tables 4 and 6? (3 points)
2. What are the importance weights of the different attributes for the average customer based on the results in Table 7? (5 points)
3. The market research company used a ‘first-choice rule’ to predict market shares from the conjoint results. Given the type of product market, is this rule appropriate or not? Explain. (5 points)
4. How would you use the market share results shown in Table 8? (3 points)
5. If CleanAir launched only one option of the three under consideration, which one should it launch, given the results in Table 9? Why? (7 points)
6. Would it make sense for CleanAir to launch both Servair DX and Premier LX, given the results in Table 10? Why? (5 points)
7. Is a targeted approach preferred to launch either just one option (part e) or two options without segmentation (part f) given the results in Table 12? Why? (5 points)
8. Given the results in Table 11, what is the $-value of 2-year warranty over a 1-year warranty for segment 1 and segment 2 customers, respectively? Should CleanAir offer a 2-year warranty, a 1-year warranty or no warranty (service contract only) in any of the options? Why (7 points)
9. As Thermatrix, how would you react to your proposed entry strategy for CleanAir? Why? (5 points)

 

 

 

Table 3: Current Products in the US Market

Competitor	Efficiency	Delivery Time	Price	Delivery Terms
Wastewatch	Exceeds Specs by 5%	9 Months	$600K	FOB with Service Contract
Thermatrix	Exceeds Specs by 9%	12 Months	$900K	FOB with Service Contract
Advanced Air	Meets Specifications	9 Months	$600K	Installed with Service Contract

FOB = “Free on Board” and means the buyer pays for delivery. “Installed” means the supplier pays for delivery.

Table 4: Considered New Product Options for US Market

Model	Efficiency	Delivery Time	Price	Delivery Terms
Servair DX	Meets Specifications	15 Months	$900K	Installed with 2-Year Warranty
Premier LX	Exceeds Specs by 9%	12 Months	$900K	Installed with Service Contract
Base Product	Exceeds Specs by 5%	12 Months	$700K	Installed with Service Contract

Table 5: Attribute Levels for Conjoint Study

Efficiency	Delivery Time	Price	Delivery Terms
Exceeds Regulation Target (Specification) by 9%	6 Months	$600K	Installed with 2-Year Warranty
Exceeds Regulation Target (Specification) by 5%	9 Months	$700K	Installed with 1-Year Warranty
Meets Regulation Target (Specification)	12 Months	$800K	Installed with Service Contract
Short of Regulation Target (Specification) by 5%	15 Months	$900K	FOB, with Service Contract

Table 6: Incremental Cost Estimates of Different Attribute Levels

Efficiency	Incremental Cost	Delivery Time	Incremental Cost	Delivery Terms	Incremental Cost
Exceeds by 9%	+$170K	6 months	+$40K	Installed, 2-Year War.	+$300K
Exceeds by 5%	Base Product	9 months	+$20K	Installed, 1-Year War.	+$100K
Meets Specs	–$70K	12 months	Base Product	Installed, w/Contract	Base Product
Short by 5%	–$90K	15 months	–$10K	FOB	–$100K

Table 7: Part-Worth Results of Conjoint Study

Attribute	Attribute Level	Average	Std dev.	Minimum	Maximum
Efficiency	Exceeds by 9%	27.3	13.2	6.0	52.0
	Exceeds by 5%	16.9	10.9	2.0	40.0
	Meets specifications	8.4	7.6	0.0	40.0
	Short by 5%	0.0	0.0	0.0	0.0
Delivery	6 months	31.2	13.3	10.0	55.0
Time	9 months	19.1	10.5	5.0	45.0
	12 months	9.2	5.6	2.0	20.0
	15 months	0.0	0.0	0.0	0.0
Price	$600K	18.6	12.6	2.0	50.0
	$700K	12.6	10.3	0.0	38.0
	$800K	6.4	5.8	0.0	25.0
	$900K	0.2	0.6	0.0	3.0
Delivery	Installed, with 2-year warranty	20.4	11.1	3.0	45.0
Terms	Installed, with 1-year warranty	13.9	9.0	3.0	40.0
	Installed, with service contract	5.6	3.7	0.0	16.0
	FOB, with service contract	0.0	0.0	0.0	0.0

Average:                Average part-worth for all respondents

Std.Dev.:               Standard deviation of part-worth over all respondents

Table 8: Market Share Results for Current Options

	Wastewatch	Thermatrix	Advanced Air
Predicted	48.9%	5.4%	45.7%
Actual	50.0%	5.0%	45.0%

Table 9: Predicted Market Share Results with New Products Added

	Wastewatch	Thermatrix	Advanced Air	New product
Base predictions	48.9%	5.4%	45.7%	N/A
…with Servair DX	44.6%	4.3%	38.2%	12.9%
…with Premier LX	43.8%	0.8%	34.1%	21.2%
…with Base model	45.7%	5.4%	39.2%	9.7%

 

 

Table 10: Predicted Market Share Results with Two Products Added

	Wastewatch	Thermatrix	Advanced Air	Servair DX	Premier LX
Prediction	39.8%	0.0%	30.1%	12.9%	17.2%

Table 11: Part-Worth Results by Segment

Attribute	Attribute Level	Population	Segment 1	Segment 2
Efficiency	Exceeds by 9%	27.3	15.6	32.1
	Exceeds by 5%	16.9	6.1	21.3
	Meets specifications	8.4	4.2	10.0
	Short by 5%	0.0	0.0*	0.0*
Delivery	6 months	31.2	17.3	36.8
Time	9 months	19.1	10.1	22.8
	12 months	9.2	6.4	10.3
	15 months	0.0	0.0*	0.0*
Price	$600K	18.6	28.6	13.6
	$700K	12.6	20.3	8.8
	$800K	6.4	5.8*	6.7*
	$900K	0.2	0.0*	0.4*
Delivery Terms	Installed, with 2-year warranty	20.4	29.3	16.8
	Installed, with 1-year warranty	13.9	19.6*	11.6*
	Installed, with service contract	5.6	4.33*	6.09*
	FOB, with service contract	0.0	0.0	0.0

* not significantly different between segments

Table 12a: Predicted Market Share Results for Segment 1

	Wastewatch	Thermatrix	Advanced Air	Servair DX
Prediction	5.6%	0.0%	61.1%	33.3%

Table 12b: Predicted Market Share Results for Segment 2

	Wastewatch	Thermatrix	Advanced Air	Premier LX
Prediction	53.8%	0.0%	17.4%	28.8%