Upstream Marketing November 2011

Eco-Flex Gekko Pricing Strategy
Upstream Marketing
Upstream Marketing
MKTG Set 1D 2011; Ann Marie Webb Hughes
Earl Alikpala; Ramneek Chandi; Daniel Tagulao;
Erin Vance; Viktor Vasilkyv; Kevin Willemse
November 2011
This is a concise analysis of Eco-Flex’s proposed “Gekko”
gymnasium flooring product line. Focus of the document is on a
pricing strategy that will support the intended goals of the
product as a whole, as well as how it fits in against competition
and within the existing Eco-Flex flooring range.

CONTENTS
Objective ......................................................................................................................................................................... 2
Problem Statement (Goal) .............................................................................................................................................. 2
Key Findings .................................................................................................................................................................... 2
SWOT Analysis ................................................................................................................................................................. 2
Competitive Analysis ....................................................................................................................................................... 3
Target Market ................................................................................................................................................................. 5
Behavioural ................................................................................................................................................................. 5
Demographic ............................................................................................................................................................... 5
Geographic .................................................................................................................................................................. 5
Potential Market Segments......................................................................................................................................... 6
Alternatives ..................................................................................................................................................................... 6
Penetration Pricing ...................................................................................................................................................... 6
Advantages .............................................................................................................................................................. 6
Disadvantages ......................................................................................................................................................... 6
Target Profit Pricing .................................................................................................................................................... 7
Advantages .............................................................................................................................................................. 7
Disadvantages ......................................................................................................................................................... 7
Yield Management Pricing with Quantity Discounts .................................................................................................. 7
Advantages .............................................................................................................................................................. 7
Disadvantages ......................................................................................................................................................... 7
Solution ........................................................................................................................................................................... 8
Implementation .............................................................................................................................................................. 8
Price ............................................................................................................................................................................. 8
Product ........................................................................................................................................................................ 8
Promotion ................................................................................................................................................................... 9
Place ............................................................................................................................................................................ 9
Conclusion ....................................................................................................................................................................... 9
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OBJECTIVE
The objective of this report is to analyze the current positioning of Eco-Flex and provide various pricing strategies
for the introduction of their new gymnasium flooring product, codenamed “Gekko”.
PROBLEM STATEMENT (GOAL)
What pricing strategy (supported by an appropriate market strategy) should Eco-Flex use Gekko, to generate a
minimum of $300,000.00 profit in its first year in the market, sell at least 10,000m 2 of product, and capturing a 12%
market spend share during its first year?
KEY FINDINGS
Eco-Flex, an Alberta, Canadian manufacturer of rubber based products derived from recycled rubber tires, has
proposed the feasible development of a new product code-named, “Gekko”, based on a Request for Proposal as
well as analysis of potential markets.
This new product combines a rubber techno-material with a bamboo backing to produce a flooring piece. Bamboo
flooring products are increasing in North America as they are more dimensionally stable compared to red oak
flooring and laboratory-made laminated bamboo lumber (Lee & Liu, 2003). In addition, bamboo-based flooring is
more environmentally sustainable because it can be harvested earlier i.e. - within 5 years as compared to decades
for hardwood trees (Kaiser, 2004) . If the product is manufactured under the proper guidelines, it can obtain LEED
certification, the international standard for green building designs, as per the bulk of Eco-Flex’s other product lines.
Increased corporate sustainability practices have been placed in the spotlight in the past few years, as 93% of CEOs
surveyed recognize this need for the future success of their companies (Singh, 2011) Eco-Flex’s Gekko flooring is
the first of its kind and can tap into the growing market for sustainable business products and practices.
Gekko’s cost of production is composed of a variable cost of $18.97/m 2 and monthly fixed costs of $8,799/month
(Refer Appendix: Table of Fixed & Variable Costs vs. Profit). Sophie’s conservative estimate sales forecast for
Gekko is 500m 2 , requiring a retail price of $36.57/m 2 to break-even. If the quantity demanded for Gekko reaches
Eco-Flex’s production capacity of 2000/m 2 , a retail price of $23.37/m 2 is needed to reach the break-even point.
With a predicted demand of 500m 2 , the calculated manufacturing break-even price is $36.58m 2 (Refer to Appendix
“Table 1: Break Even Analysis”).
Taking into consideration all calculations of Eco-Flex’s production capacities with price of $45.00, the estimated
break-even volume is 338 units.
SWOT ANALYSIS
Eco-Flex is in a very niche product market, and as such careful attention must be paid to the changing landscape it
offers. It must constantly be aware of its own strengths and leverage these to counter weaknesses. The current
social climate favours innovative, sustainable companies such as Eco-Flex which presents massive opportunity, but
growing competition and keeping up with new innovations, all while balancing costs and consumer demand, is not
to be taken lightly.
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Strengths Weaknesses
Existing rubber flooring product R&D, manufacturing &
marketing expertise
Established dealer network
Broad existing customer base as potential new product
market
Growing brand & product awareness (Vancouver
games, media coverage)
LEED Accreditation
Healthy holding company turnover with various product
lines and markets
Opportunities Threats
Growing favour towards eco-aware products and
companies in all organizational markets (esp.
B.C./Canada)
Growing awareness of recycled-rubber-based industrial
products
No existing similar product
Product visibility (esp. in large public installations) easily
creates interest
Low production capacity
Limited experience in composite (dual core) product
development
No patents or unique/specialty products make them
open to competitor attack and imitation products
Poor brand awareness, disjointed campaign (through
resellers)
Reddening competition ocean
Imitation (inferior or improved) product emergence
Long term product performance still to be evaluated
Raw material costs may rise with elevated demand (tires
and bamboo)
From the above, it is noted that Eco-Flex is presented with many opportunities, and each one of these must be
investigated to maximise profits. Balancing these against threats highlights the fact that in order to capitalise on
these opportunities, while eradicating weaknesses, will require a conscious, well thought-out and swift strategy to
protect itself from competition and subsequent losses. This must also be applied to the Gekko product, to ensure
its success and grow Eco-Flex’s overall market share.
COMPETITIVE ANALYSIS
When comparing Eco-Flex to its notable competitors, there are many similarities in terms of market and product,
with the notable exception of a wood-faced gymnasium product such as Gekko. These competitors therefore have
the ability to not only compete with Eco-Flex’s current products, but also to create a product that can be
comparable to Gekko. Legal/patent considerations aside, this is a critical element that Eco-Flex must consider
should they move forward with Gekko production and its associated market launch.
Another important factor is that Eco-Flex uses a dealer and reseller network to resale and install product – these
resellers have a diverse, non-exclusive bouquet of products which actually compete with Eco-Flex’s products. While
this is a normal, accepted practice, Eco-Flex and Gekko must compete within this scenario. It also makes
competitive analysis (in terms of manufacturing competition vs. product competition) difficult to easily assess.
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Eco-Flex 1
1.) Ecoflex Safety Flooring
2, 3
(India)
4, 5
2.) RB Rubber Products
6, 7, 8
3.) Ecore International
4.) Zebra Mats (Canada) 9
Average Years Location Produced Approx. Product
Range
Approx. Tires
Recycled P/A
Over 30 years Near Edmonton, Alberta 25 12 million tires P/A.
Over 50 years
(1960)
Over 25 years
(1985)
Over 40 years
(1989)
Over 10 years
(1997)
Mumbai, India Under 10 6 million tires P/A.
McMinnville, OR Over 30 Over a millions
pounds P/A
Lancaster, Pennsylvania 16 4 million tires P/A
Toronto, Ontario Over 30 Not Available
References: 1. (Graphos, 2011); 2. (EcoFlex); 3. (Ride4ever, 2010); 4. (Incorporated, 2011); 5. (Consulting); 6. (Flooring, 2011); 7. (Businessweek); 8.
(International, Sport and Recreation Surfacing); 9. (Canada Z. M., 2009)
While the above chart looks at rubber flooring manufacturers, it is clear that Gekko will compete against producers
and installers of “traditional” wooden gymnasium flooring. These are usually solid wood or parquet installations
installed only in higher-end sports facilities due to high price and maintenance costs, and not in free-weight areas
or harsh environments due to their weaker surface properties. However they offer the lateral and vertical flex
required by gymnasium sports persons (dancers, basketball, gymnastics etc.)
With this in mind, Eco-flex’s Gekko will have several advantages over its competitors (standard wood flooring
products):
Improved life span (15 years before replacement or refurbishing vs. 3-5 years on wooden floors)
Bamboo backing with rubber substrate is unique, combines attractive design with durability and comfort
Has a competitive advantage thanks to Eco-Flex’s large existing client base
Is inexpensive and easy to install, even by home users (end consumers) and replace panels
The chart below exhibits indicative pricing in regards to vinyl, synthetic, and wood flooring. Eco-Flex is competing to
replace wood flooring in places such as gyms and the chart below demonstrates how much it currently costs and
how long the flooring is expected to last.
The inserted chart is indicative pricing of a large competitor, a
producer and installer of wooden gymnasium/sporting flooring
(GROUP, 1997). The above chart shows how a 465m 2 floor has
an initial outlay cost of $65,000.00, and is quoted as lasting up
to 50 years. However, one must remember that this floor wood
require stripping, sanding, repainting and refinishing every 3
years at a cost of approximately $8,000.00 (GROUP, 1997). If we
extrapolate this into a comparative cost against Gekko’s 15 year
life span, the total cost of ownership would be approximately
$105,000.00. This further equates to a price of approximately
$225.00 per square metre of wooden flooring.
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As one can see, this is a very high price for a premium floor, and Gekko is far more competitive and should perform
as well with less downtime due to maintenance. It is also a more sustainable product, not only upon installation,
but also no harsh chemicals or resins etc. are required for refinishing and repair.
TARGET MARKET
BEHAVIOURAL
Eco-Flex’s product offers quality and a low price compared to other flooring. It benefits business consumers who
are looking for eco-friendly products, primarily for indoor sporting facilities, but may even include outdoor flooring
applications. Eco-Flex, an ecologically aware manufacturer, has the opportunity to target the “green market”
movement, to further cater towards their existing loyal client base.
DEMOGRAPHIC
Demonstrating the product and its uniqueness to sporting facilities, real estate developers and large private
installations will help Eco-flex build up an initial sales volume. Sporting facilities (e.g. North American fitness chain
GoodLife) has 123 gyms across Canada; of the 123 gyms, 11 of them are franchised (Magnan, 2007), which
demonstrates an opportunity to sell the product into franchise chains and increase volumes. The exposure that
public gymnasiums create for private consumers as well as potential business decision makers can create a
potential relationship and revenue stream for Eco-Flex.
We also investigated approaching Real Estate developers and having them promote Gekko flooring over other
alternatives, and even targeting government; with their 15,500 elementary schools, 163 private and public
universities, and 183 public colleges and institutions, the amount of gymnasium and sporting facilities they install
and maintain is lucrative. (The Council of Ministers of Education, 2011).
Eco-Flex has established itself (including Gekko and most of its rubber mats) in the NAICS category 44221 (floor
covering stores) (Canada I. , 2011); resellers and buyers the company conducts business with will be in the same
NAICS category.
GEOGRAPHIC
There is a growing trend in North America for entire cities to become more environmentally friendly. Proposed
green city capitals, such as San Francisco, Vancouver, New York, Seattle, and Denver (SIEMENS, 2011) will be ideal
urban areas for Gekko’s distribution and segmentation. By targeting these cities with an overall green standard
performance of 73% and greater, Gekko can further improve their environmentally friendly credentials.
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POTENTIAL MARKET SEGMENTS
In terms of actually labelling potential markets, Gekko could segment and target the following:
Sporting Facilities
The core market for Gekko – not only can Eco-Flex actively approach sports facilities and gymnasiums,
dance studios and the like, they can leverage off existing Government projects (e.g. sidewalk and
Vancouver 2010 project) to propose installations in public school sports facilities. Franchise gymnasiums
and fitness clubs can also be approached for large-scale, volume-discounted long term supply and install
partnerships and contracts.
Commercial / residential Building Developers
Gekko’s attractive appearance, low cost, insulating properties, comfortable feel and durable nature makes
it a potential fit for developers looking for premium flooring for both offices and high rise apartments. The
noise dampening characteristics and soft touch of Gekko will appeal to executive suite buyers, and the
fireproof, sustainable credentials make it even more appealing
Direct to Consumer
Gekko’s easy-to-install nature makes it a potential candidate for selling directly to consumers for home
installation, or by appointed contractors (using channels such as Home Depot, Roma etc.). Many affluent
Canadians and Americans install home gymnasiums that must be attractive, removable and durable, and
Gekko meets these demands.
ALTERNATIVES
PENETRATION PRICING
With this strategy, the company can expect to receive profits of $208,000 within Gekko’s first year, and $461,000 in
second year, based on a continuing volume growth rate. This strategy allows the company an increase in
production capacity and creates a stable cash flow. As we are looking for rapid penetration, we are adopting a low
profit margin which still supports a profitable model. It also carries the various flexibility and scaling models as
discussed in this document.
Our penetration entry price is proposed at $40.50
ADVANTAGES
Rapidly captures a new market, which is important to thwart competitor entry
Price of $40.50 delivers profit, even with predictable demand of 500m 2 , which will likely be far surpassed
Allows for scaling of prices as market, demand and exclusivity grows, to further increase profits.
DISADVANTAGES
Long term profit orientation (Will not achieve profits when just launched, requires fair volume)
Cannot rapidly maximize profits by changing the price (move from Penetration to Prestige is limited)
Rapid demand beyond current capacity will require major production, operations and management
overhaul to meet these
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TARGET PROFIT PRICING
This pricing strategy provides a specific annual target of a specific dollar volume of profit.
The proposed Target Profit Price is $65.00
ADVANTAGES
Stable profit markup margin of 77% (based on minimum 500m 2 )
This model still delivers a $270,000 profit within the first year, based on the minimum projected order
quantities
Same price for all customers makes managing sales, profits and projections/analysis simple
DISADVANTAGES
Inflexible model – adjustments can have major effect on targets
The higher markup will make the market attractive to competitors
Hard to manage/create the demand based on specific market value perceptions
No rapid growth; market penetration could be slower
Refer to Appendix 3: Profit Target Pricing Chart for a full breakdown of how this strategy demonstrates its various
advantages and disadvantages.
YIELD MANAGEMENT PRICING WITH QUANTITY DISCOUNTS
This alternative could be used in combination with the first two alternatives (it is suggested that Eco-Flex
investigate a homogenous approach towards their product pricing overall). This option strategically prices the
Gekko product depending on the quantity demanded and supplied. To ensure a greater quantity purchased by
buyers, a quantity discount is coupled with the yield management pricing strategy.
ADVANTAGES
Persuades clients to buy more, thus meeting Gekko’s main aim of increasing quantity
Large dollar amount profit margin calculated into each price break
Control of production is much more regulated
DISADVANTAGES
Eliminates small quantity buyers
Complex model of quantity/price
Hard to generate demand due to different pricing models
Refer to Appendix 4: Table 4: Yield Management Pricing Chart for a full breakdown of anticipated volumes and
pricing related to this model.
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SOLUTION
The alternative that will be the most beneficial for the introduction of the Gekko product is penetration pricing.
This option will allow Eco-Flex to introduce their product at a low price while supporting the need to rapidly grow
market share (before competition products enter; processed Bamboo flooring products are rapidly being
developed and released to the market (Lee & Liu, 2003)) as well as the need to maximise volumes to meet the
target profit. The sales they will produce from the low cost appeal will give them a chance to gain a positive
reputation and large customer base for their product.
Once demand increases, Eco-Flex will then be able to subtly raise Gekko prices, thanks to a large existing customer
base and proven product. Furthermore, this adds to the exponential profits created by covering fixed costs.
By offering the product at a very low profit margin, Gekko has the greatest chance of capturing the 12%
market share Eco-Flex are aiming for, and still meet the overall profit targets
The company’s research shows that conservative demand estimates support these targets, boosted by the
penetration strategy which should further increase the ability to meet set goals
Based on these projections and annual achievable sales using the penetration strategy, Eco-Flex should
achieve these targets by the end of its first year of selling Gekko.
If penetration pricing is not chosen by Eco-Flex, our second choice would be target for profit pricing. This would
allow for full consistency in the price given to customers, and would launch the product with an opportunity to gain
workable profit margins. Eco-Flex should investigate an integrated model of pricing strategies as well (i.e.,
combining all strategies to maximise market yield).
IMPLEMENTATION
The pricing strategy of Gekko is critical to its success; however it must be bolstered by a comprehensive marketing
strategy which supports the chosen pricing models. This must encompass how we will leverage the pricing model
into the market, where, and how it will be presented to the market as a whole.
PRICE
The price of $40.50 is an excellent entry point as a vehicle for initial market launch and rapid penetration, which
should guarantee profits even given a low anticipated initial demand. The lower price point breaks down potential
entry barriers and accomplishes our main aim of rapidly growing and protecting a new market share during its first
year. Considering buyer retention and loyalty on products such as Gekko is high, getting that initial share is critical,
and the chosen price must support achieving this. As market share is established, Eco-Flex could leverage this
market share during its second (and future) years by slowly raising prices and further growing volumes.
PRODUCT
The Gekko product will have many unique properties and a definite market position. It is worthy of a strategy that
ensures the product is a success. It fits in well with Eco-Flex’s range (and ecological statement) and can utilise the
company’s existing sales and manufacturing abilities and reseller/customer networks.
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PROMOTION
Since Eco-Flex depends on its resellers and distributors to promote and sell its products, an intense reseller
education program must be implemented. This will be focussed initially on larger volume resellers who have
established partnerships and large strategic customer relationships.
This will mean the Eco-Flex sales force will immediately start setting up meetings with these contractors and
partners, to provide promotional materials, samples and interactive training as to how best market the product to
potential buyers. Furthermore, Eco-Flex will have to educate the contractors regarding installation procedures. Eco-
Flex’s sales team can also approach actual business buying organizations for bulk purchase opportunities (e.g. long
term government contracts or franchise sporting complexes). Eco-Flex must aggressively promote Gekko at trade
shows, expos, trade magazines and on their website.
These promotional campaigns must be prepared and launched at the same time Gekko first rolls off the production
line.
PLACE
Eco-Flex has representation and resellers across Canada and North America, which are used to bring the current
range of products to market. For Gekko, Eco-Flex will utilise these same channels. If demand grows sufficiently,
Eco-Flex can expand Gekko’s geographic visibility by approaching the over 10,000 flooring stores and contractors
(Co, 2009) to broaden their distribution channels further into both regions, and even look at global exports through
overseas partnerships.
CONCLUSION
Eco-Flex has an excellent opportunity to enter the marketplace with an innovative flooring concept that can
compete well against existing markets as a unique, eco-friendly product.
As demonstrated in this document, volume and rapid presentation must be attained to ensure Gekko captures the
market share and ongoing profits as defined in our overall goal.
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