CASE: ECO 7

Group 2
Members:

Sneha Bahety B19051

Ambar Laad B19005
Chinmay Mundhra B19012
Harsh Parasrampuria B19019
Ankush Kumar Singh B19007

1. How do consumers purchase motor oil? Use "Experimentation done by customers" pn

X Axis and "Level of Involvement" in the Y axis and place the consumer behavior between
Super Traction (low experimentation and low involvement) and Super Slippery (High on
both Experimentation and Involvement). Comment on the nature of customers.

Consumers of motor oil essentially fall into two categories: Do-it-yourself (DIY) and do-it-for-
me (DIFM).
DIY:
These consumers change their own motor oil.
Characteristics:
- Young
- Live in rural and remote areas
- Less affluent (price conscious)
- Have a better understanding of their vehicles and motor oil
- Favoured trucks and SUVs
- Purchased from mass merchandiser

DIFM
These consumers relied on professionals for routine maintenance
Characteristics:
- Older
- More educated and higher income
- Live in metropolitan areas
- Preferred foreign cars and luxury vehicles
- Low understanding of vehicles and motor oil

Level of involvement
 Experimentation Low High
done by customers Low DIY
High DIFM

The DIY consumers would be high in level of involvement, but their willingness to experiment
is low. Whereas, the DIFY consumers would not really care about what product they buy, which
means a low level of involvement. 83% of DIFM customers were willing to accept a
professional installer’s recommended PCMO brand, which shows a high level of
experimentation.

Consumer behaviour

DIFM consumers in general, would show higher propensity towards green oil compared
to DIY consumers. Therefore, it makes sense to target them first. Also, it was easier for
fast-lube stores and other independent installers to switch PCMO brands, and eventually,
it was these stores which steered the DIFM customers into purchasing a specific variety.
In the DIY segment, 25% customers were unsure about green motor oil, and only 41%
were interested (Exhibit 4). But if the oil were to provide similar quality and performance
and were priced at the same rate as current PCMO, the numbers change to 21% and 45%.
This shows that the market penetration can be increased by keeping the prices at a
competitive level.
But at the same time, 34% were still unlikely to purchase green oil. This shows lack of
willingness to experiment and a certain lack of awareness of the environmental benefits.
In the DIFM segment, more than 50% of the customers have shown interest in the green
motor oil. This displays a willingness to experiment, though in this case it stems from a
lack of knowledge about the product. Nevertheless, this customer segment should be the
target.

2. Assess Avellin's strategy in PCMO market, including customer perception and

distribution strategy.

Distribution strategy

Since the beginning of 1980s, Avellin distribution strategy revolved around the DIFM channel
and this seems in tandem with the shifting trend around that time on account of changing
consumer demographics and behaviour and emergence of a more cost-effective option, that is
Do-It-For-Me (DIFM) in lieu of Do-It-Yourself (DIY). By 2013. the independent DIFM
customers contributed to 68% of the company’s PCMO sales. Of these DIFM purchases, fast-
lubes, oil-change-plus stores and repair stores accounted for 53% of the total. Their strategy also
included focusing on their loyalty program, Adventage and though they succeeded in getting
70% (4400/6000) of their fast-lube customers to join this program, it didn’t meet the purpose of
generating loyalty as surveys showed that most DIFM customers could not even recall the brand
of the motor oil they last purchased.
Protecting loyal DIFM customers was such a big priority for Avellin that despite competitors
expanding their fast-lube chains, they continued to remain conservative with their expansion
plans.

Other customer types included – National Retailers and AvellinAuto stores. Among national
retailers, it was only able to cater to the DIY segment as these retailers like Walmart promoted
their private labels like Baud or Motoline. These mass merchandisers and warehouse clubs
(national retailers) ran their own local promotions on Avellin products which shows that
probably their products for DIY customers had a low inventory turnover and high inventory
days.

AvellinAuto stores were located in places that minimised the impact on existing customers.
Sales through these stores led to higher gross profit margins to the tune of $0.75 higher per five
quarts and this was on account of self-servicing rather than through a wholesaler.

Customer Perception

If a customer perceives a brand positively, it is obvious that it will be taken into it’s choice set.
We thus set to gauge how high is the customer’s intent to buy for Avellin. Purchase is a function
of convenience factors like accessibility, availability of product and not a function of customer
perception.

As per Exhibit 3, 45% of the PCMO customers intend to fall into the price-focused DIFM
segment. Among this 45%, Avellin commands 17% of this segment whereas Baud and Motoline
have 9% and 12% respectively in their kitty. The overall intent of PCMO customers to buy
Avellin products is 15% and 16% of the 25% DIY segment. The DIFM quality-focused segment
customers of Avellin intent is around 10% of the 30% total proportion.
Therefore, the DIFM price-focused customers of Avellin are 7.65% of the total PCMO
customers which is a big lot. This intent leads Avellin to focus further on products where they
can command market share based on charging lesser price as compared to their rivals which is
seen in the case of Eco7 where the green motor oil is charged lower than SevoGreen of Sevoline
to take care of this ~8% market and beyond.

3. Does Eco 7 have any strategic role? Discuss willingness to pay and customer interest
shown in a Green Motor oil. So, is the product right?

As expected-
For the green PMCO to grow- Right product -- marketed in the right way and at the right price
As it turns out to be:

There are for sure strategic benefits of Eco7 green motor oil for Avellin which are:
1) Manufactured using 65% recycled oil and 45% less energy than what was typically
required to produce conventional oil, therefore less cost to produce per quart, lesser price
for customers
2) Avellin’s refining process and additives gave Eco7 a longevity and performance
comparable to a synthetic blend; displaying better performance at extreme temperatures
without breaking down, and, for most vehicles, would require replacement only after
 7,500 miles; therefore providing higher value to the customer leading to lesser
complaints & thereby building loyalty towards the green oil & also the brand Avellin.
3) Although there is a buzz around electric or hybrid vehicles, most consumers still have
standard cars that require regular oil changes. An environmentally friendly motor oil like
Eco7 with competitive performance would be compelling. As said by the Vice President
Marketing of Avellin, they can create the green oil buzz and regain market share through
Eco7 and take head-on challenge with the competition.
4) Eco7 has a nice selling point for the customers- that with every quart they spend, they
reduce the amount of oil that needs to be extracted from the ground as nearly 80% of
discarded PCMO was usable, thereby reducing the toll on environment. Each quart used
by the customer means a little less dependency on imports from foreign producers.

However, there are a few stats & figures which also point out to something more insightful:
1) Almost 45% consumers in the DFIM segment which is targeted by Avellin are either
unsure or not interested along with ~60% in the DIY segment having the same
characteristics.
2) Around 45% of consumers are willing to pay the same price for Eco7 as their current
PCMO whereas only 31% consumers are willing to pay 50% more for the green oil while
only 14% are ready to shell out 100% more for the environment-friendly oil.
However, one thing to be noted is that this response is based assuming similar quantity &
performance, therefore the idea of charging a premium only by selling the idea of ‘green
oil’ is not that feasible. The green oil must be backed by better performance to ensure a
premium which consumers can give.
3) 67% of consumers would be influenced in their decision to purchase the green motor oil
by the professional service provider. This figure adds a new dimension to the whole idea
of selling green. It is much of a selling touchpoint game now. The distribution of the
products to the correct vendors at the right places would make the cut. The distribution
needs to be on point as 2/3rd of the consumers are influenced by that. The selling points
need to be conveyed to the correct sellers properly and the sales will follow suit.
Therefore, Avellin would need to consider distributor preferences in mind as a high
priority including their margins.

Thus, to say the product is right won’t be wrong completely but to say this right product would
make sales on its own is wrong. The challenge lies in convincing the customers that they pay the
premium not just for a greener product, but also for a product that gives them better performance
and longevity. Thus, a significant chunk of a customer’s Willingness to Pay also lay on the
message relayed to them by the DIFM service provider.
The distribution strategy of Avellin would matter a lot. A higher margin to them would make
them incentivised to sell Eco7 which would help Avellin to penetrate and gain market share
which they plan to.

4. What should be the price of Eco7 (Check for profitability implications for the
wholesalers and DIFM stores)?

The price of Eco7 should be $6.75. At this price, Avellin would be able to extract more annual
gross profit, in both the distribution strategies of Aventage (exclusive distribution) and through a
mix of independent DIFM installers, wholesalers and AvellinAuto stores, when compared to the
discounted price. The gross profit for Avellin will be $19.88 million for exclusive distribution
and $27.29 million for distribution through a mix of DIFM installers, wholesalers and
AvellinAuto stores.
For the DIFM installers, selling at the full price of $6.75 per quart provides them an incremental
gross profit of $13151/annum and $3937/annum over conventional and private label synthetic
respectively.
For the Wholesalers, selling at the full price of $6.75 per quart provides them incremental gross
profit of $2777/annum and $827/annum over conventional and private label synthetic
respectively.
These calculations are made assuming that there are 105 monthly upgrades to Eco7 from DIFM
installers and Wholesalers and 150 conversions from AvellinAuto stores.
(Refer to Excel Sheet for more clarification) –

Eco 7 full
non-
Aventage aventage others AvellinAuto total
Total stores 4400 1600 6500 436
penetration 75% 45% 30% 100%
Eco7 penetration per store 3300 720 1950 436
Eco7 oil change per store,
annual 1277.5 1277.5 1277.5 1825
Eco 7 oil change annual 4215750 919800 2491125 795700

revenue per oil change eco 7

,Avelin 13.29 13.29 13.29 13.29
gross profit per oil change
Avelin 3.24 3.24 3.24 3.24
annual gross profit Avelin 13659030 2980152 8071245 2578068 27288495

eco 7 full (Aventage only)

Aventage avellinAuto total
Total stores 4400 436
penetration 95% 100%
Eco7 penetration per store 4180 436
Eco7 oil change per store,
annual 1277.5 1825
Eco 7 oil change annual 5339950 795700

revenue per oil change eco 7

,Avelin 13.29 13.29
 gross profit per oil change
Avelin 3.24 3.24
annual gross profit Avelin 17301438 2578068 19879506

DIFM Retail
per unit monthly(105) annual(1260)
revenue per oil change DIFM Retail 33.75 33.75 33.75
gross profit Eco7 DIFM Retail 18.5625 1949.0625 23388.75
gross profit conventional DIFM
Retail 8.125
Eco7 incremental over conventional 10.4375 1095.9375 13151.25
gross profit private label DIFM
retail 15.4375
Eco7 incremental over private label 3.125 328.125 3937.5
gross profit Avellin synthetic DIFM
Retail 21
Eco7 incremental over Avellin
synthetic -2.4375 -255.9375 -3071.25
Wholesaler
gross profit Eco 7 wholesaler 4.21875
gross profit conventional wholesaler 2.015
Eco 7 incremental over conventional 2.20375 231.39375 2776.725
gross profit private label wholesaler 3.5625
Eco 7 incremental over private label 0.65625 68.90625 826.875
gross profit avellin synthetic
wholesaler 4.375
Eco 7 incremental over Avellin -
synthethic 0.15625 -16.40625 -196.875

5.What about distribution? Should it be distributed through Adventage exclusively?

We suggest distribution through the AvellinAuto stores and independent DIFM customers while
keeping it out of the major auto part chains, clubs and national mass merchandisers. This
distribution plan is likely to reach the DIFM customer base. The independent DIFM also
generate large percent (68%) of revenue which would help Avellin to reach significant portion of
market. Moreover, majority of them join the Aventage loyalty program. Given that Avellin is the
leading PMCO brand among the independent DIFM customers, these customers will be more
likely to be receptive to the new product as they already trust the brand. In this way Avellin
might attract new customers of the growing DIFM segment by offering Eco 7 in these stores.
Selling Eco 7 through a wide chain of distributors makes sense as it would help the company to
reach more customers and the company would generate higher revenue.
Furthermore, since DIFM stores has higher gross profit than AvellinAuto, introducing Eco7 in
DIFM stores will maximize the profit in future same as other manufacturers. One other
advantage of this is that AvellinAuto stores are located in the places where DIFM stores have
less presence but the priority should be to focus on independent DIFM customers first and
AvellinAuto second to ensure low competition between AvellinAuto and independent DIFM.
Thus, introducing Eco7 at $6.75 per quart would be good as it will give higher margin and limit
the encroachment of Private labels.