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By: Melissa Bockhold Heather Coddington Laura Duerstock Ali Wampler
March 1, 2006
TABLE OF CONTENTS
I. II. III. IV. Introduction……………………………………………………………………3 Assumptions…………………………………………………………………...4 History………………………………………………………………………....5 SWOT Analysis 1. Two-Cup Approach……………………………………………………….6 2. One-Cup Approach………………………………………………………..7 V. The Coffee Market 1. Market Analysis/Needs/Growth…………………………………………...8 2. Competition………………………………………………………………..9 VI. Keurig Marketing Strategy 1. Target Market…………………………………………………………….11 2. Product i. ii. iii. 3. Place i. ii. iii. K-Cups (or Keurig Cups)...…………………………………….16 B100 Brewer...…………………………………………………17 Market Segmentation…………………………………………..18 K-Cups (or Keurig Cups)...…………………………………….14 B100 Brewer...…………………………………………………15 Product Life Cycle……………………………………………..16
4. Promotion i. ii. 5. Pricing i. ii. VII. VIII. IX. X. XI. K-Cup (or Keurig-Cup)……..………………………………….21 B100 Brewer...….……………………………………………...26 K-Cups (or Keurig Cups)...…………………………………….19 B100 Brewer...…………………………………………………19
Problematic Issues and Alternatives…………………………………………36 Conclusion…………………………………………………………………...38 Comments on Opposing Group’s Paper……………………………………..39 Keurig Authorized Dealer Interview………………………………………...44 Works Cited………………………………………………………………….46
Everyone has a morning ritual while getting ready for the day’s activities. Some people exercise. Some people shower. Some people help get their children ready for school. Some people watch the news or listen to traffic reports. Some people drink coffee. In fact, in 2001, 20 million Americans drank gourmet coffee on a daily basis (Sherry). Keurig, Inc. was founded on the idea that coffee lovers should be able to brew and enjoy one perfect cup of coffee at time. With the establishment of gourmet coffee houses like Starbucks, consumers began stretching their pocketbooks a bit more by spending on average $1.50 or more for a cup of gourmet coffee (Anderson 4). This change in consumer behavior opened the door for Keurig to offer gourmet coffees by the single-cup in offices in 1998. Keurig noticed that from 1996 to 2000 gourmet coffee sales increased by 40 percent in the U.S. at-home coffee market. This statistic persuaded Keurig’s management to develop an at-home, one-cup coffee brewer specifically for gourmet coffee lovers (Anderson 15). Keurig’s development progress toward the launch of their first at-home brewing model was stunted in February of 2003, six months prior to the release date of the brewer, by company shareholder Green Mountain Coffee Roasters Inc. This paper will address Green Mountain Coffee Roasters’ concerns and provide recommendations and alternative solutions to problematic pricing and marketing dilemmas. In addition to our analysis, we are going to examine the presenters’ approach and critique the options they suggest.
In analyzing the marketing strategies and launch options of Keurig, Inc., we are operating under the following assumptions: • Surveys and market testing were completed with professional services and accurately reflect the current feelings of the consumers at the time of testing. • • • The description of the coffee drinkers/customers is correct. Keurig is outsourcing the manufacturing of their brewers. Keurig has already incurred design and manufacturing cost of their Keurig-Cup and brewer of $700,000 ($400,000 for development of the new cup-based technology, and $60,000 per Keurig-Cup packaging line, assuming one line per each of Keurig’s five roasters). • The manufacturer of the B100 included all variable and fixed costs in their calculation of the unit costs for manufacturing the B100 brewer. • The costs of the B100 brewer, as reported by the manufacturer, are $220 at the time of Mr. Lazaris’ meeting with GMCR management. The manufacturer is attempting to lower those costs to $200, but this has not yet been achieved.
8% of brewer distributors offer a single-cup system for the OCS market Filterfresh establishes relationship to market Keurig’s commercial brewer. thus creating a system with greater variety of coffees and teas (February) Ownership structure changes. (42%). Inc.000 20 million Americans are drinking gourmet coffee on a daily basis (February) Keurig sets plans to launch B100 system in the at-home market Total single-cup brewer placement in the OCS market reaches 143.200 Keurig increases roaster partnership to five. History Timeline of Keurig.46 billion in total revenue Keurig’s total number of brewers shipped across North America reaches 33. 8 varieties of coffee offered 14. the first line is to be “Celestial Seasonings” brand teas OCS market reaches $3.8% of brewer distributors offer a single-cup system for the Office Coffee Service (OCS) market 44. Inc. three largest shareholders become Van Houtte. and Memorial Drive Trust John Whoriskey joins Keurig as the GM of the at-home Division Keurig’s roaster partners ship more than 125 million K-Cups Total K-Cup shipment since the launch rises over 340 million Keurig begins working on a line of teas (T-Cups).1 pounds per capita) Keurig’s inception • • • • • • • • • • • • • • • • Gourmet coffeehouses reinvigorate the market Keurig introduces its single-cup brewing system (B2000 model). and the North American Coffee Market Mid1940s 1960s Mid1990s 1992 Late 1990s 1998 • • Peak of coffee consumption (16. thus providing the largest variety of coffees for a single-cup brewing system 5 2000 2001 2002 2003 . Green Mountain Coffee Roasters.III. Inc.5 pounds per capita) Popularity of soft drinks causes coffee consumption to decline • • All-time low of coffee consumption (6. (28%).
Similarity between cups can cause confusion between which cup goes with which brewer. • • Increased inventory for roasters Lack of demonstration ability in retail sector – Keurig-Cups not available for purchase in retail stores • Lack of resources to properly market and sell brewer and Keurig cup in retail outlets Opportunities • No change or continued growth in OCS market = more available resources for expanding distribution of at-home market into the retail sector Threats • Brewer pricing does not decrease and competition enters with a lower pricing strategy. 6 . Keurig suffers large losses. because the differentiation would prevent theft of K-Cups provided for office consumption. Two-Cup Approach with Brewer Strengths • • • Does not threaten the KADs and the OCS market Increases control of pricing – specifically for the Keurig-Cup Increases the likelihood of managers’ participation in in-office promotions of the Keurig at-home system. SWOT 1.IV. Weaknesses • Don’t confuse the buyer.
Weaknesses • • Could result in alienation of the OCS K-Cup channel Decrease in control of pricing with the KADs Opportunities • If Keurig is able to enter the market quickly. One-cup Approach with Brewer Strengths • • • Allows quick entry into the at-home market before competition Less customer confusion Roasters not required to keep two separate cup inventories (one inventory for OCS market and one for at-home market) • Roasters’ production levels will probably increase with the increase in demand. then they have more opportunity and time to come out with smaller and cheaper brewers. Keurig suffers loss of market share. 2. since the at-home market will include KADs and at-home consumers. • Easier to enter the retail market in the future because of less overall costs Threats • Brewer pricing does not decrease and competition enters with a lower pricing strategy. • Lack of resources to market and sell brewers and cups through retail outlets at time of launch 7 .• The brewer pricing is so high that breakeven sale point is not met. making Keurig rely on Keurig-Cup sales to make up for losses from brewer sales. This scenario results in the brewer becoming loss leader.
1. Several others are seeing the growth potential and are developing their own at-home one-cup brewers. 4. Market Analysis/Needs/Growth 2000 Total Retail Coffee Market ($ in billions) Ot her.6 billion At Home .Ret ail.9 billion At Home . According to these statistics.Gourmet . the overall coffee market is vast and growing. V.9 billion Away f rom Home .• OCS users experience losses from K-Cup theft and thus it is not economical for offices to use the Keurig system. However. This section will delve more into the coffee market as a whole and the competition that is challenging Keurig. in terms of amount of coffee consumed. 3. The Market As shown in our diagram below. 3. there is a market. Keurig is not the only company with their eye on the single-cup market. The gourmet coffee market generates around $7 billion dollars in sales annually.Gourmet.1 billion (Anderson 6) 8 . 6. for Keurig’s single-cup brewer.
their system left much room for improvement. The pricing of Procter & Gamble. Filterfresh. Nestlé. Keurig faces greater competition. Sara Lee’s at $70. In the at-home single-cup market. was the pioneer of the one-cup coffee brewing system. Although Filterfresh was the first to introduce a single-cup brewer.. subsidiary of Van Houtte. Salton’s home model retails at $49. Inc. Flavia’s focus is also on ease of use. and there is speculation that both Procter & Gamble and Nestlé may do so as well. Keurig has two primary competitors: Filterfresh Coffee Service. The hopper it used made clean-up and reloading coffee beans necessary (Anderson 5). Similar to Keurig’s system. introducing the technology in the 1980s.2. Keurig does not currently have the resources to compete in these retail markets. so one of Keurig’s challenges is in creating meaningful product differentiation to bring their brewer to the up-scale market. foil-sealed Filterpacks (Anderson 6). and Flavia. They also plan to sell through mass retail and grocery outlets (Anderson 8-9). Keurig’s introduction of the K-Cup enhanced the one-cup system to something better and more convenient for users. and other competitors’ brewers and coffee pods is much lower than the proposed pricing of Keurig’s. Flavia offers a variety of twenty-four coffees in individual. Both Salton and Sara Lee plan to enter the at-home market. Competition In the Away-from-Home single-cup market. Inc. and Procter & Gamble is expected to price similarly upon entering the market (Anderson 8). 9 .
not all products offered are exactly the same. 10 . Procter & Gamble and Philip Morris/Kraft hold 68% of the entire market. In the gourmet sector of the coffee market. we can see that there is stiff competition in the general coffee market: 2000 Coffee Market Share Other 8% Private Label 8% Community Coffee 2% Tetley 2% Chock Full o' Nuts 3% Starbucks 4% Nestle 5% Proctor & Gamble 36% Philip Morris/Kraft 32% (Anderson 18) Together. Instead. Keurig must utilize a marketing strategy that creates a competitive advantage. Keurig is targeting a more up-scale audience of gourmet coffee drinkers. While the entire coffee market seems to be an oligopoly with Procter & Gamble and Philip Morris/Kraft as the main competitors. thus taking away market share from other companies and attracting those customers to gourmet coffee and brewing systems. perfect competition does not exist. Here. although they primarily target the non-gourmet coffee consumer (Anderson 18). it is important to define the relevant target market and competitors within that market.In looking at the following exhibit.
This gives the competitors pricing options (McCarthy 96). Target Market As Keurig decided whether or not to launch their product into the at-home market. when comparing the brewers of Flavia and Melitta. Keurig has some significant advantages over the competition. The consumers of these up-scale brewers are those that Keurig will target and attempt to show the appeal of one-cup technology. models. there are. Krups. For example. Melitta and Flavia both offer the user a choice between a strong five-ounce cup and a weaker eight-ounce cup. Keurig is viewed to have the upper hand over these two companies because they offer the consumers a greater variety of coffees and a better quality coffee with every cup. In Keurig’s case. competition includes Cuisinart. Below. DeLonghi. we will discuss Keurig’s approach to marketing their B100 brewer. Keurig Marketing Strategy All companies need a marketing strategy upon entering a new market. Keurig’s K-Cup (or Keurig-Cup) system and brewer match up very well against the competition. the main difference is in the size of cup brewed.this is monopolistic competition. a subsidiary of Salton. However. areas in which Keurig trails. and pod systems. they looked at the statistics for the United States retail at-home coffee market. 1. In the up-scale sector of multi-cup brewers. VI. The 11 . In this monopolistic competition. and Bunn (Anderson 8). Braun. Keurig’s B100 only offers the eight-ounce choice (Davids). however. Products and whole marketing mixes contain differences between companies. they had a successful marketing strategy for the OCS market already in place by the time they decided to break into the at-home market.
in 2000. the gourmet coffee sales had increased by 40 percent to $3.100 million. Keurig needed to find out if their single-cup brewer would be accepted by gourmet coffee consumers (Anderson 15).S. Retail At-Home Coffee Market 3100 2000 3815 3000 1999 3800 Year 2800 1998 3975 Gourmet Mass Market 2500 1997 4205 2200 1996 3905 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Coffee Sales ($ in millions) 12 . These large boosts in the market’s gourmet coffee area proved to Keurig that this market was and would continue to quickly expand. Also. Four years later. a 25.200 million. U. approximately 320 million pounds of gourmet coffee were sold in the United States. In 1996.5 percent increase in pound consumption by volume from 1996.results were very promising. in 2000. gourmet coffee sales were at $2.
The same key elements were identified during the internet-based survey.S. For more information on pricing. The same people. showed that over 75 percent would consider purchasing a system like Keurig’s. Keurig was able to determine the key factors in marketing their brewer and K-Cups. Retail At-Home Coffee Market 320 2000 840 310 1999 850 Year 290 1998 830 Gourmet Mass Market 270 1997 845 255 1996 850 0 100 200 300 400 500 600 700 800 900 Pound Volume (in millions) From 1999 to 2001. The research was conducted in several different formats. The results of the intercept surveys. indicated that they would pay $0. Keurig carried out market research studies to determine the acceptability of their product to the at-home consumer. and home use surveys. The internet-based survey helped identify Keurig’s “core customer” group as younger males (Anderson 7). surveys of current OCS users. Through intercept. see section VII.55 for a K-Cup and $130 for the B100 brewer. Key elements identified through demonstration during the intercept surveys included quick brewing time and minimal clean-up. and focus groups of at-home test users (Anderson 7). whose respondents had to drink at least one cup of gourmet coffee per day. The internet survey also proved that a demonstration of the Keurig model increased the likelihood of a sale from 75 to 90 percent. The 13 . There were intercept and internet surveys.U. who saw the demonstration. internet.
2. they can move ahead with their marketing plan of the at-home B100 brewer. A variety of coffees are available for the system. who had a commercial brewer placed in their home. The concerns included GMCR’s fear of complicating the production of portion packs with the two-cup approach. K-Cup (or Keurig Cup) Keurig’s patented K-Cup is a unique portion system that contains ground coffee beans and filter paper. Keurig is also planning to launch a variety of teas. In 1998. In 2003. as well as which aspects of their product are most valued. GMCR is Keurig’s strategic partner and business investor. GMCR was also fearful that customer dissatisfaction would result from using the wrong portion pack in a Keurig brewer. coffee variety. This would also affect inventory levels and warehousing. reflecting the selection available in gourmet coffeehouses. The management team expressed their wishes to keep a one-cup 14 . Keurig is now able to offer the largest variety of coffees for any single-cup system in the market. the executives of Green Mountain expressed some concerns to Mr. Lazaris about the details of the B100 launch. they offered eight varieties of coffee. thus making available over 75 varieties of coffee (Anderson 2). During the February progress meeting with GMCR’s management.home use testers. Now that Keurig is aware of which market and type of consumer to target. when Keurig launched their commercial brewer. TCups (Anderson 4). K-Cups are produced by five roasters packaging six total brands. Product i. and cleanliness of preparation (Anderson 7-8). not only identified speed and clean-up as key attributes but also taste consistency.
The proposed two-cup system increases the likelihood of office managers to participate in promotion of the Keurig at-home system because the threat of K-Cup theft would be eliminated. We feel the color distinction is necessary if the two-cup approach is chosen. at-home brewing market (Anderson 10). as coffee makers represent one of the largest volumes of small appliances sold for use in the home (Anderson 6). in both the away-from-home and at-home markets. The company is fearful that office managers in the successful OCS market. ii. We feel Keurig has a strong argument against a universal K-Cup. an important marketing channel for the at-home system. This fear exists because employees owning an at-home Keurig system could be enticed to steal K-Cups from the office’s supply (Anderson 10). A key element of this brewer is that it 15 . Entering the at-home market with this model is important for Keurig. will not support Keurig’s using the same K-Cup for the home brewer. B100 Brewer The new B100 model from Keurig is a revolutionary new single-cup brewing system targeting at-home users. However. the K-Cup. but the two colors chosen by Keurig are too similar and the buyer would be easily confused. the proposed K-Cup (OCS)/Keurig-Cup (at-home) package differentiation has some problems. the color of the cups will be different. We agree with GMCR management after looking at the benefits of using the existing commercial portion pack. tan for at-home and white for away-from-home (Anderson 9). There is potential for customer dissatisfaction if the wrong cup is purchased and used in the wrong brewer.approach based on their desire for “long-term simplicity” and the ability to move quickly into the one-cup. The main benefits are that the buyer will not be confused by the two-cup approach and roasters will not have to have two separate inventories for Keurig products. First.
” is a key factor for the potential success of Keurig’s at-home brewing system (Anderson 3-4). 16 . and place to establish the new product in the market (McCarthy 271). product. Each KAD has entered into direct relationships with one or more roasters to purchase K-Cups and subsequently sell them to office managers. in the introduction stage. This results in the perfect cup of coffee every time. companies generate losses because financial resources are focused on promotion. iii. Generally. the speed of brewing a cup of coffee. Place i. I I) II) III) IV) II Introduction Growth Mature Decline III IV 3. Although they have been in the OCS market since 1998.provides the user a significant amount of control over the amount of coffee and the temperature and pressure of the water. K-Cup (or Keurig-Cup) KADs provide a variety of coffees to offices for their Keurig OCS system. the B100 is designed for the athome market. Product Life Cycle Keurig’s B100 is currently in the introduction phase of the product life cycle. “perfection in under a minute. Keurig is entering a new market and a new product life cycle. The flavor profile from each roast of coffee is recreated on a consistent basis. Also.
Keurig needs to quickly find a viable means through which to launch 17 . yet problems arise when dealing with the roasters’ concerns about its complexity. in turn. causing concern for a potential decrease in cup sales. a controlled distribution strategy must be utilized. Keurig’s competition is already pricing below the K-Cup prices at which KADs sell to the OCS market. Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs) markets. The KAD is then responsible for ongoing maintenance and repairs to the brewer (Anderson 5). If production and inventory costs were to increase.000 and are placed in offices for free or for a low rental fee in exchange for ongoing coffee sales. in turn. B100 Brewer KADs play the primary role in serving the OCS market. We agree with GMCR that it appears the two-cup approach would be inefficient when the goal is to keep production and inventory costs down. ii. Instead. Keurig does not yet have the resources to sell either their brewer or coffee in mass retail outlets. the cost of the K-Cups would also likely increase. KADs will. Keurig’s rapid penetration into the OCS market and the use of many reliable distributors and KADs has given the company a good reputation. Another major distribution problem that Keurig faces is in their lack of existence in retail channels. sell the cups directly to OCS employees owning an at-home system (Anderson 10). Commercial brewers are purchased by KADs from Keurig at wholesale prices ranging from $500 to $1. We believe that the distribution channel that Keurig is proposing for the two-cup approach is logical. makes entering the at-home market on the coattails of the office market a viable business opportunity. This.As stated earlier.
but P&G offers the greatest variety with only 15 coffees and teas available. Keurig has its own niche.the sale of the B100 into retail outlets. and Sara Lee are all clustered in the same segment of the market. As shown below. (Anderson 9). Their brewers are cheaper in price compared to Keurig. The only current option is “e-commerce-enabled” Web sites. Procter & Gamble1. iii. but according to the case. The brewer pods they package are compatible with other brands’ single-serve coffee systems. While they are the highest in price. they will price similarly to Salton and Sara Lee. Market Segmentation We segmented the coffee market into a comparison between the price of the brewer and the varieties of cups/pods offered. if they decide to introduce a brewing system. 18 . Salton. they also have over 75 varieties of coffees and teas. High Price Limited Variety Wide Variety Low Price Legend Keurig P&G Salton/Melitta Sara Lee/Senseo 1 Procter & Gamble does not currently manufacture brewers.
all of which are sources of dissatisfaction with at-home users’ current systems. The key elements Keurig must implement into its promotion strategy for the B100 include being one of the first entrants into the at-home market. it has been shown that the B100’s core customers are younger males. Another strength of Keurig’s promotional strategy is that by partnering with five different roasters. ii. Keurig’s B100 system has the potential to seize a large portion of their target market if it is promoted well. K-Cup (or Keurig-Cup) We feel the best promotional activity for K-Cups is to offer discounts when buying cups. The key factors of interest to promote include convenience. being portrayed as a single-cup pioneer. and minimal cleanup. They believe that being the single-cup pioneer will enhance the system’s visibility in the up-scale market. Promotion i.4. they can offer the largest variety of coffees and teas in the at-home market. Through the internet-based survey. and enhancing its visibility in the up-scale market (Anderson). One strength of Keurig’s promotional strategy is that they are aiming to be the first entrant into the at-home gourmet coffee market. B100 Brewer The market research commissioned by Keurig shows that the best way to gain interest in the system is through demonstrations. quick brewing. ease of use. Another possibility is to offer 25 cups at regular price and half off on the second 25 purchased. For example. a discount could be offered through free shipping and handling when total cup purchases are over a certain dollar amount. 19 . 90% of those surveyed indicated that the demonstration increased their likelihood of buying the product.
from sports to stock and financial sites. Keurig needs to utilize this avenue. affluent shopping malls. The first promotional offer is a referral program. When a first-time buyer goes onto Keurig’s Web site to purchase K-Cups or a brewer. There are also two promotional activities that Keurig can offer to their buyers in order to increase their customer base. Although it is stated in the case that Keurig does not currently have resources to sell through retail chains. That referral person and the new Keurig B100 owner would then receive $25 in free K-Cups. there are several weaknesses with the rest of the plan.’ Having your company’s name associated with excellence can be another great marketing tool. airports. which are prime locations for demonstrations. Promotion needs to be geared toward these younger males.While these factors strongly support Keurig’s promotional strategy. the word ‘Keurig’ is Dutch for ‘excellence. there would be a place to type in the name of the person who referred them. One such weakness is that they do not use their slogan or the origin of their company name to their advantage. The second promotional offer would be to utilize point of purchase sites in the OCS market 20 . “Deliciously Simple” is a great slogan that emphasizes the two major themes of coffee advertising: ‘good taste’ and ‘positive stimulation’ (Anderson 6). Keurig is currently not doing everything it can to target its core customers. One way to achieve this would be to buy advertising space on various Web sites. and high-end appliance shows. The slogan also touches on the fact that the system is very easy to use. Since market research has shown that demonstrations are a significant way to increase system interest and purchasing potential. In addition. perhaps they should set up demonstrations at professional conventions.
1 14.54 16.49 20.25-$0. it is evident that those coffee drinkers consuming two or more cups per weekday are more willing to pay a higher price for each cup of coffee than those coffee drinkers consuming only one cup per weekday.40-$0.5 $0. The first graph.45-$0.29 60.2 48. displays the willingness of one-cup and 2+ cups per weekday coffee drinkers to pay for a K-Cup (or Keurig-Cup).30-$0. K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption $0.6 0 10 20 30 40 50 60 70 80 Cumulative Percentage of Respondents 21 .7 30.2 $0.7 K-cup (or Keurig-cup) Pricing $0. 5. K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption.39 28.3 75.6 $0.34 41 58. we can see that there is a significant difference between the responses for the two coffee drinking sectors (Anderson 16).6 $0.55 + 5.by giving $50 instant rebates to entice buyers to invest in the Keurig system for their athome enjoyment (Anderson 19). Pricing i. These results can be confirmed by looking at the following bar graphs.35-$0.5 33.50-$0. K-Cup (or Keurig-Cup) When looking at the results of Keurig’s market research. These results show that 2+ cups per weekday coffee drinkers are much more willing to pay higher prices for their cups of coffee than the one-cup drinkers.5 1 Cup/Day 2+ Cup/Day $0. While this survey includes only those consumers who were very or somewhat likely to purchase the system.44 22 41.
3 6.30 9.39 5.5 9.9 22.9 0 5 10 15 20 25 30 35 40 Percentage of Respondents Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption (2+ Cups/Day Consumption) 10.1 $0.50+ 5.00 5.2 $0.4 34.2 $130+ $100-$129 < $100 6.4 $0. Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption (1 Cup/Day Consumption) 1.5 5.9 10.4 2.3 0 5 10 15 20 25 Percentage of Respondents 22 .40-$0.7 5.6 4.9 < $0.40-$0.30-$0.1 0 Don't Know 0 5.2 $130 $100-$129 < $100.49 2. are also more willing to pay a higher price for their cups of coffee (Anderson 16).4 2.49 2. These graphs suggest that those 2+ cups per weekday coffee drinkers.3 < $0.2 0 Don't Know 0 6.9 1. who are more willing to pay a higher ($130+) price for a brewer.39 7.7 K-Cup (or Keurig-Cup) Pricing $0.30 8.30-$0.1 8.50+ 9.9 K-Cup (or Keurig-Cup) Pricing $0.We can further show that 2+ cups per weekday drinkers are more willing to pay a higher price for their individual cups of coffee by looking at the next two graphs comparing K-Cup (or Keurig-Cup) pricing and brewer pricing between one-cup and 2+ cups per weekday consumers.2 $0.
and the office managers regardless of whether a one-cup or two-cup approach is used. From the $0. it seems like the ideal price for a K-Cup (or Keurig-Cup) in the at-home market is $0. the incentive to office managers to buy K-Cups from the roasters or Keurig is eliminated because they can buy more cheaply through the KADs. Keurig is paid a $0. we can assume K-Cup (or Keurig-Cup) sales will also be higher than the average of what one consumer drinks per day without the Keurig system. If the at-home K-Cups (or Keurig-Cups) are sold at a price of $0.Since the survey of the B100 system showed that at-home coffee consumption increased with the presence of the Keurig brewer.50 per K-Cup. From these analyses and the results of the K-Cup (or Keurig-Cup) pricing based on consumption survey. The survey showed that per day consumption averaged out to approximately 2. This pricing strategy gives the KADs pricing power in their OCS market. While in this survey K-Cup (or Keurig-Cup) pricing did not seem to be an issue.55 to the at-home users through either the roasters or Keurig.55 per cup. Based on the market research it appears that regardless of whether Keurig decides on a one-cup or two-cup strategy. This price would benefit Keurig.04 royalty on each cup sold (Anderson 5).25 paid to the roasters. By looking at the graph above we see that they are also more willing to pay $130+. the pricing of the at-home portion pack should be 23 .25 cups per day with the Keurig system (Anderson 7-8).40 $0. from the other market research conducted we can see that those gourmet coffee drinkers consuming 2+ cups of coffee per day are more willing to pay a higher price for the K-Cups (or Keurig-Cups). the higher price for the brewer (Anderson 16). Currently KADs are able to buy K-Cups from the roasters at a price of $0.25 and sell the K-Cups to office managers for $0. the KADs.
55 through Keurig or a licensed roaster. These contracts not only protect the KADs sales of K-Cups. if the KADs are able to increase the price of the K-Cups they sell to the OCS market to $0. if the one-cup option is chosen. it seems to be a consensual point in all the surveys conducted by Keurig. Keurig can impose a higher price for their coffee because the variety offered is one of the most important aspects of the K-Cup appeal. there is still no incentive for the office managers to buy from any place other than their KAD. On the other side of this pricing arrangement. As stated earlier. Keurig’s large variety of coffees and teas enables pricing power in their K-Cups to appeal to these consumers. the quantity of 24 . While this price is above the price set by the KADs. Of course. if the K-Cups were priced lower. If an office manager were to buy K-Cups directly from a roaster or Keurig. all Keurig brewers sold. These people know what they want and like in a cup of coffee. but they also protect the users because the contracts stipulate that the KADs are responsible for all maintenance and repairs to the brewers while they are in use. However. or used through KADs are done so through contractual agreements in which the user can only buy brewer supplies through the KADs.55.55. at-home B100 users not in contract with a KAD will be able to purchase their K-Cups for the price of $0. leased. the office managers and KADs will still have the benefit of a favorable price discrimination strategy by Keurig.$0.55. According to Keurig Authorized Dealer Bob Spangler. The market we are targeting with the Keurig at-home brewing systems are connoisseurs of coffee. it would be a breach of contract and grounds for removal of the Keurig system. While the KADs have no real incentive not to increase their K-Cup pricing to match that of the online selling price of $0. a rise in the price of K-Cups would probably deter office managers from buying a large amount of K-Cups or investing in Keurig’s OCS at all.
20 each. This pricing is optimal for the same reasons as for the one-cup option. the wholesale price of the K-Cups from the manufacturer is $0.25 the KADs would not make any money from the sales.25. If Keurig were to price their cups at the Salton price of $0. However. decreasing profits that Keurig and the roasters could make through direct Keurig-Cup sales. investing in the Keurig athome system. The price of the K-Cup would still be left to the discretion of the KADs. Market competitors like Salton. whose pods sell for $0. according to market research. As we have stated before. our main target market is focused on the serious gourmet coffee drinker averaging a little more than two cups per day.55. there is no real foreseeable pricing competition between the two different cups. and the lower price per cup of coffee might entice other people to invest in the Keurig at-home brewing system.25. If Keurig would decide to go ahead with the planned two-cup strategy.40 to be competitive with the Senseo pods. and Senseo. and. these pod prices are sometimes deceiving because the Senseo machine requires two pods to create one eight-ounce cup of coffee.K-Cups sold have the potential to be higher. could opt to buy through KADs. are marketing their gourmet coffees at a much cheaper price (Anderson 9). whose pods sell for $0.04 royalty. If Keurig were to price around $0. Other K-Cup (or Keurig-Cup) Pricing Options One option in the pricing of cups not discussed above is to price the K-Cups (or Keurig-Cups) at a level similar to their competition. sales would be better but still inconsistent with the cup demand. almost five times 25 . the pricing for the at-home system Keurig-Cup should also be $0. but since the Keurig-Cup would not be a substitute for the K-Cup in the OCS market. and Keurig would receive less than their current $0. A con to this option would be that consumers.
as many people were willing to pay $0. and Van Houtte. taste assurance. B100 Brewer Keurig’s goal is to use value pricing in order to set a fair price level for their marketing mix that will give the target market superior value through convenience. up-scale gourmet coffee drinkers. Either way. 26 . is very important in the development of their pricing strategy (Anderson 6). would decrease. Keurig is very dependent upon their KADs to help promote the B100 through word-of-mouth with their clients. if Keurig would decide to price lower to be more competitive. Keurig’s definition of their target market. A pricing strategy that is focused on their competition is not the way to meet this objective. and variety. Also vital to their pricing strategy is the recognition and analysis of the competition within the retail at-home coffee market (see Section V-2). the profit margins for all parties involved. Yet since two of Keurig’s roasters are shareholders. This drop in profits could also cause the KADs to not participate in the KAD referral program for the B100. speed. except the roasters. Inc. The benefits of Keurig’s value pricing strategy is in giving their customers pleasant surprises in convenience and speed of coffee preparation while continuing to provide a consistently great-tasting gourmet coffee. and if the KADs do not help with marketing the B100 to the “Keurig-awares” in the OCS market. Green Mountain Coffee Roasters.40 (see bar graph on page 23). they would also suffer from Keurig’s decreased profit margins. ii.50 for the cups than they were $0. so they need to focus on a pricing strategy that will not only meet the demands of the potential B100 coffee consumers but that is non-threatening to the KADs. projected sales for the brewer will be very disappointing.
According to Keurig’s marketing materials. make $36.00 compensation for each at-home brewer sale attributed to the KADs OCS accounts. Those participants who actually experienced a demonstration of the B100 27 . Early market research has shown that consumers will pay greater attention to the pricing of the brewer and will have direct impact on consumers’ willingness to buy into the Keurig system. In the fourth quarter of 2003. It appears that the pricing objective of Keurig is oriented toward sales.90 per customer for each B100 sold through their OCS accounts.and post. with expected sales of two brewers for each office where advertising is placed. various prices were tested and also recommended by participants.00 per office if they participate in the joint marketing program with Keurig. a KAD will profit $21. single-cup gourmet coffee brewing category.work coffee cravings. if a B100 customer drinks on average one cup of coffee per day for three years. In addition. In price testing of the brewer. each KAD is expected to make at least $74. This profit does not include the spread KADs receive through the sale of K-Cups (or Keurig-Cups) to the clients. for example. These proposed allowances will include a $15. So. Therefore. a flexible pricing policy is being used at point-of-sale displays to entice OCS users to purchase the at-home system to fulfill their pre.90 over the three year annuity period. Their primary goal concerning the at-home market is to be the leader and pioneer in the up-scale. it is expected that 60% of the KADs will participate in the joint marketing program. Keurig plans to use push money allowances with their KADs through a KAD referral program. on average. To help achieve their sales-oriented goals. Therefore a KAD will. when the B100 is scheduled to launch. The pricing of the brewer is a great concern for Keurig executives. the KAD will also receive a two-cent-per-K-Cup (or Keurig-Cup) annuity on subsequent coffee sales that Keurig makes to that customer for three years (Anderson 12).
Past experiences with a former at-home brewer designed by Keurig. Follow-up questions to this internet survey found that the average price these core-customers would pay for such a system was actually $125.$149. requiring more consideration prior to purchasing (Anderson 7-8). Finally.000. these costs should be factored into Keurig’s breakeven analysis for the B100 brewer because the costs will be paid by Keurig regardless (Jordan 313).99 was tested. were found to be $400. However.and were informed that the average price of high-quality coffee makers sold in the range of $69 . an acceptable price range for the brewer was found to be in the $129-$199 range. This survey resulted in a 9% positive return identifying those core-customers who would “definitely buy” or “probably buy” a system like the B100. total costs of the new KeurigCup system with the B100 are $700. responded with a willingness to pay more than $130 for the brewer. A price exceeding $200 was found to be a price point at which consumers began to view the brewer as a luxury purchase. provided insight into worrisome high costs and design issues from Keurig’s 28 . Costs involved with the production of the at-home system. a price point of $149. with a two-cup approach. In another survey given to daily coffee drinkers over the internet. During this test.000 per roaster of K-Cups and Keurig-Cups for new parts for the packaging lines to enable production of both cup types. an at-home use test was conducted in the homes of gourmet coffee drinkers with a commercial model brewer. the B1000. This is a sunk cost that should be omitted from cup pricing considerations because Keurig incurs the cost regardless of which cup approach is chosen.000 for the development and design of the necessary tooling to thermoform the new cup bases for the Keurig-Cups and another $60. With five licensed roasters.
976.000.00 -$410.000.980.00 $4.000.760.100.000.000.00 $4.362.000.00 $5.00 $16.000.00 $6.00 24138 Profit -$700.000.000.000. the most recent costs reported for the B100 from the manufacturing partner were projected to be $220 per brewer.000.00 $7.000.300.000.00 $6.900.735.00 $9.00 $5. breakeven quantities for brewer sales are as follows for the key price points of $249 and $299 (Anderson 11): Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 10000 15000 20000 23000 24000 24138 25000 30000 40000 70000 100000 Cost $700.000.00 $6.000.000.000.manufacturing partner.00 $7.00 $25.000.900.010.00 $3.000.00 $170.490.000.000.00 $5.000.000.00 $2.00 $5. Even with the knowledge gained from past mistakes and problems with the B1000.200.700.727. With costs at $220 per brewer.00 -$120.430.000.000.330.100.000.000.00 $700.000.000.000.200.00 $2.500.00 $1.010.00 $249.980.00 $460.00 -$265.00 $220.960.470.000.00 $17.00 $24.000.00 29 .00 $2.00 $6.000.00 $5.000.360.225.00 -$4.00 $9.00 Revenue $0.00 $22.00 $2.00 -$33.
000.420.00 $880.00 $220.00 $6.00 Revenue $0.100.000.460.00 $299.000.00 $2.000.000.000.000.000.439.000.000.000.00 $2.500.000.960.000.000.00 $1.900.000.00 $2.000.000.00 $7.495.800.00 $1.00 $7.00 $20.930.00 $2.000.700.392.990.000.000.000.00 8861 Profit -$700.475.00 $8.000.300.000. with additional engineering efforts.200.000.00 $2.00: 30 .000.00 $5.000.485.00 $2.000.00 $90.00 $700.00 Keurig and the B100 manufacturing partner are hopeful that.00 $16.100.670.980.649.00 $9.000.830.00 -$305.000.000.00 $485. the production costs can be reduced to $200.900.00 $7.00 $22.00 $4.Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 8000 8861 10000 15000 20000 25000 30000 40000 70000 100000 Cost $700.460.000.000.00 $2.00 $4.00.970.000. Another breakeven analysis is shown below for the key price points with unit costs at $200.00 $1.00 $1.00 $29.00 $11.000.00 -$68.649.200.00 $4.275.00 $5.00 $19.
000.700.00 $249.000.270.200.000.200.000.000.00 $2.00 $5.000.00 $14.00 31 .00 $5.000.00 $290.00 $14.00 $700.Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 10000 14000 14286 15000 20000 25000 30000 40000 70000 100000 120000 Cost $700.700.000.700.000.180.00 $9.260.000.000.00 $700.000.00 $5.930.000.00 $3.229.000.000.000.230.000.000.00 $2.475.00 $20.00 $525.000.000.00 -$7.700.000.000.980.00 $5.700.00 $8.00 $4.430.00 $2.000.470.490.000.485.000.00 $7.000.000.00 $2.700.495.00 $20.970.200.000.000.00 $4.000.00 $29.700.00 $6.000.000.00 $3.000.00 $1.500.000.486.557.000.000.280.00 $8.000.00 -$14.880.00 $4.00 $29.980.700.700.00 Revenue $0.557.000.00 $7.00 $9.000.00 $2.00 $2.00 $3.00 $1.700.000.00 $14.00 $1.00 $2.700.00 $3.700.00 $2.00 $200.00 $280.00 $1.00 $6.960.000.730.00 Revenue $0.000.735.114.900.000.00 $35.700.00 $2.000.000.000.00 $1.100.00 $17.00 $24.00 $8.000.000.00 -$210.000.000.00 $785.000.200.000.00 $3.00 $3.00 $6.000.260.00 $4.00 $4.00 $24.000.960.093.00 $29.00 Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 7000 7071 10000 15000 20000 25000 30000 40000 70000 100000 Cost $700.00 $6.000.775.00 $11.700.000.00 $2.000.00 $299.700.00 $200.700.000.900.700.00 14286 Profit -$700.214.00 $770.000.700.000.000.114.990.00 -$205.225.000.000.000.00 7071 Profit -$700.00 $3.00 $20.00 $3.000.000.
000. the B100 would become a loss leader.450.25 cups/weekday*5 days*52 weeks = $175.00 $175.000.55-$0.000.390.000. there would be no level of brewer sales that would result in a profit.25 cups of coffee per day with their B100 system five days a week.700.00 $16.00 Cost $700.745.820.00 $188.8.131.520.000.750.50 32 .50 $72.000.00 $845.00 $1.696.000.000.500.000. If the B100 is sold at a price of $199.00 $5. If Keurig relies on the sale of cups to make up for pricing the brewer below cost.000.100.25)*2.000.000.498.00 $1.000.55 will be used with the assumption that the owner of the B100 would consume.00 $2.00 Profit -$700. The K-Cup (or Keurig-Cup) price of $0.00 Annual Projected Coffee Sales: ($0.500.00 $10.000.000.00 $22.00 $2.00 $14.00 $1.00 4531 Revenue $0. Obviously.50 $1.00 $220.00 $3.859.000.00 $26.00 $37.980.00 $5.502 $700.00 $14. otherwise. 2.00 $1.000.490. Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 4000 4531 5000 10000 20000 40000 70000 100000 2 $199.580.480.000. The annual coffee sales are included in the breakeven analysis at the price of $199. but those figures are not really important since both price points are higher than the unit costs of each brewer for the analyses.900. if the annual projected coffee sales are included in the above breakeven analyses at the unit sale prices of $249 and $299.000.00 -$82.00 $39.00 $9.The price point of $199 is below the $220 (or hopefully $200) production costs of the brewer.000. on average.00 $7. the loss on the brewer would be expected to be made up through K-Cup or Keurig-Cup sales.000. the breakeven quantity would be lower for Keurig than they appear to be above.000.872.215.500.696.
Someone who drinks 2.494.00 Revenue $0.00 $1.00 4012 Profit -$700.25 cups of coffee per weekday.00 $199.000.280. 3 The average price of an 8 oz.000.00 $14.000.000.00 $1.Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 4000 4012 5000 10000 20000 40000 70000 100000 Cost $700.000.000. Dunkin’ Donuts.502.215. Seattle’s Best.00 The benefits of an investment in the B100 brewing system are great for the gourmet coffee lovers who flock to Starbucks.55/cup.00 $6.745.750.00 $8. an investment in the Keurig system would allow the consumer to pay for the B100 brewer and X number of years of K-Cups (or Keurig Cups) at a price of $0. who drinks 2.501 $700.700.00 $11.500.00 $1.000.872.00 $175.000.00 $200.00 $94. The average gourmet coffee drinker in downtown Chicago.00 $1.000.500.490.00 $7.045.000. 33 .000.700.700.498.25 cups/weekday would spend $936 ($14. would spend an estimated $936 on coffee per year (IL Starbucks).7*1.980.00 $20.00 $2. and Caribou Coffee to satisfy their cravings before work every morning.00 $3.00 $1.400.502.00 $2.00 $26.000.00 $4. IL.700.47 plus tax (tax rate of 9%).700.00 $37.25 cups/weekday*5 days*52 weeks).000.00 $16.700.3 In the Chicago market.000.00 -$2.000.000.000. black Starbucks’ coffee in downtown Chicago. For example.91 years of equivalent coffee in K-Cups and spend the same amount of money as one year’s worth of coffee consumption at an average downtown Chicago. if the brewer is sold at $249. Starbucks.000. IL is $1. IL.790.000.00 $14.450.500.00 $1.00 $172.09*2.515.000. the consumer could buy the B100 and 3.000.000.00 $1.
a decrease in the selling price would put the brewer at an even larger loss for the company and shareholders. 34 .4 Brewer Price $199 $249 $299 Years of K-Cups 2.95 ($1.86 Therefore. we feel the price of $199 is not ideal because Keurig would be relying on the sales of K-Cups (or Keurig-Cups) to cover the expenses for manufacturing the B100. while the Keurig brewing system may appear to be a pricey investment. Also.95 on coffee per year (IN Starbucks). IN. 4 The average price of an 8 oz.43 2. who drinks 2.Brewer Price $199 $249 $299 Years of K-Cups 4.20 3.5 A lower price of $199 for the brewer does appear to be appealing to consumers.63 In the Indianapolis market. it is clear that the consumer would be saving money by making his/her own cup-by-cup gourmet coffee instead of traveling to a gourmet coffee provider such as Starbucks. and place development (McCarthy 271). Also. This is a very risky decision.15 1. would spend an estimated $625. The average gourmet coffee drinker in Indianapolis. the same comparison can be made. IN is $1. since Keurig is in the introductory stage of the B100.00*1. if the demand for the at-home system is lower than expected and Keurig must lower the price of the brewer to move the product. often profits are lower since more money is spent by the company on promotion. A price below $200 does not trigger a luxury purchase mentality in the consumer. However. Someone who drinks 2. black Starbucks’ coffee in downtown Indianapolis. product.25 cups/weekday would spend $625.25 cups/weekday*5 days*52 weeks).91 3.25 cups of coffee per weekday.07*2. Keurig’s profits will decrease. 5 Savings do not include travel time and gasoline. If the sale of K-Cups (or KeurigCups) does not live up to the expected levels.00 plus tax (tax rate of 7%).
It seems that building up equity to put toward R&D would be 35 . it does not seem within the capabilities of Keurig to price the brewer at $149. This is even riskier than using the $199 price. The profits of the B100 will give Keurig the opportunity to draw in a broader consumer base and hopefully will enable Keurig to develop new target markets with lower-priced one-cup brewers. with the production costs of the B100 at $200-$220. after meeting their breakeven quantities. While Keurig’s management is concerned that they may not have enough time to lower the price of the brewer once it is out in the market. It is important for Keurig to use price as an indicator of superiority without putting themselves out of the market entirely. It appears to be Keurig’s best option to price higher than their manufacturing costs so.25 cups per weekday to break even on their investment in the B100.699 brewers to people that will drink at least 2. all additional sales contribute to the profits of the company. it seems that the optimal price for the brewer would be $249 based on our focused price points. Based on the breakeven analysis below with annual projected coffee sales again at $175. We feel that Keurig’s at-home brewer will be a luxury item for most consumers willing and able to invest. On the other hand. all profits can be put toward research and development efforts to lower the production costs of the B100 and to develop subsequent one-cup brewers at a lower price to appeal to other markets. Keurig would have to sell 6.From our breakeven analyses above. By pricing the brewer at $249. pricing above $200 forces consumers to think harder about making a B100 brewer purchase. it seems that this is a risk that is worth taking (Anderson 11).50 per consumer. so a $200 luxuryindicator can be considered irrelevant to our target consumers. A price of $149 would force the company to rely too heavily on K-Cup (or Keurig-Cup) sales. Currently.
and high-end appliance shows.100.00 $220.242.000.173.000.867.000. Problematic Issues and Alternatives Promotion In order to sell units.000.000.000.00 $2.00 -$73. we plan to accomplish this through product demonstrations in alternate venues such as professional conventions.00 $9.00 $3.800.25)*2.500.750.390.00 $6.000.000.500.000.500. As addressed earlier. In 2005.00 $2.25 cups/weekday*5 days*52 weeks = $175.000.50 $3.780.947.000.50 36 .173.506 $700.020.825.000.000. affluent shopping malls.000.00 6699 Profit -$700.288. but we feel that in 2003 it would have been a very effective way to push to the B100 brewer to the “Keurig-awares” 6 Annual Projected Coffee Sales: ($0.00 $1.954.000.a much better option for Keurig to enable them to later meet the needs of the consumers in the market of $149 one-cup brewers.00 VII.000.00 $22.000.900.00 $22.500.00 $7.300.980.00 $175.000.490.000.000.000.715.450.00 $867.622. Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 6000 6699 10000 15000 20000 25400 30000 40000 70000 100000 Cost $700.300.00 $45.500.00 $12.615.00 $4.00 $9.00 -$177.435.00 $6.480.00 $4. airports. we need to show the benefits of the B100 brewer first-hand.55-$0.00 $1.00 $2.000.100.00 $5.00 $9.000.00 $149.00 Revenue $0.000.00 $1.000.000.00 $2.000.00 $1.00 $6.000.245.00 $8. the KAD referral program no longer existed.00 $1.735.50 $345.00 $32.300.00 $16. We also plan on offering referral programs and discounts which will help raise awareness and product loyalty.00 $2.700.
in the at-home market. Packaging The main problem with packaging lies in deciding between the one-cup and twocup approaches. According the Bob Spangler. since the cups are available through the KADs and on Keurig’s and roasters’ Web sites. It is important to maintain both direct and indirect channels in the at-home market. and simplifies the product for the consumer. because the only athome consumers the KADs sell to are office workers in their districts. the OCS market is a very valuable source of at-home sales because the customers have already experienced the benefits of a Keurig coffee system. and they will need a channel through which to purchase the brewer and cups. decreases the chance for customer dissatisfaction. lower-priced brewers are offered by Keurig. There will be other consumers who do not work in an office that maintains a KAD relationship. However. as well. One reason is that the KADs have established relationships with office managers and will initially push the brewer sales to office workers. we are not only marketing exclusively. 37 . meaning that sales are only through KADs’ specializing in particular geographic areas (McCarthy 311). the benefits of such a program are not as high. allowing closer relationships between the KAD representatives and the office managers.in the OCS market (Spangler). Now that the product has been out for more than two years and alternative. We feel it is important to sell through Web sites. Place Keurig needs to use an exclusive marketing approach in the OCS market. We feel this is important because the KADs’ territories are mostly independent of one other. We feel that the one-cup approach is Keurig’s best option because it appeases GMCR. a KAD through Purefact.
at the $249 price. Then.After the KADs sell to the workers. We chose to price the brewer at $249. Price Pricing the brewer is a main concern of Keurig. those new Keurig buyers will continue the promotion. The pricing of the K-Cups is also of concern to Keurig. Also. Based on the sales projections. the K-Cup profits can be put towards research and development of less expensive brewers that can later be sold to the mass market through retailers. Based on the market research. Conclusion With Keurig’s success in the office coffee market. We feel retailers like Williams-Sonoma. Their shareholder. family. and the price will allow Keurig and the roasters to make a higher profit per K-Cup. $249. we could breakeven or profit at the prices of $199. a “logical business extension” does. because it is much easier to price high and lower later. One of Keurig’s main objectives for the years to come should be to not only lower brewer costs but to also create partnerships with high-end retailers to sell the Keurig at-home brewers. and $299. We agree that the one-cup approach is much simpler and 38 . seem to be the at-home coffee market (Anderson 6). and neighbors in order to get $25 off their purchase of K-Cups through our proposed referral program. GMRC. This price will still give the KADs pricing control in the OCS market. VIII. and other high-end home stores are viable candidates for such partnerships. we feel that our target market would be willing to pay $0. Their positive experiences with the B100 will prompt the new owners to spread the word of the product to friends. Keurig can cover their manufacturing costs without having to depend on KCup sales. indeed. presented some very relevant and important concerns regarding the company’s B100 brewer launch.55 per K-Cup. Crate & Barrel.
These include focusing on their target market and promotional strategies. We have also offered some recommendations and ideas regarding Keurig’s at-home brewer marketing. 39 . While the manufacturers are trying to lower their costs to $200.55.” The presenting group is assuming that manufacturing costs are $200.” The case states that Braun and Bunn are companies heightening pressure in the single-cup division. We feel these prices will allow Keurig to effectively enter the gourmet at-home coffee market while providing profits to be put toward future promotion in the retail market and the development of lower-priced one-cup brewers. IX. However. the latest reports show manufacturing costs as $220. The opposing group has very good ideas. Page 3 – 4: “In the up-scale sector Braun and Bunn were some of the companies heightening pressure in the single-cup division. Page 4: “This made our $200 manufacturing costs look outrageous.economical for the roasters and consumers. Nowhere in the case does it say that these companies are single-cup brewer competitors. they have not yet achieved this goal. but we feel our recommendations on pricing and promotion of the B100 are the correct actions for Keurig to take at this time. We have proposed a fair and realistic pricing strategy for the B100 at $249 and K-Cups at $0. According to the case on page 11. Comments on Presenting Opposing Group’s Paper Below are various statements found throughout the opposing group’s paper that we feel either are not accurate or need further discussion. we are supposed to be proposing solutions at this moment in time. and we have decided to provide solutions that will appease GMCR and make the introduction of Keurig’s product into the at-home market much smoother.
nor do they care how companies handle their hiring of employees. This is not a solution that Keurig can implement.99.” The presenters state that the survey results give a ‘best price’ of $199. We realize that this point was made as a solution to employee theft of K-Cups. The office system could be removed if managers purchased K-Cups anywhere else. “An acceptable price range for the brewer was determined to be in the $129 .” Page 6: “If companies do not have trust in their employees they need to restructure their hiring requirements. Page 6: “They now would not have to accommodate for the production of a second cup line. Page 7: “Going by survey results the best price for the B100 would be $199. This means that office managers can only buy from KADs. KADs and office managers are under a contractual agreement.” Page seven of the case states.” This statement contradicts page nine and ten of the case which states. “These two portion packs would be manufactured on the same packaging lines. but Keurig has no control over. 40 .$199 range. this would allow office managers to have access to K-Cups in stores. Also.” This is a major digression to their paper. You cannot screen employees to tell if they are going to take something home from the office. just in case they were to run out between orders.Page 5: “In addition to the desire for simplicity and the limited time before launch. However.99.” Page nine of the case states that Keurig does not have the resources to enter the retail market at this time. this is not specifically stated in the case. This is virtually impossible.
with total shipment since launch (1998) of 340 M. we calculated a yearly cost of the in-home system to be roughly $304 as compared to coffeehouse purchases of $312. “In 2002.25 cups of coffee per day and not a little over three. the presenting group assumes Keurig will immediately be distributing their product through mass retail channels. Page 11: “Internet sales. eliminate the need for the mark-up for the KAD or in-store profit. that Keurig does not have the resources to distribute through retail channels right now. the average coffee drinker consumes a little over three cups of coffee per day. a cost that could be passed on to the consumer.99” Throughout this paper.” There are shipping costs associated with KADs. you cannot eliminate mark-ups because whoever is selling the product on the internet site will still mark-up in order to make a profit. This would also change the presenting group’s calculations. they shipped 125 million cups…” Page 10: “According to Keurig’s research. the presenting group should say. Also.” Therefore.Page 8: “The mail-in rebates would be for 20 percent off the retail price of $199. but add the cost of shipping and handling. research shows the average coffee drinker consumes 2. however. Page 8 – “Keurig machines are brewing about 125 million cups of coffee annually…” Page four of the case states. However. Assuming that same amount of coffee will be consumed. as stated on page eight of the case.” According to Keurig’s marketing research. the case plainly states on page nine. 41 . “Keurig shipped 125 M K-Cups in 2002. Their entire paper is based on an incorrect assumption that was clearly stated in the case material.
55. Keurig cannot enter the retail market at this time. Page 14: “We thought that commercials would not be the best way to promote our product since it is a “demonstration-driven product. why would these two stores agree to run a promotional video on a product they cannot profit from? Secondly. While our price suggestion is higher than the KADs. it is based more on market demand. There is nothing stopping the KADs from increasing their price to match our suggested $0. If a product is demonstration-driven.Page 12: “If using two different types of cups. 42 . & Beyond and Linens N Things. it would make more sense to advertise with television commercials than to advertise in newsprint. Bath. So with that in mind.” This is a contradiction to their ideas on promoting the product as stated in the beginning of the paragraph as well as on page 15 of their paper.” First. the presenting group plans on using testimonials from office managers whose offices utilize the Keurig system. we would have to price the residential Keurig-Cup higher than the commercial K-Cup based on the expected volume and the informal contracts in place between the KADs and the business owner or manager.” We disagree with this statement because it is possible to not price the KeurigCups higher than the K-Cups. We feel the average consumer would relate better to an actual at-home user who has experienced the benefits of the Keurig at-home system than to an office manager. Page 13: “One of our recommendations for promoting this product using the demonstration aspect was to create a promotional video loop that can be played at higher-end retailers such as Bed.
Even in the interview with Kathy Kelly.” The launch of a tea line (T-Cups) was already in the works when the case was written.” Based on the case material and other research. In 2005. it would increase production and development costs to create these filters. the Director of Customer Services At-Home Division.” While this is a good idea. but at the time of the B100 launch. it states. the first 20.000 would come packaged with the filter that allows the consumer to use their own coffee grounds and not just the K-Cups. we do not feel this is anywhere near Keurig’s target market of high-end. 43 . they did not.Page 14: “We also decided that college students would also be a good target market for our product. gourmet coffee drinkers. Page 15: “We think it would be a good idea to branch out into tea and hot chocolate in order to meet the demands of our extended target market. “Our focus is and always has been based on a high income demographics and gourmet coffee drinkers.” Page 15: “Also. these filters exist.
MI 49085 Ph: (269) 208-3669 The following questions and responses collected through a phone interview with Keurig Authorized Dealer. How much do you charge your at-home customers for K-Cups? It varies based on their coffee consumption. Someone who drinks less coffee per year will be charged a slightly higher price for the K-Cups through Purefact than someone who drinks three to four cups per day. Purefact Sales Representative Purefact 355 West Maiden Lane St. How do you handle K-Cup sales for the brewers you sell to at-home consumers? There is a contractual agreement between Purefact and the customer that stipulates that all K-Cup sales for their individual brewers must be purchased through Purefact for the life of the Brewer. so it is not a problem between customers. Joseph. Question: Answer: You are a Keurig Authorized Dealer. All offices and at-home brewers use the same cups. One of the main concerns of office managers is their fear of K-Cup theft if the brewers in the office coffee system (OCS) use the same cups as the at44 Question: Answer: Question: Answer: Question: Answer: Question: Answer: Question: . and B60 Special Edition models because they are much less expensive. the B100 brewer is sold almost exclusively to small offices. Robert Spangler.X. How popular is the B100 brewing model in homes today? From my experience. through Purefact I am authorized to sell Keurig coffee brewers in offices and homes. Only the K-Cups will fit into the brewers. Keurig Authorized Dealer Interview Mr. Bob Spangler at 2:15 PM Wednesday February 22. At-home buyers opt for the lower priced B40 Elite. Did the B100 ever use a cup different from the K-Cup called a KeurigCup? Not that I am aware of. The pricing difference is only a few cents however. The price of this brewer is significantly much higher than our other models. 2006. B50 Ultra. correct? Yes.
We felt that a possibility for eliminating the possibility of office theft might be to install a vending system in offices for the K-Cups. there are no referral programs sponsored by Keurig. their consumption will drop to below ten K-Cups per day. Keurig’s management had presented a marketing idea to implement a KAD referral program to help penetrate the OCS market with the at-home B100 brewer. The two-cup approach was proposed to deal with this issue. but our clients are our own. In reading our case. For example. while the vending machine may eliminate or drastically reduce the ability for an employee to steal KCups. Therefore. Purefact is a distributor of the brewers. We noticed that the B100 and other OCS brewers are vending compatible. Question: Answer: Copy of thank you note mailed to Bob Spangler on 2/24/2006: Front: Inside: 45 . if a small office using the B100 typically goes through 20 K-Cups a day prior to the installation of a Keurig K-Cup vending machine. How does the vending work and is it successful in the offices? Answer: The presence of a K-Cup vending machine in offices reduces the office consumption of coffee by at least 50%. Is or has there ever been such a program in place? No. the machine more importantly reduces the benefits of having a Keurig one-cup brewer in your office because employees do not like nor want to pay for in-office coffee.home brewers.
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