Kaushik Jayaram, Shashank Shekhar, Shreeraj Pawar, Sidhant Gupta4th Feb, 2015MKT 558 (Section 2): Pricing Strategies

Case Analysis and Solution

Submitted By: Kaushik Jayaram, Shashank Shekhar, Shreeraj Pawar, Sidhant Gupta

Eastman Kodak Company: Funtime Film

1) Here, we have many companies who are selling films. Based from the questions, we can assume that there is no changes by any of the firms in the market. Estimating market share: Let us take that market size is currently 670 Million with Kodak 469, Fuji 73.7, Polaroid 26.8, Private 67, other 33.5. Fuji and Polaroid are growing by 15%, private by 10% and Kodak by 3% (based on prev. year estimates). So, the new estimates are as follows:Fuji = 73.7*1.15 = 84.75, Polaroid = 4*1.15 = 30.82, Private = 73.7 and Kodak = 483.07. Total market is growing by 2% which means that the market will be 683.2 million. So, the market share for Kodak = 483.07 / 683.2 = 70.7%.We know that the formula for the Incremental Break Even is:. We need to find delta S here. Let us assume that Kodak has the production capacity and so there is no change in the fixed cost which would mean that (TFC2-TFC1) = 0. The new price is 15% less than the previous price which means that P2 = 3.49 (3.49 * 0.15) = $2.97. P1 = 3.49 as given. Also, here we see that there is no advertising cost for Funtime and that we can assume that the change in the variable cost will be very less or negligible. So, we can take that VC1 VC2 = 0 and so we can ignore that value. Here we are making another important assumption that all of the costs incurred are variable costs that are 30% of the price initially based on the gross margin. This means that the variable costs are 3.49 *0.3 = $1.05So, S = {0 + [(3.49- 2.97) (0)] * 483.07}/ (2.97 1.05) = 130.83 million increase in sales. This is a very huge number and also almost 28% more than the total sales of Kodak from the previous year. This is firstly a very big rise that is usually not attained in just one year by any company. The next thing is that they are also not spending anything for the marketing which is very important as a company. Kodak is already known as an expensive manufacturer of film rolls and if they do not advertise about this model, then the customers will not know about this and there would be no use of making such a product available in the market. Also, there is a huge dependency of Kodak on the two to three months of sale that it is planning to use. But the issue is that at the same time, other manufacturers may look at that and try to emulate the same thing. Looking at the price cut and the increase in sales needed in one year for the product, it does not seem likely that Kodak will be able to be very successful in the first year of the launch. This is why they have to consider more options.2. What would be the likely competitive response from Fuji? Who has the cost advantage and how important is it?Fuji, seeing that Kodak is trying to capture market share by launching a brand close to Fujis price can respond in the following manner:Fuji can enter into a price war with Kodak in this situation. Considering that Fuji is already well established in the economy segment, it will try everything possible to ensure that Kodak stays out of that segment. Market share of Kodak is the highest currently(70%) but their concern after seeing the growth rate of Fuji(18%) has made them think about launching Funtime to compete with economy brands. In terms of cost advantage, Fuji had an advantage over Kodak because of following reasons:Low advertising cost- Kodak spent close to $50 Million on advertising. This was four times that of Fujis advertising cost ($12.5 Million). The other cost advantage that Fuji had over Kodak was the margin advantage that Fuji got (55%) over a film of $2.91 versus the margin that Kodak got(70%) over a film of $3.49. If Kodak did decide to launch Funtime version, their margins would also be affected because of cannibalization and seeing the increase in product lines that Kodak has to offer, we can assume that dealers could increase their margin on Kodak film from 20% to 25%, thus again hurting Kodak. Kodak historically focused on increasing advertising and focusing on marketing, however it is important that they also build in house strength and keep the price on line like Fuji did.3. Alternatively, considering introduction of Funtime and ignoring Royal Gold, calculate the breakeven points for Funtime market share (or the number of rolls that need to be sold) in the decision to either introduce Funtime or take no action.Considering introduction of Funtime, we calculated the breakeven points in terms of increase in market share and breakeven units needed. As per the below calculations, Kodak would gain market share of almost 35% if it goes ahead with the introduction of Funtime. In terms of breakeven number of units, the number would be 70350000.Also, for cannibalization we assumed the rate to be 15%.

Gold Plus

CurrentNew Price

Price3.492.9665

Gross Margin70%70%

Dealer Margin20%20%

Profit Markup0.6980.5933

Selling Price2.7922.3732

Profit1.95441.66124

Sales375200000441411764.7

Profit733290880733290880

Increase in Sales17.65%

Fun Time

Price2.792

Gross Margin70%

Dealer Margin20%

Profit Markup0.5584

Selling Price2.2336

Per Unit Profit1.56352

Cannibalization56280000

Lost Profit109993632

Breakeven Units70350000

Mkt Share Gained35.00%

Absolute Market Share10.50%

4. Evaluate how realistic it is to achieve an incremental break-even or better position with introduction of Funtime taking into account the existing market segments.Considering the protection and growth of Kodaks total market share in the film roll industry to be the key objective then the introduction of a new brand (Funtime) in the Economy price-tier/segment is a strategic must. It is crucial for Kodak to have a representation of its products in the Economy tier which is fastest growing, and represents a segment with the biggest competitors. The key objective for Funtime is to maximize gain of incremental market share from Fujicolor Super G, Konica Super SR and ScotchColor, at the same time to minimize the cannibalization of Kodak Gold Plus, the biggest volume source of Kodak, due to introduction of Funtime.

The pricing strategy of Funtime seems to be fundamentally correct, as it is aggressive and competitive against the major players in the economy segment and is low enough to differentiate itself from the premium brand of Kodak Gold Plus. Funtime is planned to be sold only in multi-packs of 2 and 4 rolls. Looking at the market we can say that an additional discount per pack is necessary, in order to offer an additional value.Concisely we can say that multipack strategy is a great way to boost product loyalty: a pack of 4 rolls would be enough for substantial time (half year or so) for over 20% of consumers, thus preventing any competitive switching within that timeframe.

But, branding of Funtime is a big challenge in itself for Kodak. Introduction of a new product brand which is not an extension of Kodak is a strategically carved decision to minimize cannibalization of Kodak Gold Plus. Also, it shall not deteriorate the premium brand image of Kodak with a reference to a lower-price product. On the other hand Funtime is a completely new name, and shall not have any leverage opportunity with Kodak brand.After listing out the pros, cons and difficulties in going ahead with the launch of Funtime, We can say that launching Funtime would definitely help Kodak improve its positioning in the market. In fact it would also help Kodak acquire extra market share to regain its lost position.5. What do you recommend Eastman Kodak do? Cut the price of the Gold Plus brand, introduce the Funtime brand, or take no action? Discuss the pro and cons of each choice.Launching Funtime brand Few obvious reasons (Cons) why Kodak should refrain from launching the Funtime brand would be:1. Suspect Pricing Strategy: The economy rage is from $2.69 to $2.91. The private labels are priced from $2.91 to $2.49. The Funtime product is proposed to be offered right in the middle of Economy range and not yet aggressive enough to match Private range. This pricing is very questionable and Im not sure how far this strategy will take Kodak in their effort to protect its market share.2. Kodak has built its reputation on quality and by innovating. It is risking its brand image and might end up hurting the sales in the most profitable product which is Kodak Gold Plus.3. If Kodak launches the Funtime brand there is no guarantee that players such as Fuji and other private label manufacturers would not drop their price further.4. The current idea of providing the Funtime only during the off-peak season is too complex and will become a huge over-head when retailers and distributors will come into picture.Cut the price of Gold Plus brand1. Cutting down the price will clearly send a signal to the customers and competitors that Kodak is no more the high-quality and high-price player that it was. 2. It will also hurt the margins of Kodak Company and it may never get the customers it is afraid of losing as they would anyways get a private label which is even cheaper than the Funtime brand.I would recommend Kodak not to launch the new brand Funtime. Kodak is walking into a Price-war with some of these private label brands and will end up fighting a battle that plays to their competitors strength. Rather, if Kodak wants to continue to dominate the market with a high brand-image, it will have to rationalize its distribution channel. It will have to double down on the advertising to re-emphasize the quality. Also, it will have to continue investing in R&D for long term success as a high-margin business.