SIBM- 2009-11 (EMBA) Vaibhav Maheshwari

12/7/2010
Micro Fridge: Case Study:-

1. Central Issue:

(a) How to produce?

(b) For whom to produce?

(c) If he should go with the Sanyo offer?

(d) If he should only use distributors to supply his product to the market or go
with house accounts?

(e) How much should be the cost of the micro fridge that could fetch him
decent % of profit.

2. Objectives to be achieved:

(a) To be able to introduce the micro fridge the market with $50000 capital.

(b) To convince the dormitories and other targeted customers.

(c) To set up a price that earns him return of minimum 15% initially on the
selling price.

(d) To find a manufacturer that fits his budget.

3. Situation analysis & alternatives available:

Situation analysis:

(a) Low capital: Robert Bennett has $50,000 in hand to start up his new
business which is not enough.

(b) Manufacturing problem: After speaking with few home appliances

manufacturers out of which only SANYO and Samsung agreed to
manufacture his product provided Bennett pays all the upfront cost of
$170,000. Being low on budget Bennett has to think over the offer.

(c) Administration, Legal, Patent & other miscellaneous expenses: Besides

upfront and basic product cost Bennett has to pay for these expenses as
well.

(d) Potential buyers: The potential buyers he was targeting were not very
sure if they would like to buy the product from an unknown brand like his.

Alternatives available:

(a) The electronic circuitry should be patented and later find the buyer of the
concept and keep getting a permanent royalty or a flexible royalty on the

Case Study-1 Prof Banarbanas Marketing Management

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SIBM- 2009-11 (EMBA) Vaibhav Maheshwari
12/7/2010
basis of increase in sales. This way Bennett can retain his job as well as
introduce his concept in the market.

(b) As Sanyo and Samsung are ready to manufacture the product. Bennett
should negotiate with them, if he can pay the upfront cost of $170,000
once the sales start to pick up and pay the per unit cost with a credit
period of 45-60 days after the delivery from the manufacturer. That ways
he would have enough time in hand to arrange the money from the sales
of the units.

(c) Taking loans from the financial institutions for the upfront &
administration cost.

(d) If he decides to go for the direct sales the price could be quoted as $350
to $375/unit initially which fetches him a profit of 30% to 40%, after
paying $263/unit to the manufacturer but because of direct sales volume
would be less and more manpower would be required. Delivery of product
in perfect condition in another hassle.

(e) If he decided to go to the end user via distributor’s channel, he can share
his profit of 30% to 40% with the distributors. In this case he should quote
them a price of $309 to $ 315(depending on the volume) & the
distributors further sell it for $350 to $375/unit. In this case both the will
get a profit of 14% to 20% but in return Bennett can ensure to supply in
bulk at a time creating high revenue in the long run. Distributors on the
other hand will be happy too to save that extra few % of profit by selling
the product directly to the end user than through the vendors.

4. Suggested Alternative & why?

The positives of this products: - patentable product, less space consuming,

less power consuming, tie up with SANYO or Samsung will ensure good
quality product and a large potential market like:- college housing, hotels,
motels, military quarters, service apartments, old age homes, Small offices
might attract some investor to invest in this idea.

Step 1: Having a capital of $50,000 look for a partner or a financial

institution who could invest equal or more money in this business.

Step 2: create awareness about the product. Set up a marketing team to do

detailed market survey. The marketing people could be Bennett and his
partners and besides that he can hire few marketing researchers with his
little capital for the process.

Case Study-1 Prof Banarbanas Marketing Management

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SIBM- 2009-11 (EMBA) Vaibhav Maheshwari
12/7/2010
Step 3: Subcontract the manufacturing part to Sanyo or Samsung who will
ensure that the labor cost is low due to the offshore manufacturing. And as
this product is patentable, manufacturer according to the contract should not
be selling the product to anyone or leaking the concept to any competitor.
Negotiate with manufacturer about the credit payment period of 6 months-1
year for upfront cost of $170,000 and 45 days- 60 days for the product per
unit cost of $263.

Step4: He and his marketing team create a market for the product in the
initial stage by doing direct marketing with the cost of $350 to $375/unit to
the end user.

Step 5: Once the awareness is created supply the product to the

interested distributors at

$309 to $ 315. Though going via distributors will result into low margin of
profits but will ensure

a large volume once the market is created. Distributors on the other side
will be happy too to

save some % of profit for not going through the dealers and supplying the
product directly. Per

unit payment from the distributors is the rapid cash flow that should be
recovered within the

credit payment of 30 days.

Step6: The minimum margin of 17.4% that he gets every month from the
difference of

$309-$263/unit should be further used to get the product patented within 6

months so that the

electric circuitry and the concept is not copied. By the time a big
manufacturer comes up with its

own electric circuitry and concept Micro fridge will have enough goodwill to
sustain in the market.

Case Study-1 Prof Banarbanas Marketing Management

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SIBM- 2009-11 (EMBA) Vaibhav Maheshwari
12/7/2010

COST MANAGEMENT:

Cash in hand: $50,000

Upfront cost: $170,000

Admin&sales cost: $300,000/12=$25,000

Patent cost: $60,000

Price/unit: $263

Selling price: $309

Initial 1 year we cannot expect much of sales as Bennett would be busy marketing
his product and as not many people know about it, there will be less buyers. He
should target for a breakeven point in initial year, i.e. selling at least 13,000 units.

13,000*$315 = $4,095,000

13,000*$263 = $3,419,000 (manufacturer payment)

Balance = 676000

This amount could be used for paying the upfront cost, admin cost, advertising,
patent, rent for office & misc expenses.

Once the market is made he should target for minimum 30,000units/year he gets:

Dealer payment : 30,000*$309=$9,270,000

Sanyo payment : 30,000*$263=$7,890,000

Balance : $1,380,000/12= $115,000/month

Case Study-1 Prof Banarbanas Marketing Management

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SIBM- 2009-11 (EMBA) Vaibhav Maheshwari
12/7/2010

And every semester the sales should improve at least by 10%

If x is no. of units:

309x= 263x+476000

263x-309x=476000

46x=476000

X=47600/46=10348pcs

10348*309(selling price) =3.2 million

If 3.2 million of revenue is reached the recurring cost & cost price for SANYO will be
taken care of.

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