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Teaching Notes for Cases
CASES FOR PART 1
CASE 1-1
CLOVER VALLEY DAIRY COMPANY
Introduction
This case, although it presents a relatively simple business decision, provides an excellent wrap-up for the introductory section. Class analysis should bring out three key points: (1) the purpose of the research, (2) the role that the marketing manager plays in the research process, and (3) the need to assess the value of the research information.
1.The student should recognize what purpose the research should perform. In this case, Clover Valley needs specific information as to product acceptance rather than exploratory research with routine feedback. The text proposed in the case can be viewed as an example of field experimentation or even as a preliminary form of test marketing.
2.The student should evaluate the role of the marketing manager in the research process by taking the role of the manager in a situation where there is no market research specialist. He must struggle with (a) defining the problem to be studied, (b) deciding how much to spend on the research, i.e., how valuable is the data which he wishes to collect, (c) designing the research project, and (d) deciding what data needs to be collected. The case provides an excellent example for the student to see the kind of involvement which a marketing manager must play in the several stages of the research purpose.
Much of the discussion should probably center on the quality of the research design and which design would be most appropriate to collect the information needed.
3.The case also offers an opportunity for a conceptual discussion of the value of research information although sufficient data are not available to permit a quantitative analysis of this topic. For a company the size of Clover Valley, the issue of how much to spend on research is an important one and the risk involved in putting out a bad package is evident. Thus, the student can balance the need for “perfect information” against the fact that there are few funds for research activity.
Teaching Approach
Some students will argue that as the risk is low and the value of new information is slight, the company should not test; others will argue that as additional risks exist and as the cost of information is low, the company should test. It is probably useful to get the break-even analysis out early in the class. Without this analysis, the students cannot see how far sales could drop with the new package before contribution begins to be lost. The computational work may be preceded by a discussion of what information Clover Valley should have before making the decision about testing, and once the break-even figures are obtained, students can usually conceptualize the problem concretely.
The discussion can then cover the buying motives for yogurt and move into an evaluation of the proposed test and possible redesigns of the test to obtain better information.
Special Topics of Interest
A.What information should Clover Valley Dairy obtain before making the decision? The information required will depend upon the judgments they make about (a) the amount of uncertainty which would be reduced by adding additional information to existing information, (b) the amount at stake in the decision, and (c) the amount that Clover Valley can afford to spend.
1.Amount of uncertainty. Uncertainty should be rather high since case data suggest that a package change may have a major effect on sales. The point can be emphasized by looking at the notion of product differentiation through packaging. But Clover Valley still does not know why a certain type of package influences sales and consequently does not know how the proposed package will affect sales. This should lead to a discussion of buying and use patterns related to yogurt. Even after this discussion, however, most students will probably want to test.
2.The amount at stake. Before specifying the information needed, the amount at stake should be considered. At the current level of sales, the amount to be saved is low in an absolute sense, but this amount is
100,000 units x $.035 =$3,500
120,000 units x $.045 =$5,400
Total Contribution:$8,900
which is relatively high compared to the total sales of 6 oz. units of around $77,000. Thus, what can be saved is approximately 12% of current sales.
As can be seen from the contribution analysis at the end of this note, unit sales can drop in the neighborhood of 50% if the proposed package were used and the contribution to fixed cost would be roughly the same as at present. Thus, the possible gains of a “perfect decision” are not high and sales could drop substantially before contribution suffers. However, the effect of the sales decline on consumer preference for other Clover Valley products and trade attitudes, especially where Clover Valley is having trouble obtaining shelf space for other products, must be considered. Students will probably decide the risk involved warrants testing even if they are reasonably sure that unit sales won’t drop 50% with the new package.
B.Many students will argue that since the risk is low, the value of new information is slight, and therefore, Clover Valley should not test:
1.Housewives buy on quality, price, promotion, brand and shelf location to a much greater extent than on packaging.
2.The threefold increase in Clover Valley sales may have been caused by increases in primary demand, death of competing dairies, or Clover Valley’s maintenance of quality.
3.Unit sales of the proposed package could fall by 50% from their present level without a decrease in $ contribution and since such a drastic decline is unlikely, we have little to lose by going ahead without a test.
Other students will argue that additional risks exist and that since the cost of new information is low, Clover Valley should test:
1.Clover Valley can’t afford to risk unfavorable relations with its retailers; lowered yogurt sales may affect both sales and shelf position of other Clover Valley products; Clover Valley’s present independents are unlikely to grow, and since national accounts are unavailable, existing relationships are vital.
2.The cost of a test—even if redesigned—is modest, probably less than $500 to $1000.
3.How much can Clover Valley Dairy afford to spend? Clover Valley probably can’t afford much because of the sales drop in 1976. Students should realize that different types of information with different degrees of validity are obtainable, however, depending upon the nature of the research design, and on the amount spent.
C.How do customers buy yogurt? What influences their choice?
1.brand loyalty - is it high or low?
2.native taste for yogurt
3.the quality of the yogurt, price, store where the yogurt is sold, amount of shelf space that yogurt has, and the characteristics of the package such as:
•convenience
•material
•shape
•impression of size
•printing
•viewability
•recommendation of retailer
A review of these factors may suggest that a test is not necessary.
D.Retailer: what would the effect be on our entire line if we faced a rapid drop
in sales level?
Eif a test is necessary, what should the criteria be for success?
•more total contribution from the new package
•more sales volume
•favorable effect on retailer relations
•favorable effect on brand image
F.Amount of decrease possible before losing money.
Here the student can work through break-even analyses such as those presented in the back of this note. Some evaluation should be made by the students of whether a 50% decrease in sales volume is likely, and would they accept the new package if they knew that even a 30% drop in sales volume were possible given the risks associated with the loss of goodwill in the distribution channels.
G. Is the proposed test any good?
1.If the test is to measure consumer demand for the new package, the question may be raised as to whether a test should be conducted in a store where no competitive brands are available. Certainly this situation is not present in most of Clover Valley’s territory.
2.Giving Bill’s a special deal on the new multi-packs may result in enthusiastic display or recommendation by store employees.
3.Leaving the new package at Bill’s exclusively for the next ten days could, however, provide some information if sales dropped drastically In such a case, consumers are obviously either foregoing yogurt or going to the trouble of visiting another store inasmuch as Bill’s is an exclusive outlet.
4.There is a real question as to whether the reintroduction on the third weekend of the regular package along with the new in Bill’s represents a realistic consumer situation. Given the relative attractiveness of the package, the sales comparisons on this weekend may not be particularly relevant.
5.The in-store survey raises some real questions of validity inasmuch as it is a situation where valid consumer questionnaire responses might not be anticipated given a respondent tendency to want to please the company. Some information might be obtained, however, if there was substantial antagonism towards the new package.
6.The length of time of the test - (ten days) - may not be long enough to get a measure of repeat purchases, a key variable if the new package should prove to be unsatisfactory in home use.
H.What kind of test should have been run?
1.It should have duplicated the conditions consumers will face, i.e., in a competitive situation facing competitive containers.
2.It should have been conducted for long enough a period to permit repeat purchases.
3.It may be argued that the test should have included tests in a number of different types of stores including small stores and supermarkets. This decision should be balanced against loss of dealer goodwill if the test fails.
I.Some lessons from Clover Valley’s experience.
1.Assumptions about what the consumer will do can be dangerous.
2.Frequently assumptions can be tested inexpensively.
3.Set up base for judging information before you get it—this reduced arguments later on and assured usefulness of test.
4.Market research need not be complicated - however, if done incorrectly, market research can mislead rather than help.
Analysis of Revenue and Costs
June 1976 June 1977
to to
May 1977 May 1978
(Pre - intro) (Post-intro)
8 oz. unit sales 64,354 —
6 oz. unit sales — 226,206
1 lb. tub sales 38,308 36,099
Retail Sales
8 oz. ($.41) 26,385.00 —
6 oz. (S.34) — 76,910.00
1 lb. ($.75) 28,731.00 27,074.10
Total Retail Sales $55,116.00 $103,984.00
Revenue to company
(= 90% of retail) $49,604.00 $93,585.00
Variable Cost Analysis
Assume that a constant x% variable cost applies to all sizes of yogurt, except the 6 oz. size where the variable cost per unit is increased by the amount of the more expensive package: 12.0 cents—7.2 cents—4.9 cents. The savings in yogurt of 4 cents in a 6 oz. container does not change this variable cost proportion.
Because we know that the total dollar contribution from yogurt only increased by 5% despite a tripling in volume we obtain the following equation:
(49604 - 49604x} 1.05 = 93585 - (93585x + 10858)
Where the extra packaging variable cost of 4.8 cents on 226,206 of the 6 on units is $10,858.
Solving for x:
52084 - 52084x = 82727 - 93585x and x = .74 the variable cost proportion.
Savings on Proposed Package
1. Total variable costs (June 1977 to May 1978)
VC = .74 (93585) + 10858 = $80,110.90
2Savings on:
(a) first 100,000 of new containers
= 12 - 8.5 (100,000) = $3,500.00
(b) remaining 120,000 units
= 12 - 7.5 (120,000) = $5,400.00
(c)Total Saving = 5400 + 3500 = $8.900
3.Allowable drop in unit sales of 6 oz. package without loss of dollar
contribution:
= $8,900/contribution per unit with new package
= $8,900/.306 (0.74) = 111 250 units.
(this assumes that the variable cost proportion is 0.74 which is reasonable inasmuch as the cost of the new containers is comparable to that of the old containers).
In effect, sales with the new multi-pak could drop by 109,070/226,206 = 48% and the contribution would be the same.
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