Should Tweeter continue with its Automatic Price Protection (APP) policy along with Every-day Fair Pricing (EDFP)? Tweeter should continue with its current Marketing strategy based on APP policy and Every-day Fair pricing. Their target customer is the Quality/Service oriented and they should focus on retaining their loyalty. The shift from having continuous Sales Events to fair pricing and price protection has been proven successful as same store sales have increased, new stores have delivered consistent sales and total marketing expense has not increased as a % of Sales.
Also profitability of the company has gone back to positive numbers as a result of the new pricing strategy. By not entering the Sale events, Tweeter will be able to maintain its reputation of high-end quality service retailer and keep its current market segment very well satisfied with its price protection program. 1. Customer Analysis: (a) What are the challenges that Tweeter faces in the market environment that they have to compete in? Use the data in Exhibit 13 to assess whether Tweeter is price competitive with its competitors when comparing objective prices?
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What factors impact the price image of retail store and how does Tweeter compare with its competitors? As a retailer of consumer electronics Tweeter faces several challenges in order to keep growing its sales and capture new consumers into their stores. As a boutique or specialty retailer of electronics Tweeter faces direct competition from other distribution channels in which the same products are sold. These are Electronic/Appliance Superstores, Department stores and in less weight Mass merchants and Warehouse clubs.
These bigger retailers characterize by giving consumers an image of everyday low prices which drive them into their stores, generally offering attractive Sales Event every week. Another challenge Tweeter faces is the entrance of new stores to the market with the chain Wiz planning to open 8 more stores in the New England Market, so this means Tweeter will need to work a strategy to keep its core customer loyal and not switching to these new stores.
Bigger retailers carry more products so portfolio offering to consumers is greater than Tweeter creating a one stop shop for electronics consumers, which could drive away customers from Tweeter. Comparing price competitiveness of Tweeter against other retailers; 32 audio and video products sold across multiple retailers were analyzed. Of those 32 products 18 products sold on Tweeter were sold at the same price or below compared to Lechmere, Circuit City or Wiz. Only 9 products were priced higher by Tweeter in % ranging from 4% to 17% higher and most of the prices were on sale or advertised.
See Exhibit 1 for calculations. Based on information in exhibit 1, Tweeter has a competitive position in similar products against the other retailers, the key is how they could advertise this position so that consumers think they have competitive prices even though they are a high-end, high quality retailer. (b) How do consumers make purchasing decisions in the electronics market? What are the challenges faced by Tweeter due to this? Will APP help in overcoming some of these challenges and how?
By conducting Focus Groups Tweeter identified how consumers made their decisions in the New England Market. They identified consumers thought about their purchase decision two months in advance on average and visited two to three retailers prior to making the purchase. Most of visits were driven by newspaper ads and most of them waited for the product to be advertised in order to purchase the desired product. Tweeter also found out that most of the customers who shopped on Tweeter stores also visited Lechmere, Fretter and Sears because they believed Tweeter was more expensive than other retailers.
Finally focus group interviews showed that if price would not be an issue, most of the customers would prefer to shop on Tweeter. Another key information they got from the study was customer type: Entry level customers, The price biter, the convenience customer and Quality/Service Customer. 70% of Tweeter customers are in the Quality/Service Type but only represented 10% of total market in New England. By having most of customer base in smallest market segment Tweeter needs to create a marketing strategy to satisfy its current customer base in order to become 100% loyal.
Value proposition and differentiation will be key drivers in order to keep current customers satisfied. 20% of tweeter customers are price-biters, so these customers could be potentially lost to lower-cost perceived retailers. With APP introduction Tweeter could overcome price competition by offering current customers the peace of mind that they will pay the lowest price without the need of lowering retail prices and continue to offer great customer service.
This strategy works perfectly because customers will not see cheap retail prices which could trade down Tweeter’s image of being a high-end quality retailer to a low cost cheap retailer. (c) Which segments of the market is Tweeter currently targeting? Who is their primary target? Evaluate Tweeter’s performance with their target customers? How will APP impact Tweeter’s performance with their primary target market and other segments? Tweeter is currently targeting the Quality/Service oriented customer.
Customers who want high-end products and are willing to have a better shopping experience with great customer service. They are outperforming competition in this segment with 70% market share with closest competitor being circuit city with 15% (out of the 10% quality/service customer segment). APP will consolidate loyalty and create a shield to defend its current customers from competition. Tweeter primary customer likes quality and service but could be driven away by a lower priced retailer, so by giving the price guarantee to their current customers Tweeter could retain them.
Another segment that could be influenced by APP will be the price-biters. Currently Tweeter has 20% of its customer base in this segment and they could drive additional consumers who are searching for the lowest price with APP strategy. In the Pennsylvania market the new acquired Bryn Mawr stores have not been able to successfully increase sales with APP but Tweeter CEO should not worry about this strategy because market could be different. They should conduct same analysis done in New England for market segmentation to understand better their customer and come out with correct strategy. . Company Analysis: (a) Enumerate the key objectives that a retailer might have? In your assessment, which objectives are challenging for Tweeter to achieve given the competitive market and customer environment that they face? Specialty retailers have key objectives that have to be met in order to be successful. They need to have good location, credibility, great customer service, good product offer, competitive prices, financially feasible margins and they need to bring people to their stores and make final purchase decision at their stores.
Tweeter faces the challenge of capturing consumers from other retailers and be the best option for final purchase decision. Price competition is a major challenge to Tweeter because it could lose sales, or it could drop down its current margin by trying to offer lower cost products trying to compete against bigger retail chains. (b) How does APP help Tweeter in overcoming these challenges and achieving the objectives? Tweeter target customer is very special. They like to receive good service and like to purchase good quality products.
The threat Tweeter faces by new market entrants is by price reductions to current products. Those customers who are a little price sensitive could switch from Tweeter to other retailers. APP is a great tool that Tweeter management designed in which they will automatically match a lower advertised priced after the purchase and send a check for the difference to its customer. This will help Tweeter keep its current customer base and don’t lower retail prices keeping image of high-end quality service retail store. (c) Use the data in the case to evaluate whether APP has been effective?
List the metrics that you are using and present your analysis using data in the case. Since the change of marketing strategy in 1993 sales have grown almost two times by 1996 from $43M to $82M (estimated). The new strategy had three components: APP, Everyday-fair pricing (no more Sales events) and change in advertising mix from newspaper to Television and Radio. Same-store sales grew by 50% with new strategy and the other incremental revenue came from the seven new stores they opened over the three year period.
With the information given in the case APP is not the only component of the new marketing strategy, but a part of a new shift in the marketing strategy. As a part of the new strategy APP has been effective as it only represents around 0. 5% of the total revenues. See Exhibit 2 for Calculations. Sales per store have increased since the switch to the new strategy, not all of them could be addressed to APP but as a part of the new strategy and representing a small expense as a % of revenues, strategy has proven to be effective. See Exhibit 3 for same store sales.
On the financial performance Tweeter has been able to improve margins, not affected by new fair-pricing strategy and reduce expenses boosting net income from negative numbers to 4% over sales. See Exhibit 4 for Margin Analysis. 3. Company Analysis: (a) What are the necessary factors for APP to be sustainable? In order for the APP program to be sustainable it will have to create additional sales growth and I will target maximum budget for APP under 1% of sales, not exceeding the other components of the marketing plan as Radio and Television advertisement and total marketing expense.
The policy should also consider check shipping costs, so that minimum amount check could be modified in case shipping costs increases. The total amount per check should also be limited, calculating an average rebate that will not go below marginal cost of advertised products. They should maintain the 30 day policy for rebate granting. Last but not least, overhead costs from people operating the program should be consistent with revenue growth as a % of sales and don’t create any additional overhead costs for Tweeter. (b) Is APP sustainable for Tweeter? Currently APP represents only 0. 5-0. % of revenues in first years of operation (Exhibit 2). APP is sustainable as total sales have increased by 100%, new stores have good sales and same-stores have experienced a 50% growth increase since the program was launched. As part of the new marketing strategy, advertising has gone down from 8. 9% to 8. 0% as a percentage of sales so Tweeter has not incurred in additional marketing expense just a different mix. So APP has been sustainable for Tweeter in this 3 years of operation and has been effective to maintain its target customer: Quality/Service oriented electronic goods shopper.