Sonik CD was a wholesale buying club for classical, jazz, and blues enthusiasts. Annual membership was $40. Sonik scoured distributors and independent retailers to find hard-to-get and outof-print releases. At $10.95 per CD, Soniks prices were lower than average retail prices; average cost to Sonik was $10.50 per CD. Subscribers paid $4.00 per package shipping and handling; average cost to Sonik was $0.50 per package. On average, subscribers purchased 19.9 CDs annually, mostly through Soniks website. Annual subscriber retention rate was 90 percent. Sonik accumulated CDs from various suppliers and fulfilled its own orders. Annual fixed costs of fulfillment were $400,000; shipments averaged 3.7 CDs per package. Annual marketing expenses were $230,000; Sonik spent 90 percent on acquiring new subscribers and 5 percent on subscriber retention. Soniks cost of capital was 12 percent. It was considering three growth options: a. Continue the Niche Strategy: Sonik believed it could acquire 20,000-30,000 new customers per annum for the next several years without major new investment. Sonik also believed that spending $0.5 million per annum would increase customer retention to 95 percent. b. Mass-Market Strategy: Abandon the subscription model, add many other music genres, and build a mass-market brand. Sonik estimated it would need an initial investment of $1-2 million to build brand awareness, plus an additional $0.5 million per annum for distribution and warehousing. Sonik believed it could add 40,000-50,000 new subscribers per quarter at a subscriber acquisition cost of $12.50; annual margin, $15; and 60 percent customer retention rate. c. Distribution Strategy: In addition to CDs, Sonik distributed products for other online retailers. AmeriNet Radio operated 43 radio stations in the southeast U.S. and sold CDs though its stations websites. It approached Sonik for an exclusive arrangement. Sonik would close its retail operations and become the sole distributor for all CDs sold through AmeriNets websites, charging its normal handling fee. Soniks price per CD would be $13.25 it would pay AmeriNet $1.50 per CD sold. AmeriNet had 25 million listeners. Research suggested that 5 percent of its listeners bought CDs online and that 10 percent of these would buy from Sonik. A typical customer would buy twice a year, averaging two CDs per order. Sonik would incur additional fixed costs of $0.5 million per annum. Based on these data, which option should Sonik take? What are the risks of each option? 1. SONIK CD1 1 Thanks to Professor Sunil Gupta for permission to use this case study. 4 MANAGING MARKETING IN THE 21ST CENTURY after the Jackson mill manager discussed different proofing formulations with the proofers factory manager. Smithson Mills was the most successful weaver. After several attempts, Smithson's fabric was successfully proofed by Grouch Mills, made up by Maclean Tarpaulins, and tested by Carter Paterson, a major trucking company. Final test results were not in but preliminary feedback was encouraging. The tarpaulins were waterproof, and drivers liked them because they were considerably lighter and easier to handle. This was important for fleets of large trucks. Malcolm Hand knew that Carter Paterson was one of several hundred large trucking companies that tended to keep careful records on their tarpaulins cost and life. However, record-keeping at the many thousands of small truckers was poor to nonexistent. Large truckers tended to place orders directly with their favorite tarpaulin suppliers. The suppliers purchased proofed fabric from weaving mills like Jackson, Smithson, and Waterside and made-up tarpaulins. Small truckers typically purchased from wholesalers that stocked several standard tarpaulin sizes purchased from makers-up. Hand was under pressure from senior management to increase sales of Terylene fiber for tarpaulins. He wondered how he should approach the problem of increasing sales. The Arden Company operated in a slow-growth business. Arden offered a commodity product for which total demand was highly inelastic. Both Arden and its seven competitors sold the product through industrial distributors. Six of these competitors were very small factors in the industry, while the strongest was Columbia Corporation. Columbia had increased market share by a little under two percent in the past two years almost all of this increase had come from Arden. Recently a new, young, aggressive team had assumed top management positions at Columbia. It was common knowledge that the new Columbia team had given first priority to significantly improving Columbias market position. Ardens marketing VP Pedro Albertos task was to design a market strategy to effectively meet this potential challenge. To provide a basis for developing strategy, Albertos assistant compared Ardens economic structure with Columbias. He produced the data in Table 1 using the definitions in Table 2. TABLE 1: DATA FOR THE ARDEN CASE Economic Indicators Firms Arden Columbia Current market share 61% 22% Current dollar sales ($millions) $403 $146 Break-even point ($millions) $217 $121 Safety factor 46% 17% Contribution margin rate 48% 45% Loss in contribution margin from a 5% drop in unit price ($millions) $20.15 $7.30 Volume gain required to offset a 5% drop in unit price $44.54 $17.31 Equivalent share point gain 7.0 points 2.8 points Capacity utilization 80% 75% As he contemplated the task of developing a market strategy for Arden, Alberto knew that he had to have a clear grasp of the scope of the challenge. He broke the task into four steps: a. Be clear about important characteristics: Industry growth rate Degree of product differentiation Distribution methods Price-inelastic nature of demand consider only the effect on Arden and its chief competitor, Columbia. Disregard smaller competitors. b. Identify strategic alternatives available to Arden and Columbia considering: Sales volume Contribution margin Market share Capacity utilization c. Decide Columbias likely strategy given: industry characteristics, Columbias objectives, and Columbias strengths and weaknesses relative to Arden. d. Develop a counter-strategy for Arden to pre-empt Columbias strategy. 3. THE ARDEN COMPANY TABLE 2: DEFINITIONS FOR THE ARDEN CASE Term Definition 1. Break-even Point (BEP) The sales volume at which the firms sales revenues cover all fixed and variable costs: BEP = Fixed Costs/Contribution Margin Rate 2. Safety factor (SF) The percent by which current sales volume could decline and still cover all fixed and variable costs where the firm operates at break-even: SF = (Actual Sales BEP)/Actual Sales 3. Contribution Margin Rate The percent of each sales dollar that contributes to fixed costs and profits Contribution Margin = Sales Revenues Variable Costs Contribution Margin Rate = Contribution Margin *100 /Sales Revenues 4. Loss in Contribution Margin The dollar amount by which contribution margin from a 5% Drop in Unit Price will decline if the price drops by 5% and sales do not increase. For firms operating above the breakeven point, this represents a loss in profits. 5. Volume Gain Required to The increase in sales revenues that the firm Offset 5% Drop in Unit Price requires to regain the contribution margin it loses by a 5% drop in price (see 4). Or, restated, by how much must sales increase to earn the same profits as before the price drop? 6. Equivalent Share Point Gain The increase in market share that the firm requires to restore profits to the level before the price drop. This shows how much the volume required in (5) means in terms of market share Volume Required in (5) / Total Market Sales Volume.

What additional realistic assumptions did you have to make and why?