ODI Case: Key Points

1
ODI Case Key Points

• Understanding Customers
• -Quantifying customer benefitsEconomic Value
  Analysis
• -Understanding perceived benefits that customers
  seek for new products
• -Do these benefits vary across customers
• -Logic of estimating demand
• -Break-even calculations
• -Sensitivity analysis
• -Key problems facing a start-up company like ODI

2
Economic Value
Economic Value
Risk,education
(2) Your value above that product
(3)Perceived Value
(1) Reference product
(the next best substitute)
3
Economic Value Analysis

• It helps you determine the maximum customers are
  willing to pay for your product, based on the
  perceived benefits they associate with your
  product.
• We will revisit economic value analysis again
  when we discuss pricing since it is a critical
  component in the pricing process. Specifically, a
  customer- oriented view of pricing.

4
Factors That Influence Perceived Customer
Benefits When Assessing New Products

• In the early stage of a product (i.e.,when a new
  product is being introduced customers seek
  certain benefits that will enhance their
  acceptance of the new product)
• These benefits are
• -Comparative advantage of the new product
  relative to existing substitutes EVA analysis
  helps us to assess this
• -Perceived Complexity How easy is it to explain
  the sources of this advantage
• -CompatibilityHow compatible is the new product
  to current users relative to existing substitutes
• -Observability of AdvantagesCan the customers
  easily observe the comparative advantages
• -RiskPhysical, Financial and/or Social

5
Segmentation

• Based on the factors that influence perceived
  customer benefits Will large or small farms be
  more receptive to this idea ?
• Farm size in this example is a surrogate for
  differences in perceived benefits

6
Logic of Demand Estimation

• When assessing attractiveness of different
  markets often marketing managers have to provide
  estimates of demand and develop a logic for it.
• One can build a persuasive case for why ODI
  should first focus on the large farms-based on
  our earlier customer analysis
• Then it is important to make some key assumptions
  in order to estimate the demand (it is important
  to be explicit about assumptions, so that other
  managers can assess clearly how the demand is
  estimated)

7
Key Assumptions
Demand estimation has two parts - Demand
estimation for trial - Demand estimation for
adoption Demand estimation for Trials 1. 50 of
farms in California with 50,000 or more chickens
will try the product by the end of the second
year. So use the total number (201) of such firms
from exhibit 3, p.g. 8. 2. 1 increase in
number of chickens per year starting with 1969
chicken figures. Thus, in 1975 the number of
chickens will be (32,236,961) the number of
chickens in 1969 multiplied by 1.06. The 1.06
comes by adding 1 chickens every year for 6
years (1969-1975). 3. Trial starts at 2 and
increase every quarter of the 1st year. It climbs
to 8 by the beginning of of second year and
stays there till year end.
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Key Assumptions (continued)

• Demand estimation for adopters
• 1. 75 of farms that try adopt giving us the
  number of farms adopting.
• 2. Large farms buy chickens every quarter (p.g 3,
  column2).So using the average number of chickens
  for 1975 and dividing it by four we get quarterly
  replacement of chicken for each farm. Multiplying
  that number by the number of farms adopting will
  give us 1st year 1st quarter figures for number
  of chickens adopting. For the second year start
  with 1976 figures.
• 3. Adding the purchases of adopter and farmers
  who try we get total sales in units demand.
• Check spreadsheet DEMODI.xls .

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Break-Even Analysis

• Break-even volume gives the firm an assessment of
  the volume that has to be sold in order to cover
  costs
• Break-Even Volume (Fixed cost/unit
  contribution)
• Unit Contribution Unit price - unit variable
  cost
• Excel spread sheet ODIBEV.xls shows formulae and
  details.
• With price at 0.08 and two levels of fixed costs
  - bargain and case plans.

10
Sensitivity Analysis

• Excel spread sheet FORODI.xls will show all the
  formulae
• and details.
• Notice the two plans
• a bargain plan cheap with no money spent on
  headquarters or RD
• a case plan
• The BEV numbers change as you change the price
  per pair from 0.08 to 0.12.
• Another spread sheet ODIFree.xls shows how gross
  contributions change if ODI decides to let
  farmers try the lens for free.

11
What are biggest problems that ODI faces ?

• Difficulties encountered by a start-up company in
  introducing a new to the world product
• -Company reputation/viability - will it be around
  ?
• -Source credibility -how believable are these
  enhanced economic benefits