Keurig: Managing a New Product Launch

By: Melissa Bockhold Heather Coddington Laura Duerstock Ali Wampler

March 1, 2006

TABLE OF CONTENTS
I. II. III. IV. Introduction3 Assumptions...4 History....5 SWOT Analysis 1. Two-Cup Approach.6 2. One-Cup Approach..7 V. The Coffee Market 1. Market Analysis/Needs/Growth...8 2. Competition..9 VI. Keurig Marketing Strategy 1. Target Market.11 2. Product i. ii. iii. 3. Place i. ii. iii. K-Cups (or Keurig Cups)....16 B100 Brewer...17 Market Segmentation..18 K-Cups (or Keurig Cups)....14 B100 Brewer...15 Product Life Cycle..16

4. Promotion i. ii. 5. Pricing i. ii. VII. VIII. IX. X. XI. K-Cup (or Keurig-Cup)...21 B100 Brewer.......26 K-Cups (or Keurig Cups)....19 B100 Brewer...19

Problematic Issues and Alternatives36 Conclusion...38 Comments on Opposing Groups Paper..39 Keurig Authorized Dealer Interview...44 Works Cited.46

I. INTRODUCTION
Everyone has a morning ritual while getting ready for the days activities. Some people exercise. Some people shower. Some people help get their children ready for school. Some people watch the news or listen to traffic reports. Some people drink coffee. In fact, in 2001, 20 million Americans drank gourmet coffee on a daily basis (Sherry). Keurig, Inc. was founded on the idea that coffee lovers should be able to brew and enjoy one perfect cup of coffee at time. With the establishment of gourmet coffee houses like Starbucks, consumers began stretching their pocketbooks a bit more by spending on average $1.50 or more for a cup of gourmet coffee (Anderson 4). This change in consumer behavior opened the door for Keurig to offer gourmet coffees by the single-cup in offices in 1998. Keurig noticed that from 1996 to 2000 gourmet coffee sales increased by 40 percent in the U.S. at-home coffee market. This statistic persuaded Keurigs management to develop an at-home, one-cup coffee brewer specifically for gourmet coffee lovers (Anderson 15). Keurigs development progress toward the launch of their first at-home brewing model was stunted in February of 2003, six months prior to the release date of the brewer, by company shareholder Green Mountain Coffee Roasters Inc. This paper will address Green Mountain Coffee Roasters concerns and provide recommendations and alternative solutions to problematic pricing and marketing dilemmas. In addition to our analysis, we are going to examine the presenters approach and critique the options they suggest.

II. Assumptions
In analyzing the marketing strategies and launch options of Keurig, Inc., we are operating under the following assumptions: Surveys and market testing were completed with professional services and accurately reflect the current feelings of the consumers at the time of testing. The description of the coffee drinkers/customers is correct. Keurig is outsourcing the manufacturing of their brewers. Keurig has already incurred design and manufacturing cost of their Keurig-Cup and brewer of $700,000 ($400,000 for development of the new cup-based technology, and $60,000 per Keurig-Cup packaging line, assuming one line per each of Keurigs five roasters). The manufacturer of the B100 included all variable and fixed costs in their calculation of the unit costs for manufacturing the B100 brewer. The costs of the B100 brewer, as reported by the manufacturer, are $220 at the time of Mr. Lazaris meeting with GMCR management. The manufacturer is attempting to lower those costs to $200, but this has not yet been achieved.

III. History

Timeline of Keurig, Inc. and the North American Coffee Market

Mid1940s 1960s Mid1990s 1992 Late 1990s 1998 Peak of coffee consumption (16.5 pounds per capita) Popularity of soft drinks causes coffee consumption to decline

All-time low of coffee consumption (6.1 pounds per capita)

Keurigs inception

Gourmet coffeehouses reinvigorate the market Keurig introduces its single-cup brewing system (B2000 model); 8 varieties of coffee offered 14.8% of brewer distributors offer a single-cup system for the Office Coffee Service (OCS) market 44.8% of brewer distributors offer a single-cup system for the OCS market Filterfresh establishes relationship to market Keurigs commercial brewer, thus creating a system with greater variety of coffees and teas (February) Ownership structure changes; three largest shareholders become Van Houtte, Inc. (28%), Green Mountain Coffee Roasters, Inc. (42%), and Memorial Drive Trust John Whoriskey joins Keurig as the GM of the at-home Division Keurigs roaster partners ship more than 125 million K-Cups Total K-Cup shipment since the launch rises over 340 million Keurig begins working on a line of teas (T-Cups); the first line is to be Celestial Seasonings brand teas OCS market reaches $3.46 billion in total revenue Keurigs total number of brewers shipped across North America reaches 33,000 20 million Americans are drinking gourmet coffee on a daily basis (February) Keurig sets plans to launch B100 system in the at-home market Total single-cup brewer placement in the OCS market reaches 143,200 Keurig increases roaster partnership to five, thus providing the largest variety of coffees for a single-cup brewing system 5

2000

2001

2002

2003

IV. SWOT
1. Two-Cup Approach with Brewer Strengths Does not threaten the KADs and the OCS market Increases control of pricing specifically for the Keurig-Cup Increases the likelihood of managers participation in in-office promotions of the Keurig at-home system, because the differentiation would prevent theft of K-Cups provided for office consumption. Weaknesses Dont confuse the buyer. Similarity between cups can cause confusion between which cup goes with which brewer. Increased inventory for roasters Lack of demonstration ability in retail sector Keurig-Cups not available for purchase in retail stores Lack of resources to properly market and sell brewer and Keurig cup in retail outlets Opportunities No change or continued growth in OCS market = more available resources for expanding distribution of at-home market into the retail sector Threats Brewer pricing does not decrease and competition enters with a lower pricing strategy; Keurig suffers large losses.

The brewer pricing is so high that breakeven sale point is not met, making Keurig rely on Keurig-Cup sales to make up for losses from brewer sales. This scenario results in the brewer becoming loss leader.

2. One-cup Approach with Brewer Strengths Allows quick entry into the at-home market before competition Less customer confusion Roasters not required to keep two separate cup inventories (one inventory for OCS market and one for at-home market) Roasters production levels will probably increase with the increase in demand, since the at-home market will include KADs and at-home consumers. Weaknesses Could result in alienation of the OCS K-Cup channel Decrease in control of pricing with the KADs

Opportunities If Keurig is able to enter the market quickly, then they have more opportunity and time to come out with smaller and cheaper brewers. Easier to enter the retail market in the future because of less overall costs

Threats Brewer pricing does not decrease and competition enters with a lower pricing strategy; Keurig suffers loss of market share. Lack of resources to market and sell brewers and cups through retail outlets at time of launch

OCS users experience losses from K-Cup theft and thus it is not economical for offices to use the Keurig system.

V. The Market
As shown in our diagram below, the overall coffee market is vast and growing. The gourmet coffee market generates around $7 billion dollars in sales annually. According to these statistics, there is a market, in terms of amount of coffee consumed, for Keurigs single-cup brewer. However, Keurig is not the only company with their eye on the single-cup market. Several others are seeing the growth potential and are developing their own at-home one-cup brewers. This section will delve more into the coffee market as a whole and the competition that is challenging Keurig. 1. Market Analysis/Needs/Growth

2000 Total Retail Coffee Market ($ in billions)

Ot her, 4.6 billion

At Home - Ret ail, 6.9 billion

Away f rom Home - Gourmet, 3.9 billion

At Home - Gourmet , 3.1 billion

(Anderson 6) 8

2. Competition
In the Away-from-Home single-cup market, Keurig has two primary competitors: Filterfresh Coffee Service, Inc. and Flavia. Filterfresh, subsidiary of Van Houtte, Inc., was the pioneer of the one-cup coffee brewing system, introducing the technology in the 1980s. Although Filterfresh was the first to introduce a single-cup brewer, their system left much room for improvement. The hopper it used made clean-up and reloading coffee beans necessary (Anderson 5). Keurigs introduction of the K-Cup enhanced the one-cup system to something better and more convenient for users. Similar to Keurigs system, Flavias focus is also on ease of use. Flavia offers a variety of twenty-four coffees in individual, foil-sealed Filterpacks (Anderson 6). In the at-home single-cup market, Keurig faces greater competition. Both Salton and Sara Lee plan to enter the at-home market, and there is speculation that both Procter & Gamble and Nestl may do so as well. The pricing of Procter & Gamble, Nestl, and other competitors brewers and coffee pods is much lower than the proposed pricing of Keurigs. They also plan to sell through mass retail and grocery outlets (Anderson 8-9). Saltons home model retails at $49, Sara Lees at $70, and Procter & Gamble is expected to price similarly upon entering the market (Anderson 8). Keurig does not currently have the resources to compete in these retail markets, so one of Keurigs challenges is in creating meaningful product differentiation to bring their brewer to the up-scale market.

In looking at the following exhibit, we can see that there is stiff competition in the general coffee market:
2000 Coffee Market Share

Other 8% Private Label 8% Community Coffee 2% Tetley 2% Chock Full o' Nuts 3% Starbucks 4% Nestle 5% Proctor & Gamble 36%

Philip Morris/Kraft 32%

(Anderson 18) Together, Procter & Gamble and Philip Morris/Kraft hold 68% of the entire market, although they primarily target the non-gourmet coffee consumer (Anderson 18). Keurig must utilize a marketing strategy that creates a competitive advantage, thus taking away market share from other companies and attracting those customers to gourmet coffee and brewing systems. While the entire coffee market seems to be an oligopoly with Procter & Gamble and Philip Morris/Kraft as the main competitors, Keurig is targeting a more up-scale audience of gourmet coffee drinkers. Here, it is important to define the relevant target market and competitors within that market. In the gourmet sector of the coffee market, perfect competition does not exist; not all products offered are exactly the same. Instead,

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this is monopolistic competition. Products and whole marketing mixes contain differences between companies, models, and pod systems. This gives the competitors pricing options (McCarthy 96). In this monopolistic competition, Keurigs K-Cup (or Keurig-Cup) system and brewer match up very well against the competition. Keurig has some significant advantages over the competition; there are, however, areas in which Keurig trails. For example, when comparing the brewers of Flavia and Melitta, a subsidiary of Salton, the main difference is in the size of cup brewed. Melitta and Flavia both offer the user a choice between a strong five-ounce cup and a weaker eight-ounce cup. Keurigs B100 only offers the eight-ounce choice (Davids). However, Keurig is viewed to have the upper hand over these two companies because they offer the consumers a greater variety of coffees and a better quality coffee with every cup. In the up-scale sector of multi-cup brewers, competition includes Cuisinart, Krups, Braun, DeLonghi, and Bunn (Anderson 8). The consumers of these up-scale brewers are those that Keurig will target and attempt to show the appeal of one-cup technology.

VI. Keurig Marketing Strategy

All companies need a marketing strategy upon entering a new market. In Keurigs case, they had a successful marketing strategy for the OCS market already in place by the time they decided to break into the at-home market. Below, we will discuss Keurigs approach to marketing their B100 brewer.

1. Target Market
As Keurig decided whether or not to launch their product into the at-home market, they looked at the statistics for the United States retail at-home coffee market. The 11

results were very promising. In 1996, gourmet coffee sales were at $2,200 million. Four years later, in 2000, the gourmet coffee sales had increased by 40 percent to $3,100 million. Also, in 2000, approximately 320 million pounds of gourmet coffee were sold in the United States, a 25.5 percent increase in pound consumption by volume from 1996. These large boosts in the markets gourmet coffee area proved to Keurig that this market was and would continue to quickly expand. Keurig needed to find out if their single-cup brewer would be accepted by gourmet coffee consumers (Anderson 15).
U.S. Retail At-Home Coffee Market

3100 2000 3815

3000 1999 3800

Year

2800 1998 3975

Gourmet Mass Market

2500 1997 4205

2200 1996 3905

500

1000

1500

2000

2500

3000

3500

4000

4500

Coffee Sales ($ in millions)

12

U.S. Retail At-Home Coffee Market

320 2000 840

310 1999 850

Year

290 1998 830

Gourmet Mass Market

270 1997 845

255 1996 850

100

200

300

400

500

600

700

800

900

Pound Volume (in millions)

From 1999 to 2001, Keurig carried out market research studies to determine the acceptability of their product to the at-home consumer. The research was conducted in several different formats. There were intercept and internet surveys, surveys of current OCS users, and focus groups of at-home test users (Anderson 7). The results of the intercept surveys, whose respondents had to drink at least one cup of gourmet coffee per day, showed that over 75 percent would consider purchasing a system like Keurigs. The internet survey also proved that a demonstration of the Keurig model increased the likelihood of a sale from 75 to 90 percent. The same people, who saw the demonstration, indicated that they would pay $0.55 for a K-Cup and $130 for the B100 brewer. For more information on pricing, see section VII. The internet-based survey helped identify Keurigs core customer group as younger males (Anderson 7). Through intercept, internet, and home use surveys, Keurig was able to determine the key factors in marketing their brewer and K-Cups. Key elements identified through demonstration during the intercept surveys included quick brewing time and minimal clean-up. The same key elements were identified during the internet-based survey. The

13

home use testers, who had a commercial brewer placed in their home, not only identified speed and clean-up as key attributes but also taste consistency, coffee variety, and cleanliness of preparation (Anderson 7-8). Now that Keurig is aware of which market and type of consumer to target, as well as which aspects of their product are most valued, they can move ahead with their marketing plan of the at-home B100 brewer.

2. Product
i. K-Cup (or Keurig Cup) Keurigs patented K-Cup is a unique portion system that contains ground coffee beans and filter paper. A variety of coffees are available for the system, reflecting the selection available in gourmet coffeehouses. In 1998, when Keurig launched their commercial brewer, they offered eight varieties of coffee. In 2003, Keurig is now able to offer the largest variety of coffees for any single-cup system in the market. K-Cups are produced by five roasters packaging six total brands, thus making available over 75 varieties of coffee (Anderson 2). Keurig is also planning to launch a variety of teas, TCups (Anderson 4). During the February progress meeting with GMCRs management, the executives of Green Mountain expressed some concerns to Mr. Lazaris about the details of the B100 launch. GMCR is Keurigs strategic partner and business investor. The concerns included GMCRs fear of complicating the production of portion packs with the two-cup approach. This would also affect inventory levels and warehousing. GMCR was also fearful that customer dissatisfaction would result from using the wrong portion pack in a Keurig brewer. The management team expressed their wishes to keep a one-cup

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approach based on their desire for long-term simplicity and the ability to move quickly into the one-cup, at-home brewing market (Anderson 10). We feel Keurig has a strong argument against a universal K-Cup. The company is fearful that office managers in the successful OCS market, an important marketing channel for the at-home system, will not support Keurigs using the same K-Cup for the home brewer. This fear exists because employees owning an at-home Keurig system could be enticed to steal K-Cups from the offices supply (Anderson 10). The proposed two-cup system increases the likelihood of office managers to participate in promotion of the Keurig at-home system because the threat of K-Cup theft would be eliminated. However, the proposed K-Cup (OCS)/Keurig-Cup (at-home) package differentiation has some problems. First, the color of the cups will be different, tan for at-home and white for away-from-home (Anderson 9). We feel the color distinction is necessary if the two-cup approach is chosen, but the two colors chosen by Keurig are too similar and the buyer would be easily confused. There is potential for customer dissatisfaction if the wrong cup is purchased and used in the wrong brewer. We agree with GMCR management after looking at the benefits of using the existing commercial portion pack, the K-Cup, in both the away-from-home and at-home markets. The main benefits are that the buyer will not be confused by the two-cup approach and roasters will not have to have two separate inventories for Keurig products. ii. B100 Brewer The new B100 model from Keurig is a revolutionary new single-cup brewing system targeting at-home users. Entering the at-home market with this model is important for Keurig, as coffee makers represent one of the largest volumes of small appliances sold for use in the home (Anderson 6). A key element of this brewer is that it

15

provides the user a significant amount of control over the amount of coffee and the temperature and pressure of the water. This results in the perfect cup of coffee every time. The flavor profile from each roast of coffee is recreated on a consistent basis. Also, the speed of brewing a cup of coffee, perfection in under a minute, is a key factor for the potential success of Keurigs at-home brewing system (Anderson 3-4). iii. Product Life Cycle Keurigs B100 is currently in the introduction phase of the product life cycle. Although they have been in the OCS market since 1998, the B100 is designed for the athome market. Keurig is entering a new market and a new product life cycle. Generally, in the introduction stage, companies generate losses because financial resources are focused on promotion, product, and place to establish the new product in the market (McCarthy 271).

I I) II) III) IV)

II Introduction Growth Mature Decline

III

IV

3. Place
i. K-Cup (or Keurig-Cup) KADs provide a variety of coffees to offices for their Keurig OCS system. Each KAD has entered into direct relationships with one or more roasters to purchase K-Cups and subsequently sell them to office managers.

16

As stated earlier, Keurig does not yet have the resources to sell either their brewer or coffee in mass retail outlets. Instead, a controlled distribution strategy must be utilized. Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs) markets. KADs will, in turn, sell the cups directly to OCS employees owning an at-home system (Anderson 10). Keurigs rapid penetration into the OCS market and the use of many reliable distributors and KADs has given the company a good reputation. This, in turn, makes entering the at-home market on the coattails of the office market a viable business opportunity. We believe that the distribution channel that Keurig is proposing for the two-cup approach is logical, yet problems arise when dealing with the roasters concerns about its complexity. We agree with GMCR that it appears the two-cup approach would be inefficient when the goal is to keep production and inventory costs down. Keurigs competition is already pricing below the K-Cup prices at which KADs sell to the OCS market. If production and inventory costs were to increase, the cost of the K-Cups would also likely increase, causing concern for a potential decrease in cup sales. ii. B100 Brewer KADs play the primary role in serving the OCS market. Commercial brewers are purchased by KADs from Keurig at wholesale prices ranging from $500 to $1,000 and are placed in offices for free or for a low rental fee in exchange for ongoing coffee sales. The KAD is then responsible for ongoing maintenance and repairs to the brewer (Anderson 5). Another major distribution problem that Keurig faces is in their lack of existence in retail channels. Keurig needs to quickly find a viable means through which to launch

17

the sale of the B100 into retail outlets. The only current option is e-commerce-enabled Web sites. (Anderson 9). iii. Market Segmentation We segmented the coffee market into a comparison between the price of the brewer and the varieties of cups/pods offered. As shown below, Keurig has its own niche. While they are the highest in price, they also have over 75 varieties of coffees and teas. Procter & Gamble1, Salton, and Sara Lee are all clustered in the same segment of the market. Their brewers are cheaper in price compared to Keurig, but P&G offers the greatest variety with only 15 coffees and teas available. High Price

Limited Variety

Wide Variety

Low Price Legend Keurig P&G Salton/Melitta Sara Lee/Senseo

1

Procter & Gamble does not currently manufacture brewers, but according to the case, if they decide to introduce a brewing system, they will price similarly to Salton and Sara Lee. The brewer pods they package are compatible with other brands single-serve coffee systems.

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4. Promotion
i. K-Cup (or Keurig-Cup) We feel the best promotional activity for K-Cups is to offer discounts when buying cups. For example, a discount could be offered through free shipping and handling when total cup purchases are over a certain dollar amount. Another possibility is to offer 25 cups at regular price and half off on the second 25 purchased. ii. B100 Brewer The market research commissioned by Keurig shows that the best way to gain interest in the system is through demonstrations; 90% of those surveyed indicated that the demonstration increased their likelihood of buying the product. The key factors of interest to promote include convenience, quick brewing, ease of use, and minimal cleanup, all of which are sources of dissatisfaction with at-home users current systems. Through the internet-based survey, it has been shown that the B100s core customers are younger males. The key elements Keurig must implement into its promotion strategy for the B100 include being one of the first entrants into the at-home market, being portrayed as a single-cup pioneer, and enhancing its visibility in the up-scale market (Anderson). Keurigs B100 system has the potential to seize a large portion of their target market if it is promoted well. One strength of Keurigs promotional strategy is that they are aiming to be the first entrant into the at-home gourmet coffee market. They believe that being the single-cup pioneer will enhance the systems visibility in the up-scale market. Another strength of Keurigs promotional strategy is that by partnering with five different roasters, they can offer the largest variety of coffees and teas in the at-home market.

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While these factors strongly support Keurigs promotional strategy, there are several weaknesses with the rest of the plan. One such weakness is that they do not use their slogan or the origin of their company name to their advantage. Deliciously Simple is a great slogan that emphasizes the two major themes of coffee advertising: good taste and positive stimulation (Anderson 6). The slogan also touches on the fact that the system is very easy to use. In addition, the word Keurig is Dutch for excellence. Having your companys name associated with excellence can be another great marketing tool. Keurig is currently not doing everything it can to target its core customers. Promotion needs to be geared toward these younger males. One way to achieve this would be to buy advertising space on various Web sites, from sports to stock and financial sites. Since market research has shown that demonstrations are a significant way to increase system interest and purchasing potential, Keurig needs to utilize this avenue. Although it is stated in the case that Keurig does not currently have resources to sell through retail chains, which are prime locations for demonstrations, perhaps they should set up demonstrations at professional conventions, airports, affluent shopping malls, and high-end appliance shows. There are also two promotional activities that Keurig can offer to their buyers in order to increase their customer base. The first promotional offer is a referral program. When a first-time buyer goes onto Keurigs Web site to purchase K-Cups or a brewer, there would be a place to type in the name of the person who referred them. That referral person and the new Keurig B100 owner would then receive $25 in free K-Cups. The second promotional offer would be to utilize point of purchase sites in the OCS market

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by giving $50 instant rebates to entice buyers to invest in the Keurig system for their athome enjoyment (Anderson 19).

5. Pricing
i. K-Cup (or Keurig-Cup) When looking at the results of Keurigs market research, it is evident that those coffee drinkers consuming two or more cups per weekday are more willing to pay a higher price for each cup of coffee than those coffee drinkers consuming only one cup per weekday. These results can be confirmed by looking at the following bar graphs. The first graph, K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption, displays the willingness of one-cup and 2+ cups per weekday coffee drinkers to pay for a K-Cup (or Keurig-Cup). These results show that 2+ cups per weekday coffee drinkers are much more willing to pay higher prices for their cups of coffee than the one-cup drinkers. While this survey includes only those consumers who were very or somewhat likely to purchase the system, we can see that there is a significant difference between the responses for the two coffee drinking sectors (Anderson 16).
K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption

$0.55 +

5.1 14.6

$0.50-$0.54

16.7 30.7

K-cup (or Keurig-cup) Pricing

$0.45-$0.49

20.5 33.6

$0.40-$0.44

22 41.5

1 Cup/Day 2+ Cup/Day

$0.35-$0.39

28.2 48.2

$0.30-$0.34

41 58.5

$0.25-$0.29

60.3 75.6 0 10 20 30 40 50 60 70 80

Cumulative Percentage of Respondents

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We can further show that 2+ cups per weekday drinkers are more willing to pay a higher price for their individual cups of coffee by looking at the next two graphs comparing K-Cup (or Keurig-Cup) pricing and brewer pricing between one-cup and 2+ cups per weekday consumers. These graphs suggest that those 2+ cups per weekday coffee drinkers, who are more willing to pay a higher ($130+) price for a brewer, are also more willing to pay a higher price for their cups of coffee (Anderson 16).
Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption (1 Cup/Day Consumption)

1.2 $0.50+ 5.9 10.6

4.7 K-Cup (or Keurig-Cup) Pricing $0.40-$0.49 2.4 2.4

2.4 $0.30-$0.39 7.1 8.2

$130 $100-$129 < $100.00

5.9 < $0.30 9.4 34.1

0 Don't Know 0 5.9 0 5 10 15 20 25 30 35 40

Percentage of Respondents

Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption (2+ Cups/Day Consumption)

10.1 $0.50+ 9.5 9.9

1.9 K-Cup (or Keurig-Cup) Pricing $0.40-$0.49 2.5 5.7

5.2 $0.30-$0.39 5.3 6.2

$130+ $100-$129 < $100

6.3 < $0.30 8.9 22.2

0 Don't Know 0 6.3 0 5 10 15 20 25

Percentage of Respondents

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Since the survey of the B100 system showed that at-home coffee consumption increased with the presence of the Keurig brewer, we can assume K-Cup (or Keurig-Cup) sales will also be higher than the average of what one consumer drinks per day without the Keurig system. The survey showed that per day consumption averaged out to approximately 2.25 cups per day with the Keurig system (Anderson 7-8). While in this survey K-Cup (or Keurig-Cup) pricing did not seem to be an issue, from the other market research conducted we can see that those gourmet coffee drinkers consuming 2+ cups of coffee per day are more willing to pay a higher price for the K-Cups (or Keurig-Cups). By looking at the graph above we see that they are also more willing to pay $130+, the higher price for the brewer (Anderson 16). From these analyses and the results of the K-Cup (or Keurig-Cup) pricing based on consumption survey, it seems like the ideal price for a K-Cup (or Keurig-Cup) in the at-home market is $0.55 per cup. This price would benefit Keurig, the KADs, and the office managers regardless of whether a one-cup or two-cup approach is used. Currently KADs are able to buy K-Cups from the roasters at a price of $0.25 and sell the K-Cups to office managers for $0.40 $0.50 per K-Cup. From the $0.25 paid to the roasters, Keurig is paid a $0.04 royalty on each cup sold (Anderson 5). If the at-home K-Cups (or Keurig-Cups) are sold at a price of $0.55 to the at-home users through either the roasters or Keurig, the incentive to office managers to buy K-Cups from the roasters or Keurig is eliminated because they can buy more cheaply through the KADs. This pricing strategy gives the KADs pricing power in their OCS market. Based on the market research it appears that regardless of whether Keurig decides on a one-cup or two-cup strategy, the pricing of the at-home portion pack should be

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$0.55. As stated earlier, if the one-cup option is chosen, the office managers and KADs will still have the benefit of a favorable price discrimination strategy by Keurig. While the KADs have no real incentive not to increase their K-Cup pricing to match that of the online selling price of $0.55, a rise in the price of K-Cups would probably deter office managers from buying a large amount of K-Cups or investing in Keurigs OCS at all. However, if the KADs are able to increase the price of the K-Cups they sell to the OCS market to $0.55, there is still no incentive for the office managers to buy from any place other than their KAD. According to Keurig Authorized Dealer Bob Spangler, all Keurig brewers sold, leased, or used through KADs are done so through contractual agreements in which the user can only buy brewer supplies through the KADs. If an office manager were to buy K-Cups directly from a roaster or Keurig, it would be a breach of contract and grounds for removal of the Keurig system. These contracts not only protect the KADs sales of K-Cups, but they also protect the users because the contracts stipulate that the KADs are responsible for all maintenance and repairs to the brewers while they are in use. On the other side of this pricing arrangement, at-home B100 users not in contract with a KAD will be able to purchase their K-Cups for the price of $0.55 through Keurig or a licensed roaster. While this price is above the price set by the KADs, it seems to be a consensual point in all the surveys conducted by Keurig. The market we are targeting with the Keurig at-home brewing systems are connoisseurs of coffee. These people know what they want and like in a cup of coffee. Keurigs large variety of coffees and teas enables pricing power in their K-Cups to appeal to these consumers. Keurig can impose a higher price for their coffee because the variety offered is one of the most important aspects of the K-Cup appeal. Of course, if the K-Cups were priced lower, the quantity of

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K-Cups sold have the potential to be higher, and the lower price per cup of coffee might entice other people to invest in the Keurig at-home brewing system. If Keurig would decide to go ahead with the planned two-cup strategy, the pricing for the at-home system Keurig-Cup should also be $0.55. This pricing is optimal for the same reasons as for the one-cup option. The price of the K-Cup would still be left to the discretion of the KADs, but since the Keurig-Cup would not be a substitute for the K-Cup in the OCS market, there is no real foreseeable pricing competition between the two different cups. A con to this option would be that consumers, investing in the Keurig athome system, could opt to buy through KADs, decreasing profits that Keurig and the roasters could make through direct Keurig-Cup sales. Other K-Cup (or Keurig-Cup) Pricing Options One option in the pricing of cups not discussed above is to price the K-Cups (or Keurig-Cups) at a level similar to their competition. Market competitors like Salton, whose pods sell for $0.25, and Senseo, whose pods sell for $0.20 each, are marketing their gourmet coffees at a much cheaper price (Anderson 9). However, these pod prices are sometimes deceiving because the Senseo machine requires two pods to create one eight-ounce cup of coffee. If Keurig were to price their cups at the Salton price of $0.25 the KADs would not make any money from the sales; the wholesale price of the K-Cups from the manufacturer is $0.25, and Keurig would receive less than their current $0.04 royalty. If Keurig were to price around $0.40 to be competitive with the Senseo pods, sales would be better but still inconsistent with the cup demand. As we have stated before, our main target market is focused on the serious gourmet coffee drinker averaging a little more than two cups per day, and, according to market research, almost five times

25

as many people were willing to pay $0.50 for the cups than they were $0.40 (see bar graph on page 23). Either way, if Keurig would decide to price lower to be more competitive, the profit margins for all parties involved, except the roasters, would decrease. Yet since two of Keurigs roasters are shareholders, Green Mountain Coffee Roasters, Inc. and Van Houtte, they would also suffer from Keurigs decreased profit margins. This drop in profits could also cause the KADs to not participate in the KAD referral program for the B100, and if the KADs do not help with marketing the B100 to the Keurig-awares in the OCS market, projected sales for the brewer will be very disappointing. Keurig is very dependent upon their KADs to help promote the B100 through word-of-mouth with their clients, so they need to focus on a pricing strategy that will not only meet the demands of the potential B100 coffee consumers but that is non-threatening to the KADs. A pricing strategy that is focused on their competition is not the way to meet this objective. ii. B100 Brewer Keurigs goal is to use value pricing in order to set a fair price level for their marketing mix that will give the target market superior value through convenience, speed, taste assurance, and variety. The benefits of Keurigs value pricing strategy is in giving their customers pleasant surprises in convenience and speed of coffee preparation while continuing to provide a consistently great-tasting gourmet coffee. Keurigs definition of their target market, up-scale gourmet coffee drinkers, is very important in the development of their pricing strategy (Anderson 6). Also vital to their pricing strategy is the recognition and analysis of the competition within the retail at-home coffee market (see Section V-2).

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According to Keurigs marketing materials, a flexible pricing policy is being used at point-of-sale displays to entice OCS users to purchase the at-home system to fulfill their pre- and post- work coffee cravings. It appears that the pricing objective of Keurig is oriented toward sales. Their primary goal concerning the at-home market is to be the leader and pioneer in the up-scale, single-cup gourmet coffee brewing category. To help achieve their sales-oriented goals, Keurig plans to use push money allowances with their KADs through a KAD referral program. These proposed allowances will include a $15.00 compensation for each at-home brewer sale attributed to the KADs OCS accounts. In addition, the KAD will also receive a two-cent-per-K-Cup (or Keurig-Cup) annuity on subsequent coffee sales that Keurig makes to that customer for three years (Anderson 12). So, for example, if a B100 customer drinks on average one cup of coffee per day for three years, a KAD will profit $21.90 over the three year annuity period. Therefore a KAD will, on average, make $36.90 per customer for each B100 sold through their OCS accounts. In the fourth quarter of 2003, when the B100 is scheduled to launch, it is expected that 60% of the KADs will participate in the joint marketing program, with expected sales of two brewers for each office where advertising is placed. Therefore, each KAD is expected to make at least $74.00 per office if they participate in the joint marketing program with Keurig. This profit does not include the spread KADs receive through the sale of K-Cups (or Keurig-Cups) to the clients. The pricing of the brewer is a great concern for Keurig executives. Early market research has shown that consumers will pay greater attention to the pricing of the brewer and will have direct impact on consumers willingness to buy into the Keurig system. In price testing of the brewer, various prices were tested and also recommended by participants. Those participants who actually experienced a demonstration of the B100

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and were informed that the average price of high-quality coffee makers sold in the range of $69 - $149, responded with a willingness to pay more than $130 for the brewer. In another survey given to daily coffee drinkers over the internet, a price point of $149.99 was tested. This survey resulted in a 9% positive return identifying those core-customers who would definitely buy or probably buy a system like the B100. Follow-up questions to this internet survey found that the average price these core-customers would pay for such a system was actually $125. Finally, an at-home use test was conducted in the homes of gourmet coffee drinkers with a commercial model brewer. During this test, an acceptable price range for the brewer was found to be in the $129-$199 range. A price exceeding $200 was found to be a price point at which consumers began to view the brewer as a luxury purchase, requiring more consideration prior to purchasing (Anderson 7-8). Costs involved with the production of the at-home system, with a two-cup approach, were found to be $400,000 for the development and design of the necessary tooling to thermoform the new cup bases for the Keurig-Cups and another $60,000 per roaster of K-Cups and Keurig-Cups for new parts for the packaging lines to enable production of both cup types. With five licensed roasters, total costs of the new KeurigCup system with the B100 are $700,000. This is a sunk cost that should be omitted from cup pricing considerations because Keurig incurs the cost regardless of which cup approach is chosen. However, these costs should be factored into Keurigs breakeven analysis for the B100 brewer because the costs will be paid by Keurig regardless (Jordan 313). Past experiences with a former at-home brewer designed by Keurig, the B1000, provided insight into worrisome high costs and design issues from Keurigs

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manufacturing partner. Even with the knowledge gained from past mistakes and problems with the B1000, the most recent costs reported for the B100 from the manufacturing partner were projected to be $220 per brewer. With costs at $220 per brewer, breakeven quantities for brewer sales are as follows for the key price points of $249 and $299 (Anderson 11):
Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 10000 15000 20000 23000 24000 24138 25000 30000 40000 70000 100000 Cost $700,000.00 $2,900,000.00 $4,000,000.00 $5,100,000.00 $5,760,000.00 $5,980,000.00 $6,010,360.00 $6,200,000.00 $7,300,000.00 $9,500,000.00 $16,100,000.00 $22,700,000.00 Revenue $0.00 $2,490,000.00 $3,735,000.00 $4,980,000.00 $5,727,000.00 $5,976,000.00 $6,010,362.00 $6,225,000.00 $7,470,000.00 $9,960,000.00 $17,430,000.00 $24,900,000.00 $249.00 $700,000.00 $220.00 24138 Profit -$700,000.00 -$410,000.00 -$265,000.00 -$120,000.00 -$33,000.00 -$4,000.00 $2.00 $25,000.00 $170,000.00 $460,000.00 $1,330,000.00 $2,200,000.00

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Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 8000 8861 10000 15000 20000 25000 30000 40000 70000 100000 Cost $700,000.00 $1,800,000.00 $2,460,000.00 $2,649,420.00 $2,900,000.00 $4,000,000.00 $5,100,000.00 $6,200,000.00 $7,300,000.00 $9,500,000.00 $16,100,000.00 $22,700,000.00 Revenue $0.00 $1,495,000.00 $2,392,000.00 $2,649,439.00 $2,990,000.00 $4,485,000.00 $5,980,000.00 $7,475,000.00 $8,970,000.00 $11,960,000.00 $20,930,000.00 $29,900,000.00 $299.00 $700,000.00 $220.00 8861 Profit -$700,000.00 -$305,000.00 -$68,000.00 $19.00 $90,000.00 $485,000.00 $880,000.00 $1,275,000.00 $1,670,000.00 $2,460,000.00 $4,830,000.00 $7,200,000.00

Keurig and the B100 manufacturing partner are hopeful that, with additional engineering efforts, the production costs can be reduced to $200.00. Another breakeven analysis is shown below for the key price points with unit costs at $200.00:

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Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 10000 14000 14286 15000 20000 25000 30000 40000 70000 100000 120000 Cost $700,000.00 $2,700,000.00 $3,500,000.00 $3,557,200.00 $3,700,000.00 $4,700,000.00 $5,700,000.00 $6,700,000.00 $8,700,000.00 $14,700,000.00 $20,700,000.00 $24,700,000.00 Revenue $0.00 $2,490,000.00 $3,486,000.00 $3,557,214.00 $3,735,000.00 $4,980,000.00 $6,225,000.00 $7,470,000.00 $9,960,000.00 $17,430,000.00 $24,900,000.00 $29,880,000.00 $249.00 $700,000.00 $200.00 14286 Profit -$700,000.00 -$210,000.00 -$14,000.00 $14.00 $35,000.00 $280,000.00 $525,000.00 $770,000.00 $1,260,000.00 $2,730,000.00 $4,200,000.00 $5,180,000.00

Breakeven Analysis Parameter Values: Unit Sales Price Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 7000 7071 10000 15000 20000 25000 30000 40000 70000 100000 Cost $700,000.00 $1,700,000.00 $2,100,000.00 $2,114,200.00 $2,700,000.00 $3,700,000.00 $4,700,000.00 $5,700,000.00 $6,700,000.00 $8,700,000.00 $14,700,000.00 $20,700,000.00 Revenue $0.00 $1,495,000.00 $2,093,000.00 $2,114,229.00 $2,990,000.00 $4,485,000.00 $5,980,000.00 $7,475,000.00 $8,970,000.00 $11,960,000.00 $20,930,000.00 $29,900,000.00 $299.00 $700,000.00 $200.00 7071 Profit -$700,000.00 -$205,000.00 -$7,000.00 $29.00 $290,000.00 $785,000.00 $1,280,000.00 $1,775,000.00 $2,270,000.00 $3,260,000.00 $6,230,000.00 $9,200,000.00

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The price point of $199 is below the $220 (or hopefully $200) production costs of the brewer. If the B100 is sold at a price of $199, the loss on the brewer would be expected to be made up through K-Cup or Keurig-Cup sales. If Keurig relies on the sale of cups to make up for pricing the brewer below cost, the B100 would become a loss leader. The K-Cup (or Keurig-Cup) price of $0.55 will be used with the assumption that the owner of the B100 would consume, on average, 2.25 cups of coffee per day with their B100 system five days a week. The annual coffee sales are included in the breakeven analysis at the price of $199; otherwise, there would be no level of brewer sales that would result in a profit. Obviously, if the annual projected coffee sales are included in the above breakeven analyses at the unit sale prices of $249 and $299, the breakeven quantity would be lower for Keurig than they appear to be above, but those figures are not really important since both price points are higher than the unit costs of each brewer for the analyses.
Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 4000 4531 5000 10000 20000 40000 70000 100000
2

$199.00 $175.502 $700,000.00 $220.00 4531 Revenue $0.00 $1,498,000.00 $1,696,859.50 $1,872,500.00 $3,745,000.00 $7,490,000.00 $14,980,000.00 $26,215,000.00 $37,450,000.00 Profit -$700,000.00 -$82,000.00 $39.50 $72,500.00 $845,000.00 $2,390,000.00 $5,480,000.00 $10,115,000.00 $14,750,000.00

Cost $700,000.00 $1,580,000.00 $1,696,820.00 $1,800,000.00 $2,900,000.00 $5,100,000.00 $9,500,000.00 $16,100,000.00 $22,700,000.00

Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50

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Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 4000 4012 5000 10000 20000 40000 70000 100000 Cost $700,000.00 $1,500,000.00 $1,502,400.00 $1,700,000.00 $2,700,000.00 $4,700,000.00 $8,700,000.00 $14,700,000.00 $20,700,000.00 Revenue $0.00 $1,498,000.00 $1,502,494.00 $1,872,500.00 $3,745,000.00 $7,490,000.00 $14,980,000.00 $26,215,000.00 $37,450,000.00 $199.00 $175.501 $700,000.00 $200.00 4012 Profit -$700,000.00 -$2,000.00 $94.00 $172,500.00 $1,045,000.00 $2,790,000.00 $6,280,000.00 $11,515,000.00 $16,750,000.00

The benefits of an investment in the B100 brewing system are great for the gourmet coffee lovers who flock to Starbucks, Dunkin Donuts, Seattles Best, and Caribou Coffee to satisfy their cravings before work every morning. The average gourmet coffee drinker in downtown Chicago, IL, who drinks 2.25 cups of coffee per weekday, would spend an estimated $936 on coffee per year (IL Starbucks).3 In the Chicago market, an investment in the Keurig system would allow the consumer to pay for the B100 brewer and X number of years of K-Cups (or Keurig Cups) at a price of $0.55/cup. For example, if the brewer is sold at $249, the consumer could buy the B100 and 3.91 years of equivalent coffee in K-Cups and spend the same amount of money as one years worth of coffee consumption at an average downtown Chicago, IL, Starbucks.

The average price of an 8 oz. black Starbucks coffee in downtown Chicago, IL is $1.47 plus tax (tax rate of 9%). Someone who drinks 2.25 cups/weekday would spend $936 ($14.7*1.09*2.25 cups/weekday*5 days*52 weeks).

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Brewer Price $199 $249 $299

Years of K-Cups 4.20 3.91 3.63

In the Indianapolis market, the same comparison can be made. The average gourmet coffee drinker in Indianapolis, IN, who drinks 2.25 cups of coffee per weekday, would spend an estimated $625.95 on coffee per year (IN Starbucks).4
Brewer Price $199 $249 $299 Years of K-Cups 2.43 2.15 1.86

Therefore, while the Keurig brewing system may appear to be a pricey investment, it is clear that the consumer would be saving money by making his/her own cup-by-cup gourmet coffee instead of traveling to a gourmet coffee provider such as Starbucks.5 A lower price of $199 for the brewer does appear to be appealing to consumers. A price below $200 does not trigger a luxury purchase mentality in the consumer. Also, since Keurig is in the introductory stage of the B100, often profits are lower since more money is spent by the company on promotion, product, and place development (McCarthy 271). However, we feel the price of $199 is not ideal because Keurig would be relying on the sales of K-Cups (or Keurig-Cups) to cover the expenses for manufacturing the B100. This is a very risky decision. If the sale of K-Cups (or KeurigCups) does not live up to the expected levels, Keurigs profits will decrease. Also, if the demand for the at-home system is lower than expected and Keurig must lower the price of the brewer to move the product, a decrease in the selling price would put the brewer at an even larger loss for the company and shareholders.
4

The average price of an 8 oz. black Starbucks coffee in downtown Indianapolis, IN is $1.00 plus tax (tax rate of 7%). Someone who drinks 2.25 cups/weekday would spend $625.95 ($1.00*1.07*2.25 cups/weekday*5 days*52 weeks). 5 Savings do not include travel time and gasoline.

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From our breakeven analyses above, it seems that the optimal price for the brewer would be $249 based on our focused price points. It appears to be Keurigs best option to price higher than their manufacturing costs so, after meeting their breakeven quantities, all additional sales contribute to the profits of the company. While Keurigs management is concerned that they may not have enough time to lower the price of the brewer once it is out in the market, it seems that this is a risk that is worth taking (Anderson 11). By pricing the brewer at $249, all profits can be put toward research and development efforts to lower the production costs of the B100 and to develop subsequent one-cup brewers at a lower price to appeal to other markets. The profits of the B100 will give Keurig the opportunity to draw in a broader consumer base and hopefully will enable Keurig to develop new target markets with lower-priced one-cup brewers. On the other hand, pricing above $200 forces consumers to think harder about making a B100 brewer purchase. It is important for Keurig to use price as an indicator of superiority without putting themselves out of the market entirely. We feel that Keurigs at-home brewer will be a luxury item for most consumers willing and able to invest, so a $200 luxuryindicator can be considered irrelevant to our target consumers. Currently, with the production costs of the B100 at $200-$220, it does not seem within the capabilities of Keurig to price the brewer at $149. A price of $149 would force the company to rely too heavily on K-Cup (or Keurig-Cup) sales. Based on the breakeven analysis below with annual projected coffee sales again at $175.50 per consumer, Keurig would have to sell 6,699 brewers to people that will drink at least 2.25 cups per weekday to break even on their investment in the B100. This is even riskier than using the $199 price. It seems that building up equity to put toward R&D would be

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a much better option for Keurig to enable them to later meet the needs of the consumers in the market of $149 one-cup brewers.
Breakeven Analysis Parameter Values: Unit Sales Price Annual Projected Coffee Sales Fixed Costs: Unit Costs Breakeven Quantity Quantity 0 5000 6000 6699 10000 15000 20000 25400 30000 40000 70000 100000 Cost $700,000.00 $1,800,000.00 $2,020,000.00 $2,173,780.00 $2,900,000.00 $4,000,000.00 $5,100,000.00 $6,288,000.00 $7,300,000.00 $9,500,000.00 $16,100,000.00 $22,700,000.00 Revenue $0.00 $1,622,500.00 $1,947,000.00 $2,173,825.50 $3,245,000.00 $4,867,500.00 $6,490,000.00 $8,242,300.00 $9,735,000.00 $12,980,000.00 $22,715,000.00 $32,450,000.00 $149.00 $175.506 $700,000.00 $220.00 6699 Profit -$700,000.00 -$177,500.00 -$73,000.00 $45.50 $345,000.00 $867,500.00 $1,390,000.00 $1,954,300.00 $2,435,000.00 $3,480,000.00 $6,615,000.00 $9,750,000.00

VII. Problematic Issues and Alternatives

Promotion In order to sell units, we need to show the benefits of the B100 brewer first-hand. As addressed earlier, we plan to accomplish this through product demonstrations in alternate venues such as professional conventions, airports, affluent shopping malls, and high-end appliance shows. We also plan on offering referral programs and discounts which will help raise awareness and product loyalty. In 2005, the KAD referral program no longer existed, but we feel that in 2003 it would have been a very effective way to push to the B100 brewer to the Keurig-awares
6

Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50

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in the OCS market (Spangler). Now that the product has been out for more than two years and alternative, lower-priced brewers are offered by Keurig, the benefits of such a program are not as high. Packaging The main problem with packaging lies in deciding between the one-cup and twocup approaches. We feel that the one-cup approach is Keurigs best option because it appeases GMCR, decreases the chance for customer dissatisfaction, and simplifies the product for the consumer. Place Keurig needs to use an exclusive marketing approach in the OCS market, meaning that sales are only through KADs specializing in particular geographic areas (McCarthy 311). We feel this is important because the KADs territories are mostly independent of one other, allowing closer relationships between the KAD representatives and the office managers. However, in the at-home market, we are not only marketing exclusively, since the cups are available through the KADs and on Keurigs and roasters Web sites. We feel it is important to sell through Web sites, as well, because the only athome consumers the KADs sell to are office workers in their districts. There will be other consumers who do not work in an office that maintains a KAD relationship, and they will need a channel through which to purchase the brewer and cups. It is important to maintain both direct and indirect channels in the at-home market. One reason is that the KADs have established relationships with office managers and will initially push the brewer sales to office workers. According the Bob Spangler, a KAD through Purefact, the OCS market is a very valuable source of at-home sales because the customers have already experienced the benefits of a Keurig coffee system.

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After the KADs sell to the workers, those new Keurig buyers will continue the promotion. Their positive experiences with the B100 will prompt the new owners to spread the word of the product to friends, family, and neighbors in order to get $25 off their purchase of K-Cups through our proposed referral program. Price Pricing the brewer is a main concern of Keurig. Based on the sales projections, we could breakeven or profit at the prices of $199, $249, and $299. We chose to price the brewer at $249, because it is much easier to price high and lower later. Also, at the $249 price, Keurig can cover their manufacturing costs without having to depend on KCup sales. Then, the K-Cup profits can be put towards research and development of less expensive brewers that can later be sold to the mass market through retailers. One of Keurigs main objectives for the years to come should be to not only lower brewer costs but to also create partnerships with high-end retailers to sell the Keurig at-home brewers. We feel retailers like Williams-Sonoma, Crate & Barrel, and other high-end home stores are viable candidates for such partnerships. The pricing of the K-Cups is also of concern to Keurig. Based on the market research, we feel that our target market would be willing to pay $0.55 per K-Cup. This price will still give the KADs pricing control in the OCS market, and the price will allow Keurig and the roasters to make a higher profit per K-Cup.

VIII. Conclusion
With Keurigs success in the office coffee market, a logical business extension does, indeed, seem to be the at-home coffee market (Anderson 6). Their shareholder, GMRC, presented some very relevant and important concerns regarding the companys B100 brewer launch. We agree that the one-cup approach is much simpler and 38

economical for the roasters and consumers, and we have decided to provide solutions that will appease GMCR and make the introduction of Keurigs product into the at-home market much smoother. We have proposed a fair and realistic pricing strategy for the B100 at $249 and K-Cups at $0.55. We feel these prices will allow Keurig to effectively enter the gourmet at-home coffee market while providing profits to be put toward future promotion in the retail market and the development of lower-priced one-cup brewers. We have also offered some recommendations and ideas regarding Keurigs at-home brewer marketing. These include focusing on their target market and promotional strategies. The opposing group has very good ideas, but we feel our recommendations on pricing and promotion of the B100 are the correct actions for Keurig to take at this time.

IX. Comments on Presenting Opposing Groups Paper

Below are various statements found throughout the opposing groups paper that we feel either are not accurate or need further discussion. Page 3 4: In the up-scale sector Braun and Bunn were some of the companies heightening pressure in the single-cup division. The case states that Braun and Bunn are companies heightening pressure in the single-cup division. Nowhere in the case does it say that these companies are single-cup brewer competitors. Page 4: This made our $200 manufacturing costs look outrageous. The presenting group is assuming that manufacturing costs are $200. However, we are supposed to be proposing solutions at this moment in time. According to the case on page 11, the latest reports show manufacturing costs as $220. While the manufacturers are trying to lower their costs to $200, they have not yet achieved this goal. 39

Page 5: In addition to the desire for simplicity and the limited time before launch, this would allow office managers to have access to K-Cups in stores, just in case they were to run out between orders. Page nine of the case states that Keurig does not have the resources to enter the retail market at this time. Also, KADs and office managers are under a contractual agreement. This means that office managers can only buy from KADs. The office system could be removed if managers purchased K-Cups anywhere else. Page 6: They now would not have to accommodate for the production of a second cup line. This statement contradicts page nine and ten of the case which states, These two portion packs would be manufactured on the same packaging lines. Page 6: If companies do not have trust in their employees they need to restructure their hiring requirements. This is a major digression to their paper. This is virtually impossible. You cannot screen employees to tell if they are going to take something home from the office. We realize that this point was made as a solution to employee theft of K-Cups, but Keurig has no control over, nor do they care how companies handle their hiring of employees. This is not a solution that Keurig can implement. Page 7: Going by survey results the best price for the B100 would be $199.99. Page seven of the case states, An acceptable price range for the brewer was determined to be in the $129 - $199 range. The presenters state that the survey results give a best price of $199.99. However, this is not specifically stated in the case.

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Page 8: The mail-in rebates would be for 20 percent off the retail price of $199.99 Throughout this paper, the presenting group assumes Keurig will immediately be distributing their product through mass retail channels. However, the case plainly states on page nine, that Keurig does not have the resources to distribute through retail channels right now. Their entire paper is based on an incorrect assumption that was clearly stated in the case material. Page 8 Keurig machines are brewing about 125 million cups of coffee annually Page four of the case states, Keurig shipped 125 M K-Cups in 2002, with total shipment since launch (1998) of 340 M. Therefore, the presenting group should say, In 2002, they shipped 125 million cups Page 10: According to Keurigs research, the average coffee drinker consumes a little over three cups of coffee per day. Assuming that same amount of coffee will be consumed, we calculated a yearly cost of the in-home system to be roughly $304 as compared to coffeehouse purchases of $312. According to Keurigs marketing research, as stated on page eight of the case, research shows the average coffee drinker consumes 2.25 cups of coffee per day and not a little over three. This would also change the presenting groups calculations. Page 11: Internet sales, however, eliminate the need for the mark-up for the KAD or in-store profit, but add the cost of shipping and handling, a cost that could be passed on to the consumer. There are shipping costs associated with KADs. Also, you cannot eliminate mark-ups because whoever is selling the product on the internet site will still mark-up in order to make a profit.

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Page 12: If using two different types of cups, we would have to price the residential Keurig-Cup higher than the commercial K-Cup based on the expected volume and the informal contracts in place between the KADs and the business owner or manager. We disagree with this statement because it is possible to not price the KeurigCups higher than the K-Cups. While our price suggestion is higher than the KADs, it is based more on market demand. There is nothing stopping the KADs from increasing their price to match our suggested $0.55. Page 13: One of our recommendations for promoting this product using the demonstration aspect was to create a promotional video loop that can be played at higher-end retailers such as Bed, Bath, & Beyond and Linens N Things. First, Keurig cannot enter the retail market at this time. So with that in mind, why would these two stores agree to run a promotional video on a product they cannot profit from? Secondly, the presenting group plans on using testimonials from office managers whose offices utilize the Keurig system. We feel the average consumer would relate better to an actual at-home user who has experienced the benefits of the Keurig at-home system than to an office manager. Page 14: We thought that commercials would not be the best way to promote our product since it is a demonstration-driven product. This is a contradiction to their ideas on promoting the product as stated in the beginning of the paragraph as well as on page 15 of their paper. If a product is demonstration-driven, it would make more sense to advertise with television commercials than to advertise in newsprint.

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Page 14: We also decided that college students would also be a good target market for our product. Based on the case material and other research, we do not feel this is anywhere near Keurigs target market of high-end, gourmet coffee drinkers. Even in the interview with Kathy Kelly, the Director of Customer Services At-Home Division, it states, Our focus is and always has been based on a high income demographics and gourmet coffee drinkers. Page 15: Also, the first 20,000 would come packaged with the filter that allows the consumer to use their own coffee grounds and not just the K-Cups. While this is a good idea, it would increase production and development costs to create these filters. In 2005, these filters exist, but at the time of the B100 launch, they did not. Page 15: We think it would be a good idea to branch out into tea and hot chocolate in order to meet the demands of our extended target market. The launch of a tea line (T-Cups) was already in the works when the case was written.

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X. Keurig Authorized Dealer Interview

Mr. Robert Spangler, Purefact Sales Representative Purefact 355 West Maiden Lane St. Joseph, MI 49085 Ph: (269) 208-3669 The following questions and responses collected through a phone interview with Keurig Authorized Dealer, Bob Spangler at 2:15 PM Wednesday February 22, 2006. Question: Answer: You are a Keurig Authorized Dealer, correct? Yes, through Purefact I am authorized to sell Keurig coffee brewers in offices and homes. How popular is the B100 brewing model in homes today? From my experience, the B100 brewer is sold almost exclusively to small offices. The price of this brewer is significantly much higher than our other models. At-home buyers opt for the lower priced B40 Elite, B50 Ultra, and B60 Special Edition models because they are much less expensive. How do you handle K-Cup sales for the brewers you sell to at-home consumers? There is a contractual agreement between Purefact and the customer that stipulates that all K-Cup sales for their individual brewers must be purchased through Purefact for the life of the Brewer. Did the B100 ever use a cup different from the K-Cup called a KeurigCup? Not that I am aware of. All offices and at-home brewers use the same cups. Only the K-Cups will fit into the brewers. How much do you charge your at-home customers for K-Cups? It varies based on their coffee consumption. Someone who drinks less coffee per year will be charged a slightly higher price for the K-Cups through Purefact than someone who drinks three to four cups per day. The pricing difference is only a few cents however, so it is not a problem between customers. One of the main concerns of office managers is their fear of K-Cup theft if the brewers in the office coffee system (OCS) use the same cups as the at44

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home brewers. The two-cup approach was proposed to deal with this issue. We felt that a possibility for eliminating the possibility of office theft might be to install a vending system in offices for the K-Cups. We noticed that the B100 and other OCS brewers are vending compatible. How does the vending work and is it successful in the offices? Answer: The presence of a K-Cup vending machine in offices reduces the office consumption of coffee by at least 50%. For example, if a small office using the B100 typically goes through 20 K-Cups a day prior to the installation of a Keurig K-Cup vending machine, their consumption will drop to below ten K-Cups per day. Therefore, while the vending machine may eliminate or drastically reduce the ability for an employee to steal KCups, the machine more importantly reduces the benefits of having a Keurig one-cup brewer in your office because employees do not like nor want to pay for in-office coffee. In reading our case, Keurigs management had presented a marketing idea to implement a KAD referral program to help penetrate the OCS market with the at-home B100 brewer. Is or has there ever been such a program in place? No, there are no referral programs sponsored by Keurig. Purefact is a distributor of the brewers, but our clients are our own.

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Copy of thank you note mailed to Bob Spangler on 2/24/2006: Front:

Inside:

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Works Cited
1. Anderson, Eric T. Keurig At Home: Managing a New Product Launch. Harvard Business School. 28, February 2005. 2. Davids, Kenneth. At What Cost Convenience? Testing the New Single-Serve Coffee Systems. January 2004. http://www.coffeereview.com/article.cfm?ID=83 3. Home Caf. http://www.homecafe.com 4. Jordan, Bradford D., Stephen A. Ross, and Randolph W. Westerfield. Fundamentals of Corporate Finance. 6th Ed. Boston: McGraw-Hill Irwin, 2003. 5. Keurig, Incorporated. http://www.keurig.com/ 6. McCarthy, Jerome E. and William D. Perreault Jr. Basic Marketing: A GlobalManagerial Approach. 15th Ed. Boston: McGraw-Hill Irwin, 2005. 7. Melitta, USA. http://www.melitta.com 8. Senseo. http://www.senseo.com 9. Sherry, Cheryl. Coffee shops look to fill caffeine cravings. The Post-Crescent. 24 Mar. 2002. http://www.wisinfo.com/postcrescent/news/annual/annual_2001791.shtml 10. Spangler, Bob. Keurig Authorized Dealer, PureFact. Phone interview. 22, Feb. 2006. 11. Starbucks. Phone inquiry. Circle Tower, Indianapolis, IN. 22, Feb. 2006. 12. Starbucks. Phone inquiry. Illinois Center, Chicago, IL. 22, Feb. 2006.

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