Keurig Case Analysis free essay sample

Keurig has been successful in selling its coffee brewing system to the office coffee segment (OCS) of the US market. This success led its leaders to ponder entering the consumer market. While making the move might seem like a reasonable next step in the development of the company core business, it also presents unique challenges. The biggest of those challenges concerns the danger of losing the existing OCS business due to a possible disruption of the unique distribution channels that the company relies on for OCS. The management also has to decide on the appropriate pricing scheme for its new brewer, which is further complicated by the proprietary nature of the coffee cup (aka K-Cup) that comes with it. Calculating the brewer price In calculating the price for the brewer we must consider the full picture. In particular, the proprietary nature of the company business inevitably ties the profits on the brewer and the profits on the coffee that comes with the brewer. We will write a custom essay sample on Keurig Case Analysis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page More specifically, the total profit per customer: Profit=Profitbrewer+Profitcoffee It should be notes here that the aforementioned profit model is by no means unique to Keurig, and can be observed in other industries, like computers (where the profits are oftentimes split across hardware and software) or printers (where the profits are split across hardware and cartridges). Writing out the above formula further, we get: (1) Profit=Marginbrewer? Qbrewer+Profitcoffee (2) Profit=(Pricebrewer-Costbrewer)? Qbrewer+Margincoffee? Qbrewer (3) Profit=(Pricebrewer-(Costbrewer-Margincoffee))? Qbrewer The last equality (3), although follows immediately from the previous one (2), illustrates an important conceptual point, namely: profit margins gained on coffee sales can offset the costs of a brewer. Also, given the nature of their coffee business (royalties), the margins on coffee sales are virtually equivalent to profits (no â€Å"costs† are incurred in order to receive royalties). Calculating profit on coffee From the case we know that a typical customer consumes 2. 25 cups of coffee per day. This number multiplied by 365 gives us 365 ? 2. 25 ? 821 cups per year. Keurig receives $0. 04 in royalties per cup; therefore the total profit will amount to $32 per customer per year. Assuming the four year time horizon (N = 4) and the cost of capital, r=10%, the NPV value for the stream of income on coffee sales is NPV=i=1N321+ri = $101 per customer. Calculating brewer price elasticity To calculate the elasticity we use the market research data presented in Exhibit 6. A log-log regression of the 6-point data gives us an estimate of the price to share elasticity equal to ? -3. 2 (see Appendix A), which we shall round to -3 per this assignment’s instructions. The mark-up coefficient in the â€Å"optimal price† formula will therefore be equal to ? 1+? = 1. 5. the recommended brewer price Using the original cost estimate for the brewer ($200) and the mark-up factor of 1. 5 would give us the optimal price of $300. However, as was explained earlier, per equation (3) we can interpret Keurig’s profit on its coffee sales as a brewer cost reduction factor. Thus, the original cost of a brewer is reduced to $200-$101=$99; applying the mark-up coefficient of 1. 5 will give the recommended price of $99? 1. 5? $148 per brewer. Calculating the K-Cup price