Classic Knitwear and Guardian: A Perfect Fit?

...

Other problems in proposed Guardian marketing program:

Classic decided to sell their products under the name of Guardian instead of their own name. This might be beneficial and less risky fir Classic if the product fail in the market, but they will not achieve awareness for Classic’s brand name if the product successes exceptionally. Classic’s new product-line attracts people for out-door activity. Therefore sales are seasonal in nature. Launching a product in January will not be a good idea because they will struggle selling their product in winter. It will be a better idea of launching the product sometime in spring. According to me, there isn’t a need for 16 SKU’s as the product is not fashion clothing. At beginning level, company can launch a product line with less SKU and then Classic can add more SKU if the product is successful in the market. A trade margin is another concern for the retailers. Trade margin for Classis if 45% compared to 50% trade margin on other branded products. Classic can encourage retailers display Classic’s products in front by increasing a trade margin. Marketing research is not extensive and fully dependable for forecasting. Classic should invest some more money in the marketing research to understand the market deeply.

5. Advantages and Disadvantages of Licensing Agreement:

Advantages:

- Classic Knitwear receives exclusive rights to use Guardian’s trademark and EPA rating to sell their products in USA and Canada. Therefore Classic has a competitive advantage.

- There is a fixed licensing fee of $100,000 for the first year instead of 5% commission on the total sales.

- Guardian brand awareness is very positive in the market, which reduces the marketing investments for Classic.

Disadvantages:

- Guardian requires Classic to meet a series of steadily rising annual sales targets over the first four years of agreement. If Classic fails to meet the targets, License will be cancelled.

- Only Guardian’s logo will be used on all the products and marketing materials. Classic will not have any awareness benefits if there are any conflicts between the companies and license is cancelled.

- Guardian may terminate this agreement during the first year, in Guardian’s sole decision, if sales of Guardian’s existing products are affected because of new product-line.

Break-even volume:

Two-Year Marketing Expense

Retail Display (10,000 x $100)

$1,000,000

Advertising Expense

$1,200,000

Additional Sales force (3 x $85,000 x 2 years)

$510,000

Licensing Fee (only for 1st year)

$100,000

$2,810,000

Two-Year Break-even

Year 1

Year 2

Average

Selling Price

$17.87

$17.87

Less:

Cost of goods sold

$10.82

$10.82

Trade Promotion (5% of MSP)

$0.89

$0.89

Advertising allowance ($17.87 * 20% * 10%)

$0.36

$0.36

Royalty ($17.87 * 5%)

-

$0.89

Contribution margin

$5.80

$4.91

$5.35

Contribution margin %

32.45%

27.45%

29.95%

Two-year Break-even = Marketing Expense / Contribution Margin

= $2,810,000 / $5.35

= 525,003 Units

Estimated Demand over the 2-year launch period:

Two-year demand forecast

Year 1

Year 2

Total 2-year demand

Target audience

100,000,000

100,000,000

Awareness (12.5% each year)

12,500,000

12,500,000

Response base (18.5%)

2,312,500

2,312,500

Definitely buy in 1st year (38%)

878,750

878,750

60% of definitely buy group

527,250

527,250

2nd year buyer (50% of 1st year)

263,625

Total Demand

527,250

790,875

1,318,125

If Classic implements all of the Miller’s marketing recommendations, the estimated demand for the new product over two years will be 1,318,125 units.

Recommendation:

After evaluating the whole case, I came to