Aqualisa Case

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Rebate Cost Calculation

As per our analysis of Aqualisa’s financials, the Quartz product has a higher margin than the company’s average (60% over 47% of Gross Margin), which makes the rebate strategy flexible without hurting Gross Margin. To maintain the average margin, we estimated an approximate total rebate of 20% over retail price. This amount would be around €170-€216 which would be a significant incentive for plumbers to try the new Quartz products. Aqualisa can consider increasing rebate more than 20% for a more Customer Centric marketing approach, looking at the future value brought by loyal/converted plumbers.

Product

Retail Price

Rebate Amount

Total Cost

Standard

€850

€170

€340,000

Pumped

€1,080

€216

€432,000

Total

€772,000

As per the calculation, rebates on the first 4000 Quartz products will cost Aqualisa a total of €772,000 which is way less than €3-4 Mil it would cost in targeting the end customers. Also giving rebates only for the first 4000

products will encourage competition among the plumbers and will incentivise them through a reasonable dollar value to use the Quartz showers. Furthermore, using the Quartz showers will clear all the aversions plumbers have about the new technology.

Was the investment worth it?

The decision to develop the Quartz Shower Valve was forward looking. While the company enjoyed number 3 overall market-share in the UK shower industry the differentiation of its products with respect to competition was eroding and the company wanted to offer clients a truly superior product to justify its premium price.

Number of Quartz Sales Required to recoup the Research Investment

Undiscounted Basis (Assumption: 260 working days in a year)

Product

Product Cost

Margin

Research Investment

€ 5.8 Mil

Quartz Standard

€ 175

€ 275

Average Margin

€ 310

Quartz Pumped

€ 230

€ 345

Break Even Point

18710 units

Average Margin

€ 310

Units to be sold per day to achieve break even point in one year

72 units

Discounted Basis

The company is currently getting an average rate of return of 25% from its operations therefore the opportunity cost of investing in R&D is 25%. The relatively high discount rate means that Aqualisa would need to sell an average of 81 units per day in order to recoup the cost of its investment in one year. If we are looking at a 2-year horizon for recouping costs, 45 sales per day are required.

Currently the Aqualisa is selling 15 units per day. At this rate it would take it over 10 years to recoup the R&D investment. However, this scenario is not realistic, as sales channels would discontinue offering the Quartz line long before that. Based on current sales levels of Quartz line the company will not recoup its R&D investment.

With the investment Aqualisa was able to set up a testing facility and expand its engineering staff. In addition to the Quartz line, the company has several additional products in its development pipeline. This is incremental value to the company from R&D investments needs to be considered in addition to the financial returns from Quartz Shower sales.