Chilis's Sonic3 Product

1. Executive Summary

Our firm, ChiliS, is one of 8 companies, in the portal music player market dominated by three customer segments – Standard, Sports and Youth.

At the beginning of 2014, ChiliS had only one product offering, Sonic3, targeted toward the Standard consumer segment. Faced with couple of years of stiff competition and falling revenues, we planned to return to profitability through economies of scale by capturing the bigger market share. The plan failed on execution due to poor distribution and inventory management. In period 2, we were one of the first movers to develop the new product, SonicCool, to capture new but rapidly growing Youth segment. We missed on the golden opportunity to capitalize on SonicCool till 2016, as the inventory management failed to deliver the product to the market on time. In period 3, we revised our strategy from cost leadership to higher margin products by further investing in the development of SonicCool and introducing a new product, Sonic X, to target the Sports segment.

Period 4 became a turning point for our company. At this point, we revised our strategy and decided to focus our limited resources entirely on the growing Youth and Sports segments as we were rapidly losing market share in the mature Standard segment. Our strategy was successful and we were able to increase gross margin and the net marketing contributions consistently in periods 4, and 5 (Appendix A, B and C). Moreover, we have also improved our inventory and distribution management through research based forecasting and improved sales force management. Our distribution channels remain critical component to support our short and long term growth plans, we kicked off the initiatives towards increasing our distribution channels by incentivizing the retailers with bigger margin. One area of concern is the lower effectiveness of the promotion mix of all three products as none of the product lines achieved higher than a rating of 72.0%, when the products of ChiliS’ competitors averaged a rating of 79.2%.

Finally, we recommend the future management team to continue to focus on the Youth and Sports segments while positioning the ChiliS for late re-entry into the Standard segment once we are in the financial position to do so.

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2. Market Segments

There were three distinct consumer segments within the portable music player market; Standard, Sports and Youth. By 2019, the aggregate estimated potential market size was 41 million units (Standard, Sports and Youth represent 46%, 27%, and 27% respectively). Each segment was uniquely sensitive to different factors. Accordingly, we tailored the pricing, advertising, distribution and product specifications according to the segments’ preferences.

The Standard segment represented the mass market, which was highly sensitive to pricing and distribution. The retail price of the products in the segment ranged from $40 to $120. This segment had a relatively normal sensitivity to media advertising, and could primarily be reached through TV and radio. In comparison to the other two segments, Standard was not sensitive to style / design, technical and product specifications.

In the Sports segment, we observed that the products commanded a higher retail price range (from $60 to $150) with low price sensitivity. In comparison, this segment reacts poorly to advertising. Sports consumers tended to be more tech-savvy and had a preference for higher technical and product specifications.

In the Youth segment, the retail price of the products ranged from $20 to $80. Youth consumers were highly influenced by TV and radio advertisements and at a lesser degree by newspaper and magazine advertisements. Youth consumers placed a high importance on the product style / design, low importance on technical specifications and medium importance on product specifications.

3. Competitor Analysis

In 2014, ChiliS entered the portable music player market together with seven other firms, which were identical in terms of initial products and marketing budget. By 2019, Firm1 had established itself as the market leader with the highest cumulative net marketing contribution ($476 million). In terms of market share, BEATS controlled 19.2%, which was the largest market share. The top three firms represented half of the market share.

By 2019, ChiliS’ closest competitor was Go2Music. Despite the fact that Go2Music had 38.7% more revenue, it failed to rein in its cost of goods sold and was 47.8% higher than ChiliS. This deteriorated Go2Music’s net marketing contribution and allowed ChiliS to overtake Go2Music through heavy investment in sales force in order to convert awareness to purchases.

ChiliS also regarded Exponent5 as a declining rival. Exponent5’s low product advertising spending failed to capture the Youth segments’ awareness. This is reflected in the low 2019 net marketing contribution of $22 million (approximately half ChiliS’).

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4. Business Strategies (2014 - 2019)

• Period 1 (2014 – 2015): Establish Cost Leader Position

As per the SWOT analysis we conducted (see Appendix A). ChiliS chose to differentiate

itself as the cost leader in the standard segment. Our Sonic3 was the lowest priced portable music player to the market. With an intention to capture ~20% of the market share by the end of 2015, we invested in product cost reduction in an effort to improve our gross margin. However, significant product cost reduction did not take place until several development cycles later.

• Period 2 (2015 – 2016): Expand into High Growth Market Segment

ChiliS took the first mover advantage and introduced a new product, SonicCool, in the Youth segment. Sales