Our client is a large toothbrush manufacturer. They have two major products – manual toothbrushes and electric re-chargeable toothbrushes. The manual toothbrush is priced at 2$ and the electric rechargeable toothbrush is priced at 33$. One of the main competitors of our client has launched Teknobrush, a battery operated toothbrush, for 4$. The competitor has now gained 4% market share.
The client has hired us to advise them on whether they should also launch a battery operated toothbrush in the market.
Suggested case structure
Allow the interviewee to come up with a case structure. The key would be to do a segment wise profitability analysis and comparison.
Wait for him to come up with the key metric on the basis of which he would do the comparison. In case he struggles, prompt him to use a ‘per customer per year’ metric.
- Segment wise profitability: We need to calculate the profit per customer per year from the different segments. It is similar to the lifetime value of customer calculation; but in this case it would be more prudent and simpler to do it on a annual basis. The profit per customer per year would depend on:
- Profit margin of each segment
- Average life of each product
- Recommendation: Based on the profitability of the new product vis-à-vis the existing products, the interviewee can recommend the future course of action
1. Segment wise profitability analysis
If enquired, share the below information verbally with the interviewee:
- Electric toothbrush segment constituted 20% of the market last year, the rest was manual toothbrush
- Electric toothbrushes have a 16% market share this year
- Manual toothbrushes are sold for 2$
- Manual toothbrush is typically replaced every 9 months by the customers
- The company has a net profit margin of 60% in this segment
- Rechargeable toothbrushes are sold for 33$
- Rechargeable toothbrushes are made of a main body and a detachable rotating ‘head’ on top
- The initial purchase of the toothbrush includes both the head and the body
- The head requires a replacement every 6 months
- The customer can buy a replacement head at 3$ separately
- The average life of the ‘body’ of the brush is 10 years
- The company has a net profit margin of 50% on the body and 70% on the head
Teknobrush (Battery operated toothbrush):
- Battery operated toothbrushes have an average life of 1 year
- Our client’s product team has estimated the cost of manufacturing of these brushes to be 2.4$
2. Segment-wise profitability calculation
The interviewee can now use the information shared to calculate the profit per customer per year for each of the product segments
- Profit per sale
- No of sales per customer per year
The product of profit per sale and sales per customer per year, will give us the profit/customer/year
We can use the below formulae to calculate the key metrics:
𝑃𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝑠𝑎𝑙𝑒=𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒∗𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛
P𝑟𝑜𝑓𝑖𝑡/customer/year=𝑃𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝑠𝑎𝑙𝑒∗𝑁𝑜. 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Now the interviewee can perform the calculations for each segment
- For the electric toothbrush, the profit would have to be calculate separately for the head & the body
- The price of the tooth brush is 33$ which includes the head worth 3$. Hence we can assume the price of the body to be 30$
Total Profit/ customer/ year for Electric toothbrush is:
- The Profit/customer/year is different for all the three products:
- Manual toothbrush: 1.6$
- Electric toothbrush: 5.7$
- Teknobrush (Battery operated toothbrush): 1.6$
- The electric toothbrush segment is the most profitable. The profitability of the manual toothbrush and of Teknobrush (battery operated toothbrush) is the same.
3. Final recommendation
The interviewee must make the following observations:
- Based on the segment profitability analysis, we know that the electric rechargeable toothbrush segment is the most profitable
- Teknobrush (battery operated toothbrush) is gaining market share at the expense of the electric toothbrush segment. It is unlikely that it would make in-roads into the market share of manual toothbrush, as it is twice as expensive as the manual toothbrush
- If the company were to introduce battery operated toothbrush, it would cannibalize its most profitable segment of electric toothbrush
Hence, the company must not launch the battery operated toothbrush. However, it must instead find other ways to protect the market share of the electric toothbrush segment.
A great interviewee will also make the following observations:
- The electric toothbrush is more expensive for the customer compared to Teknobrush (battery operated toothbrush)
- Over a 10 year period, a customer will spend 40$ on Teknobrush (4$ * 10)
- In a similar period, a customer will spend 30$ on the body of the electric brush. And the customer would require 2 heads per year, costing 3$ each. Hence over a 10 year period, the customer would spend 60$ on heads. The total cost to the customer for using an electric rechargeable brush over a 10 year period would be 90$.
Hence, the company would need to compete and defend its market share on functional benefits of electric toothbrush instead of value.