Gillette, Procter & Gambles powerhouse razor brand, is experiencing challenges from consumer trends and upstart digital competitors.
Question:
Gillette, Procter & Gamble’s powerhouse razor brand, is experiencing challenges from consumer trends and upstart digital competitors. Gillette and close competitor Schick have focused on product innovation and higher prices. Indeed, their cartridges first contained two blades, then three, and now five. Razors now have swiveling balls that let the blades pivot, some used to vibrate, and Gillette recently applied for a patent for a razor that heats up. And with each addition, prices have increased accordingly. Even though Gillette produces excellent products that garnered $1.5 billion in sales last year, it faces threats posed by the continuing consumer trend of “beardedness,” such as the “scruff” or “stubble” look that’s not likely to go away soon. Online upstarts like Dollar Shave Club, Harry’s, and 800Razor.com are also eating away at Gillette’s sales. And when Gillette’s patent expired on its Mach 3 razor, rival Schick came out with a less expensive compatible refill blade cartridge. Although Gillette still captures more than 50 percent market share in the men’s grooming market, its market share has dropped from 70 percent in 2010. To help win back share, Gillette launched its own Gillette Shave Club in 2016. But the brand’s most significant change was to focus less on product innovation and implement an average 12 percent across-the-board price cut.
Appendix 3: Marketing by the number
Setting Price Based on Costs
Fixed costs: Costs that do not vary with production or sales level.
Unit cost = variable cost + (fixed costs / unit sales)
Markup price = unit cost / (1 - desired return on sales)
ROI price = unit cost + (ROI / investment unit sales)
Setting Price Based on External Factors
Dollar markup = selling price - cost
Markup percentage on cost = dollar markup / cost
Markup percentage on selling price = dollar markup / selling price
Determining Break-Even Unit Volume and Dollar Sales
Break-even volume = fixed costs price - (unit / variable cost)
BE sales = BEvol * price
Contribution margin = (price - variable cost) / price
Break-even sales = fixed costs / contribution margin
Contribution margin = (total sales - total variable costs) / total sales
Determining “Break-Even” for Profit Goals
Unit volume = (fixed cost + profit goal) / (price - variable cost)
Dollar sales = Unit volume * price
Sales = (fixed cost + profit goal) / contribution margin
Market Potential and Sales Estimates
Q = n * q * p
where Q = total market demand
n = number of buyers in the market
q = quantity purchased by an average buyer per year
p = price of an average unit
Analytic Ratios
Gross margin percentage = gross margin / net sales
Net profit percentage = net profit / net sales
Operating expense percentage = total expenses / net sales
Inventory turnover rate = cost of goods sold / average inventory at cost
Return on investment = net profit before taxes / investment
Net Marketing Contribution = net sales - cost of goods sold - marketing expenses
Marketing Return on Sales (Marketing ROS) = net marketing contribution / net sales
Marketing return on investment (marketing ROI) = net marketing contribution / marketing expenses
Increase Advertising Expenditures
Increase in sales = increase in fixed cost / contribution margin
Increase Distribution Coverage
NS = (NC * FC * LC) / TA
NS = number of salespeople
NC = number of customers
FC = average frequency of customer calls per customer
LC = average length of customer call
TA = time an average salesperson has available for selling per year
Decrease Price
Current total contribution = contribution margin * sales
New contribution margin * new sales level = original total contribution
1. Assuming a contribution margin of 60 percent, what sales would be necessary to break even (that is, maintain the current total contribution) on the 12 percent across-the-board price reduction? Refer to Financial Analysis of Marketing Tactics: Price Decrease in Appendix 3: Marketing by the Numbers to learn how to perform this analysis. (AACSB: Written and Oral Communication; Analytical Thinking)
2. What absolute increase and percentage increase in sales does this represent? (AACSB: Written and Oral Communication; Analytical Thinking)
Financial Accounting
ISBN: 978-0078025549
3rd edition
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann