Question

David is a product manager at HP (Nebraska), and in charge of printers and related accessories....

David is a product manager at HP (Nebraska), and in charge of printers and related accessories. After reviewing his sales figures for the past third quarter, David is worried that he might not hit this year’s annual sales targets. As a consequence, he considers an end-of-year promotion in cooperation with selected retailers in Nebraska. David has been approached by Samantha, owner and managing director of Direct2U, a direct marketing firm in Omaha. Samantha has offered her services in developing and implementing a sales promotion campaign to help boost HP’s end-of-year sales. She suggests an in-store promotional campaign in 10 hypermarkets: Walmart (4 stores), Staples (3 stores), Bestbuy (2 stores), and OfficeDepot (1 store). Samantha suggests placing one booth at the entrance of each hypermarket during the four crucial Saturdays before Christmas. Direct2U’s price quote is $500/day/booth including promotional material and remuneration of a sales promotion specialist. David has to make a decision. Is Samantha’s proposal interesting? The details are as follows:

In HP’s business, customer retention rates are as follows: on average, four customers out of five continue to use their inkjet printer after a full year. In fact, many customers trade up after a while to more sophisticated laserjet printers. After the second year, only half of the remaining customers continue. In other words, two customers out of four defects after year two. After year three, the remaining customers also stop using their printer. Thus, the maximum lifetime of a customer is three years. Consumers typically print 200 pages with a HP 100 ink cartridge. In a consumer household, cartridges thus generally last for 3 months before they need replacing. HP does not capture all replacement cartridge purchases. In reality, 15% of all customers buy HP-compatible low-cost and/or recycled cartridges from specialists or over the internet from vendors such as www.inktechnologies.com. Thus, at a rather conservative estimate, an average household typically buys every seventh replacement cartridge from other sources. To boost sales, David plans to sell a promotional bundle during the holiday season at a retail price of $100.88. The bundle consists of one HP Inkjet Printer ($66.90/unit), one Hi-Speed cable ($7.99/unit), and one HP 100 Black Ink cartridge ($25.99). HP achieves higher margins on cartridges (85% profit margin) and cables (80% profit margin) than on printers, which are sold at a loss (-40% profit margin).

HP forecasts annual price increases for its products of 2% per year. HP price increases come into effect on January 1 each year. The company uses a corporate-wide discount rate of 10%. To know whether he should move forward regarding Samantha’s proposal, David asks you (marketing analyst) the following questions:

Q: What could be done to improve the profitability of this direct marketing initiative for HP? In other words, what could HP do to enhance the economic return of acquiring these new customers? Suggest two concrete actions and briefly explain, in 3–4 sentences, how they would impact results.

Homework Answers

Answer #1

A good direct marketing campaigns will help you build relationship with new customers and increasing sales. In this case acquiring new customers is expensive and time consuming. so, there are two initiatives to improve the profitability of this direct marketing, those are;

1. Create new business - In this initiative you could use a direct marketing campaign to boost sales of a particular product,runout discontinued stock,increase customer contacts and directly follow up ona promotion.

2. Target your ideal customers - A well-targeted direct marketig campaign will also provide you with an accurate understanding of how your customers are responding to your product and service offers.

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