Newfood Corporation

Test marketing, marketing mix

Product development at Newfood is considering adding a new "nutritional food" product to their snack/diet food product line. The product is tentatively labeled K-Pack and is packaged to look like a typical candy bar.

Newfood is interested in determining the demand and a good marketing mix (e.g. a price, advertising and promotion strategy) for K-Pack. Management believes the product will have very little direct competition in the diet-snack food category. Further, a pre-test market study was very encouraging. Management predicts sales of 2 million cases (24 packages in a case) in 1999 of K-Pack using a mix of 48 cents per package and a $3 million in advertising per year.

The projected P&L for the year (national sales) is:

Sales 2 million cases

Revenue $16.12 million (assume about 70% of the retail price is revenue to the manufacturer)

Costs:

Manufacturing Costs $3 million ($1 million fixed manufacturing cost plus $1 per case variable)

Advertising $3 million

Net Margin $10.12 million.

Newfood plans to subcontract the production and distribution of K-Pack. The total annual cost of contracting (production and distribution) is given in the above projected Profit & Loss (P&L) as the fixed manufacturing cost (=$1 million in 1999). This cost is expected to change very little over the next 3 years.

Prior to making the "go-no-go" decision on K-Pack, Newfood plans to conduct a 6-month test market study in 2 different market regions (New York and Los Angeles). The objective of the tests are:

• Obtain better estimates of the first year
• Study the effects of marketing mix variables on sales
• Estimate the long-run potential of the product

Newfood believes the above objectives can be achieved using a "controlled" introduction of the K-pack into four cities in each marketing region. Marketing mix variables are to be varied across grocery stores in each city and in each region. Sales of K-Pack will be measured using store audits from a panel of stores in each city.

Design of the Test Market

Marketing mix variables are: price, advertising, and location of K-Pack within each store. Considered are: three prices (48 cents, 58 cents, 68 cents), two levels of advertising (a simulation of a $3 million introduction plan and a $6 million plan), 2 store locations (L!: K-Pack in the bakery section versus L2: K-Pack in the breakfast section). Prices and location are to be varied across stores within cities while advertising will be varied across cities. Advertising will be in the form of spot TV ads. Ad levels will be selected that simulate on a local basis the impact of national ads at the level of $3 million and $6 million. Due to differences in costs across markets, and costs between spot and network ads, Newfood plans to measure and equate the effect of advertising, normalized for market size, on consumer impression of K-Pack.

Controls

In the selection of cities (and stores within each city) within each region for the test, Newfood plans to "match" cities on the variables: store size, number of checkout counters, and characteristics f the market region. Newfood hopes to obtain useful information, about the "relationships between" the mix variables and sales that can be used in introducing and managing K-Pack nationally.

Test Design

The test design to be used in each region is given below. Each cell contains three stores and each store will be audited monthly.

Region

P=price; L=location with 3 stores per cell; a, b, c, d are unique city labels determined by random selection without replacement from the list: 1, 2, 3 and 4.

The preceding test design will generate the following sample sizes for each region:

The advertising plan and actual GRPs achieved by the city within the region are given in the following tables.

Results from the T est Marketing

Table 1A: Los Angeles Region*

*GRP = reach x Frequency where Reach is a measure of the % of the target audience reached by the advertising and Frequency is the number of times those reached view the ad. E.g. a business with a 60% reach and a frequency of four produces an impact of 240 GRPS. This is a far better measure of advertising effectiveness than the dollar spent on advertising because GRPs better measure the level of impact delivered by target market Reach and Frequency.

Price: $25.39

Solution: The downloadable solution consists of 12 pages, 1339 words.
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