Question

David is 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 defect 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:

Question 3: 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.

Answer 1

To improve the profitability of direct marketing initiative for Hp :

Here are certain points elaborating this:

1.​​​​​checklist: improving the profitability of your business:

Improving your business' profitability can help you to reduce costs, increase turnover and productivity, and help you to plan for change and growth.

• locating areas in your business that could be improved or made more efficient - e.g. general business processes or administration
• using key performance indicators (KPIs) to analyse your strengths and weaknesses - e.g. rising costs or falling sales.
• long-term deals with suppliers to negotiate a better price on products
• researching new opportunities in your business sector and identifying where you could expand the market
• put monitoring systems and processes in place - e.g. benchmarking.

2.Expand your market:

Moving into new market areas can transform a business and, handled correctly, can significantly increase your profitability. However, expanding into new markets can be risky - and mistakes can prove very expensive.

3.Manage your costs:

Close management of your costs can drive your profitability. Most businesses can find some wastage to reduce, it's important not to cut costs at the expense of the quality of your products and services.

Key cost areas to consider are:

• Suppliers - are you getting the best deal from suppliers? Can you negotiate better terms or do you need to change supplier? Can you drive better deals by consolidating your supplier base? Can you buy on a 'just in time' basis to make more effective use of your working capital?
• Finance - do you need to review your finance facilities? - are they at the most competitive terms available? Are you using any loans and overdrafts effectively?
• Premises - have you examined whether you are getting the most out of your space? Are there more efficient ways to use your premises? Could you sublet some unused space?
• Production - have you assessed whether you can cut waste and lower the costs of your materials. Check whether you can adapt your production processes so they are more streamlined, using fewer working hours or resources to cut labour costs.

4.Review your offer:

Look carefully at what you offer, who you sell it to and at what price and see if you can make improvements.

• up-selling - selling them premium products that make a greater contribution to your profit
• cross selling - analysing what they buy and offering complementary products
• diversifying - identifying a need and developing new products and services to meet them.

​To enhance the economic return of acquiring new customers :

1.Take Customer Advice (and Credit Them for It)

One great way to keep your customers loyal to your brand is to constantly improve. Instead of just going by the numbers or your gut, try figuring out what your customers want next. Create a poll with a few of the ideas you’ve been thinking about and send it out via your blog, social media accounts, and email.

2.Give Customers an Upgrade

If some of your customers are actively and openly engaging with your brand on a regular basis, they’re the best possible people to give the full experience. If you have a product line, send them something they haven’t tried. If you have a premium service, give them the upgrade for free. The actual cost to you is miniscule compared with the impact those customers will have on their friends, family, colleagues, and social followers.

3.Be There When Customers Need You

Your social media channels or your blog may not be your primary channel for customer service, but they are touch points. Make sure the people manning the stations are capable of helping your customers solve common problems.

4.Give Customers Something Your Competitors Aren’t

We’re not talking discounts here. We’re talking features, services, resources, or whatever else your customers will place some value on.

Results:

• You can target recipients very precisely.
• You can protect against overwhelming response.
• Costs can be modest. Or, more accurately, you can create a campaign to fit large or small budgets.
• Direct mail can happen fast.
• You can never run out of prospects.