10.

KEURIG AT HOME MANAGING A NEW PRODUCT LAUNCH

a.
Discuss Keurigs pricing and channel strategies for its athome venture. Assess
whether the company was making the right choice of strategy.
Suggested answer
Keurig was well instituted and the leader in single-cup coffee brewing systems for the OCS
market where many reliable distributors and KADs had given the company a good reputation.
Keurig recognized that it had an opportunity to penetrate the home market, where many
single-cup coffee makers already had a presence, provided it could develop a single-cup
brewer that appealed to high-end retailers and upscale consumers.
Pricing strategy
From the Keurigs market research, it is evident that those coffee drinkers consuming two or
more cups per weekday are more willing to pay a higher price for each cup of coffee than
those coffee drinkers consuming only one cup per weekday.
Value based pricing: Keurigs goal was to use the value pricing strategy in order to set a fair
price level for their marketing mix that will give their customers pleasant surprises in
convenience and speed of coffee preparation while continuing to provide a consistently greattasting gourmet coffee. The survey revealed that intercept respondents were willing to pay
$130 for the brewer, price of the coffee system based on internet survey was $125 and for the
home use test, the price range for the brewer was found to be in the $129-$199 whereas
premium price was more than $200. While in this survey Keurig-Cup pricing did not seem to
be an issue, from the other market research it was found that those gourmet coffee drinkers
consuming 2+ cups of coffee per day are more willing to pay a higher price for the KeurigCups. They were also more willing to pay $130+, the higher price for the brewer.
Cost based pricing: Another vital factor to the Keurigs pricing strategy was the recognition
and analysis of the competition within the retail at-home coffee market. They had to set the
level of price so as to gain profit, but still, at the same time, would fall into the level of
willingness to pay off their target customers. Selling brewer at $149, only losses could incur
by the company, at $249 would yield small loss but selling it at $299 could give them a small
profit margin. If the B100 was sold at a price of $199, the loss on the brewer would be
expected to be made up through K-Cup or Keurig-Cup sales. For Keurig-Cup, setting price
was not a problem for the OCS market through KADs but there was a requirement to set the
price for their direct sales of coffee. Based on the market research it appears that regardless of
whether Keurig decides on a one-cup or two-cup strategy, the pricing of the at-home portion
pack should be $0.55. If the one-cup option is chosen, the office managers and KADs will
still have the benefit of a favourable price discrimination strategy by Keurig.
Channel strategies
Keurig did not have the resources needed to launch B100 through retail channel. They have
to sell directly over the internet for their new product line. This direct sale at home market
would be the first step towards direct approach in the OCS market in the long run. This kind
of channel conflict would diminish the marketing efforts in the markets, resulting erosion of

installed base and revenue stream from OCS market and a less effective launch in the athome market.
Because of limited resources Keurig must utilize a controlled distribution strategy. So
Keurigs challenge was to create meaningful product differentiation to bring their brewer to
the up-scale market. In order to introduce a controlled distribution of brewers and portion
packs that would maximize the launch of the at-home while protecting the away-from-home
OCS channel, Keurig had to come up with a two portion packs i.e. the K-Cup, and the Keurig
cup. Roasters would sell Keurig-Cups directly to consumers and indirectly to KADs markets.
KADs would, in turn, sell the cups directly to OCS employees owning an at-home system.
Evaluation of the strategy
Keurig should set the retail price of its at-home brewer at $249, because it is much easier to
price high and lower later. Also, at the $249 price, Keurig can cover their manufacturing
costs without having to depend on KCup sales. Then, the K-Cup profits can be put towards
research and development of less expensive brewers that can later be sold to the mass market
through retailers.
If it set its brewer price at $149 or $199, Keurig would need to generate revenue from KCups to offset losses on equipment sales. Alternatively, a price of $299 could alienate many
customers, and the higher margin did not make up for the loss in unit sales. Keurig should set
a retail price for K-Cups that were higher than the price office managers receive. If the retail
price was less than or equal to the wholesale price, Keurig would be competing directly with
the KADs and office managers would be able to purchase K-Cups online. This could strain
the relationship between Keurig and KADs and not give KADs a very good incentive to push
the Keurig at-home system.
The pricing of the K-Cups is also of concern to Keurig. Based on the market research, it is
learnt that target market would be willing to pay $0.55 per K-Cup. This price will still give
the KADs pricing control in the OCS market, and the price will allow Keurig and the roasters
to make a higher profit per K-Cup.
Keurig should revise its distribution channel to prevent the roasters from selling directly to
the KADs. Keurig should purchase K-Cups from roasters and sell to KAD in the OCS
market. Additionally, Keurig should sell directly to end-users in the at-home market. Under
this revised distribution system, roasters and KADs would receive and pay the same amount
of money as before; however, this strategy will enable Keurig to maintain price control.
It is also important to sell through Web sites, as well, because the only at-home consumers
the KADs sell to be office workers. There will be other consumers who do not work in an
office but maintains a KAD relationship, and they will need a channel through which to
purchase the brewer and cups.
It appeared that the two-cup approach would be inefficient when the goal was to keep
production and inventory costs down. Keurigs competition was already pricing below the KCup prices at which KADs sold to the OCS market. If production and inventory costs were to
increase, the cost of the K-Cups would also likely increase, causing concern for a potential
decrease in cup sales.

Conclusion
One of Keurigs main objectives for the years to come should be to not only lower brewer
costs but to also create partnerships with high-end retailers to sell the Keurig at-home
brewers. Adopting the proposed strategy would enable Keurig to make a strong entrance into
the at-home market while satisfying both roasters and KADs. Roasters would receive the
same price for K-Cups and benefit from the single-cup strategy, and KADs would pay the
same price for K-Cups and receive incentives to push the at-home system. Both would
benefit from increased sales in the at-home market. However distribution channels of athome markets brewers were growing through small appliance retailers and coffees are sold
at grocery stores, coffee shop. These channels could threaten its established business in the
OCS market.
b.
Critically analyze Keurigs marketing plan for its brewing system targeting the
athome market. What are the factors that the management would have to consider to
select an appropriate strategy to succeed in the new business?
Suggested answer
Keurig had a successful marketing strategy for the OCS market already in place by the time
they decided to break into the at-home market. They looked at the statistics for the United
States retail at-home coffee market. The results were very promising. At-home retail
consumption was a $6.9 billion market, with at-home gourmet coffee accounting for $3.1
billion. These large boosts in the markets gourmet coffee area proved to Keurig that this
market would continue to quickly expand.
Target market
Keurig commissioned various market research studies on the at-home product concept to find
out if their single-cup brewer would be accepted by gourmet coffee consumers. Through
intercept, internet, and home use surveys, Keurig was able to determine the key factors in
marketing their brewer and K-Cups. Key elements identified through demonstration during
the intercept surveys included quick brewing time and minimal clean-up. The same key
elements were identified during the internet-based survey. The home use testers, who had a
commercial brewer placed in their home, not only identified speed and clean-up as key
attributes but also taste consistency, coffee variety, and cleanliness of preparation. Now that
Keurig is aware of which market and type of consumer to target, as well as which aspects of
their product are most valued, they can move ahead with their marketing plan for its brewing
system in the at-home market.
Place
Major issue in the case of Keurig was on how they will market their new model of single cup
brewing system as well as the new cup that is being presented specifically to at-home
customers. As stated earlier, Keurig does not yet have the resources to sell either their brewer
or coffee in mass retail outlets. Instead, a controlled distribution strategy must be utilized.
Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs) markets.
KADs will, in turn, sell the cups directly to OCS employees owning an at-home system.

To target its office users in order to convert them to at-home buyers, Keurig had to use direct
marketing strategy and implement two market plans for Keurig-aware coffee drinkers.
Keurig needs to quickly find a viable means through which to launch the sale of the brewing
into retail outlets. The only current option is e-commerce-enabled Web sites.
Promotion
Since market research has shown that demonstrations are a significant way to increase system
interest and purchasing potential, Keurig needs to utilize this avenue. Although it is stated in
the case that Keurig does not currently have resources to sell through retail chains, which are
prime locations for demonstrations, perhaps they should set up demonstrations at professional
conventions, airports, affluent shopping malls, and high-end appliance shows. The key
factors of interest to promote include convenience, quick brewing, ease of use, and minimal
cleanup, all of which are sources of dissatisfaction with at-home users current systems. The
key elements Keurig must implement into its promotion strategy include being one of the first
entrants into the at-home gourmet coffee market, being portrayed as a single-cup pioneer, and
enhancing its visibility in the up-scale market.
There are also two promotional activities that Keurig can offer to their buyers in order to
increase their customer base. The first promotional offer is KAD referral program which was
to be driven by point-of sale advertising via display on or near the office brewer. This was
also designed to give KAD attractive incentives to support the marketing of the new brewer.
The second approach would be internet direct marketing campaign which had 12000 users of
its office system who were interested in at-home use. Combined, these methods should
eventually pull the products into new retail channels. It is important of having KADs market
for Keurigs at-home product to office users for success.
Conclusion
With Keurigs success in the office coffee market, a logical business extension does,
indeed, seem to be the at-home coffee market
Factors to succeed in the new business
New business would present bigger planning challenges in some respects because there were
no previous records to act as a guide, but in other respects they offered enormous
opportunities to create genuinely innovative and exciting founding principles on which the
plans could be built and developed. Amongst the obstacles and details of new business
planning, it is important to keep sight of the following basic rules of new business success:
(i)
Defining the business and vision: Defining vision was important. It would become the
driving force of new business. Some questions could help to clarify the vision. Who is the
customer? What business is it? What is the product/service? What is the plan for growth?
What is the primary competitive advantage?
(ii)
Setting business Goals: Often a new business concept must go through a period of
research and development before the outcome could be accurately predicted for longer time
frames. There were two sets of goals; short term (range from six to 12 months) and long term
(can be two to five years).

(iii) Understanding customer: Choosing the target market carefully based on needs, wants,
problems and perceptions of the customers. Successful new business must offer something
unique that people wanted otherwise there was no reason for customers to buy from it.
(iv)
Learning from competition: Management could learn a lot about new business and
customers by looking at how its competitors do business such as competitors approach to the
market, competitors weaknesses and strengths, customers lifestyles, demographics and
psychographics etc.
(v)
Financial matters: Preparing financial projections such as startup investment,
assumptions, running monthly overhead, streamlined sales forecast, cumulative cash, breakeven etc.
(vi)
Identifying marketing strategy: Most companies experience majority of their business
from their customers. Creating a marketing strategy for new business depended on
identifying all important customers; determining the customer profile which met the best
odds of success; finding, communicating and educating the primary market about the
products/services and testing all business assumptions especially during major expenditures.
Conclusion
Keurig had developed their own unique offering first by identifying what people want and
which nobody was providing properly. Keurig should position its brewers and K-Cups as
high quality, great tasting, yet convenient products that offer a selection of coffee
unparalleled by competitors. It should position itself as a convenient, more affordable
alternative to coffee shops such as Starbucks and a premium brand with better taste and
variety in comparison to other at-home systems.