Colgate-Palmolive Company:The Precision ToothbrushHarvard Business School Case

Company Background

Colgate-Palmolive(CP) was a global leader in household and personal care products with sales of$6.06 billion and gross profit of $2.76 billion in 1991

In 1991, $243 million was spent to upgrade itsmanufacturing plants and several strategic acquisitions were completed

Reuben Mark, CP’s C.E.O since 1984, had beenpraised for transforming a “sleepy and inefficient ”Company into a lean and profitable one

In 1991, CP held 43% of the world toothpaste market and 16% of the world toothbrush market

The following table presents the operating statements forCP’s U.S toothbrush business since 1989

CP held the top position in the U.S market with a 23.3%volume share

CP was poised to launch a new toothbrush in the United States, tentatively named

Colgate Precision

Susan Steinberg, Precision product manger had to recommend positioning,

branding and communication strategies to division

general manger Nigel Burton

Where shouldwe focus???

1) The U.S. Market

2) Positioning

3) Branding

4) Communication & Promotion

5) Profit and loss pro forma

6) Advertisement Budget

The U.S. Toothbrush Market

The following summarizes new product introductions in the toothbrush market since 1980

In 1991, the U.S. Oral Care market was $2.9 billion inretail sales and had growth at an annual rate of 6.1%

Toothpaste accounted for 46%, mouth rinses 24%,toothbrushes 15.5% and other products making up the remainder

Dollar sales of toothbrushes had growth at an average rate of 9.3% but in 1992 they increased by 21% due to introduction of 47 new products and line extentions

Product Segments

In 1992, three players dominated the U.S. toothbrush market overall : CP and Johnson & Johnson, whose brushes were positioned in the professional segment and Oral-B, whose brushes were positioned in super-premium segment

Consumer BehaviorPurchase frequency : every 12.4 months in 1990

every 11.6 months in 1991every 9.7 months in 1992

45% brushed before breakfast, 57% after breakfast,28% after lunch, 24% after dinner and 71% before bed

Buying behavior of 3 groups

More chances for Precision to enter

CompetitionMajor competitors in the super-premium segment areOral-B, Reach Advanced Design, Crest Complete andAquafresh Flex.

Toothbrush brand product lines

Advertising and Promotion

Increased advertising and promotion enhanced the visibility to fuel consumer demand

Growing competition also increased the frequency andvalue of consumer promotion events

Retail ads and in-store display increased the sales

CP had four display systems

To maximize sales CP salespeople tried to locateColgate line in the middle ofthe category shelf space,between Reach and Oral-B

DistributionTraditional food stores sold 75% products in 1987 but only 47% by 1992

Retailers were provided with an average margin between 25% and 35%

22% of toothbrushes were expected to be distributedby dentists

1ess marginOral-B dominated

Positioning

It has chances to position itself as a Niche or Mainstream product

Pros:

Niche

Less erosion of Colgate Plus

Increases brand equity

Can enter into new super premium market, whereCP hold no position

Can extend later to mainstream position with additional capacity

Cons:

Niche

Less contribution to profits

Potential competitors with similar product and technology

MainstreamPros:

Huge sales and great demand

Generates more profits

Easy to distribute as no need to distribute much through dentists

MainstreamCons:

Causes erosion of Colgate Plus

Might need to drop one of the slow moving children’s brush from the product line

Pressure on production might lead to inadequate supply

Consumer concept tests were carried out by the taskforce, name tests were also conducted among those consumers.

Alternative names tested included Colgate Precision,Colgate System III, Colgate 1.2.3 , etc.

The Colgate Precision name was consistently viewedmore favourably, it was deemed appropriately by 49%of concept acceptors and appealing by 31%

It was estimated that cannibalization figures for Colgate Plus would increase by 20% if Colgate brand name was stressed.

But CP’s strategy was to build on the Colgate brand equity

Communication&

Promotion

Four Concept tests were conducted among 400 adult professional brush users.

Consumers were exposed to various product claims inprototype print advertisements and then asked about the likelihood that they would purchase the product

Summary of Consumer Concept Test results

The results indicate that the toothbrush, which would prevent gum disease motivated the greatest purchase intent among test consumers

55% of test consumers found Precision to be very different and 77% claimed that it was more effective

Once tried consumer indented to purchase rose dramatically, so sampling would be critical to success

PromotionNiche Market:

Aggressive advertisement campaigns

Emphasize technological superiority of the brush

Channel through drug store , food store and dentists

Sampling

Mainstream Market:

Financial incentives

Induce trail by leveraging CP’s star products : free 5 oz. tube of Colgate paste 50%-off offer on any size Colgate paste 50 cent coupon

Channel through mass merchandisers, club stores,and food stores

Profit and losspro forma

Unit volumes reaching consumers

Production costs and pricing

Cost of sales = manufacturing cost * total units

Net sales= manufacture price * total units sold

Given that all sales were made at a discount of 5%

Net sales

Niche product Mainstream productYear 1 Year 2 Year 1 Year 2

$24.95M $38.34M $70.22M $98.65M

$8.58M $13.2M $26.88M $37.76M

$11.2M $11.7M $32.8M $29M

$0.32M $0.45M $0.89M $1.27M

$4.85M 12.99M 9.65M 30.62

Cost of Sales

AdvertisementsDepreciation

Profit

Cannibalization loss= (net price)*(units)*

Assuming same loss for Colgate Plus and Active

Plus Price : $1.35 Active Price : $0.69 (from Exhibit 4)

Niche product Mainstream product35% 60% 35% 60%

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Year 1

Year2

4.55 7 7.8 12 14.7 20.65 25.2 35.4

4.64 7.14 7.96 12.24 15 21.06 25.70 36.11

0.21 5.85 3.11 0.75 5.35 9.56 16.05 5.49

Units(MM)

units= (% cannibalization)*(volume of new product)

Cannibalization loss(M)

Net profit/ loss (M)

Hence we can say that Niche strategy is for short termprofits and mainstream strategy is for long term pofits

Advertisement budget

To increase overall CP’s toothbrush Advertisement budget by 80%.

To allocate 75% of budget to Precision and remaining to Plus.

Others argued that budget must be increased for Precision but they should not reduce the budget for Plus and Classic

Thank You