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Given the scarcity of lever machines on the market and the unique nature of the niche market, price elasticity of demand is expected to be low. There may not be many prospective consumers, but those who want this product will be keen and are unlikely to be strongly price sensitive. The best price would therefore be at the high end of the range, $1,200. This means that the selling price to the distributor would be $600, for a contribution margin of $350 per machine when sold through the distributor, or $950 if sold through the company website. These figures have been included in the contribution margin analysis.
Marketing Issues -- Place
Distribution for a niche product is a tricky proposition. Consumers are often far apart, meaning that it is difficult to use a storefront retail location to reach these consumers. The Australian market -- in particular with respect to high end espresso -- is focused on the major cities. This implies that retail might be possible in Sydney or Melbourne in particular. However, the chosen distribution route is through two channels. The first is the Internet, through the company's own website. The company has the ability to control its own marketing message through this route, and can build a direct interaction with consumers. The Internet is a favored way to reach customers of niche products, because it has global reach and sales can be conducted from a single physical location. Consumers can find the company's offering through search functions as well as through more conventional advertising means (Brynjolfsson, Yu & Smith, 2006). Product on the Internet should be priced the same as product sold through the distributor. This will avoid undercutting the distributor, allowing the company to secure one. The company will be able to reach consumers in all parts of Australia, however, and will also allow for a higher contribution margin on products sold through the company's online store.
In addition, a distributor will be used. There are a number of distributors of high-end coffee equipment in Australia, a reflection of the market's sophistication. 5 Senses Coffee is a distributor of high end equipment with a location in Victoria and one in Western Australia (FiveSenses.com.au, 2011). They sell both commercial and domestic equipment, but do not presently carry a lever machine. A distribution partner such as 5 Senses, should they choose to go with us, would be able to reach customers in the major urban areas, and would be able to offer some after-sales service as well. They would typically take a 100% markup, so that must be accounted for in the price as well.
Marketing Issues -- Promotion
Even though the Espresso Art Lever machine appeals to sophisticated consumers, the premium pricing and steep learning curve means that there will need to be a sophisticated promotional campaign in order to sell the machines. The message will focus on two key elements -- the experience of the lever machine and the high quality of the espresso that the machine delivers. The literature will be highly visual, the only real way to convey the sensory experience that the customer will receive. This will include visuals of both the machine and the espresso. The sales pitch will focus on the uniqueness of the lever experience in particular, to differentiate the machine from other high end espresso machines on the market. An additional component will be an education and training component, to reduce customer apprehension about the steeper learning curve of using the lever machine.
Promotion will be carried out through two channels -- the online marketing material and through advertisements. The online material will be the most detailed in nature, as the company will have room on its website for this. The distributor's website will also contain this information. The advertisements will be focused on creating interest in the consumer for the product. They will lead the consumer to the distributor's website, where they will find the information about the machine. The advertisements will be strategically placed in coffee-centric magazines, both trade and consumer, print and online. The ability to do this is one of the reasons that the Australian market is perfect for this launch.
There are a couple of key operational issues that need to be taken into consideration. The company should be located close to the expected major markets, but in a location where costs are relatively low. A location in either Sydney or Melbourne would have prestige, and signal that the company is in a hub of coffee culture, however. Knowing that, a low cost location for a workshop will be found in an industrial park, presumably on the outskirts of Melbourne but possible outside Sydney. The shop's needs are relatively minimal with respect to specialized equipment. The parts for the machine will largely be ordered from suppliers either in Italy, the United States or Australia, with some of the finer components being produced in the shop. The machines will be assembled in the shop. The shop itself will not need to be large -- a typical suite at an industrial park suffice. Rent in outlying areas should be relatively low -- perhaps as low as $2,000 per month.
The company will start life as a single-person company, with the proprietor both building the machines and handling all of the paperwork. This will dramatically reduce overhead, although there is reason to believe that if the business appears as though it is going to be successful a technician will be hired to help with manufacturing and an office staff member may also need to be hired. At present, however, production is going to be manual and by hand. It should take 1-3 days to produce a machine, depending on the amount of time the proprietor is able to dedicate to the task on a given day. It is expected, however, that only around 1-2 machines per week will be built. This will meet an aggregate demand of around 100 machines in the first year. It is hoped that demand will double in each of the successive years, either through success in the Australian market or through expansion into the U.S. And Asian markets.
There is little in the way of specialized equipment that will be needed to build the machines. Parts that require complex tool-and-dye work, for example, will be purchased from external suppliers. A number of supplier options are currently being investigated. The manufacturing facility will have some extra space initially, as expansion is expected as demand is expected to increase in the second and third years in particular. Demand may peak after the third year, simply because of the niche nature of the product. Its durability implies that there may not be many repeat customers in the early years -- they will not need to come back to us except for servicing.
Some hired expertise may be required at times for specialized tasks. This can include accounting, legal or building the website. Payment for these will come from the startup capital and will be expensed. Financing is a key element of the operations plan, as the business will require financing to begin operations. Because of the niche nature of the product and the hand production, it is expected that sales will grow slowly, but will eventually reach a level that will allow expansion of the product line and a sustainable dividend paid to the owner.
The shop will also include a small section for servicing existing machines. These high performance machines will require servicing or perhaps even parts replacement after a year or two. It is expected that the owners of Espresso Art Lever espresso machines are dedicated espresso drinkers who will pull 15-20 shots per week and will probably be keen to show off their home barista talents to visitors as well. With this heavy usage, the machines will require regular servicing. This will be a source of ongoing income for the company and will supplement earnings from the initial sale of the machines.
As with any new venture, the financial projections for Espresso Art and its Lever espresso machine are based on best estimates. This means that while the market has been investigated, the fact that the product is new means that nobody truly knows how it will be received by the market. The purpose of the financial projections, therefore, is to test ownership's numbers for the soundness of the business idea. The estimated demand in year one is 100 machines, doubling in year two and again in year three. The variable costs have been outlined earlier as $75 in materials and $125 in labor, with a further $50 in marketing and transportation costs, mostly the latter. There are also fixed costs to be considered as well in the contribution analysis, which are estimated to be around $75,000 for rent, utilities and the proprietor's salary. The sales figures are based on an estimated 75/25 split between those sold via the distributor and through the company's website. The…[continue]
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