HP CONSUMER PRODUCTS BUSINESS

ORGANIZATION: DISTRIBUTING
PRINTERS VIA THE NTERNET

Marketing Case
Analysis

Case Facts

HP started selling refurbished printers through an internet outlet center, but they are
considering a move to sell printers directly to the customers via eChannel.
In 1997, the net revenue for HP was $42.9 billion and the employee strength was
121,900, and the net earnings were $3.1 billion.
HP grouped its products into five categories: Computer Products, Services and
Support; Test and Measurement Products and Service; Medical Electronic Equipment
and Services; Electronic Components; and Chemical Analysis and Service.
The consumer products, service & support division made up 83% of the total revenue.
It included all types of computers, peripherals, and services.
HP had the leading market shares in 1997 and 1998 in both Inkjet and Laserjet
segments.
It was also the leader in the printer supply business and it contributed to about $5
billion.
In 1997, revenue for printer manufacturers was $8 billion for US and $22 billion
worldwide. 70% of the printers sold were Inkjet printers. In 1998, HP had 55%
market share in this division.
Laser printers were used for handling large volumes of text documents with quality
and speed. HP had 85% market share in this division.
In 1997, 91% of people with home computers also owned a printer. Large retailers
accounted for about 90% of the total printer sales.
Inkjet and Laserjet cartridges represented a total US market of $7 billion in sales in
1997 and provided higher margins to manufacturers as well as retailers.
Manufacturers Advertised Price (MAP) policies stipulated that manufacturer would
not reimburse the reseller for cooperative ads that involved a price below a specified
level.

Statement of the Problem

HP had to decide on whether to sell new printers directly to consumers via the
emerging eChannel.

It also had to decide on the products to be sold online and at what prices to be sold.
The way in which this emerging strategy will be communicated to the existing retail
partners without damaging the existing relations also needs to be decided.

Causes of the Problem

With the increasing success of eCommerce, it was important for Consumer Products
Business Organisation of HP to keep up with the new trend in the market.
Competitors like Dell had already showcased that direct selling was a success and was
the next big thing in the market.

Margins of retailers for printers were very low (in single digit) due to 6 weeks of
inventory holding and 30 days of payment to manufacturers

There was growing dissatisfaction among consumers with the level of service which
stemmed from high sales personal turnover.

Consumers were dissatisfied with lack of knowledgeable salespeople offered by the

conventional channels.

50% of Americans considered shopping an unpleasant chore and the shoppers were
becoming comfortable purchasing goods sight unseen. Recent demographic trends
suggest that the combination of two income families and the expanding workweek,
supported online sales.

Decision Criteria and Alternative Solutions

Criteria for evaluating distribution channels:

1. Time for Implementation
It refers to the time taken to establish the network or putting the system in
place before you can start receiving and fulfilling the customer orders via the
distribution network you opt for. Each distribution channel selected requires
its own implementation time.
Some channels can be established very fast whereas some channels takes long
time to be functional. So depending upon the time available with the
organization, competitive landscape etc., and a particular distribution channel
should be selected.
2. Tangible costs
How costly is a particular channel of distribution plays a very crucial role in
deciding which channel to go for. Setting up a particular channel costs a lot
and thus proper analysis needs to be done before picking a channel for
distribution.
Other than initial set up costs, there are lots of running costs associated to that
channel which impacts profitability greatly. So a detailed cost-benefit analysis
needs to be done taking into account the likely benefits from that channel and
all the setup or running costs for the channel.
3. Compatibility with the existing channel
Many a times organizations have to launch new channels of distribution
which can be totally different from the existing channels and most of the times
there arises a conflict of interest between such multiple channels.
So the management must give due consideration to the likely impact of the
new channel on the existing channels and make sure that both the new and old
channels go in sync with each other.
4. Customer preference
Ultimately it is the customer who has to purchase the product and therefore the
preference of the customer should be given supreme importance. Customers
buying behavior has changed a lot in the recent past and they have their own
set of needs and requirements.
It is for HP to identify how it could meet those needs of customers in the best
possible way and generate maximum value for the customer like by providing
distribution channel which the customer demands for.

5. Organizational resources required

Each distribution channel has own requirements in terms of funds, manpower,
time etc. Management has limited resources and therefore it has to make
choice which distribution channel would it like to focus upon and commit the
organizational resources upon. Organization would go for that resource which
demands least finance and personnel for the same level of sales.

Solutions suggested in the case:

1. Wait and See- Continue selling refurbished printers through Internet.
2. Participate through Online Retailers- Use retailers online stores to sell HP printers.
3. Expand the Offerings Online- Go direct and sell HP printers online directly to users
through own website.

Alternatives Suggested not mentioned in Case

1. Sell Peripheries and accessories such as toners, cartridges etc. through brick and
mortar retail and sell printers through online outlets.
2. Go completely offline i.e. dont sell anything online and continue focusing and
expanding via physical outlets.

Evaluation of the alternatives:

1. Wait and See
Pros:
It would give HP a feel of how the sales through Internet work and if in
future due to competitors or any other reason, it has to go the online way
then it would be easier for HP.
There is cost saving/ revenue earing in this alternative as HP could easily
sell online open box returned products which earlier it had to break and
use their spare parts. Now such printers could be sold online at some
discount which would fetch higher returns than what would have been
possible otherwise.
It is beneficial for the customers as there are customers who want these
printers which they get at reduced prices.
There is no conflict with existing brick and mortar retail outlets as they
continue to sell brand new printers whereas online store is only used to sell
refurbished printers.

Cons:

Not exploiting the full potential- By selling the refurbished printers HP is

only taking advantage to a limited extent whereas it has the opportunity to
exploit it further by selling new printers also via the online channel.

2. Participate through Online RetailersPros:

Very cost effective channel of distribution as no cost is involved. Other
retailers would be using their own online channel to sell HPs printers and
therefore no initial investment or regular running or maintenance cost need
to be incurred by HP.
Convenience to customers- Customers benefit as they get the option to
purchase printers online as well. Those customers who are first time
purchases could actually visit the HPs authorized physical retail outlets
and purchase from there whereas repeat purchases could order it online as
they know how the product is like.
No organizational resources need to be committed like finance or
manpower.
Helps fight competitors like Dell and Gateway who are anyway using
direct channel of distribution and thus HP would be able to sustain
competitive landscape in distribution channel also.
Cons

Possibility of conflict with the existing HP retail outlets who might complain
against such online retailers as they eat into their sales volume and directly
impacts their revenues.
Not much flexibility exist in this channel. The HP products would be sold by
online retailers and thus HP would have less control over them. The models
that they keep, the profit margin that they make would all be decided by the
online retailers only. Also such stores are moving slowly in the Ecommerce
space which is another problem for HP.

3. Expand the Offerings online

Pros:
Give customer an added channel to purchase the printers. Offering them such
facility would help HP interact with its customers, build relationships, and
strengthen the HP brand.
Cons:

Selling HPs printer through own website would require making expenditure
on developing and maintaining the web site, spending on marketing and
advertising for customer acquisition.
5

Existing physical retail outlets would lose part of their regular business and
thus they would oppose such a move and this would spoil relationships with
them which HP cant afford to do.
It would seriously take a very long time to establish and make this channel
functional. HP first need to develop the website and then build a delivery
network taking away a lot of time.

Recommended Solution, Implementation and Justification

Recommended Solution
Products to Sell Online

HP should start selling InkJet and Multifunction Printers online directly to the
consumers through their website.
Pricing will be kept same as offline store of $299 ( inkjet) plus the delivery cost
of printer directly to home as there is MAP policies in place and thus the value
which the online channel will offer is convenience and direct interaction with the
company.
Online sales will try to increase market share by targeting the At Home and Home
Office customers
Laser Jet printers will not be sold online as resellers add substantial value to
customers by providing assistance like network installation and other services.

Managing Channel Conflicts

Offline channel like Computer Product superstores like CompUSA wont get
affected as printer buying decision is clubbed with PC purchases
Consumer Electronic Superstores like Circuit City and Office Product Superstores
like Staples will have their sales affected by this decision
But since Staples derive higher profit by selling printing accessories like ink and
as printer has lower margins it is possible to convince them regarding online
move.
All the retail partners should be informed well in advance about the promotions
being offered online as this would give them time to avoid potential loss of
customers by coming up with new innovative offers.

Justification: Profitability analysis for selling InkJet printers online

Market size of printers

InkJet market
HP share
Expected growth in eTailing

$8 billion
$5.6 billion (70 % of 8 billion )
$3.08 billion (55% of 5.6 billion)
2432-866/866 = 180% (Computer
Hardware Exhibit 1)
Average price per unit
$299
InkJet units sold by HP
10 million
Market for InkJet units
18.8 million
Projected increase in sales by online 1 million units
channel( Assumed)
Incremental revenues earned by online $.3 billion ( 1million * $299)
sales
Incremental Gross Profits
$45 million (Assuming 15% margin)
Incremental Fixed Costs
$0.5 million for website
Incremental Variable Costs
$25 for Amazon (customer acquisition)
Incremental Net Profit
$19.5 million (For 1 million increase in
sales)

Value created for offline channels like Staples by going online

Revenue lost due to online sale = .3 billion * 5%(margin) = 15 million

Increased revenue due to cartridge purchases= 25 * 3 * 1 = 75 million

Hence online channel is also creating value for offline channel.

Justification: Wait and See Strategy

This strategy was not chosen in comparison to expand offerings online strategy as this
will restrict the growth in business due to various issues already mentioned in cons.
It will also take away the first movers advantage from HP if any other company enters
into eRetail.

Justification: Participate through online retailers

One of the main causes of problem was that the current sales process was poor and if
this strategy is taken, overall cost will go down as compared to direct selling but
services and sales process might deteriorate.
Also this strategy will lead to low brand equity for HP as customer interact with HP
products on other company website

Implementation
The below figure describes the eCommerce model that can be used for distributing HP
printers through direct selling.

Order
Customer

HP Distribution
Website

Notification
HP Printers

Delivery
Delivery

Distribution
Center and
Facilities