KOOKABURRA CRICKET BATS

DEALING WITH CANNIBALIZATION

 KOOKABURRA

• Positioning a new cricket bat in the Indian market

• Two possible strategies
• Both would cannibalize current sales
• Calculate financial impact of both in order to choose the best option
 COSTS

• FIXED COSTS
• Costs associated with business that must be paid regardless of the volume of product or
service sold
• No matter how much you sell or don't sell, you still have to pay your fixed costs

• VARIABLE COSTS
• Variable costs are directly related to sales volume.
• As sales go up, so do variable costs. As sales go down, variable costs go down

• SEMI VARIABLE COSTS

• Some costs have components that are fixed and some that are variable
 HOW TO REDUCE

• Moving to less expensive office

• Fire employees
• Find low cost supplier
• Reduce commission for salespeople
 MORE TERMS
• Unit Contribution
• Selling price – variable costs

• Contribution margin ratio

• Contribution margin per unit/selling price

• Break even
• Break even units = Total Fixed cost (in rupees)/contribution (in rupees)
• Break even sales (rupees) = Total fixed costs (rupees)/contribution margin ratio
 BREAK EVEN
• Total profit at the break-even point is zero
• Break-even analysis allows determination of the minimum output that must be
exceeded for a business to profit
• The break-even point is one of the simplest, yet least-used analytical tools
• Break-even analysis can also help businesses see where they could re-structure or
cut costs for optimum results
• By inserting different prices into the BE formula, one can obtain a number of
break-even points, one for each possible price charged
 USEFULNESS OF CONTRIBUTION MARGIN

• For pricing decisions

• More in special order situations

• Low contribution margins indicate

• Product line or a segment that is not profitable

• Can analyse impact of different levels of sales

• Can be used to resolve bottlenecks
 MARGINS
• Profit margin
• Calculated on selling price and not cost
• 50% margin would indicate margin/SP = 50%

• Let us look at an example

• Manufacturer
• Variable cost per unit – rupees 350; SP to wholesalers – rupees 650
• Wholesaler
• CP – 650, selling price to retailers – rupees 750
• Retailer
• CP – 750; selling price to consumers – 900 rupees
 AND THE NUMBERS…..

• RETAILER MARGIN = 150/900 = 16.67%

• WHOLESALER MARGIN = 100/750 = 13.33%
• MANUFACTURER MARGIN = 300/650 = 46%
 MANAGERIAL USES OF BE
• Safety margin
• = (sales-bep)X100/sales
• = (250-150)100/250 = 40%

• Target profit – say 150 rupees

• (Fixed cost + profit)/contribution
• (150+150)/1 = 300units

• Change in price – how much more to sell to get same profit? Price reduction by 0.25
• (150+150)/0.75 = 400 units

• Change in costs
 LIMITATIONS
• Break-even analysis is only a supply-side (i.e., costs only) analysis, as it tells you
nothing about what sales are actually likely to be for the product at these various
prices
• It assumes that fixed costs (FC) are constant
• It assumes average variable costs are constant per unit of output, at least in the
range of likely quantities of sales
• It assumes that the quantity of goods produced is equal to the quantity of goods
sold
• In multi-product companies, it assumes that the relative proportions of each
product sold and produced are constant
 KOOKABURRA

• Calculate the impact of cannibalization on units and profits

• Determine break even cannibalization rates
 KOOKABURRA
• New cricket bat with superior performance
• Existing bats – Blade and Kahuna (77% unit sales and 86% dollar sales)
• Threats from Adidas and others
• New bat
• Ready kangaroo by Kookaburra (super premium niche)
• Immediately ready to use
• Kookaburra Kahuna Ready
• Best performing bat overall – mass market
 CANNIBALIZATION

• What is cannibalization? Is it good or bad?

• Growth
• Line and brand extensions
 Q3 AND Q4

• Which positioning strategy to choose?

• Would any cannibalization rate result in the niche strategy breaking even
or positive profit in year 1?
• What is the break even cannibalization rate for niche option in year 2?