A cheap new product appears, grabs a slice of the market, and the client's first instinct is to copy it. This management consulting case study shows why the maths of profit per customer, not market share, should drive the answer.
Case Scenario
A unit of a major consumer goods manufacturer that makes toothbrushes is our client. One year ago, a brand-new rival launched a $5 battery-operated electric "spinbrush", which has since gained 1% of the global toothbrush market.
Key Problem
The client is interested in learning whether it should create a product equivalent to the one it does not currently offer. Typically, the client looks at the market in terms of margins and KPIs such as profit per customer per year.
Specific Information
Around the world, 20% of toothbrushes were rechargeable and 80% were manual one year ago. The 1% market share gained by the spinbrush primarily came at the expense of sales of rechargeable toothbrushes. According to the client's product development team, a spinbrush "knockoff" could be made for $3 per brush.
Analysis
The best strategy starts by figuring out how much money is made from each customer every year.
Manual: [2 toothbrushes bought] × [$3 retail] × [66% profit margin] = $4 profit per customer per year
Rechargeable: ([2 heads bought] × [$5 retail] × [90% profit margin]) + ([1/10 base] × [$50 retail] × [60% profit margin]) = $12 profit per customer per year
Spinbrush: assuming that the client's and its rival's manufacturing costs are equal, [2 toothbrushes bought] × ($5 price − $3 manufacturing cost) = $4 profit per customer per year
Although the profitability of the manual and spinbrush products is comparable, the manual toothbrush serves the mass market (80% market share at a $3 retail price point) and is therefore unlikely to be displaced by the spinbrush.
Recommendation
The spinbrush is obviously a danger to the rechargeable market, which is where the client is most profitable. The client's successful rechargeable business would probably end sooner if it responded with a "knockoff" spinbrush of its own. As a result, the client should think of alternative ways to react to the "disruptive technology" of the spinbrush.
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