Cumberland Metal Industries

Cumberland Metal Industries Company Background From 1963 to 1979, Cumberland Metal Industries has grown over $18 million in sales. They are the largest manufacturer of curled metal products in the United States. Cumberland began creating fabricated components for highly technical applications and has evolved to selling products that use metal as a raw material. Their fast growth through the mid-1970's is predominantly because of the creation of an exhaust gas recirculation used for automobiles. With an 80% market share, Cumberland has been keen on innovation and new technology. This is a decision case based on the problem: “how will CMI price their new curled metal cushion pad”. It must be decided what type of pricing strategy to utilize: value-based or cost orientated. Strengths, Weaknesses, Opportunities and Threats As previously stated, Cumberland is the largest manufacturer of curled metal products in the United States. That is one of their biggest strengths as they are a market leader and have great influence and power on the industry. Their product Slip-Seal which is an exhaust gas recirculation valve for automobiles contributed heavily to their growth over the years. In comparison to alternatives used in the industry their cushion pads for pile driving perform amazingly as shown in the performances done in the Colerick Test and Fazio Construction (details of this comparison explained in the “Product” section of this case). They assemble their cushion pads in-house showing how innovative and intuitive the company is. Cumberlands products consistently get great reviews from, contractors and professors who have a huge impact on the direction of the pile driving industry. Especially since the new pads have not reached the market yet, having these influencers will positively assist with the word-of-mouth business. While having many strengths, there comes weaknesses. Cumberland outsources their raw materials (wires) for their products. Relying on outside vendors for the main component in a product can be cost saving but also risky. If they get too expensive, run out of business or cut ties with the company, Cumberland might have to put a pause on production leading to lost revenue. According to their income statements in 1978 and 1979, there has been a 38.67% decline in net income and 9% decline in net sales. With a launch of a new product there needs to be a substantial amount of financials to back up and assist with the launch and if net income continues to decline it can hinder some success of their new product. In the current pile driving industry there are many opportunities for growth. Construction workers are starting to desire other material when it comes to cushion pads which shows that there is a slight demand for something new. If Cumberland can appeal to them then it will be great business from the start. Researchers are becoming more knowledgeable on the health dangers of asbestos pads. This leads to an easy opportunity for the new pads with curled metal to replace the asbestos pads and can be marketed as a safer option for consumers. In continuance, there aren’t many competitors in this industry at the moment which is a great opportunity for Cumberland to stay a market leader and hold onto their 80% share. Despite there being a few competitors, there are still other threats. Little attention has been paid to the importance of cushion pads in the pile driving process so it will be a little trickier to enter the market and educate consumers, asbestos pads have been used all these years and are the most common. They pose a threat because they are affordable, well-known and used most often. Consumers are not going to switch right away to a new product without heavy influences. Other competitors include anonymous job shops as they manufacture micarta and asbestos pads which are most popular. Lastly, this innovation does not have a patent protection, yet which runs the risk of other manufactures discovering it and keeping it before Cumberland can. Segmentation, Targeting and Positioning The U.S market for cushion pads is estimated to be 130,000 pile hammers owned by pile drivig companies, 6500-13000 were leased and they operated 25 weeks out of the year. In the pile driving business there are 6 types of influences that do purchasing. Pile hammer manufactures, architectural/consulting engineers, soil consultants, pile hammer distributing/renting companies, engineering/construction contractors and independent piledriving contractors. Within these influences, the companies provided pads to contractors whereas the engineers and consultants provided advice such as materials and techniques to use on certain projects. Manufacturers that sold hammers are very influential recommendations even if they do not personally purchase the pads themselves. Contractors are very knowledgeable on pile driving aspects and they go out and buy their own equipment. Cumberland has decided to target all of these influences but mainly sell the cushion pads to construction-oriented manufacturer representatives. This way they can reach a variety of distributors and supply houses which can then influence many of their own consumers. Cumberland’s employees are still trying to find the best way to position the cushion pads to maximize their sales and brand awareness. They want to be seen as efficient, cost saving and overall, the best choice of pads to be used in the entire industry. Below is an in-depth analysis on the cushion pads using the 4P’s of marketing. Product, Place, Pricing and Promotion Cumberland’s cushion pads are made from curled metal and the standard size is 11 ½ inches. The curled metal is about one inch thick tightly around the center of a flat metallic disk then a similar disk is placed on top to hold it all together. It is coated with polyvinyl chloride to enhance appearance and disguise the metal. This cushion pad prevents the shock of the hammer from damaging the pile and hammer while pile driving. These cushion pads will be marketed in the U.S. within the pile driving industry. It will be sold to distributors and supply houses and they will then sell it to contactor companies and independent contractors. Pricing is very important as it sets the tone for the entire product line. There are two options: cost-oriented or value-oriented pricing. With the cost-oriented strategy, Cumberland wants a 40% - 50% contribution margin. There are two sets of projected manufacturing costs. The first one is if there is a purchase of permanent tooling and they would have to price it within $110.68 -$138.36. The total cost per pad with existing equipment would have to be priced withing the range of $236.99 -$296.34. Both price ranges will give a contribution margin of 40%-50%. Value-oriented pricing depends on a lot of factors, not just manufacturing costs. A price needs to be put on the consumers value of the product. While two tests were conducted, Cumberland’s cushion pads were more efficient and cut down on a lot of labour hours. According to Table A, the cost of renting equipment and labour cost for a job like the Colerick performance, it costed $138 per real hour. Comparing asbestos pads to Cumberland’s pads, between the two tests, contractors save 166 hours using Cumberland’s products. There are a certain number of sets required and a number of set changes. With the company’s product, the Colerick and Fazio tests showed that they only needed one se of CMI pads and only one set change. This leads to 166 hours cut down for changing the pad sets which equals to $22,908 worth of costs that construction jobs can save by using Cumberland pads. Not only will companies be saving money, but they can use that time to create more projects or focus more time on the task at hand and perfect their work. These pads never go above 250 degrees Fahrenheit and ca be handled immediately with proper gloves. With asbestos pads they can go between 600 to 700 degrees Fahrenheit which endangered contractors because it was s hot and they would have to wait for it to cool down. This results in lots of wasted time especially because the pads would have to be changed about 20-50 times per job. Time is very valuable and because the pads are more efficient, safer and innovative, consumers will pay a premium price. Value based pricing also takes into consideration the costs and because these companies are saving tens of thousands of dollars, Cumberland’s pads are very valuable. They will be an estimated $400; this covers costs and also contributes to the value based on the pads. This price cannot be too high as companies still want to save money, but it is just enough where they can save and complete their projects the best way possible. For promotion of the cushion pads the push strategy should be used because this product relies heavily on influencers especially because it is a new product. There needs to be a cognitive appeal as a creative strategy. Cumberland should reach out to all the purchase influences in the industry to promote CMI pads. In the earlier stages there should be some deals on the product so that it can entice more distributors to purchase it. Action Plan Cumberland Metal Industries need to use the cost-oriented pricing strategy. More specifically, invest in the permanent tooling and charge $138.36. There are less manufacturing costs associated with purchasing the tooling and overtime the company will make the $50,000 back. With new products in an industry that does not really have a demand for something new, it can’t enter the market at a high price. This is because no one will want to try out the product in fears that it does not work out well. Even with the two tests and influences from the segmentations above, that can only do so much in promoting the product. Value-based pricing will generate way more revenue but as a new product people do not really know how much they need the product yet. In the long-term for these cushion pads, prices should gradually go up as an increase in demand does. An increase in demand shows how much companies are starting to realize that the Cumberland pads are way better. People will start to value it more and that is when they can raise their prices. As of now, there is no significant value to these pads until the consumers try it out for themselves, there is a great amount of advertising and the word-of-mouth business is strong. Pricing it this way will not only cover manufacturing costs but can help cover the costs of promotion because new products need lots of advertising to get the word out. In conclusion, Cumberland Metal Industries will succeed with this new innovation and assist the company with their continuous growth.