Background and Challenge
A Fortune 500 building products manufacturer has a leading market position for wall board and ceiling systems building products. The company, along with most of the players in the construction industry, has experienced a major reduction in volume during the past two years due to the recession, and decreased construction of new residential and commercial buildings.
The company developed a next-generation product in a market segment that has historically seen little innovation. Rigorous testing shows that the new product is 30% lighter and 20% stronger than the competition. The product’s lightweight benefits have broad appeal – including increased productivity for contactors who install the product and reduced shipping costs. The channels that sell building materials, however, perceive varying benefits of the product. Additionally, the product category is seen as somewhat commoditized, and ultimately, product selection frequently comes down to price.
The manufacturer asked L.E.K. Consulting to formulate the optimal launch strategy for the new product based on clear insight into the following issues:
- Qualify and quantify how decision makers valued the product’s attributes
- Determine the optimal pricing and positioning
- Define the go-to-market strategy
- Identify the channel (and contractor) segments to target for the initial launch
Approach and Recommendations
To address these critical issues, L.E.K. segmented the market and acknowledged distinct product purchasing behaviors. L.E.K. developed price elasticity curves across the value chain, including consideration of laborers, contractors/buyers and channels. Leveraging these elasticity curves, L.E.K. identified which channels to target (adjusting for expected cannibalization of existing company products for each customer segment). Finally, L.E.K. modeled the expected gross profit and return on capital employed (ROCE) associated with the launch strategy to maximize profitability.
Working closely with the business unit leader and other senior executives, L.E.K. developed a compelling, fact-based solution that gave senior management the insight and confidence to move forward. The company is currently implementing the recommended strategy, and is forecasting the new product to generate significant profits.