Group D July 23, 2010 Word Count: 2625 (excluding tables) Table of Contents 1. Executive Summary3 2. Problem Statement4 3. Company Objectives4 4. Company Background4 5. Analysis4 5. 1. Market Analysis4 5. 2. Market Analysis5 5. 3. Competitive Analysis8 5. 4. Financial Analysis9 6. Key Factors10 6. 1Key Opportunities10 6. 2. Key Success Factors10 6. 3. Key Uncertainties10 7. Alternatives10 7. 1. Provide a third proposal free of charge10 Pros:11 Cons:11 7. 2. Menu Pricing11 Pros:11 Cons:11 7. 2. Value Pricing11 Pros:11 Cons:12 8. Recommendations12 9.
Action Plan13 10. Contingency Plan13 11. References14 12. Appendices14 1. Company Name – Executive Summary henderson bas, one of Canada’s leading and most awarded interactive advertising agency has to make a decision on what pricing to charge for its third creative proposal to Halpernia. Louisa Morgan, director of client services sees Halpernia as a potential large client and wants to maintain a good relationship with them but still has to find a way to balance the organization’s profitability and future potential revenues along with the company’s objectives and goals.
The following pricing models have been identified for the current situation: 1. Provide a third proposal free of charge 2. Menu Pricing 3. Value Model In the short term we recommend that henderson bas use a value model with one free creative proposal and Morgan should inform Halpernia of this pricing model and the reasoning behind it. This will ensure that costs are covered for any additional work required on the agreed project. In the long term, henderson bas should focus on the automotive and consumer packaged goods industries as identified in the segment analysis to grow the firm’s focus and market share.
They also need to look at the pricing strategies and evaluate what competitors are doing and come up with a model that will help retain clients, provide excellent customer service and also remain profitable. 2. Problem Statement Louisa Morgan, director of client services at henderson bas, one of Canada’s leading and most awarded interactive advertising agency, is trying to make a decision on the appropriate price to charge for the third creative proposal that has to be presented to Halpernia in five business days. Morgan wants to maintain a good relationship with Halpernia while still meet the organization’s financial goals.
The relationship and her career depend on this decision. 3. Company Objectives •To provide creative, high quality and innovative interactive advertising solutions to customers •To maintain a high level of service and build a strong relationship with customers for long-term relationship •To remain profitable on all projects and meet financial goals 4. Company Background Henderson Bas was founded by Dawna Henderson, the firm’s current chief executive officer in 1996. The company’s name was changed from Ninedots to henderson bas in 2004 for copyright issue and became a majority owned subsidiary by a publicly traded company, MDC Partners Inc.
Employing 65 professionals, henderson bas provides full online and interactive services, ranging from creative to advanced web & mobile technologies. henderson bas is the only agency that develops marketing-driven strategy and creative. (http://preview. pr. com/company-profile/overview/50214). The company has been focusing most of its efforts on large companies; its client roster includes Coca-cola, eBay, Capital One, Molson, Mercedes-Benz, Nike, Tim Hortons, Federal Express, Nintendo and Discovery Channel to name a few.
Henderson bas has evolved to become Canada’s most awarded interactive agency with its strong market niche by aligning with large global brands and by offering a very high level of service. 5. Analysis 5. 1. Market Analysis Henderson bas is renowned for developing superior creative works and direct opportunities for some great brands. The company has been identified as a digital leader at global award shows such as Cannes, the London International Awards and the One Show Interactive Awards. (http://www. globelink. ca/mediacentral/canadaincannes/) They also earned four winning campaigns in the Applied Arts Magazine Awards in November 2008.
Strengths •The company has its reputation established and was recognized as a leader in the interactive advertising industry •Dawna Henderson, President & CEO has also been listed by Profit Magazine six years running as one of Canada’s top 100 women entrepreneurs and is the only woman to own a pure play agency in Interactive for 18 years •It has attracted a blue chip client list including Coca-Cola Ltd. , ING Direct, Joe Fresh, Molson Canadian, Capital One, eBay •Financial backing of MDC, one of the largest advertising companies in the world. It gains new clients by referral from existing clients or through word-of-mouth communication •The company manages client engagements through a well defined step-by-step process Weaknesses •Henderson bas focuses on a limited segment in the market •Company may have high turnover on its management and design team •Rigid pricing model that does not allow for “value” pricing. •Significant resources (manpower ; money) must be invested upfront to acquire new business. •Detailed Pricing components allow room for customers to nitpick. •Potential negative word of mouth could result if Halpernia account is lost.
Opportunities •There is room for North America and international market in online and interactive services •Henderson bas can be expanding its interest to the emergence of digital media outside the Internet, including SMS and digital signage Threats •The company relies solely on manpower – staff skills and expertise and is exposed to labour market fluctuations and loss of intellectual capital through turnover •Evaluations are more subjective and perception based, thus difficult to quantify and measure the quality of strategic engagements. It needs to be creative and innovative to stay atop within the industry •Can be very challenging to meet clients’ expectation in competitive marketplace •The online advertising industry is very sensitive to economic changes i. e. dot-com bubble (SWOT Analysis Source: Marketing Management, CGA Canada, Case Book) 5. 2. Market Analysis Henderson bas operates in the interactive advertising industry, which is fragmented, competitive and diverse in service offerings. Suppliers of these services are judged based on their reputation, price, and relationships.
It is, therefore, extremely important that these companies offer good quality services and strategies in order to develop favorable public perceptions. As reported by the Interactive Advertising Bureau of Canada the online advertising market has grown continuously over the past six years and was worth $1. 24 billion in 2007. This represents 8. 8 percent of the total $14 billion total media revenue in Canada. Despite the continuous growth the industry is currently in the maturity phase.
The chart below shows a four year trend of online ad revenue growth by advertising vehicle. While this industry is fairly fragmented, revenues are somewhat consolidated with the top twenty earners in 2007 holding 85 percent of the market revenues. (Source: http://www. iabcanada. com/reports/IABCanada_2008Act2009Budg_CdnOnlineAdRev_FINAL. pdf) Total Canadian online ad revenue has been segregated into nine categories based on main product or service. The table below shows the percentage of revenue earned by each category for 2007.
Category2007 % ad revenue Automotive16% Financial11% Leisure7% Media/Entertainment8% Packaged goods6% Retail9% Technology10% Telecommunications7% Other26% Total100% (Source: http://www. iabcanada. com/reports/IABCanada_2008Act2009Budg_CdnOnlineAdRev_FINAL. pdf) As indicated on the company profile (http://www. pr. com/company-profile/overview/50214) henderson bas focuses marketing efforts on six industries which we have identified according to the textbook and the general guidelines provided (Marketing Management, 3rd Ed). Segment #123456
NameAutomotiveConsumer Packaged GoodsSports ; EntertainmentFinancial ServicesRetailLegal Services QUALIFYING DIMENSIONSProfitable company with Canadian branch, need for interactive advertising, positive public imageProfitable company with Canadian branch, need for interactive advertising, positive public imageProfitable company with Canadian branch, need for interactive advertising, positive public imageProfitable company with Canadian branch, need for interactive advertising, positive public imageProfitable company with Canadian branch, need for interactive advertising, positive public imageProfitable company with Canadian branch, need for interactive advertising, positive public image Who? Manufacturers, dealersManufacturers, wholesalersSports ; entertainment providing companies, TV stations, magazines, production companiesFinancial institutions, investment companies, accounting firmsRetail businessesCompanies providing legal services What?
Creative strategy, planning ; research, online advertising, promotions ; integrated marketing, technology ; development, database marketing, CRM, CMSCreative strategy, planning, research, online advertising, promotions ; integrated marketingCreative strategy, planning, research, online advertising ; media, SEO, promotions ; integrated marketing, E-mail ; SMS, database marketing, CRM, CMS, online games, video ; audio productionCreative strategy, planning, research, online advertising ; media, SEO, promotions ; integrated marketing, technology ; development, database marketing, CRM, CMS, Creative strategy, planning, research, online advertising ; media, promotions ; integrated marketing, E-mail ; SMS, database marketing, CRM, CMSCreative strategy, planning, research, online advertising ; media, promotions ; integrated marketing, database marketing, CRM, CMS WhenThroughout yearThroughout yearThroughout year with seasonal fluctuationsThroughout yearThroughout yearThroughout year Where? Through previously established contact or referralThrough previously established contact or referralThrough previously established contact or referralThrough previously established contact or referralThrough previously established contact or referralThrough previously established contact or referral Why?
To remain competitive, increase effectiveness of sales campaign, increase market share or revenues, introduce new model, build or reshape company image, lack internal expertiseIncrease market share or revenues, develop demand push or pull, introduce new product, build brand awarenessTo remain competitive, routine marketing purchase, increase market share or revenues, introduce new concept or product, build or reshape company image, lack internal expertiseTo remain competitive, increase market share or revenues, build or reshape company image, lack internal expertise, to promote new serviceTo remain competitive, routine marketing purchase, increase market share or revenues, build or reshape company image, lack internal expertiseTo remain competitive, increase market share or revenues, introduce new service, build or reshape company image, lack internal expertise How? In installments or pay-as-you goIn installments or pay-as-you goIn installments or pay-as-you goIn installments or pay-as-you goIn installments or pay-as-you goIn installments or pay-as-you go Segment size16% or $198. 5 million6% or $74. 5 million8% or $99. million11% or $136. 5 million9% or $111. 7 million TrendsTotal revenues from segment decreasing, trend may turn around if new auto sales improve ; as competition increases Total revenues from segment increasing and likely to continue into the future as competition in this industry is fierceTotal revenues from segment decreasingStable revenues, will likely continue as not many new entrants and strict budgets prevent increases in spendingTotal revenues from segment decreasing, will likely continue as margins become smallerStable revenues, will likely continue as not many new entrants and strict budgets prevent increases in spending DETERMINING DIMENSIONS
Benefits soughtRemain competitive, increase effectiveness of sales campaign, increase market share or revenues, build or reshape company imageIncrease market share or revenues, develop demand push or pull, introduce new product, build brand awarenessRemain competitive, market share or revenues, build or reshape imageRemain competitive, increase market share or revenuesRemain competitive, increase market share or revenues, build or reshape company imageRemain competitive, increase market share or revenues, introduce new service, build or reshape company image Based on the above analysis, henderson bas should focus on the automotive and consumer packaged goods industries. The automotive industry, while volatile due to fluctuating consumer purchase patterns, is an extremely large industry with significant spending on interactive advertising. Even though the industry is expected to decrease, the trend may turn around if consumer spending on automobiles improves and competition in the industry increases to recapture some of this market share.
The consumer packaged goods industry is fairly small but total interactive advertising spending in this industry is increasing and expected to continue to increase as competition in this industry will continue to be fierce and manufacturers fight for market share. 5. 3. Competitive Analysis CompanyBackgroundProductsCompetitive advantages Leo Burnettestablished in 1935 97 offices in 84 countries employees approx. 5,000 peoplespecialized in advertising services2nd largest ad agency in US Many well-known clients Worked with well-known brands: McDonald, VISA, Nintendo Avenue A/Razorfishestablished in 1995 2,000 personnel worldwideadvertising and branding trategy and planning interactive design emerging mediaone of the largest buyers of digital advertising space won over 75 well-recognized awards Agency. comestablished in 1995 11 offices in 3 continents 500 employeesinteractive marketing emerging channels web developmentMany clients in various industries extensive experience working with diverse clients Cossette CommunicationsEstablished in 1972 offices in USA, UK, Canada, and China 1430 employeescomplete range of specialized communication serviceslargest Canadian advertising agency Serving clients of all sizes more than 800 clients worldwide representing virtually every sector 5. 4. Financial Analysis
The financial analysis is based on the consolidated financial statements for the year ended December 31, 2008 (Exhibit 1). A few points regarding the financials are as follows: •The annual financial statements were used for purposes of evaluation as they consider a full year of activity and will smooth out any timing differences. The quarterly financial statements are subject to seasonal financial activities. •Gross Margin has decreased 3% from December 2007 to December 2008 period ending. • The revenues have increased, however, the cost of services sold have increased at a greater rate indicating a direct relation to gross margin %. This could be indicative of employee wage increases without an increase in the sales rates.
Another item that could affect this is the free services provided due to a lack of satisfaction from the client such as the Halpernia project. •Office and general expenses have decreased by 2% indicating higher efficiencies in the administration of the business. •Depreciation and amortization have increased in the current year, which could have resulted in the acquisition of capital assets in the current fiscal year end. •Fixed costs as a percentage of the variable are 44%. •The breakeven point in sales for MDC is $522,861. 54. This is the point when all further sales lead to increased profit for the company. Anything below the breakeven point will result in losses. The Halpernia project has utilized approximately 1,252 employee hours.
The cost of these hours based on an average hourly rate of $17. 48 is $21,888 (Exhibit 2). This is the total amount expended to date on this project. Any additional costs will most likely be written off to build and maintain the client relationship. As more costs are written off, this will decrease the gross margin of the company as a whole. The wages will still be incurred and a liability of the company and directly affect the profits as they are a variable expense. As approximately 300 hours were a duplication of effort, this amount to $5,244 of additional costs of the project that may not be recoverable. The total amount that should be charged on the actual hours worked is $26. 6 per hour for a total of $32,632. 93 (Exhibit 3). This will achieve the gross margin that is 33% according to their December 31, 2008 financial statements. For every $1. 00 of sales revenues of MDC Partners Inc, there is $0. 29 of fixed expenses (Exhibit 1). These expenses are not dependent on the revenues and will be incurred whether they increase or decrease their sales revenues. These are considered fixed costs and they should not vary depending on the activities of the company. The estimated overhead for henderson bas based on MDC Partner’s consolidated statements is $9,609 as per the above ratio of sales to fixed expenses. 6. Key Factors 6. 1.
Key Opportunities •Referral from existing customers to build long-term relationship and reputation as well as saving administrative costs for submitting proposals •Future project opportunities from existing clients as the positive experience with henderson bas will keep clients coming back and stay •Advances in technology might create new means of interactive advertising and new channels for marketing 6. 2. Key Success Factors •Reputation in the advertising industry for being a leader of quality work, innovative strategies and proven successful projects. Client portfolio. •Remuneration remains competitive, yet not a compromise for quality and effort.
The organization needs to remain profitable as well as price competitive. •Relationship management for building long-term win-win situations. A good relationship will bring future projects as well as references for potential customers. 6. 3. Key Uncertainties •Variability in time and resource commitment from different clients can pose a challenge for accurate estimate of pricing to charge to customers •Competitors’ actions to build reputation, relationship and better remuneration •Customers’ reactions to the creative proposal can vary 7. Alternatives 7. 1. Provide a third proposal free of charge A new team at henderson bas will prepare a third creative proposal, free of charge.
This can have a large financial impact on henderson bas and there is no guarantee that Halpernia will accept this proposal. This time commitment to Halpernia may also affect henderson bas’ other clients’ commitments. This alternative does not support henderson bas’ objective of remaining profitable on projects. Pros: •Restore and strengthen the relationship with Halpernia •Long term allegiance with a large client •Enhance Henderson bas’ reputation by word of mouth •A way to attract talent and gain future business •Fresh ideas, learn from earlier attempts Cons: •Very costly to continue to do free proposals •Sets a precedent for future •Have to find new people to come up with creative proposal •Not certain that Halpernia will accept proposal 7. 2. Menu Pricing
Henderson bas will prepare a third creative proposal for a standard fee, menu pricing. This will ensure that the costs incurred are being paid for. It could also turn Halpernia away and they could go work with a competitor as they have come to expect good service with a few freebies along the way. This alternative may go against Henderson bas’ objective of maintained strong client relationships. Pros: •Client pays for exact service it orders •Clients would no longer receive free services •Standard fee would cover development costs Cons: •Halpernia could end the relationship and go with a competitor •Negative word of mouth could result if Halpernia didn’t like the quality of service they received 7. 3. Value Model
Henderson bas will prepare a third creative proposal but will use a new pricing strategy, the value model. The entire project will be done for a higher flat fee. This alternative meets all of henderson bas’ objectives and will ensure that all the multiple concepts and edits given to the customer are paid for. Pros: •Maintains good reputation •Assurance that henderson bas would allocate sufficient resources to the client •Henderson bas could focus on fulfilling the Halpernia’s needs rather than making sure it got paid for its work •Halpernia can consent to a price •Fair remuneration •Most of the development costs will be covered Cons: •Problem of variability in time and resource commitment from client to client •Project costs may not be recovered Commitment by clients inconsistent and price set might not be enough to cover resources required •Not certain that Halpernia will stay with Henderson bas 8. Recommendations Louis Morgan should come up with a new pricing strategy for Halpernia ensuring that they pay for any ongoing changes to the proposals and henderson bas’ costs are covered as it will also set precedence for other clients as well. The first option of agreeing to do a third creative proposal free of charge will have a huge financial impact on henderson bas and may not even cover the benefit of restoring good relationship with Halpernia going forward. Assuming Halpernia approves the third proposal this will still be a risky option for Morgan to consider.
The second option of providing menu pricing will somewhat cover the shortfall of the first option as the work done on the two development of the proposal would be paid for. However, if Halpernia still rejected the third proposal and did not offer to pay for the work already done, they could terminate the relationship and negative word of mouth and financial loss could result for henderson bas. The third option is the best option for henderson bas, the value model; as the Halpernia account has the possibility of becoming the agency’s largest account. This option will cater to Halpernia’s requests of multiple concepts and edits and henderson bas will also be able to bill for the costs incurred on those.
This option will also give henderson bas the opportunity to showcase their creativity and adjust along the way to satisfy Halpernia creating good word of mouth. In the short term we recommend that henderson bas use a value model with one free creative proposal and Morgan should inform Halpernia of this pricing model and the reasoning behind it. This model will vary the price according to how much resources already have been spent on the project and how much more are expected for completion when providing a quote. This model should also include the number of proposals that are included before the strategy has to be re-evaluated to meet client’s satisfaction.
This model can be customized to each clients need and adjusted accordingly. In the long term, henderson bas should focus on the automotive and consumer packaged goods industries as identified in the segment analysis to grow the firm’s focus and market share. They also need to look at the pricing strategies and evaluate what competitors are doing and come up with a model that will help retain clients, provide excellent customer service and also remain profitable. 9. Action Plan WhoWhenActivity Pierce, Morgan and RussellImmediatelyReview client’s campaign brief. Determine the cost of these additional hours to decide if henderson has enough financial and human resources.