Sonance at a Turning Point

CASE SONANCE AT A TURNING POINT I. Introduction Problem / General Issue Sonance is a lodge at a crossroads, long established as the attracter in steep- windup home theatre speakers, it is at an inflection point where it ineluctably to decide whether it wants to be a high-end speaker producer served through with(predicate) with(predicate) customized monger tracks, or a potful foodstuff audio systems maker. The past go has seen the rise of a peeled competitive threat, the demise of its star channel and the emergence of a highly informed and selective node motif which birth all served to hurt the companys prospects.In the early 2000s, when set competition prompted Sonance to increase client variability through sell transmit Sonance sacrificed its brand identity. Having no experience in change its results directly to end customers, Sonance suffered from its own inexperience of appealing to the novel merchandise while at the same alienating its established market place. eyepatch the company made strong investments in R&038D, these efforts were never backed by a well-thought psychoanalysis of distribution st respectgy or an on a lower floorstanding of the value of each customer channel.What follows is an analysis of Sonances current situation and the articulation of a strategy, that if implemented, is knowing to re-establish Sonance position as the leader in the in-wall, home theatre speaker market. II. Situation Analysis In trying to capture the opportunities of the growing consumer electronics market, Sonances attempt at expanding into sell ultimately backfired with a wane in tax from $53mm in 2003 to $47mm in 2004 (almost back to the level of 1999).This situation has brought the company to the edge with limited funds avail able-bodied, Sonance needs to actualisely define its mathematical produce development and distribution strategy. By entering the mass retail market channel in 2000, Sonance eviscerated its historical base of corpus customers, losing roughly 50% of its dealers in a 5 family period. While overall revenues dipd by exactly 19% during this period, the composition of Sonances revenue stream has changed from a +90% engrossment in Dealers to less(prenominal) than a 50% concentration in Dealers, with the balance spread between Retail and Production Housing.Due to this shift, Sonance is non only perilously exposed to the cyclical flows of retailing, but excessively is untold more sensitive to the overall performance of each customer, as the overtaking of the Lowes account in 2004 resulted in a 37% decline in mass market revenue. Ultimately, the run short to retail puts Sonance in a precarious long-term position as its customers have significant acquire power as high volume purchasers.In the future it is likely that mass-market retailers go out be able to use their purchasing power to drive bulge the margins Sonance is able to extract on its gross gross sales, and ultimately serve t o diminish the dealer channel. The decline of the dealer channel increases Sonances long-term risk by locking it out of the market for luxury home theatre systems. While the move to retail offset $10 trillion of the $17 million of revenue lost through normal dealer installations between 1999 and 2004, it is supposed(prenominal) that any of the $6 million of highend home theater system revenue could be recouped through mass market retail.As luxury customers be less damage sensitive and look to dealers to customize their entire installation, Sonances move towards the retail model at the expense of the dealers leave behind eventually dominate it locked out of the lucrative and sticky luxury market altogether. Furthermore, Sonances dealer base faces further erosion as its main competitor, SpeakerSoft, has taken return of Sonances wounded dealer channel by undercutting roughly 25% on set and further incenting custom dealers to postulate SpeakerCraft speakers over Sonance buffer series speakers in customer take tos.This, combined with the alienation from competing with Sonances retail offerings serves to further erode Sonances dealer channel as dealers choose lower priced competitor offerings. Paradoxically, as Sonance has developed a mass retail channel at the expense of its dealer network, it is deciding whether to push front with the development of the architectural serial of speakers. It would be the branch and only unfeignedly flush-mount trimless speaker, a true niche product appealing to the less address sensitive high end, luxury market.This product line, with a manufacturing cost four hundred% higher than the original series and a complex installation process, requires a viable luxury dealer network in order to be in the market. Sonance is also exploring the potential of converting the current Sonance-only iPort doohickey into a universal, clastic dock tailored for all home theatre systems. Moving forrard on this plan would be a reaffir mation of the retail pass the company began in the early 2000s.With an optimistic price tag of $335, Sonances strategy of introducing the product via Target, a discount retailer, appears misguided as the device is more expensive than its competition and even an iPod itself. Furthermore, by entering the market of retail iPod accessories, Sonance is looking to go head to head with many an early(a)(a)(prenominal) discount brands. The competition and dynamics of this market atomic number 18 unlike that of the custom home theatre market, and it is expected that Sonance will have challenges adapting and efficiently executing within it. III.Evaluate Available Options / Alternatives The primary choice that Sonance has to make is which product to arrange at the coming CEDIA EXPO, two the architectural Series or the detachable iPort, and as a result, which customer base should they focus their attention on. We evaluated the customer lifetime value (CLV) of Sonances different customers as of 2004 based on the information provided in the case and our own assumptions (see lay out 1 in the Appendix). Our primary assumptions for this analysis are to a lower place Original Series Dealers value per pair of $140 o retention point of 75%, nonprogressive estimate based on change in number of dealers from 2003 to 2004 (600 to 500) o Growth rate of 5%, below reaping in consumer expending due to Dealers unhappiness with Sonance o Sales per Customer of three hundred, presumptuous 15 projects per dealer per year, with an average of 20 speaker pairs per project Original Series Production Builders o wrong per pair of $90 o retentiveness prise of 50%, below Dealers because of competitive bidding structure for big scale projects vs. ndividual homes through Dealers o Growth rate of 10%, in-line with new home sales growth o Sales per Customer of 960, assuming 80 projects per Production Builder per year, with an average of 12 speaker pairs per project Original Series the great unwashed Retail Market o Price per pair of $120 o Retention Rate of 20%, shares ledge space with all competitors products, smaller size projects o Growth rate of 10%, in-line with consumer spending o Sales per Customer of 83,333, divided BestBuy 2004 sales ($10 million) by average price per pair iPort Dealers Price per iPort of $300 o Retention Rate of 75%, equal to Dealers Retention Rate of Original Series speakers o Growth rate of 15%, below iPod growth due to high price, but higher growth than new(prenominal) Sonance products o Sales per Customer of 7, assumes 1 / 3 of Dealers annual projects will generate a sale Based on this analysis, we chose founding the Architectural Series and refocusing Sonance on the Dealer channel as our first alternative to evaluate. The CLVs for this alternative are shown in present 2.We assume the Architectural Series will be a star(p) product in the market and will earn a high retention rate among ultra high-end dealers of 90%. Sonanc e would also be able to initially attract 50% of these niche dealers they had in 1999 (75 vs. 150 previously). Sonance would have the choice in this scenario to price the Architectural Series at either $875 per pair, based on the advice of their focus group, or $305, based on the inherent marketing groups testimonial.Our assumptions regarding customer mix for this scenario is that Sonance would drop the mass retail market customer to signal they are focused only on the custom and semi-custom installation markets. In addition, Sonance would consider reducing the price of their Original Series Speakers to the Dealers to $90 from $140. This would improve the Dealers gross margin to 75%, equal to SpeakerCrafts, although the margin net of installation costs would still be lower (see Exhibit 2). These assumptions would lead to an increased Retention Rate through the Dealers sales of Original Series Speakers of 85% and a higher growth rate of 10% vs. %. Sonance would also increase their Retention Rate with Dealers for the alert iPort product to 85% in this scenario. The second alternative we evaluated was to launch the detachable iPort instead of the Architectural Series and to continue to focus on the Mass Market Retail. The CLVs for this alternative are shown in Exhibit 3. For the Detachable iPort, we assumed a very low Retention Rate of 5% since Sonance would be entering an already crowded market with a product that is priced at a premium to most of the competition.Sales of the iPort would grow at 40%, lower the growth rate of iPod sales since the Detachable iPort would be priced at the high-end of iPod accessories. We the assumed iPort would penetrate 0. 5% of the iPod sales in 2004 of 22. 5 million. The Dealers would likely be unhappy with Sonance in this scenario so we assumed the Retention Rate at the current price of $140 per pair would decline to 65%. If Sonance were to help mend the relationship by reducing the price to $90 per pair, we assumed a Retenti on Rate of 75%, with no additional growth.The Retention Rate for the be iPort product sold through the Dealers would be reduced to 65% since the launch of the Detachable iPort would be viewed as undermining their efforts and a lack of commitment to custom installation products. In both scenarios, we assumed no change in our assumptions for Production Builders as this is a market based largely on price and the actions of Sonance in other markets will have little effect on their decisions. Recommendation and implementation PlanBased on our calculations of customer lifetime value (see class Exhibit 1), it is clear that dealers and production builders are crucial to our sales of the Original Series product and therefore we should continue to sell through these channels. However, the mass retail market is a less appealing channel through which to sell this product firstly, the CLV of these customers is much lower than the other two, and more importantly, by selling to these customers we are losing the business of dealers, who are far more important clients.Our recommendation is to eliminate the mass retail channel, and to reduce the price of the Original Series speakers to $90 in order to rebuild the dealer channel. Lastly, we recommend launching the Architectural Series speakers at a price point of (or near) $875 to dealers, quite than focusing efforts on bringing the iPort to the mass market. The Architectural Series speakers are unique and innovative, thus we expect that both dealers and their customers will have a higher willingness to pay for this product as compared to competitors existing in-wall speakers.Using this price and estimated sales, we expect to plunder even in 1 year by selling only 23% of projected annual sales (as compared to 66% under marketings suggested price of $305 to dealers see figure Exhibit 5). Although the 65% margin to dealers is smaller than they could make off competing offers, dealers would be earning far more in absolute ter ms ($1,425 as compared to $245 under the $305 price see figure Exhibit 4).The choice to launch the Architectural Series is strategically wise from both a quantitative and a qualitative standpoint. First, adapting the iPort to the mass market requires more than double the R&038D and Marketing expenses than launching the Architectural Series (see figure Exhibit 5). Although the new iPort model would have a lower cost, the sales required to break even in one year are only meagrely higher for the Architectural Series (23% vs. 17%).In addition, the iPort model, even as a detached unit, is only comparable to our competitors existing products which are sold for less. The Architectural Series, on the other hand, is truly innovative, and can be successfully sold at a much higher price. It would also position the company as an innovator and boost brand perception. By shifting the focus back to dealers through the Architectural Series and apart from the mass market, we can appease these imp ortant clients and increase sales of other products (for example, the Original Series speakers).