How did the breakeven point change?

One Month to Make ItTwo Entrepreneurs PersuadedWal-Mart to Give Their PenA Tryout — Now the Hard PartMay 30, 2006; Page B1When he persuaded a Wal-Mart buyer to give his unusual pen a test run some 18 months ago, ColinRoche thought the hard part was over. Selling to the world’s largest retailer is, after all, theentrepreneurial Holy Grail: With 138 million weekly customers, Wal-Mart Stores Inc. dwarfs otherbricks-and-mortar competitors.But far from game over, the toughest challenge begins thisweek, as Mr. Roche’s “PenAgain,” as the ergonomicallydesigned writing instrument is called, rolls out in 500 Wal-Martstores nationwide. PenAgain has 30 days to prove itself to WalMart sales officials. Meanwhile, the 34-year-old Mr. Roche islearning to manage everything from Wal-Mart’s strict shippingstandards to fears that other retail partners will protest hisproduct’s discounted price tag at the big-box chain.Five versions of the Penagain, from the 1987 prototype, left, to the one currently inproduction, far right.During the trial, PenAgain will get space in the specialdisplays, known as “end caps,” at the edge of aisles, in the thick of consumer traffic. The primepositioning will give the product a fighting chance: After 30 days, the stores need to sell close to 85%of the 48,000 pens Wal-Mart ordered if the product is to be considered for wider distributionthroughout the chain.”It’s a test, that’s exactly what it is,” says Mr. Roche.He conceived of PenAgain in 1987 while sitting in high-school detention and dreamed up its design torelieve his writer’s cramp. A prototype built in his Dad’s garage became the catalyst that launched thebusiness and drove it to nearly $2 million in sales last year. Mr. Roche and a former fraternity brother,Bobby Ronsse, also 34, launched Pacific Writing Instruments Inc., of San Mateo, Calif., in 2001.There are about 10,000 suppliers hawking their goods in WalMarts world-wide and an equal number of newcomers trying toget in each year. Of those applicants, only about 200, or 2%,make it to the trial-run stage. While roughly 75% of those testproducts stay on past the trial period in at least some stores,they won’t move into new locations unless sales are robust.Seeing a product through this critical phase requires suppliersto shift from sales-pitch mode to marketing backup. “A lot ofBobby Ronsse (left), Colin Roche (right) and their ergonomic pen (bottom), showntimes, what will hurt suppliers more than anything is that theyat actual size.may not monitor the product very well” during the trial period,says Excell La Fayette Jr., Wal-Mart’s director of supplier development. “They are busy still trying tosell the [Wal-Mart] buyer on that item. You’ve sold them. Now, just make sure that the information isout there, and drive customers to the product.”1Price — low price, that is — is another concern. The PenAgain model going into Wal-Mart will sell for$3.76, compared with a nearly identical version priced at $6.49 on amazon.com and more than $12elsewhere. By slashing their price for Wal-Mart — which they must do to sell there — the PenAgainentrepreneurs risk angering their bread-and-butter retail base of some 5,000 retailers, many of themsmall stationery shops.It’s a fine line that all manufacturers walk when they hit mass retailing’s big leagues. The PenAgainpartners haven’t detected a backlash yet, but says Mr. Roche, “We are bracing ourselves.”It is up to the young entrepreneurs to provide the marketing to support their product’s Wal-Mart debut.Messrs. Roche and Ronsse say they plan a full frontal assault with all the business contacts andnetworks they’ve amassed since launching PenAgain. Too small to afford traditional print or TVadvertising, the company will market virally, reaching out to their national fraternity headquarters andconsumer groups that have already shown interest in the PenAgain. The company has a general emaillist of some 10,000 customers who regularly buy their pens — “people who really want to know whatthe heck is going on with us,” Mr. Roche says. Among them are doctors, patients and medicalorganizations, for whom the PenAgain’s ergonomic design has a lot of appeal.Ergonomics is a hot niche in the $4.8 billion dollar writing-instrument industry, as aging baby boomersface carpal tunnel syndrome and arthritis. Most traditional pens are stick-shaped, requiring users togrip them. In contrast, the PenAgain’s wishbone design allows users to write by resting the indexfinger, and the weight of the entire hand, between two prongs. Any pen can call itself ergonomic, butwhat gives PenAgain credibility is that it has been tested with occupational therapists and physicians,many of whom sell it in their offices. The pen also is distributed by Sammons Preston Rolyan, arehabilitative-products purveyor.A notable segment of PenAgain’s repeat customers are doctors whose patients, in turn, becomecustomers, too. It is a strategy that has paid off handsomely in some unexpected ways. Scott Koerner,senior vice president of merchandising at Office Depot Inc., first saw the PenAgain last year at his eyedoctor’s office and noted on return visits that it had sold out. He pursued it for his stores. Starting nextmonth, Office Depot will stock the PenAgain in its 1,049 stores nationwide (price: $3.99). “We sell to alot of small businesses, and this doctor happened to be a small business and that caught my attention,”Mr. Koerner says.The PenAgain entrepreneurs know they must track daily sales at Wal-Mart’s 500 stores closely -something they can do over the Internet, via the chain’s Retail Link software system. The system trackssales data, telling vendors where their items are, and aren’t, selling. Should a product do well in say,Salt Lake City, but not in Indianapolis, Wal-Mart can shift merchandise between stores.But it is a common mistake of neophyte suppliers to expect Wal-Mart buyers to do the tracking forthem, says Wal-Mart’s Mr. La Fayette. “When you have a buyer with 10 to 20 different categories, theycannot monitor everyone’s pieces, and they depend on the supplier to inform them of what is goingon,” he says.Knowing this, PenAgain founders produced an extra 100 displays for use in Wal-Mart stores, whichthey are keeping in their own warehouse. “If one store sells through like crazy, we could ship out more2to keep things going” during the test, Mr. Roche says. They also are considering hiring a merchantservice organization, a third-party group that sends reps into stores to check out display placement andconsumer traffic and then report back electronically to the supplier.Messrs. Roche and Ronsse also have had to navigate Wal-Mart’s packaging and shipping requirements,which are highly regimented, down to the thickness of the cardboard used on display cartons. Shippingboxes must have a reddish stripe around the outside that says “stationery,” to help Wal-Mart staffersroute the boxes at stores.Timing is tricky, too. There are no guarantees for suppliers until Wal-Mart issues an official purchaseorder. When it comes down, the window for getting products into stores isn’t open long. PenAgainmanufactures all its pens and packaging in China, and so even before they got the April 12 purchaseorder they were ramping up pen production — they needed the 48,000 for Wal-Mart, plus 5,000 more asbackup — and printing packaging.Shipping labels must specify a litany of data, including purchase-order numbers and distribution-centerdetails. Because the pens for Wal-Mart were hurried out of China, PenAgain didn’t have time to havetheir own packaging manufacturers print all the necessary data on the boxes. It had to be added whenthe boxes hit shore in Long Beach, Calif., on May 2. “We didn’t sleep during that three weeks,” saysMr. Roche.The work paid off. The pens were ready to move to Wal-Mart’s distribution centers on time, startingMay 17. Currently, pens are arriving in Wal-Mart stores from Fishkill, N.Y., to Tucson, Ariz. Helped inpart by the exposure the pens are getting at Wal-Mart, PenAgain’s founders expect sales to double thisyear to between $4 million and $5 million.The partners haven’t forgotten their smaller retail partners. The company is creating exclusive offeringsfor small stores: It plans to offer an ergonomic sample set, including a basic pen, a black marker, twohighlighters and refills, for $15 to $20, and a brushed-metal pen for $20 to $30. “That’s our goal: to tryand prove that we will live in both worlds,” Mr. Roche says.Some small players say they’d welcome such efforts: Fred Ebert, an owner of Edwards Luggage Inc.,San Francisco, has been selling the same PenAgain model going into Wal-Mart, but for $9.95. He saysWal-Mart’s $3.76 price “worries” him and at some point he’ll probably stop ordering from PenAgainuntil it comes out with a higher-end model. “I don’t want to be way out of line on pricing anythingbecause it sends a bad message,” Mr. Ebert says.And so, as the PenAgain partners prepare for what may be the most crucial 30 days of their businesscareers, they are realistic about the challenges ahead. “There are things that could go tremendouslywell, and things that could sink,” Mr. Roche says. “We have a lot on the line, and honestly, we arenervous as hell.”Write to Wendy Bounds at [email protected] to think:PenAgain Case 2: Product Life Cycle and Marketing MixThis is the 2nd case of PenAgain. It shows more detailed information about PenAgain’s marketing mixdecision as it expands its distribution from specialty store (e.g., hospital, specialty stationary stores) togeneral discounters (e.g., Wal-Mart) to Category killers (e.g., office depot).1. How did PenAgain change its marketing strategy as its products move through product lifecycle? Discuss how its 4 p’s have changed over time.a. Productsb. Pricec. Promotiond. Place2. Compare PenAgain’s marketing mix changes with those of typical companies throughout theproduct life cycle.3. Do you like its strategy to become Wal-Mart’s supplier (in the short term and long-termperspective)? Why or why not? To aid your answer, perform a break-even analysis (see yourbook) on their operation when they target at niche market vs. mass market? How did the breakeven point change? If there are not enough information you can get from the two PenAgaincases, you are welcome to make reasonable assumptions.This case will serve as class participation portion of your grade. You are asked to analyze the case andsubmit a written case analysis addressed to the founders of PenAgain. Case analysis should follow theformat explained in the class.4

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