Nest Protect Marketing Plan

Adam Koch & Chris McKenzie Marketing Plan- Nest Protect 12/17/13

Meet Nest Protect.


Executive Summary

Considered the “Father of the iPod”, Tony Fadell left Apple in 2008 to found the

connected device company Nest Labs. Nest Protect is unlike any smoke or CO2 alarm on

the market and provides consumers with more than an alarm; it’s intelligent. Nest

Protect delivers information to its users that enhances safety and provides convenience

in an attractive, stylishly designed, easy to install device.

Technology in the smoke alarm industry has remained relatively unchanged over

the last decade. However, there has been a proliferation of “smart” devices over the

same period of time that has converted ordinary every day gadgets to tech-infused

versions on steroids capable of much more and easy integrated into daily life through

wireless apps on our phones and computers. Some examples of these app-enabled

accessories include the Nike FuelBand activity tracker, iGrill Cooking Thermometer, and

even an iSmartAlarm Home Security System. There is significant opportunity to increase

effectiveness in the market through products designed to leverage wireless technology.

Nest Protect is a combination of hardware (intelligent alarm) and software (app-

enabled) that consumers will be excited to install. Nest protect tells homeowners

exactly where and what the problem is, such as, “smoke is detected in the living room.”

It also eliminates frustrations with current alarms, such as, the annoying chirps and false

alarms during cooking. The app-enabled device is easy to set up on a smart phone

allowing users to monitor their home from just about anywhere.

The fire and smoke alarm market in the U.S. is about $1.4 billion in annual sales,

made up of smoke detectors, heat detectors, and fire alarm control panels. About


20.9% of sales in the market are for residential buildings, representing nearly $300

million in potential sales annually. Based on our projections, it is reasonable that Nest

Protect could reach $23.2 million in sales and $11.6 million in profit in its first year on

the market by reaching a 5% market share in its first twelve months. Distribution is

established with 5,000 stores ready to sell Nest Protect as soon as it launches. Online

sales are expected to be strong as well based on experience with our other product,

Nest Learning Thermostat.

Nest Protect offers better design and functionality than any other smoke or CO2

alarm product on the market. It’s better positioned to exceed consumer expectations

by offering form and function in a way that has never been combined in this market.

Nest Labs has proven its ability to deliver on both fronts when we launched Nest

Learning Thermostat. We will deliver that same level of quality to impact the smoke

alarm market the same way we did the home temperature control market.

This marketing plan outlines our key strategies for a successful product launch to

meet our objectives of 5% market share within 1 year. Our focus will be on upper class

homeowners who have a particular interest in design and cutting edge technology. For

these customers we must primarily emphasize the unique technological elements of the

Nest Protect along with the sleek design of the product, with a secondary focus on how

the Nest Protect is a more safe solution than traditional alarms. We have advocated a

mix of messaging channels that is focused more on digital media and public relations but

also includes traditional advertising channels such as print advertising. We see the bulk

of our sales coming through online channels including our own website, Amazon and


the websites of traditional brick and mortar retailers such as WalMart and Home Depot.

For the largest retailers in the home goods category including those listed above, we

must also establish a presence in their retail stores. Finally we are advocating a price

point of $130/unit, well above any price currently seen in the market. This price is a

reflection of the quality of our product and its position as a quantum leap beyond

anything currently provided, and aligns with our strategy of focusing on profits initially

as we target early adopters.


Industry Analysis

Analysis of factors, trends and firm posture highlight relevant insights into the

fire and smoke alarm manufacturing industry macro-environment. A publication by

Security Distributing & Marketing identifies three ongoing changes to the smoke and fire

alarm industry: 1) shift in spending for new construction and retrofits, 2) innovative

technologies (including new codes and standards) and 3) increased importance of mass

communicationi.

The United States economic improvement led to a moderate recovery of new

home construction, which helped to bring the industry back to steady revenue growthii.

Additionally, the National Fire Protection Association recommends replacing smoke

alarms every 10 years, with 1 in each bedroom, 1 outside the bedroom area that can be

heard through closed doors, and a minimum of 1 on each floor. Improved economic

conditions provide increased disposable income to replace aging alarms in current

homes. Traditionally, smoke and fire alarms incorporated audio and/or visual outputs

into the devices. Technological advancements in wireless capability mean that

additional audio and visual features are now available. Regulatory changes to

commercial buildings now require low-frequency sounding devices, which are

reportedly more effective at waking “hearing or alcohol impaired”iii people than high-

frequency sounders. Finally, in an Internet era accustomed to 24-hour news and instant

answers, a movement towards mass communication is gaining popularity among

schools and there is potential to impact the home market as well.


A demand market analysis reveals an industry in a mature life cycle stage with

projected annual growth of 3.8% from 2012-2017 in well-established product segments.

Technologic advancements are expected to contribute to an increase in profit as a

percent of revenue from 10.2% to 11.5% (2012-2017).iv It is estimated that “70% of fire

and smoke detectors are installed in new buildings, including single- and multi-family

housing units, offices, retail establishments, and schools.”v This suggests that industry

growth is closely correlated to the new construction sector. Products and services in the

industry totaled $1.4B in 2012 with 48.3% from fire alarm control panels, 28.8 from heat

detectors, and 22.9% from smoke detectors (Figure 1). Looked at another way, the

$1.4B is broken down into 32.5% commercial buildings, 27.4% Industrial buildings,

20.9% residential buildings, 14.1% Government, and 5.1% exports (Figure 2).vi

Alternatively, a supply market analysis suggests minimal threat of new entrants

with 3.5% growth in new firms over next five years ending 2017.vii There are economies

of scale across products with relatively low margins. The cost of entry could be

classified as medium with some up front fixed costs for manufacturing, but not too large

relative to other industries. Intellectual protection of new technology responsible for

trends in higher revenues and profits over the next few years may provide more difficult

barriers to entry versus traditional basic core technology. This shift in technology is

likely to increase supplier power as well. Electronic components represent a much

larger product cost than does the plastic housing and assembly. Wireless functionality

and smart-phone applications are available through fewer suppliers than other

components with limited ability to change suppliers or substitute products. Firms can


maximize their supply chain by focusing on supplier relationships to reduce costs. There

is limited ability to substitute products (smoke detectors versus heat detectors) since

they are regulated and required by state and local building requirements. It is more

likely that products would be complimentary with both smoke detectors and fire alarm

panels being installed in commercial and possibly residential buildings too. Buyer power

varies by customer segments. In the commercial, industrial, and Government space, it is

likely that few buyers with very large orders can exert power through contracts and

volume discounts for a more homogeneous product with greater price sensitivity than

the residential or international markets. Residential customers looking to replace aging

products have much smaller orders and may be willing to pay a premium for extras

versus simply looking to meet local building code. Competitive rivalry is medium with

low-medium switching costs for new systems or alarms. There are multiple competitors

that produce products in all product and service segments. Similar to buyer power,

customer loyalty can vary by segment with greater amount of loyalty in the commercial,

industrial, and Government markets due to long-term contracts, relationships, and

upfront costs of vetting product quality and specifications. Residential customers have

lower customer loyalty since the cost of replacing smoke detectors is low with minimal,

if any, switching costs.

Customer Analysis

The specific customer desired set of features and benefits largely depends on the

product category (smoke detectors, heat detectors, fire alarm control panels) and

consumer characteristics (commercial, industrial, residential, Government, exports).


Product mix also varies across the different consumer characteristics. The decision-

making process and types of needs are affected by these same factors. The commercial

and industrial markets are likely dominated by functional needs with symbolic needs

also playing a role. These two customer groups are largely driven to meet federal, state,

and local environmental and health and safety laws and regulations through the

functional benefits of the products and services.viii Symbolic needs are also important

because the symbolic benefits reflect commitment to quality and safety for the people

who live or work where they are installed. This is accomplished by purchasing known,

reputable brands with a high degree of trust and reliability. The functional and symbolic

needs felt generate a search of firms that offer products that meet those needs. The

consideration set may be further reduced to firms with preferred vendor status or

previous relationships depending on the number still in the competitive set. A request

for proposal can aid the decision-making process by facilitating comparison between

competitors across key metrics. This process is very similar for the Government, but

may have additional requirements specific to Government contracts. Residential

customers will still have a strong affinity for functional features and benefits, but they

will have greater hedonic needs with experiential benefits that may outweigh symbolic

needs and benefits (Figure 4). The buying process is relatively simple with residential

customers either replacing aging products in their home or they replace currently

working products because they were motivated to move from a current state to a new

desired state. New technology can increase the intensity of the need enough that


consumer aspirations are raised to a point where the consumer will replace current

equipment and services early.

Competitor Set Definition

Product form competitors are those competitors who make smoke, fire, and CO2

alarms most similar in attributes to the Nest Protect. Major competitors include Tyco,

Kidde, First Alert, and BRK brands with some additional smaller players, such as,

Atwood, Fire Sentry, Onelink, and Universal Security Instruments. Specific products

include individual or combined smoke and CO2 alarms that are battery or hard wired.

Category competitors include Kidde and Honeywell who both offer smoke and fire

safety products that are different from combination smoke and CO2 alarms. Generic

competitors offer products that address similar consumer needs, but use different

technology, such as, a fire extinguisher or home escape ladder. Budget competitors are

alternatives that are similar in price, but fill different needs. In this case, they could be

similarly priced home items like wallpaper or home lighting (Figure 3).

Competitor Analysis

While there are a number of smaller players in the CO2 and smoke alarm

marketplace, for the most part the industry is dominated by two large, well established

players, Kidde and First Alert/BRK. A detailed analysis of these two competitors and

their main products follows, along with an internal look at Nest’s own strengths and

weaknesses.

With strong sales and a long history in the industry, Kidde Fire Protection is the

market leader in the smoke alarm/ CO2 marketplace. The firm was established by


Walter Kidde nearly 100 years ago and built its operations to a multi-billion dollar

business whose products are sold around the globe to both residential and commercial

markets. In addition to smoke alarms the firm offers several other solutions tailored to

the fire safety space including fire extinguishers and security systems. The firm

developed strong relationships with several high profile clients, perhaps most notably

the U.S. Military. In 2005 Kidde was sold to United Technologies Corporation, one of the

100 largest companies in the world (revenues of $58B for 2012). Kidde joined with

Chubb Fire and Security to form the UTC Climate, Control and Security division, a group

that accounted for sales of $17B in 2012. In addition to its huge resources, and strong

relationships with customers, Kidde also is augmented by a very strong distribution

network, as its products can be found in all of the most significant locations where fire

safety products are sold, including Home Depot, Wal-Mart, Amazon and Lowe’s

amongst others.

The firm cites technological innovation as a source of its advantage, pointing to

its large investment in R&D to ensure a continual introduction of new products and

features. Kidde can point to some successes on this front, most recently, the

rechargeable battery solution which allows for a 10 year life span for their alarm and

which allows for the elimination of the low battery chirp which is a source of annoyance

for most customers. However, the pace of technological innovation appears to be slow

for the organization in general with many of their products being the same solutions

that were offered over a decade ago.


From a marketing standpoint Kidde seeks to play up its strengths as outlined

above. The primary focus is an appeal to fear, warning potential buyers about the

importance of fire safety protection and the implications of making a bad choice. The

firm highlights its own track record including its long history as a fire safety provider and

its strong client base, with the implication that if the product is good enough for the US

Military, it’s good enough for your children. The product features, including the long

battery life and easy silence button are only played up as a secondary focus of the

product. The firm advertises in print, online, over the radio and on TV and uses a mix of

“real stories” (where families talk of how a Kidde alarm saved their lives) and celebrity

endorsements (country music singer Craig Morgan is a spokesperson), to sell their

products. Both the company’s website and marketing materials in general come across

as dated.

Kidde offers a variety of smoke alarms in the battery powered, wired and more

recently wireless space. The products generally retail from about $20-$75 depending on

feature set. The wired and wireless solutions offer interconnectivity so that if one alarm

goes off, those in other rooms will also signal. The wireless solution offers the

additional advantage of ensuring that the system will stay live in the case of an electrical

outage (which may often precede a fire). A summary of significant products offered by

both Kidde and First Alert is attached as Figure 5.

First Alert/BRK shares many of the same characteristics of Kidde and is also a

large and formidable competitor. Like Kidde, First Alert/BRK has a long history, having

been established as BRK in 1958. The company focuses on fire and safety to both the


residential market (First Alert is aimed directly towards this base) and to the commercial

market (BRK markets here). Like its main competitor, First Alert sells a broad suite of

products that offer fire safety and protection including extinguishers, flash lights,

ladders, and security systems. First Alert further resembles Kidde in that it is a

subsidiary of a very powerful parent company, in this case the consumer goods firm

Jarden which includes brands as diverse as Oster and Yankee Candle. All told, Jarden

revenues for 2012 were approximately $6.7B, with BRK/First Alert sales estimated at

approximately $480M. Distribution looks to be a source of strength for First Alert

relative to others in the industry (with the exception of Kidde) as First Alert solutions

can be found in the largest retail and online sites. Finally, like Kidde, First Alert has

sought out key partnerships to help burnish its reputation as a solution the consumer

can trust. The most significant partner for First Alert is the U.S. Fire Administration.

First Alert also takes an approach to marketing that focuses first on fear

mongering (warning of CO2 – “The Silent Killer”) and then on product features. First

Alert likes to play up their role as a technological innovator whose solutions ensure

greater accuracy on their alarms and allow for quicker notification of potential

emergencies throughout the home. The firm is quick to play up its photoelectric

technology, which they claim gives off fewer false alarms, and the interconnectivity of

the systems which allows for someone in another part of the home to become aware

quicker of a possible fire. First Alert also advertises its products as long-lasting, much

like its main competition. Two areas where First Alert/ BRK seeks to differentiate itself

vs. Kidde are on its design and on ease of install. The latter is hardly mentioned in


Kidde’s materials but feature prominently in collateral from First Alert. First Alert also

seems to be the only major player in the space to focus on the look of its products as

part of its marketing message; “Safety with a Sense of Style” is one of the firm’s slogans.

In spite of this message, and the focus on technology, like Kidde, the firm’s website and

marketing efforts come across as staid and not particularly compelling.

First Alert offers a suite of products in the battery, wired and wireless space

tailored to the residential market that run between $20 and $70. The most significant

products the company offers are included in Figure 5.

In comparison to these major competitors, Nest offers several areas for

differentiation along with many limitations that will need to be addressed. From a

design perspective the nest solution is unquestionably a superior offering to anything

currently in the field. Our R&D group offers us an opportunity to position ourselves as a

leader in an industry where the rate of technological change has been traditionally slow,

and to react more quickly to the needs of our customers. Our marketing also could be a

source of advantage in an industry that has seen little to brag about on this front.

Finally, with our recent success in the thermostat market, and the background of our

founder and his role in creating the design of the IPod, Nest has the ability to introduce

a coolness factor to a market that the word cool has never been associated with before.

Finally, from a product standpoint, our solution does a better job of addressing some of

the customers’ primary complaints about current options in the smoke alarm space,

including false alarms and annoying chirps.


While Nest is far from a start-up at this point, both First Alert and Kidde dwarf us

in size and have substantial resources to dedicate to protecting their positions in the

market. The strong relationships Kidde and First Alert should not be underestimated

and while we should be able to get our product into most retail outlets, it is not as

certain that we can ensure on it being as prominently displayed or promoted. The

history of the two companies is also formidable, and unlike a thermostat, it’s not clear

that customers would be willing to risk their safety with an untested solution. Finally in

an industry that has become mostly commoditized and where the best-selling solutions

typically retail for about $30, a price point of over $100 represents a significant increase.

The price difference becomes even more significant when one considers that the typical

home may require 3-4 alarms throughout it.

Limitations to Analysis

The above analysis is based on the best research available to us given several

restraints. We were unable to gain detailed information on sales data (or other key

financials) for First Direct or Kidde or conduct a detailed study of their operations. We

were unable to conduct a detailed study of potential customers that might include

surveys, focus groups, conjoint analysis, perceptual mapping etc. Therefore there is

limited demographic data on customers or buying behavior. Some back of envelope

calculations around market size in terms of units can be made based on industry sales

by segment and average selling price or new & existing homes and estimated

replacement churn.


SWOT

SWOT ANALYSIS Kidde First Alert/BRK Nest

STRENGTHS Brand reputation, resources (people &

money), distribution, relationships with key

endorsers, some technology (rechargeable

battery), established incumbant

Brand reputation, resources (people &

money), distribution, relationships with

key endorsers, some technology

(photoelectric monitoring), strong #2 in

market share

R&D, design, marketing, brand

reputation (cutting edge/

cool)

WEAKNESSES Design, marketing, old/ outdated solutions,

R&D

Somewhat limited on design, products

typically less well liked that Kidde,

marketing, design

Expensive, no track record for

safety, no partnerships in

safety market

OPPORTUNITIES Growth in new construction, introduction of

newer technologies, new overseas markets

Build client satisfaction, enter into new

partnerships, promotion of newer

technologies, growth in new construction,

expand overseas

Creation of high-end market,

appeal to design focused

consumer, capitalize on

current user base for

thermostats

THREATS New technologies, price wars, regulatory

changes

Kidde continuing to build market share

(BRK had been leader), design gets

eclipsed

Copycat technologies,

disinterest in new price point

for solutions


Marketing Objectives

Objectives at different levels of the organization should align with each other to

achieve overall corporate objectives. It is important to have the individual product

objectives answer the question “Where do we want to go?” Growth and profitability

are two of the most common ways to define product objectives. However, growth can

be defined in terms of either sales revenues or market share. Steve Johnson, director

materials and procurement, stated that the “vision for Nest is to be in front of the

industry across the board – not only reacting to what is familiar, but probing into areas

that go beyond what anyone else is doing.” Innovation plays a significant role in the

identity of Nest Labs, so it is likely to be seen in their creative and marketing campaigns

as well.

The customer segment Nest Protect should initially target is the residential

buildings market, primarily made up single-family homes, townhouses, condos, and

multi-family units, such as, apartment buildings. This represents 20.9% of the $1.4

billion overall market, or $292.6 million dollars. Using Figure 1 to further refine the

market potential, if we assume a similar breakdown of product type across each

category in Figure 2, then smoke and heat detectors represent the most likely

substitutes for the Nest Protect. These two product segments represent 51.7% of the

market overall market. Apply that to the $292.6 million residential segment gives a

potential market of roughly $151.3 million. Figure 5 shows typical pricing between $20-

$40 which means the number of units sold a year in this market may be between 3.8 -

7.6 million units.


In this segment, Nest should look to exploit competitive vulnerabilities around

technology, ease of use, and relevance (coolness factor). Functionally, there is little

difference between Nest Protect and other models on the market in terms of their

ability to detect smoke or CO2 and emit an alarm. However, Nest Protect differentiates

itself by adding features that others do not through integration with other Nest Protect

alarms in the home, web-enabled apps, and style. Nest Protect is currently priced at

$129 for either the white or black models. The features and benefits are the same

between both. Tony Fadell is the founder and CEO of Nest Labs. Tony came from Apple

where he led the team that created the first 18 generations of the iPod and first 3

generations of the iPhone. Since Nest Labs is venture capital owned, it is difficult to get

actual numbers related to development and investments in R&D, marketing, etc. We

can, however, use information about margins related to the iPhone to make some

educated estimates around margins that will refine our objectives. One UBS report puts

the margins of the iPhone between 45-55%.ix Assuming some of that is related to

contracts based on scale and learnings over time, it is reasonable to assume that

margins have been preserved over time even though the price of the iPhone has come

down. This is a typical trend in technology-based products. If we assume a 50% margin

for Nest protect, then each unit produces roughly $65 in profit and has an equal amount

in costs. Nest could use their data on the number of thermostats they have sold and the

size of that market to make some estimates around market share penetration over time;

however, we will need to make much less sophisticated estimates. Since this is a

mature market, with general category growth estimated at only 3.8%, we will calculate a

http://appleinsider.com/articles/13/09/30/iphone-5s-demand-healthy-margins-for-5s-and-5c-higher-than-iphone-5-analyst-says

http://appleinsider.com/articles/13/09/30/iphone-5s-demand-healthy-margins-for-5s-and-5c-higher-than-iphone-5-analyst-says


conservative, moderate, and aggressive estimate for Nest Protect using the midpoint for

annual units sold of 5.7 million units. This number is then broken down into quarterly

sales and includes the growth factor. Profit is defined as revenue minus cost to

produce. It does not account for other operational expenses, such as, SG&A or PPE

expenses.

There is no customer segment per se that is not currently being served, however, there

is opportunity to further segment the current market by targeting customers who wants

more from their current alarm in terms of features and style. Nest Protect should look

to penetrate the current market by at least 5% at the end of the next twelve months.

We believe this is ambitious enough to be realistic, but not too aggressive to be

impossible to accomplish. Nest Protect is currently set to launch in 5,000 stores across

the US, Canada, and UKx. The above estimates require 18 (conservative), 36 (moderate),

and 70 (aggressive) units sold in each store and does not account for additional units

sold online. Five-percent of the market over the next year is only 295,000 units, and it’s

hard to see that Nest would expect to sell fewer than 30-40 units on average at each

store across the 5,000 stores and have another 1/3 to 1/2 of its sales come from online

Conservative Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year

Market Share

(30% growth quarter-to-quarter)1.00% 1.30% 1.69% 2.20% 1.61%

Units sold 14,792 19,229 24,998 32,497 91,515

Revenue $1,908,104 $2,480,535 $3,224,695 $4,192,103 $11,805,436

Profit (@50% margin) $954,052 $1,240,267 $1,612,347 $2,096,052 $5,902,718

Moderate Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year

Market Share


Units sold 22,187 33,281 49,921 74,882 180,271

Revenue $2,862,155 $4,293,233 $6,439,849 $9,659,774 $23,255,011

Profit (@50% margin) $1,431,078 $2,146,616 $3,219,925 $4,829,887 $11,627,506

Aggressive Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year

Market Share


Units sold 29,583 53,249 95,849 172,528 351,209

Revenue $3,816,207 $6,869,173 $12,364,511 $22,256,119 $45,306,010

Profit (@50% margin) $1,908,104 $3,434,586 $6,182,255 $11,128,060 $22,653,005

http://bigstory.ap.org/article/nest-labs-tries-smarten-smoke-detectors


retail. Since Nest Protect knows that its price is fixed at $129, they can use market share

by units as an effective way to quantify the number of units they need to sell to reach

profitability, their main goal. Since many of their expenses are spread out across the

firm and shared between the Nest Learning Thermostat and Nest Protect, it is tough to

know what overall profitability looks like. It is reasonable to assume that the backing

venture capital firms would like to see profitability reached rather quickly.

Secondary objectives can include building brand equity in Nest Labs which will

benefit the Learning Thermometer and future products, identify product enhancements

to Nest Protect for future models, and innovative new product ideas in the same or

adjacent product categories.

Segmentation, Targeting, Positioning

Ideally it would be great to do perceptual mapping, regression and conjoint

analysis to identify specific consumer preferences, perceptions and choices. This would

help to understand consumers and competitors and aid in segmentation, targeting, and

positioning. The residential market can be segmented into different groups of

consumers with similar needs. This may include homeowners and landlords, single-

family and multi-family units, singles, couples, families with children, tech savvy, higher

income, educated, price sensitive, etc. We then want to narrow down the different

segments to ones where Nest Protect aligns favorably. Three different approaches can

be taken here to help with this. It makes sense for Nest to take a concentrated strategy

by focusing on specific segments and leaving the other segments to competitors. An

undifferentiated strategy would treat all segments equally, which for a product selling 2-


4 times current pricing would not make sense. A differentiated approach would sell a

different product (or set of features) to different consumers, but Nest Protect is not

designed like this.

Owner-occupied make up 66% of housing units versus 34% renter-occupied.

68% of the 105 million owner-occupied households are considered “family households”

and 32% have children under the age of 18 yearsxi. Based on a concentrated strategy,

Nest Protect should target upper-class homeowners who are families with or without

children, considered to be tech savvy, stylish, and appreciate convenience. The product

positioning would then be aligned to the targeted segment and should frame the

product’s image and offer in the target consumers’ minds and is differentiated from

competitors. Nest Protect can change the rules of the game by focusing on new critical

points of differentiation:

“For homeowners who value safety, convenience, and style, Nest

Protect is a smoke and CO2 alarm that offers unrivaled functionality

and design by creating an alarm that thinks before it alerts and gives

you information, not just alarms.”

The impact on brand equity for Nest Protect is minimal since the product is just

launching, however, for Nest Labs who is still trying to establish itself in the market, the

impact can be rather significant. They already launched the Learning Thermostat

successfully and the introduction of another commodity-type product, infused with the

latest and greatest technology with a premium price that people are willing to pay adds

credibility to the mission and focus of Nest Labs. This increases the equity of the firm,

http://www.infoplease.com/us/census/data/demographic.html


adds credibility to future product launches, and generates a possible sustainable

competitive advantage difficult for competitors to imitate.

Marketing Programs

Given the above stated objectives for market share and building of brand equity and our

description of our tech-savvy target customer an integrated approach to marketing

which will combine both traditional media elements and make use of more modern

technologies will be essential to ensuring a successful launch. Detailed

recommendations for the marketing mix follow.

Pricing: Given our desire to truly differentiate the Nest Protect as an item unlike

anything that has been seen in the industry before it will be important for us to price the

Nest Protect as a premium item. As noted above, the lack of data on the firm makes it

difficult for us to form a complete picture of the cost to produce this item but we have

estimated our COGS at somewhere around $65 based on looking at the past experience

of our CEO during his time at Apple. To set an upper limit on willingness to pay, we

considered the benefits that our target customer would be gaining from Nest Protect

(convenience, peace of mind/safety, and style) and attempted to estimate what these

qualities would be worth to a customer who might need to buy 3 or 4 units per

household to replace their current solution. While more data in the form of focus

groups, surveys etc. would have been beneficial here, we believe that setting willingness

to pay at $150 (a premium of about $120 per unit over current solutions) is realistic for

the upper-class customer we will be targeting.


Given this price range of $65-$150 we feel the $130 price point currently being

offered by the company on its website to be a good price for the Nest Protect. We

advocate this skimming strategy based on this being a technology product which, like

most tech products will have a reasonable percentage of early adopters willing to pay a

considerable premium to be the first to acquire the latest and greatest solution.

Additionally, as stated above, our desire to be positioned in the marketplace as a

revolutionary creation requires us to price the Nest Protect far outside the traditional

price range for smoke and CO2 detectors. Finally given our goal of profits in the short

term, since this is still a start-up venture, with heavy investment in R&D and marketing

as we look to develop additional products, the higher price point supports a focus on

margins in the near term to allow for future growth.

Distribution: Given our goal of at least 5% market share within 12 months, Nest Protect

will need to utilize a variety of distribution channels to reach our target customers. It is

essential for us to be in front of the customers where they traditionally buy smoke

detectors, so we need to strive to have presence in major retail channels like Home

Depot, Lowe’s, Target and WalMart. Given the consideration of customers who typically

shop in these retail outlets, most notably a focus on price, it seems unlikely that we can

expect to reach sales targets by focusing primarily on these locations. Other traditional

outlets for smoke alarm purchases include local hardware and convenience stores.

Given the need for extensive sales forces in order to reach these localized stores and the

typical customer profile for these stores we do not advocate for this as a distribution

channel at this time.


Given the limitations of traditional channels for sales when considering the Nest

Protect, we must look to alternate channels that would favor our targeted demographic.

For the tech savvy customer we are positioning ourselves towards, this would mean

electronics stores such as Best Buy and leveraging our relationship with Apple to have

the product sold in their stores as well. Nest Thermostat is currently sold in both of

these locations and Nest Protect must have presence in these locations too.

Finally, given the more affluent, more technical consumer we are targeting, we

foresee a far greater percentage of our sales coming through internet sales. In addition

to the online stores of the companies listed above, we need to have heavy sales through

Amazon.com, which may prove to be our most important relationship. Investment in

our website to allow for orders to be easily purchased and received will also be

essential.

Customer Relationship Management: One of the elements the Nest Protect must both

leverage and build upon in the passion of the Nest community. Unlike any of our

competitors Nest has a dedicated “fan base” for our firm that actively advocates for and

supports Nest solutions. This is promoted through the “Nest Community” section of our

website where we actively seek suggestions from our users. Managing expectations of

this active community will be key to ensure that they continue to support and

recommend the product as word-of-mouth will need to be a key driver of sales for Nest.

Outreach to this base of users through mailings (anyone who has purchased a Nest

product on our website should be enrolled in the mailing list, and efforts should be

made to obtain information on others who purchase our products by making it easy for


them to register for mailings as part of the product setup process), discounts and

notifications of future releases should be part of the marketing program. In addition,

efforts to link the Nest Protect with Nest Thermostat and future releases will help to

promote advocacy for the Nest company as a whole and build the brand. In total,

building advocates for our products and creating a Nest Community in the mold of

Apple, Nike and other great brands is far more significant to our marketing strategy than

it would be for any of our current competition.

Website: For a company positioning itself as a technological leap forward, and targeting

tech users, the website must be a reflection of this position. As we’re also appealing to

people’s design sensibility, elegance of our website design will also speak to our ability

to create beautiful products. We should ensure that our website reflects the qualities

our brand reflects. Simplicity of design, ease of use (in terms of finding information and

ordering products) and technological sophistication should be readily apparent to users

of our site. The website must also be a source of advertising for our products and

videos which double as ads should be hosted here (and reposted on our YouTube

channel). Since PR and buzz are key to our success as well, the site must be frequently

updated to reflect any positive press the product and firm have received.

Messaging/Advertising/Promotion- Unlike most of competitors in the market, we will

hope to have a pull based sales strategy which requires us to expend significant

resources on advertising and brand building. Our price premium that we intend to

charge for the Nest Protect should leave significant money over for our advertising

budget as a percentage of revenues. Understanding that a significant share of revenues


must be set towards R&D as well, we recommend setting advertising budget at 17.5% of

forecasted sales or about $4.1M given stated moderate goal of 5% market share by EOY.

In considering how to allocate this budget we took into account threshold

amounts to be spent in order to generate ROI, where our target customer goes for

information and our goals for the marketing program in terms of both sales and brand

equity. We quickly determined that based on our ad budget, the effectiveness of a

television campaign would be limited, as it would not allow us to target prospective

users as well as we would like and it would be cost prohibitive to produce and later air

an ad with any frequency. Radio, while cheaper also suffers from many of the same

limitations. In terms of traditional media, we believe that advertising in magazines to

build awareness among our target market would prove more effective and recommend

placing advertisements in periodicals that appeal to techies (such as Wired), up-scale

homeowners (such as Better Homes & Garden) and Good Housekeeping, which appeals

to both parents and homemakers. While traditional media is effective, it is also

expensive and we recommend a split between traditional and digital at 57% and 43%,

respectively.

As important to us as traditional media for advertising will be online advertising.

Significant ad dollars should be allocated towards paid search, with additional set asides

for web banners on sites visited by our target marketplace and expenditure also made

towards SEO. It will be essential for web users in the market for a smoke alarm to be

able to become aware of and learn quickly about Nest Protect. We recommend making

internet paid search the largest segment of our digital advertising budget, at 24%.


Promotional budget also must be a key part of our marketing expense.

Specifically, significant money must be allocated towards PR efforts and getting positive

write-ups in as many locations as possible both on and off-line. Perhaps nothing did

more to boost Nest Thermostat sales than having it featured on the Ellen DeGeneris

show. Similar efforts to generate positive buzz for Nest Protect must be made. Online,

we will want to focus on getting promoted by key technology sites such as Gizmodo,

CNET, and Lifehacker. Developing relationships with other key opinion makers in the

technology space on the internet should also be made a priority and we could consider

sponsorships of key podcasts by sources such as TedTalks, Wired and NPR tech talk to

also gain visibility. For homeowners and parents, attention should also be paid to

recommendation sites like Angie’s list and Consumer Reports.

As this is a “buzz” product, special events should also be a component of our

promotional strategy. We will want to have a presence at key trade shows and should

also allocate advertising dollars to guerilla marketing events such as the recent fire truck

tour used during the product launch.

We have allocated significant budget towards trade promotions and store

displays as we will need to rely on our product being featured and prominently

displayed at major retail channels. As we do not want to compromise the cost of the

product to ensure that it viewed as a premium item, we don’t recommend allocating

budget for coupons and will want to work to ensure that our sales channels use the

trade promotion dollars as Nest intends.


In terms of messaging, primary emphasis in all advertising should be focused on

the distinguishing characteristics of the Nest Protect- specifically its coolness of design

and intelligence making for a more pleasant home experience. Most of our competition

is well established in the safety space but rates quite poorly where we excel most. We

must highlight this difference in all our messaging, emphasizing the ease of shutting off

a false alarm, the lack of annoying beeps and the sleek way the Nest Protect fits into the

design of the home. At the same time, Nest Protect must pass a certain threshold for

safety to even get in the consideration set for customers and getting endorsements of

safety professionals will be necessary if we hope to build a user-base beyond early

adopters.

Marketing Budget

The market budget below outlines how resources would be spent. It required a

number of reasonable “best” guesses to calculate CPM and other costs. It captures the

spirit of the types of marketing campaigns and weighting of each even if it is not exact.


Contingency Plans

Should it become apparent that sales are not tracking towards our forecasts,

there are several approaches we could take depending on our analysis of the reason for

the shortcoming. The first thing we would look to is whether product awareness was

where it needed to be. If there was a lack of knowledge of the products existence, our

first suggestion would be to increase ad spend in traditional media or baring the budget

for this, to look to additional promotional events to gain exposure. A closer look at the

message also might be required at this point as well. Our analysis is that consumers are

interested in the design and usability of their alarms and willing to pay a premium on

this, but if this fails to register, the messaging could shift to place greater emphasis on

the safety aspects of Nest Protect, and how our solution could translate to saving lives.


We also could reconsider our decision how much to promote the product at the

distributor level, as incentives may need to be offered to ensure that the product

receives prominent placement within the retail channels. It seems likely that online

sales need to remain our primary avenue for moving the product. However, offering

trade promotions might allow for increased margins at the distributor level and thus

increased efforts within our sales channels. We are hesitant to adjust our pricing as it

will be difficult to maintain our margins and our brand equity if the product becomes in

any ways commoditized, but if sales fail to materialize, short term discounts can be

looked into.

Finally we must plan for the product not being as well received as Nest Thermostat. At

the end of the day, word of mouth is what we hope to be our biggest advantage in

penetrating the alarm market. If we start to hear less than favorable impressions within

our Nest community or reviews on online sites such as Amazon look to be anything

other than overwhelmingly positive, we need to be able to react quickly to address and

adjust to the issues.


Figure 1:

Figure 2:

$676.2

$403.2

$320.6

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Total Revenues = $1.4B

Products and services segmentation (2012)

Smoke detectors

Heat detectors

Fire alarm control panels

32.5%

27.4%

20.9%

14.1%

5.1%

Total Revenues = $1.4B

Commercial buildings

Industrial buildings

Residential buildings

Government

Exports


Figure 3:

Figure 4:

Paint & wallpaper Lighting

Small appliances

Alarm systems Surveillance cameras

Home escape ladder

Door & window locks

Smoke detectors Fire alarm control panels

Heat detectors

Fire estinguishers

Kidde CO2 & Smoke Alarm First Alert Combo Alarm

Onelink Wireless Smoke &

CO2 Alarm

Smoke & CO2 Alarm

Fire Safety

Safety Products

Home items

Fire & smoke alarm customers

Commercial, Industrial, Gov't

Meet federal, state, local laws

++ Functional & symbolic needs

Complex buying process

Residential

Functional++, symbolic needs+, hedonic needs+

Opportunity to raise aspirations of

consumer to new desired state

Simplified buying process

Exports

Canada, UK, Mexico (significant growth), Korea, China (new),

Malaysia (new)

Functional, symbolic, and hedonic needs

vary by region


Figure 5:

Product Name Price Features Promoted Amazon Rating

Amazon Sales

Rank

Kidde KN-SMFM-i Silhouette Hardwire

Low Profile Smoke Alarm $85

Rechargeable Batteries, Easy Install,

Interconnectivity, hush feature-- push button to

silence, design (note-- no CO2) 4 stars (74 reviews) 68

Kidde 1279-9999/RF-SM-AC Hardwire

Smoke Alarm with Battery Backup,

Interconnectable $45

Interconnectivity, blinking red light to show it

works, hush feature 4.5 stars (45) 61

Kidde KN-COSM-IB Hardwire

Combination Carbon Monoxide and

Smoke Alarm with Battery Backup and

Voice Warning, Interconnectable (also

comes as a battery operated option) $30

Talking Warning (plus chrip), Interconnectivity,

blinking red light to show it works, hush feature 4.1 stars (490)

1

(Note- Battery

operated is #2

seller)

Kidde KN-COSM-XTR-B Nighthawk

Combination Carbon Monoxide, Fire,

and Smoke Intelligent Alarm $35

Talking alarm- alerts to location ("Breakthrough

Technology"), smoke-fire-co2, hush feature 4.5 stars (159) 6

Kidde Model Pi9010 Dual Sensor,

Battery Operated Photoelectric /

Ionization Smoke Alarm $18 Reliable battery- combo smoke/fire, hush alarm 3.5 stars (176) 8


First Alert SC9120B Hardwire

Combination Smoke/Carbon Monoxide

Alarm with Battery Backup $35

Interconnectivity, Easy install, Ionization,

Microprocessor controlled for few nuisance

alarms, battery backup- works during outages,

separate visual and audible warnings for CO2 and

smoke 4 stars (316) 3

First Alert SCO5CN Battery Operated

Combination Carbon Monoxide/Smoke

Alarm $30

uses an electrochemical carbon monoxide sensor-

the most accurate technology available, different

sounds for smoke, co2, low battery 3.5 stars (110) 9

First Alert SCO403 Alarm Combination

Pack $20 2 units, silencer (all basic features) 4.5 stars (30) 11

First Alert PC900 Combo $40 Slim/design; photoelectric technology Not Rated Not Known

First Alert SCO501CN-3ST (Series

SCO500) ONELINK Battery Operated

Combination Smoke and Carbon

Monoxide Alarm with Voice Location $70

Wireless integration, talking-tells you where

danger is, photoelectric technology, easy install 4 stars (109) 14


i SDM State of the Market Report

ii IBIS World: Fire & Smoke Alarm Manufacturing in the US

iii SDM Fire Alarm Notification Appliances

iv IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 11.

v IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 8.

vi IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 12)14.

vii IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 8.

viii IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 27.

ix http://appleinsider.com/articles/13/09/30/iphone)5s)demand)healthy)margins)for)5s)

and)5c)higher)than)iphone)5)analyst)says last accessed 12)14)13. x http://bigstory.ap.org/article/nest)labs)tries)smarten)smoke)detectors last accessed 12)

14)13. xi

http://www.infoplease.com/us/census/data/demographic.html last accessed 12)14)13

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