Targeting Strategy for a Premium Product in a Mature Market

Nancy Sagar – Final Exam, Marketing Strategy & Policy (Management 472a) -‐ December 5, 2009

KONE: The MonoSpace Launch in Germany

Multinational elevator manufacturer KONE has an exciting opportunity: An innovative new product for

the mature elevator market. It has been tested and launched with varying success in the Netherlands,

the UK, and France. Now they’re ready to launch in Germany, but they’re concerned about their pricing

strategy and launch plan, especially due to extreme price pressure that has led to losses for their new

elevator division and those of their major competitors. Can they afford to price the product to reflect its

entire package of economic benefits, and to whom should they sell the product?

The challenge is to target customers who gain the largest proportion of the MonoSpace’s economic

benefits. At this time, architects of low-‐rise residential properties comprise the most logical and

strategic segment because they make 40% of elevator decisions and play a direct role in designing the

plans for the buildings. In terms of pricing, KONE should follow a similar model successfully used in the

Netherlands, where they priced the MonoSpace at 1.5% higher than their next most expensive unit.

However, since KONE had more market power in that country, a slightly more conservative strategy is to

price the MonoSpace equal to that of their highest product – 80,000 DM – and build a brand that

represents innovation and creates strong value for developers, architects, and inhabitants of low-‐rise

residential properties.

SITUATION ANALYSIS

COMPANY: Established in 1910, KONE is a global manufacturer of elevators and provides services to

existing units across several continents. Unfortunately, its revenue and profits from new units has been

declining for the last three years, and they project zero profits and negative profits in the years ahead.

Until recently, the company had a competitive advantage in markets in which it had high market share

of elevator unit installations because service revenues are on the rise and are potentially more lucrative.

However, new competition for service business is a challenge, and large manufacturers are selling new

Nancy Sagar – Final Exam for Management 472 page 2 of 8

units as a loss leader. Still, KONE is a respected and known entity that has access to a great proportion

of new elevator job bids (for example, they get 96% of the low-‐rise residential bids from general

contractors in Germany). This access is tremendously valuable and gives them a built-‐in market for their

products and services. Yet if they begin losing money, they lose the ability to use new elevator

installations as a loss leader, a strategy many of their competitors are employing.

COMPETITION: In Germany, KONE is not a powerhouse, with only 9.2% of the new elevator market,

behind Schindler, Otis, and Thyssen. They also have only 4.9% of the lifts in service. Since the market is

mature, there is intense pressure from general contractors to bid low, and large competitors with

substantial cash (e.g. Otis) have more cushion to bid low and increase market share.

CUSTOMERS: KONE serves customers with 25 local sales branches in Europe, and customers vary by

installation type. Typically they bid new installation jobs to general contractors (representing 50% of

decisionmakers for their products) who have finished plans in hand and just want the best price for the

elevator. Contractors select vendors through a bidding process – they issue an RFP to major

manufacturers, winnow down the responses, meet with finalists, negotiate, perhaps require a second

bid, and then select a winner. Interestingly, contractors earn their revenue as a percentage of the total

construction cost of the job, so any bid that reduces labor costs may not appeal to them. They care

most about the actual cost of the product itself.

The customer holding the purse strings for these residential multifamily products is the property

management firm. If the firm plans to flip the property, the decisionmaker is looking to keep

construction costs as low as possible. If the management firm plans to hold the property, their

motivation is long-‐term value. KONE has no real relationships among this customer group since they

likely make the elevator decision in only 10% of cases.

Finally, architects represent another customer category, making 40% of the decisions about new

elevators in low-‐rise residential buildings. They care about aesthetics, and they also want to give

property developers the most compelling design that has the most saleable square footage. Architects


physically design the building, and since the MonoSpace does not require a machine room, the architect

can easily create a plan with a more exciting roof deck or more rentable space per floor.

MARKETING STRATEGY

The new elevator market is mature. The market for new elevators in Germany is mature with stiff price

competition; companies are often selling new elevators at below cost in order to secure service

contracts that represent about 5% of the product cost. General contractors who exert the most

influence on the buying decision bid out projects and negotiate incessantly for low prices – elevators

seem to be practically a commodity. The one bright spot is that KONE’s service revenues and profits are

increasing, but there are low barriers to entry on the service side, and a crop of new competitors have

appeared and threaten that side of the business as well.

MonoSpace is a major innovation and it poses challenges. KONE is fortunate to have an innovative new

product at the early stage in the product lifecycle. As with many new innovations, it’s disruptive because

it forces property developers and architects to design new low-‐rise residential properties without the

machine room. KONE will need to work closely with prospective customers to ensure that new building

plans incorporate the MonoSpace – which also means those customers are committing to the

MonoSpace very early in the project process, which may create resistance until the product is more

established. An added challenge: KONE doesn’t have relationships with property management firms

since they believe those firms only control 10% of the decisions for elevator purchases.

Size of the market: Low-‐rise residential properties comprise 74% of the German elevator market –

11,470 units. Yet KONE is not a market leader here; three competitors are significantly ahead of them –

Schindler, Otis, and Thyssen. Their market share in the total German new elevator market is relatively

weak – they have just 9.2% share of new units and 8.5% of the value.

Segmentation: Who gains most from the MonoSpace in a new development? Developers, then

architects. The customer for low-‐rise elevators can be a property developer, generator contractor,

and/or architect. A property developer cares most about cost because it impacts the value of their


investment, and the developer doesn’t actually gain any benefit from the energy cost savings, ride

quality, or reduction in fire hazard. However, the developer does benefit from the 25% savings in

installation cost when a machine room is unneeded, and the developer also gains more saleable square

footage. Unfortunately, KONE and other elevator companies have seldom met with property

developers for new projects, since contractors and architects make 90% of the elevator decisions.

The danger: General contractors make the elevator decision in 50% of cases, but they gain little

benefit from not building a machine room because their fee depends on overall construction costs.

They certainly gain no benefit from energy savings, either. Fortunately, four large contractors control

20% of the construction market; however, the rest of the market is extraordinarily fragmented with

20,000 small contractors vying for small jobs. Once a building’s plans are finalized, these contractors

issue bids to elevator suppliers and tend to negotiate heavily and go for the lowest bid.

KONE has 96% access, so at least they get to bid. KONE is on the list of bidders, so nearly all contractors

send bid opportunities. KONE then sends a salesperson to meet with the contractor or architect.

However, at this point, the plans are quite finished, and a major redesign to use the machine room may

add time and cost that neither party may be interested in incurring at that point in the project process.

TARGETING DECISION: Architects that specialize in new low-‐rise residential properties make the most

attractive immediate target because they A) design the building, B) make the decision in 40% of cases,

and C) realize a large subset of the total value. In the residential market, architects typically select the

elevator for cosmetic options, and KONE believes that they will make the decision in 40% of their cases.

Architects do derive economic value from the MonoSpace because it won’t obscure the roofline of their

buildings, creating more space for attractive roof decks OR giving more saleable square footage to the

property developer. They also WORK FOR THE PROPERTY MANAGERS, so they can help convey the

cost savings for the installation to the ultimate beneficiary of that benefit.

Architects also provide entre into the property developers, since they meet with multiple developers in

the course of a year, and KONE has no relationships with developers at this time. The challenge will be


for KONE (who has fewer salespeople than other competitors) to get in front of architects quickly during

launch.

The conversion market is also attractive in the future. Ultimately, another strong target for KONE is

conversions in existing properties, particularly those that have slow, oil-‐guzzling, bumpy hydraulic lifts.

The management firms and residents of these buildings don’t necessarily gain from the cost-‐savings and

rental value of the incremental square footage without the machine room, but they do gain a faster,

more pleasant, energy-‐efficient, and safe elevator (no fire hazard). However, the sales cycle for

conversions is likely long given there is no immediate need; thus, KONE should focus on new

construction that absolutely must install an elevator.

POSITIONING STATEMENT: “For German architects who design innovative, low-‐rise residential

properties, the elevator industry’s newest innovation, the MonoSpace, is a new drive system that

requires no machine room to hog valuable square footage or ruin gorgeous rooftop views. Relative to

standard hydraulic and traction units, the MonoSpace is costs 25% less to install, offers superior ride

quality and speed, and reduces energy usage and oil that create dangerous fire hazards in residential

buildings.”

IMPLEMENTATION – THE MARKETING MIX

PRODUCT AND BRAND RECOMMENDATIONS: KONE is a known brand in the marketplace, although

they are not necessarily known for high-‐end innovative products. They must create this brand for the

MonoSpace and communicate it throughout the marketing mix – especially during face-‐to-‐face meetings

between sales reps and customers.

PRICING SCENARIO – Unfortunately, the EVC is divvied up among parties. The major challenge in

pricing MonoSpace is that different parties gain different pieces of the total economic value (see Exhibit

A for eye-‐opening estimate). When you combine the 25% construction savings, the potential increase

in saleable square footage, the energy savings, the reduction in fire hazard, and the


comfort/speed/quality combination, the MonoSpace provides a multiple of the average hydraulic or

traction elevator’s value. But no individual party gains the entire set of benefits.

However, the Netherlands provides a strong case study for pricing and launch strategy in Germany.

They beat their ambitious sales targets there and increased their low-‐rise market share from 52% to 62%

(a 19% increase) in just one year. The UK market was less promising, but it is atypical in that it is

dominated by 1-‐star and 5-‐star properties.

MonoSpace must be priced so that it can capture immediate sales from the bids it receives from

contractors right now, but without jeopardizing its status as a high-‐end product with substantial value

that is better realized when pitched to architects and ultimately property managers (especially those

who maintain control of their buildings).

Cost structure: The MonoSpace costs 65,217.39 DM to produce, and KONE has only 13% of the low-‐rise

market with three larger competitors ahead of it. If KONE were to price MonoSpace to truly reflect its

total package of economic benefits, it would gain little of any traction. In the Netherlands, the

MonoSpace was priced only 6% higher than the hydraulic unit, 11% higher than the PT Traction Unit,

and 1.5% higher than the PU Traction Unit. However, KONE also had 52% market share as opposed to

their weak market strength in Germany.

Strategically, KONE should not price the MonoSpace as a loss leader because it detracts from its value

and potential branding opportunity as a true innovator in the market.

Instead, KONE should price MonoSpace at the same price (versus the 1.5% increase used successfully in

the Netherlands) as the PU Traction Unit – 80,000 DMs – to reflect its premium positioning in the

market. Doing so will not win business from contractors who care most about low price, but KONE can

still present its current product lineup to win those projects. Since sales reps meet with contractors

during the bidding process, those reps can educate contractors about the benefits of the MonoSpace

and potentially get in front of architects and/or property managers so that for the next project, they can

consider MonoSpace earlier in the design process.


KONE can also consider employing a slow increase in the price over time, considering this initial price a

“market penetration” strategy. As the MonoSpace is incorporated earlier into the design process, it

creates more value and thus gives KONE the opportunity to gradually increase prices.

DISTRIBUTION STRATEGY: KONE will need to hire additional sales staff (likely 5-‐10) to call on residential

multi-‐family architects as well as the four major general contractors in Germany to present the

MonoSpace. Their current model of offering pilot installations provides valuable information and case

studies to strengthen their story.

THE PROMOTIONAL PLAN must quickly reach architects via trade publications and trade shows. KONE

should create an elite launch event and invite all of the architects, property management firms, and

general contractor who work on large multifamily projects. That event can be used to meet and greet

and give salespeople an entre for further discussions, presentations, and potentially pilot installations

with highly strategic partners.

The key messages for the campaign must focus on the cost savings and revenue opportunity for the

additional square footage, along with the aesthetics, energy savings, fire hazard reduction and ride

improvement. Campaigns should create EXCITEMENT around this tremendous innovation – it moves

people more safely, quickly, and creates more beautiful and less expensive residential environments!

I would love to create a detailed promotional plan for this paper, but my time is up!


EXHIBIT A: TOTAL PACKAGE OF ECONOMIC BENEFITS

Targeting Strategy for a Premium Product in a Mature Market

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