Keurig: Managing a New Product Launch

By: Melissa Bockhold

Heather Coddington
Laura Duerstock
Ali Wampler

March 1, 2006
 TABLE OF CONTENTS
I. Introduction……………………………………………………………………3
II. Assumptions…………………………………………………………………...4
III. History………………………………………………………………………....5
IV. SWOT Analysis
1. Two-Cup Approach……………………………………………………….6
2. One-Cup Approach………………………………………………………..7
V. The Coffee Market
1. Market Analysis/Needs/Growth…………………………………………...8
2. Competition………………………………………………………………..9
VI. Keurig Marketing Strategy
1. Target Market…………………………………………………………….11
2. Product
i. K-Cups (or Keurig Cups)...…………………………………….14
ii. B100 Brewer...…………………………………………………15
iii. Product Life Cycle……………………………………………..16
3. Place
i. K-Cups (or Keurig Cups)...…………………………………….16
ii. B100 Brewer...…………………………………………………17
iii. Market Segmentation…………………………………………..18
4. Promotion
i. K-Cups (or Keurig Cups)...…………………………………….19
ii. B100 Brewer...…………………………………………………19
5. Pricing
i. K-Cup (or Keurig-Cup)……..………………………………….21
ii. B100 Brewer...….……………………………………………...26
VII. Problematic Issues and Alternatives…………………………………………36
VIII. Conclusion…………………………………………………………………...38
IX. Comments on Opposing Group’s Paper……………………………………..39
X. Keurig Authorized Dealer Interview………………………………………...44
XI. Works Cited………………………………………………………………….46

2
I. INTRODUCTION

Everyone has a morning ritual while getting ready for the day’s activities. Some

people exercise. Some people shower. Some people help get their children ready for

school. Some people watch the news or listen to traffic reports. Some people drink

coffee. In fact, in 2001, 20 million Americans drank gourmet coffee on a daily basis

(Sherry).

Keurig, Inc. was founded on the idea that coffee lovers should be able to brew and

enjoy one perfect cup of coffee at time. With the establishment of gourmet coffee houses

like Starbucks, consumers began stretching their pocketbooks a bit more by spending on

average $1.50 or more for a cup of gourmet coffee (Anderson 4). This change in

consumer behavior opened the door for Keurig to offer gourmet coffees by the single-cup

in offices in 1998. Keurig noticed that from 1996 to 2000 gourmet coffee sales increased

by 40 percent in the U.S. at-home coffee market. This statistic persuaded Keurig’s

management to develop an at-home, one-cup coffee brewer specifically for gourmet

coffee lovers (Anderson 15).

Keurig’s development progress toward the launch of their first at-home brewing

model was stunted in February of 2003, six months prior to the release date of the brewer,

by company shareholder Green Mountain Coffee Roasters Inc. This paper will address

Green Mountain Coffee Roasters’ concerns and provide recommendations and alternative

solutions to problematic pricing and marketing dilemmas. In addition to our analysis, we

are going to examine the presenters’ approach and critique the options they suggest.

3
II. Assumptions

In analyzing the marketing strategies and launch options of Keurig, Inc., we are operating

under the following assumptions:

• Surveys and market testing were completed with professional services and

accurately reflect the current feelings of the consumers at the time of testing.

• The description of the coffee drinkers/customers is correct.

• Keurig is outsourcing the manufacturing of their brewers.

• Keurig has already incurred design and manufacturing cost of their Keurig-Cup

and brewer of $700,000 ($400,000 for development of the new cup-based

technology, and $60,000 per Keurig-Cup packaging line, assuming one line per

each of Keurig’s five roasters).

• The manufacturer of the B100 included all variable and fixed costs in their

calculation of the unit costs for manufacturing the B100 brewer.

• The costs of the B100 brewer, as reported by the manufacturer, are $220 at the

time of Mr. Lazaris’ meeting with GMCR management. The manufacturer is

attempting to lower those costs to $200, but this has not yet been achieved.

4
 III. History

Timeline of Keurig, Inc. and the North American Coffee Market

Mid-
• Peak of coffee consumption (16.5 pounds per capita)
1940s

• Popularity of soft drinks causes coffee consumption to decline

1960s

Mid-
• All-time low of coffee consumption (6.1 pounds per capita)
1990s

1992 • Keurig’s inception

Late
• Gourmet coffeehouses reinvigorate the market
1990s

• Keurig introduces its single-cup brewing system (B2000 model); 8 varieties of coffee
1998
offered

• 14.8% of brewer distributors offer a single-cup system for the Office Coffee Service
2000
(OCS) market

• 44.8% of brewer distributors offer a single-cup system for the OCS market
2001 • Filterfresh establishes relationship to market Keurig’s commercial brewer, thus creating a
system with greater variety of coffees and teas
• (February) Ownership structure changes; three largest shareholders become Van Houtte,
Inc. (28%), Green Mountain Coffee Roasters, Inc. (42%), and Memorial Drive Trust
• John Whoriskey joins Keurig as the GM of the at-home Division
• Keurig’s roaster partners ship more than 125 million K-Cups
2002 • Total K-Cup shipment since the launch rises over 340 million
• Keurig begins working on a line of teas (T-Cups); the first line is to be “Celestial
Seasonings” brand teas
• OCS market reaches $3.46 billion in total revenue
• Keurig’s total number of brewers shipped across North America reaches 33,000

• 20 million Americans are drinking gourmet coffee on a daily basis

• (February) Keurig sets plans to launch B100 system in the at-home market
2003 • Total single-cup brewer placement in the OCS market reaches 143,200
• Keurig increases roaster partnership to five, thus providing the largest variety of coffees
for a single-cup brewing system

5
IV. SWOT

1. Two-Cup Approach with Brewer

Strengths

• Does not threaten the KADs and the OCS market

• Increases control of pricing – specifically for the Keurig-Cup

• Increases the likelihood of managers’ participation in in-office promotions of the

Keurig at-home system, because the differentiation would prevent theft of K-Cups

provided for office consumption.

Weaknesses

• Don’t confuse the buyer. Similarity between cups can cause confusion between

which cup goes with which brewer.

• Increased inventory for roasters

• Lack of demonstration ability in retail sector – Keurig-Cups not available for

purchase in retail stores

• Lack of resources to properly market and sell brewer and Keurig cup in retail

outlets

Opportunities

• No change or continued growth in OCS market = more available resources for

expanding distribution of at-home market into the retail sector

Threats

• Brewer pricing does not decrease and competition enters with a lower pricing

strategy; Keurig suffers large losses.

6
 • The brewer pricing is so high that breakeven sale point is not met, making Keurig

rely on Keurig-Cup sales to make up for losses from brewer sales. This scenario

results in the brewer becoming loss leader.

• Possibility of threatening the OCS market, which is Keurig’s cash cow

2. One-cup Approach with Brewer

Strengths

• Allows quick entry into the at-home market before competition

• Less customer confusion

• Roasters not required to keep two separate cup inventories (one inventory for

OCS market and one for at-home market)

• Roasters’ production levels will probably increase with the increase in demand,

since the at-home market will include KADs and at-home consumers.

Weaknesses

• Could result in alienation of the OCS K-Cup channel

• Decrease in control of pricing with the KADs

Opportunities

• If Keurig is able to enter the market quickly, then they have more opportunity and

time to come out with smaller and cheaper brewers.

• Easier to enter the retail market in the future because of less overall costs

Threats

• Brewer pricing does not decrease and competition enters with a lower pricing

strategy; Keurig suffers loss of market share.

• Lack of resources to market and sell brewers and cups through retail outlets at

time of launch

7
 • OCS users experience losses from K-Cup theft and thus it is not economical for

offices to use the Keurig system.

V. The Market

As shown in our diagram below, the overall coffee market is vast and growing.

The gourmet coffee market generates around $7 billion dollars in sales annually.

According to these statistics, there is a market, in terms of amount of coffee consumed,

for Keurig’s single-cup brewer. However, Keurig is not the only company with their eye

on the single-cup market. Several others are seeing the growth potential and are

developing their own at-home one-cup brewers. This section will delve more into the

coffee market as a whole and the competition that is challenging Keurig.

1. Market Analysis/Needs/Growth

2000 Total Retail Coffee Market ($ in billions)

Ot her,
4.6 billion

At Home - Ret ail,

6.9 billion

Away f rom Home - Gourmet, 3.9

billion

At Home - Gourmet ,
3.1 billion

(Anderson 6)

8
2. Competition

In the Away-from-Home single-cup market, Keurig has two primary competitors:

Filterfresh Coffee Service, Inc. and Flavia. Filterfresh, subsidiary of Van Houtte, Inc.,

was the pioneer of the one-cup coffee brewing system, introducing the technology in the

1980s. Although Filterfresh was the first to introduce a single-cup brewer, their system

left much room for improvement. The hopper it used made clean-up and reloading coffee

beans necessary (Anderson 5). Keurig’s introduction of the K-Cup enhanced the one-cup

system to something better and more convenient for users. Similar to Keurig’s system,

Flavia’s focus is also on ease of use. Flavia offers a variety of twenty-four coffees in

individual, foil-sealed Filterpacks (Anderson 6).

In the at-home single-cup market, Keurig faces greater competition. Both Salton

and Sara Lee plan to enter the at-home market, and there is speculation that both Procter

& Gamble and Nestlé may do so as well. The pricing of Procter & Gamble, Nestlé, and

other competitors’ brewers and coffee pods is much lower than the proposed pricing of

Keurig’s. They also plan to sell through mass retail and grocery outlets (Anderson 8-9).

Salton’s home model retails at $49, Sara Lee’s at $70, and Procter & Gamble is expected

to price similarly upon entering the market (Anderson 8). Keurig does not currently have

the resources to compete in these retail markets, so one of Keurig’s challenges is in

creating meaningful product differentiation to bring their brewer to the up-scale market.

9
 In looking at the following exhibit, we can see that there is stiff competition in the

general coffee market:

2000 Coffee Market Share

Other
8%
Private Label
8%
Community Coffee
2%
Tetley Proctor & Gamble
2% 36%
Chock Full o' Nuts
3%
Starbucks
4%

Nestle
5%

Philip Morris/Kraft
32%

(Anderson 18)

Together, Procter & Gamble and Philip Morris/Kraft hold 68% of the entire

market, although they primarily target the non-gourmet coffee consumer (Anderson 18).

Keurig must utilize a marketing strategy that creates a competitive advantage, thus taking

away market share from other companies and attracting those customers to gourmet

coffee and brewing systems.

While the entire coffee market seems to be an oligopoly with Procter & Gamble

and Philip Morris/Kraft as the main competitors, Keurig is targeting a more up-scale

audience of gourmet coffee drinkers. Here, it is important to define the relevant target

market and competitors within that market. In the gourmet sector of the coffee market,

perfect competition does not exist; not all products offered are exactly the same. Instead,

10
this is monopolistic competition. Products and whole marketing mixes contain

differences between companies, models, and pod systems. This gives the competitors

pricing options (McCarthy 96).

In this monopolistic competition, Keurig’s K-Cup (or Keurig-Cup) system and

brewer match up very well against the competition. Keurig has some significant

advantages over the competition; there are, however, areas in which Keurig trails. For

example, when comparing the brewers of Flavia and Melitta, a subsidiary of Salton, the

main difference is in the size of cup brewed. Melitta and Flavia both offer the user a

choice between a strong five-ounce cup and a weaker eight-ounce cup. Keurig’s B100

only offers the eight-ounce choice (Davids). However, Keurig is viewed to have the

upper hand over these two companies because they offer the consumers a greater variety

of coffees and a better quality coffee with every cup.

In the up-scale sector of multi-cup brewers, competition includes Cuisinart,

Krups, Braun, DeLonghi, and Bunn (Anderson 8). The consumers of these up-scale

brewers are those that Keurig will target and attempt to show the appeal of one-cup

technology.

VI. Keurig Marketing Strategy

All companies need a marketing strategy upon entering a new market. In

Keurig’s case, they had a successful marketing strategy for the OCS market already in

place by the time they decided to break into the at-home market. Below, we will discuss

Keurig’s approach to marketing their B100 brewer.

1. Target Market

As Keurig decided whether or not to launch their product into the at-home market,

they looked at the statistics for the United States retail at-home coffee market. The

11
results were very promising. In 1996, gourmet coffee sales were at $2,200 million. Four

years later, in 2000, the gourmet coffee sales had increased by 40 percent to $3,100

million. Also, in 2000, approximately 320 million pounds of gourmet coffee were sold in

the United States, a 25.5 percent increase in pound consumption by volume from 1996.

These large boosts in the market’s gourmet coffee area proved to Keurig that this market

was and would continue to quickly expand. Keurig needed to find out if their single-cup

brewer would be accepted by gourmet coffee consumers (Anderson 15).

U.S. Retail At-Home Coffee Market

3100
2000
3815

3000
1999
3800

2800 Gourmet
Year

1998
3975 Mass Market

2500
1997
4205

2200
1996
3905

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Coffee Sales ($ in millions)

12
 U.S. Retail At-Home Coffee Market

320
2000
840

310
1999
850

290 Gourmet
Year

1998
830 Mass Market

270
1997
845

255
1996
850

0 100 200 300 400 500 600 700 800 900

Pound Volume (in millions)

From 1999 to 2001, Keurig carried out market research studies to determine the

acceptability of their product to the at-home consumer. The research was conducted in

several different formats. There were intercept and internet surveys, surveys of current

OCS users, and focus groups of at-home test users (Anderson 7).

The results of the intercept surveys, whose respondents had to drink at least one

cup of gourmet coffee per day, showed that over 75 percent would consider purchasing a

system like Keurig’s. The internet survey also proved that a demonstration of the Keurig

model increased the likelihood of a sale from 75 to 90 percent. The same people, who

saw the demonstration, indicated that they would pay $0.55 for a K-Cup and $130 for the

B100 brewer. For more information on pricing, see section VII. The internet-based

survey helped identify Keurig’s “core customer” group as younger males (Anderson 7).

Through intercept, internet, and home use surveys, Keurig was able to determine

the key factors in marketing their brewer and K-Cups. Key elements identified through

demonstration during the intercept surveys included quick brewing time and minimal

clean-up. The same key elements were identified during the internet-based survey. The

13
home use testers, who had a commercial brewer placed in their home, not only identified

speed and clean-up as key attributes but also taste consistency, coffee variety, and

cleanliness of preparation (Anderson 7-8).

Now that Keurig is aware of which market and type of consumer to target, as well

as which aspects of their product are most valued, they can move ahead with their

marketing plan of the at-home B100 brewer.

2. Product

i. K-Cup (or Keurig Cup)

Keurig’s patented K-Cup is a unique portion system that contains ground coffee

beans and filter paper. A variety of coffees are available for the system, reflecting the

selection available in gourmet coffeehouses. In 1998, when Keurig launched their

commercial brewer, they offered eight varieties of coffee. In 2003, Keurig is now able to

offer the largest variety of coffees for any single-cup system in the market. K-Cups are

produced by five roasters packaging six total brands, thus making available over 75

varieties of coffee (Anderson 2). Keurig is also planning to launch a variety of teas, T-

Cups (Anderson 4).

During the February progress meeting with GMCR’s management, the executives

of Green Mountain expressed some concerns to Mr. Lazaris about the details of the B100

launch. GMCR is Keurig’s strategic partner and business investor. The concerns

included GMCR’s fear of complicating the production of portion packs with the two-cup

approach. This would also affect inventory levels and warehousing. GMCR was also

fearful that customer dissatisfaction would result from using the wrong portion pack in a

Keurig brewer. The management team expressed their wishes to keep a one-cup

14
approach based on their desire for “long-term simplicity” and the ability to move quickly

into the one-cup, at-home brewing market (Anderson 10).

We feel Keurig has a strong argument against a universal K-Cup. The company

is fearful that office managers in the successful OCS market, an important marketing

channel for the at-home system, will not support Keurig’s using the same K-Cup for the

home brewer. This fear exists because employees owning an at-home Keurig system

could be enticed to steal K-Cups from the office’s supply (Anderson 10). The proposed

two-cup system increases the likelihood of office managers to participate in promotion of

the Keurig at-home system because the threat of K-Cup theft would be eliminated.

However, the proposed K-Cup (OCS)/Keurig-Cup (at-home) package

differentiation has some problems. First, the color of the cups will be different, tan for

at-home and white for away-from-home (Anderson 9). We feel the color distinction is

necessary if the two-cup approach is chosen, but the two colors chosen by Keurig are too

similar and the buyer would be easily confused. There is potential for customer

dissatisfaction if the wrong cup is purchased and used in the wrong brewer.

We agree with GMCR management after looking at the benefits of using the

existing commercial portion pack, the K-Cup, in both the away-from-home and at-home

markets. The main benefits are that the buyer will not be confused by the two-cup

approach and roasters will not have to have two separate inventories for Keurig products.

ii. B100 Brewer

The new B100 model from Keurig is a revolutionary new single-cup brewing

system targeting at-home users. Entering the at-home market with this model is

important for Keurig, as coffee makers represent one of the largest volumes of small

appliances sold for use in the home (Anderson 6). A key element of this brewer is that it

15
provides the user a significant amount of control over the amount of coffee and the

temperature and pressure of the water. This results in the perfect cup of coffee every

time. The flavor profile from each roast of coffee is recreated on a consistent basis.

Also, the speed of brewing a cup of coffee, “perfection in under a minute,” is a key factor

for the potential success of Keurig’s at-home brewing system (Anderson 3-4).

iii. Product Life Cycle

Keurig’s B100 is currently in the introduction phase of the product life cycle.

Although they have been in the OCS market since 1998, the B100 is designed for the at-

home market. Keurig is entering a new market and a new product life cycle. Generally,

in the introduction stage, companies generate losses because financial resources are

focused on promotion, product, and place to establish the new product in the market

(McCarthy 271).

I II III IV

I) Introduction
II) Growth
III) Mature
IV) Decline

3. Place

i. K-Cup (or Keurig-Cup)

KADs provide a variety of coffees to offices for their Keurig OCS system. Each

KAD has entered into direct relationships with one or more roasters to purchase K-Cups

and subsequently sell them to office managers.

16
 As stated earlier, Keurig does not yet have the resources to sell either their brewer

or coffee in mass retail outlets. Instead, a controlled distribution strategy must be

utilized. Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs)

markets. KADs will, in turn, sell the cups directly to OCS employees owning an at-home

system (Anderson 10).

Keurig’s rapid penetration into the OCS market and the use of many reliable

distributors and KADs has given the company a good reputation. This, in turn, makes

entering the at-home market on the coattails of the office market a viable business

opportunity. We believe that the distribution channel that Keurig is proposing for the

two-cup approach is logical, yet problems arise when dealing with the roasters’ concerns

about its complexity. We agree with GMCR that it appears the two-cup approach would

be inefficient when the goal is to keep production and inventory costs down. Keurig’s

competition is already pricing below the K-Cup prices at which KADs sell to the OCS

market. If production and inventory costs were to increase, the cost of the K-Cups would

also likely increase, causing concern for a potential decrease in cup sales.

ii. B100 Brewer

KADs play the primary role in serving the OCS market. Commercial brewers are

purchased by KADs from Keurig at wholesale prices ranging from $500 to $1,000 and

are placed in offices for free or for a low rental fee in exchange for ongoing coffee sales.

The KAD is then responsible for ongoing maintenance and repairs to the brewer

(Anderson 5).

Another major distribution problem that Keurig faces is in their lack of existence

in retail channels. Keurig needs to quickly find a viable means through which to launch

17
the sale of the B100 into retail outlets. The only current option is “e-commerce-enabled”

Web sites. (Anderson 9).

iii. Market Segmentation

We segmented the coffee market into a comparison between the price of the

brewer and the varieties of cups/pods offered. As shown below, Keurig has its own

niche. While they are the highest in price, they also have over 75 varieties of coffees

and teas. Procter & Gamble1, Salton, and Sara Lee are all clustered in the same

segment of the market. Their brewers are cheaper in price compared to Keurig, but

P&G offers the greatest variety with only 15 coffees and teas available.

High Price
Limited Variety

Wide Variety

Low Price

Legend
Keurig
P&G
Salton/Melitta
Sara Lee/Senseo

1
Procter & Gamble does not currently manufacture brewers, but according to the case, if they decide to
introduce a brewing system, they will price similarly to Salton and Sara Lee. The brewer pods they
package are compatible with other brands’ single-serve coffee systems.

18
4. Promotion
i. K-Cup (or Keurig-Cup)

We feel the best promotional activity for K-Cups is to offer discounts when

buying cups. For example, a discount could be offered through free shipping and

handling when total cup purchases are over a certain dollar amount. Another possibility

is to offer 25 cups at regular price and half off on the second 25 purchased.

ii. B100 Brewer

The market research commissioned by Keurig shows that the best way to gain

interest in the system is through demonstrations; 90% of those surveyed indicated that the

demonstration increased their likelihood of buying the product. The key factors of

interest to promote include convenience, quick brewing, ease of use, and minimal clean-

up, all of which are sources of dissatisfaction with at-home users’ current systems.

Through the internet-based survey, it has been shown that the B100’s core customers are

younger males. The key elements Keurig must implement into its promotion strategy for

the B100 include being one of the first entrants into the at-home market, being portrayed

as a single-cup pioneer, and enhancing its visibility in the up-scale market (Anderson).

Keurig’s B100 system has the potential to seize a large portion of their target

market if it is promoted well. One strength of Keurig’s promotional strategy is that they

are aiming to be the first entrant into the at-home gourmet coffee market. They believe

that being the single-cup pioneer will enhance the system’s visibility in the up-scale

market. Another strength of Keurig’s promotional strategy is that by partnering with five

different roasters, they can offer the largest variety of coffees and teas in the at-home

market.

19
 While these factors strongly support Keurig’s promotional strategy, there are

several weaknesses with the rest of the plan. One such weakness is that they do not use

their slogan or the origin of their company name to their advantage. “Deliciously

Simple” is a great slogan that emphasizes the two major themes of coffee advertising:

‘good taste’ and ‘positive stimulation’ (Anderson 6). The slogan also touches on the fact

that the system is very easy to use. In addition, the word ‘Keurig’ is Dutch for

‘excellence.’ Having your company’s name associated with excellence can be another

great marketing tool.

Keurig is currently not doing everything it can to target its core customers.

Promotion needs to be geared toward these younger males. One way to achieve this

would be to buy advertising space on various Web sites, from sports to stock and

financial sites. Since market research has shown that demonstrations are a significant

way to increase system interest and purchasing potential, Keurig needs to utilize this

avenue. Although it is stated in the case that Keurig does not currently have resources to

sell through retail chains, which are prime locations for demonstrations, perhaps they

should set up demonstrations at professional conventions, airports, affluent shopping

malls, and high-end appliance shows.

There are also two promotional activities that Keurig can offer to their buyers in

order to increase their customer base. The first promotional offer is a referral program.

When a first-time buyer goes onto Keurig’s Web site to purchase K-Cups or a brewer,

there would be a place to type in the name of the person who referred them. That referral

person and the new Keurig B100 owner would then receive $25 in free K-Cups. The

second promotional offer would be to utilize point of purchase sites in the OCS market

20
by giving $50 instant rebates to entice buyers to invest in the Keurig system for their at-

home enjoyment (Anderson 19).

5. Pricing
i. K-Cup (or Keurig-Cup)

When looking at the results of Keurig’s market research, it is evident that those

coffee drinkers consuming two or more cups per weekday are more willing to pay a

higher price for each cup of coffee than those coffee drinkers consuming only one cup

per weekday. These results can be confirmed by looking at the following bar graphs.

The first graph, K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption, displays

the willingness of one-cup and 2+ cups per weekday coffee drinkers to pay for a K-Cup

(or Keurig-Cup). These results show that 2+ cups per weekday coffee drinkers are much

more willing to pay higher prices for their cups of coffee than the one-cup drinkers.

While this survey includes only those consumers who were very or somewhat likely to

purchase the system, we can see that there is a significant difference between the

responses for the two coffee drinking sectors (Anderson 16).

K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption

5.1
$0.55 +
14.6

16.7
$0.50-$0.54
30.7
K-cup (or Keurig-cup) Pricing

20.5
$0.45-$0.49
33.6

22 1 Cup/Day
$0.40-$0.44
41.5 2+ Cup/Day

28.2
$0.35-$0.39
48.2

41
$0.30-$0.34
58.5

60.3
$0.25-$0.29
75.6

0 10 20 30 40 50 60 70 80
Cumulative Percentage of Respondents

21
 We can further show that 2+ cups per weekday drinkers are more willing to pay a

higher price for their individual cups of coffee by looking at the next two graphs

comparing K-Cup (or Keurig-Cup) pricing and brewer pricing between one-cup and 2+

cups per weekday consumers. These graphs suggest that those 2+ cups per weekday

coffee drinkers, who are more willing to pay a higher ($130+) price for a brewer, are also

more willing to pay a higher price for their cups of coffee (Anderson 16).

Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption

(1 Cup/Day Consumption)

1.2
$0.50+ 5.9
10.6

4.7
$0.40-$0.49 2.4
K-Cup (or Keurig-Cup) Pricing

2.4

2.4 $130
$0.30-$0.39 8.2 $100-$129
7.1 < $100.00

5.9
< $0.30 9.4
34.1

0
Don't Know 0
5.9

0 5 10 15 20 25 30 35 40
Percentage of Respondents

Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption

(2+ Cups/Day Consumption)

10.1
$0.50+ 9.5
9.9

1.9
$0.40-$0.49 2.5
K-Cup (or Keurig-Cup) Pricing

5.7

5.2 $130+
$0.30-$0.39 5.3 $100-$129
6.2 < $100

6.3
< $0.30 8.9
22.2

0
Don't Know 0
6.3

0 5 10 15 20 25
Percentage of Respondents

22
 Since the survey of the B100 system showed that at-home coffee consumption

increased with the presence of the Keurig brewer, we can assume K-Cup (or Keurig-Cup)

sales will also be higher than the average of what one consumer drinks per day without

the Keurig system. The survey showed that per day consumption averaged out to

approximately 2.25 cups per day with the Keurig system (Anderson 7-8). While in this

survey K-Cup (or Keurig-Cup) pricing did not seem to be an issue, from the other market

research conducted we can see that those gourmet coffee drinkers consuming 2+ cups of

coffee per day are more willing to pay a higher price for the K-Cups (or Keurig-Cups).

By looking at the graph above we see that they are also more willing to pay $130+, the

higher price for the brewer (Anderson 16).

From these analyses and the results of the K-Cup (or Keurig-Cup) pricing based

on consumption survey, it seems like the ideal price for a K-Cup (or Keurig-Cup) in the

at-home market is $0.55 per cup.

This price would benefit Keurig, the KADs, and the office managers regardless of

whether a one-cup or two-cup approach is used. Currently KADs are able to buy K-Cups

from the roasters at a price of $0.25 and sell the K-Cups to office managers for $0.40 -

$0.50 per K-Cup. From the $0.25 paid to the roasters, Keurig is paid a $0.04 royalty on

each cup sold (Anderson 5). If the at-home K-Cups (or Keurig-Cups) are sold at a price

of $0.55 to the at-home users through either the roasters or Keurig, the incentive to office

managers to buy K-Cups from the roasters or Keurig is eliminated because they can buy

more cheaply through the KADs. This pricing strategy gives the KADs pricing power in

their OCS market.

Based on the market research it appears that regardless of whether Keurig decides

on a one-cup or two-cup strategy, the pricing of the at-home portion pack should be

23
$0.55. As stated earlier, if the one-cup option is chosen, the office managers and KADs

will still have the benefit of a favorable price discrimination strategy by Keurig. While

the KADs have no real incentive not to increase their K-Cup pricing to match that of the

online selling price of $0.55, a rise in the price of K-Cups would probably deter office

managers from buying a large amount of K-Cups or investing in Keurig’s OCS at all.

However, if the KADs are able to increase the price of the K-Cups they sell to the OCS

market to $0.55, there is still no incentive for the office managers to buy from any place

other than their KAD. According to Keurig Authorized Dealer Bob Spangler, all Keurig

brewers sold, leased, or used through KADs are done so through contractual agreements

in which the user can only buy brewer supplies through the KADs. If an office manager

were to buy K-Cups directly from a roaster or Keurig, it would be a breach of contract

and grounds for removal of the Keurig system. These contracts not only protect the

KADs sales of K-Cups, but they also protect the users because the contracts stipulate that

the KADs are responsible for all maintenance and repairs to the brewers while they are in

use.

On the other side of this pricing arrangement, at-home B100 users not in contract

with a KAD will be able to purchase their K-Cups for the price of $0.55 through Keurig

or a licensed roaster. While this price is above the price set by the KADs, it seems to be a

consensual point in all the surveys conducted by Keurig. The market we are targeting

with the Keurig at-home brewing systems are connoisseurs of coffee. These people know

what they want and like in a cup of coffee. Keurig’s large variety of coffees and teas

enables pricing power in their K-Cups to appeal to these consumers. Keurig can impose

a higher price for their coffee because the variety offered is one of the most important

aspects of the K-Cup appeal. Of course, if the K-Cups were priced lower, the quantity of

24
K-Cups sold have the potential to be higher, and the lower price per cup of coffee might

entice other people to invest in the Keurig at-home brewing system.

If Keurig would decide to go ahead with the planned two-cup strategy, the pricing

for the at-home system Keurig-Cup should also be $0.55. This pricing is optimal for the

same reasons as for the one-cup option. The price of the K-Cup would still be left to the

discretion of the KADs, but since the Keurig-Cup would not be a substitute for the K-Cup

in the OCS market, there is no real foreseeable pricing competition between the two

different cups. A con to this option would be that consumers, investing in the Keurig at-

home system, could opt to buy through KADs, decreasing profits that Keurig and the

roasters could make through direct Keurig-Cup sales.

Other K-Cup (or Keurig-Cup) Pricing Options

One option in the pricing of cups not discussed above is to price the K-Cups (or

Keurig-Cups) at a level similar to their competition. Market competitors like Salton,

whose pods sell for $0.25, and Senseo, whose pods sell for $0.20 each, are marketing

their gourmet coffees at a much cheaper price (Anderson 9). However, these pod prices

are sometimes deceiving because the Senseo machine requires two pods to create one

eight-ounce cup of coffee. If Keurig were to price their cups at the Salton price of $0.25

the KADs would not make any money from the sales; the wholesale price of the K-Cups

from the manufacturer is $0.25, and Keurig would receive less than their current $0.04

royalty. If Keurig were to price around $0.40 to be competitive with the Senseo pods,

sales would be better but still inconsistent with the cup demand. As we have stated

before, our main target market is focused on the serious gourmet coffee drinker averaging

a little more than two cups per day, and, according to market research, almost five times

25
as many people were willing to pay $0.50 for the cups than they were $0.40 (see bar

graph on page 23).

Either way, if Keurig would decide to price lower to be more competitive, the

profit margins for all parties involved, except the roasters, would decrease. Yet since two

of Keurig’s roasters are shareholders, Green Mountain Coffee Roasters, Inc. and Van

Houtte, they would also suffer from Keurig’s decreased profit margins. This drop in

profits could also cause the KADs to not participate in the KAD referral program for the

B100, and if the KADs do not help with marketing the B100 to the “Keurig-awares” in

the OCS market, projected sales for the brewer will be very disappointing. Keurig is very

dependent upon their KADs to help promote the B100 through word-of-mouth with their

clients, so they need to focus on a pricing strategy that will not only meet the demands of

the potential B100 coffee consumers but that is non-threatening to the KADs. A pricing

strategy that is focused on their competition is not the way to meet this objective.

ii. B100 Brewer

Keurig’s goal is to use value pricing in order to set a fair price level for their

marketing mix that will give the target market superior value through convenience, speed,

taste assurance, and variety. The benefits of Keurig’s value pricing strategy is in giving

their customers pleasant surprises in convenience and speed of coffee preparation while

continuing to provide a consistently great-tasting gourmet coffee. Keurig’s definition of

their target market, up-scale gourmet coffee drinkers, is very important in the

development of their pricing strategy (Anderson 6). Also vital to their pricing strategy is

the recognition and analysis of the competition within the retail at-home coffee market

(see Section V-2).

26
 According to Keurig’s marketing materials, a flexible pricing policy is being used

at point-of-sale displays to entice OCS users to purchase the at-home system to fulfill

their pre- and post- work coffee cravings. It appears that the pricing objective of Keurig

is oriented toward sales. Their primary goal concerning the at-home market is to be the

leader and pioneer in the up-scale, single-cup gourmet coffee brewing category. To help

achieve their sales-oriented goals, Keurig plans to use push money allowances with their

KADs through a KAD referral program. These proposed allowances will include a

$15.00 compensation for each at-home brewer sale attributed to the KADs OCS accounts.

In addition, the KAD will also receive a two-cent-per-K-Cup (or Keurig-Cup) annuity on

subsequent coffee sales that Keurig makes to that customer for three years (Anderson 12).

So, for example, if a B100 customer drinks on average one cup of coffee per day for three

years, a KAD will profit $21.90 over the three year annuity period. Therefore a KAD

will, on average, make $36.90 per customer for each B100 sold through their OCS

accounts. In the fourth quarter of 2003, when the B100 is scheduled to launch, it is

expected that 60% of the KADs will participate in the joint marketing program, with

expected sales of two brewers for each office where advertising is placed. Therefore,

each KAD is expected to make at least $74.00 per office if they participate in the joint

marketing program with Keurig. This profit does not include the spread KADs receive

through the sale of K-Cups (or Keurig-Cups) to the clients.

The pricing of the brewer is a great concern for Keurig executives. Early market

research has shown that consumers will pay greater attention to the pricing of the brewer

and will have direct impact on consumers’ willingness to buy into the Keurig system. In

price testing of the brewer, various prices were tested and also recommended by

participants. Those participants who actually experienced a demonstration of the B100

27
and were informed that the average price of high-quality coffee makers sold in the range

of $69 - $149, responded with a willingness to pay more than $130 for the brewer. In

another survey given to daily coffee drinkers over the internet, a price point of $149.99

was tested. This survey resulted in a 9% positive return identifying those core-customers

who would “definitely buy” or “probably buy” a system like the B100. Follow-up

questions to this internet survey found that the average price these core-customers would

pay for such a system was actually $125. Finally, an at-home use test was conducted in

the homes of gourmet coffee drinkers with a commercial model brewer. During this test,

an acceptable price range for the brewer was found to be in the $129-$199 range. A price

exceeding $200 was found to be a price point at which consumers began to view the

brewer as a luxury purchase, requiring more consideration prior to purchasing (Anderson

7-8).

Costs involved with the production of the at-home system, with a two-cup

approach, were found to be $400,000 for the development and design of the necessary

tooling to thermoform the new cup bases for the Keurig-Cups and another $60,000 per

roaster of K-Cups and Keurig-Cups for new parts for the packaging lines to enable

production of both cup types. With five licensed roasters, total costs of the new Keurig-

Cup system with the B100 are $700,000. This is a sunk cost that should be omitted from

cup pricing considerations because Keurig incurs the cost regardless of which cup

approach is chosen. However, these costs should be factored into Keurig’s breakeven

analysis for the B100 brewer because the costs will be paid by Keurig regardless (Jordan

313).

Past experiences with a former at-home brewer designed by Keurig, the B1000,

provided insight into worrisome high costs and design issues from Keurig’s

28
manufacturing partner. Even with the knowledge gained from past mistakes and

problems with the B1000, the most recent costs reported for the B100 from the

manufacturing partner were projected to be $220 per brewer. With costs at $220 per

brewer, breakeven quantities for brewer sales are as follows for the key price points of

$249 and $299 (Anderson 11):

Breakeven Analysis

Parameter Values:
Unit Sales Price $249.00
Fixed Costs: $700,000.00
Unit Costs $220.00

Breakeven Quantity 24138

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
10000 $2,900,000.00 $2,490,000.00 -$410,000.00
15000 $4,000,000.00 $3,735,000.00 -$265,000.00
20000 $5,100,000.00 $4,980,000.00 -$120,000.00
23000 $5,760,000.00 $5,727,000.00 -$33,000.00
24000 $5,980,000.00 $5,976,000.00 -$4,000.00
24138 $6,010,360.00 $6,010,362.00 $2.00
25000 $6,200,000.00 $6,225,000.00 $25,000.00
30000 $7,300,000.00 $7,470,000.00 $170,000.00
40000 $9,500,000.00 $9,960,000.00 $460,000.00
70000 $16,100,000.00 $17,430,000.00 $1,330,000.00
100000 $22,700,000.00 $24,900,000.00 $2,200,000.00

29
 Breakeven Analysis

Parameter Values:
Unit Sales Price $299.00
Fixed Costs: $700,000.00
Unit Costs $220.00

Breakeven Quantity 8861

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
5000 $1,800,000.00 $1,495,000.00 -$305,000.00
8000 $2,460,000.00 $2,392,000.00 -$68,000.00
8861 $2,649,420.00 $2,649,439.00 $19.00
10000 $2,900,000.00 $2,990,000.00 $90,000.00
15000 $4,000,000.00 $4,485,000.00 $485,000.00
20000 $5,100,000.00 $5,980,000.00 $880,000.00
25000 $6,200,000.00 $7,475,000.00 $1,275,000.00
30000 $7,300,000.00 $8,970,000.00 $1,670,000.00
40000 $9,500,000.00 $11,960,000.00 $2,460,000.00
70000 $16,100,000.00 $20,930,000.00 $4,830,000.00
100000 $22,700,000.00 $29,900,000.00 $7,200,000.00

Keurig and the B100 manufacturing partner are hopeful that, with additional

engineering efforts, the production costs can be reduced to $200.00. Another breakeven

analysis is shown below for the key price points with unit costs at $200.00:

30
 Breakeven Analysis

Parameter Values:
Unit Sales Price $249.00
Fixed Costs: $700,000.00
Unit Costs $200.00

Breakeven Quantity 14286

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
10000 $2,700,000.00 $2,490,000.00 -$210,000.00
14000 $3,500,000.00 $3,486,000.00 -$14,000.00
14286 $3,557,200.00 $3,557,214.00 $14.00
15000 $3,700,000.00 $3,735,000.00 $35,000.00
20000 $4,700,000.00 $4,980,000.00 $280,000.00
25000 $5,700,000.00 $6,225,000.00 $525,000.00
30000 $6,700,000.00 $7,470,000.00 $770,000.00
40000 $8,700,000.00 $9,960,000.00 $1,260,000.00
70000 $14,700,000.00 $17,430,000.00 $2,730,000.00
100000 $20,700,000.00 $24,900,000.00 $4,200,000.00
120000 $24,700,000.00 $29,880,000.00 $5,180,000.00

Breakeven Analysis

Parameter Values:
Unit Sales Price $299.00
Fixed Costs: $700,000.00
Unit Costs $200.00

Breakeven Quantity 7071

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
5000 $1,700,000.00 $1,495,000.00 -$205,000.00
7000 $2,100,000.00 $2,093,000.00 -$7,000.00
7071 $2,114,200.00 $2,114,229.00 $29.00
10000 $2,700,000.00 $2,990,000.00 $290,000.00
15000 $3,700,000.00 $4,485,000.00 $785,000.00
20000 $4,700,000.00 $5,980,000.00 $1,280,000.00
25000 $5,700,000.00 $7,475,000.00 $1,775,000.00
30000 $6,700,000.00 $8,970,000.00 $2,270,000.00
40000 $8,700,000.00 $11,960,000.00 $3,260,000.00
70000 $14,700,000.00 $20,930,000.00 $6,230,000.00
100000 $20,700,000.00 $29,900,000.00 $9,200,000.00

31
 The price point of $199 is below the $220 (or hopefully $200) production costs of

the brewer. If the B100 is sold at a price of $199, the loss on the brewer would be

expected to be made up through K-Cup or Keurig-Cup sales. If Keurig relies on the sale

of cups to make up for pricing the brewer below cost, the B100 would become a loss

leader. The K-Cup (or Keurig-Cup) price of $0.55 will be used with the assumption that

the owner of the B100 would consume, on average, 2.25 cups of coffee per day with their

B100 system five days a week. The annual coffee sales are included in the breakeven

analysis at the price of $199; otherwise, there would be no level of brewer sales that

would result in a profit. Obviously, if the annual projected coffee sales are included in

the above breakeven analyses at the unit sale prices of $249 and $299, the breakeven

quantity would be lower for Keurig than they appear to be above, but those figures are

not really important since both price points are higher than the unit costs of each brewer

for the analyses.

Breakeven Analysis

Parameter Values:
Unit Sales Price $199.00
Annual Projected
Coffee Sales $175.502
Fixed Costs: $700,000.00
Unit Costs $220.00

Breakeven Quantity 4531

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
4000 $1,580,000.00 $1,498,000.00 -$82,000.00
4531 $1,696,820.00 $1,696,859.50 $39.50
5000 $1,800,000.00 $1,872,500.00 $72,500.00
10000 $2,900,000.00 $3,745,000.00 $845,000.00
20000 $5,100,000.00 $7,490,000.00 $2,390,000.00
40000 $9,500,000.00 $14,980,000.00 $5,480,000.00
70000 $16,100,000.00 $26,215,000.00 $10,115,000.00
100000 $22,700,000.00 $37,450,000.00 $14,750,000.00

2
Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50

32
 Breakeven Analysis

Parameter Values:
Unit Sales Price $199.00
Annual Projected
Coffee Sales $175.501
Fixed Costs: $700,000.00
Unit Costs $200.00

Breakeven Quantity 4012

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
4000 $1,500,000.00 $1,498,000.00 -$2,000.00
4012 $1,502,400.00 $1,502,494.00 $94.00
5000 $1,700,000.00 $1,872,500.00 $172,500.00
10000 $2,700,000.00 $3,745,000.00 $1,045,000.00
20000 $4,700,000.00 $7,490,000.00 $2,790,000.00
40000 $8,700,000.00 $14,980,000.00 $6,280,000.00
70000 $14,700,000.00 $26,215,000.00 $11,515,000.00
100000 $20,700,000.00 $37,450,000.00 $16,750,000.00

The benefits of an investment in the B100 brewing system are great for the

gourmet coffee lovers who flock to Starbucks, Dunkin’ Donuts, Seattle’s Best, and

Caribou Coffee to satisfy their cravings before work every morning. The average

gourmet coffee drinker in downtown Chicago, IL, who drinks 2.25 cups of coffee per

weekday, would spend an estimated $936 on coffee per year (IL Starbucks).3 In the

Chicago market, an investment in the Keurig system would allow the consumer to pay for

the B100 brewer and X number of years of K-Cups (or Keurig Cups) at a price of

$0.55/cup. For example, if the brewer is sold at $249, the consumer could buy the B100

and 3.91 years of equivalent coffee in K-Cups and spend the same amount of money as

one year’s worth of coffee consumption at an average downtown Chicago, IL, Starbucks.

3
The average price of an 8 oz. black Starbucks’ coffee in downtown Chicago, IL is $1.47 plus tax (tax rate
of 9%). Someone who drinks 2.25 cups/weekday would spend $936 ($14.7*1.09*2.25 cups/weekday*5
days*52 weeks).

33
 Brewer Price Years of K-Cups
$199 4.20
$249 3.91
$299 3.63

In the Indianapolis market, the same comparison can be made. The average

gourmet coffee drinker in Indianapolis, IN, who drinks 2.25 cups of coffee per weekday,

would spend an estimated $625.95 on coffee per year (IN Starbucks).4

Brewer Price Years of K-Cups

$199 2.43
$249 2.15
$299 1.86
Therefore, while the Keurig brewing system may appear to be a pricey

investment, it is clear that the consumer would be saving money by making his/her own

cup-by-cup gourmet coffee instead of traveling to a gourmet coffee provider such as

Starbucks.5

A lower price of $199 for the brewer does appear to be appealing to consumers.

A price below $200 does not trigger a luxury purchase mentality in the consumer. Also,

since Keurig is in the introductory stage of the B100, often profits are lower since more

money is spent by the company on promotion, product, and place development

(McCarthy 271). However, we feel the price of $199 is not ideal because Keurig would

be relying on the sales of K-Cups (or Keurig-Cups) to cover the expenses for

manufacturing the B100. This is a very risky decision. If the sale of K-Cups (or Keurig-

Cups) does not live up to the expected levels, Keurig’s profits will decrease. Also, if the

demand for the at-home system is lower than expected and Keurig must lower the price

of the brewer to move the product, a decrease in the selling price would put the brewer at

an even larger loss for the company and shareholders.

4
The average price of an 8 oz. black Starbucks’ coffee in downtown Indianapolis, IN is $1.00 plus tax (tax
rate of 7%). Someone who drinks 2.25 cups/weekday would spend $625.95 ($1.00*1.07*2.25
cups/weekday*5 days*52 weeks).
5
Savings do not include travel time and gasoline.

34
 From our breakeven analyses above, it seems that the optimal price for the brewer

would be $249 based on our focused price points. It appears to be Keurig’s best option to

price higher than their manufacturing costs so, after meeting their breakeven quantities,

all additional sales contribute to the profits of the company. While Keurig’s management

is concerned that they may not have enough time to lower the price of the brewer once it

is out in the market, it seems that this is a risk that is worth taking (Anderson 11). By

pricing the brewer at $249, all profits can be put toward research and development efforts

to lower the production costs of the B100 and to develop subsequent one-cup brewers at a

lower price to appeal to other markets. The profits of the B100 will give Keurig the

opportunity to draw in a broader consumer base and hopefully will enable Keurig to

develop new target markets with lower-priced one-cup brewers. On the other hand,

pricing above $200 forces consumers to think harder about making a B100 brewer

purchase. It is important for Keurig to use price as an indicator of superiority without

putting themselves out of the market entirely. We feel that Keurig’s at-home brewer will

be a luxury item for most consumers willing and able to invest, so a $200 luxury-

indicator can be considered irrelevant to our target consumers.

Currently, with the production costs of the B100 at $200-$220, it does not seem

within the capabilities of Keurig to price the brewer at $149. A price of $149 would

force the company to rely too heavily on K-Cup (or Keurig-Cup) sales. Based on the

breakeven analysis below with annual projected coffee sales again at $175.50 per

consumer, Keurig would have to sell 6,699 brewers to people that will drink at least 2.25

cups per weekday to break even on their investment in the B100. This is even riskier

than using the $199 price. It seems that building up equity to put toward R&D would be

35
a much better option for Keurig to enable them to later meet the needs of the consumers

in the market of $149 one-cup brewers.

Breakeven Analysis

Parameter Values:
Unit Sales Price $149.00
Annual Projected
Coffee Sales $175.506
Fixed Costs: $700,000.00
Unit Costs $220.00

Breakeven Quantity 6699

Quantity Cost Revenue Profit

0 $700,000.00 $0.00 -$700,000.00
5000 $1,800,000.00 $1,622,500.00 -$177,500.00
6000 $2,020,000.00 $1,947,000.00 -$73,000.00
6699 $2,173,780.00 $2,173,825.50 $45.50
10000 $2,900,000.00 $3,245,000.00 $345,000.00
15000 $4,000,000.00 $4,867,500.00 $867,500.00
20000 $5,100,000.00 $6,490,000.00 $1,390,000.00
25400 $6,288,000.00 $8,242,300.00 $1,954,300.00
30000 $7,300,000.00 $9,735,000.00 $2,435,000.00
40000 $9,500,000.00 $12,980,000.00 $3,480,000.00
70000 $16,100,000.00 $22,715,000.00 $6,615,000.00
100000 $22,700,000.00 $32,450,000.00 $9,750,000.00

VII. Problematic Issues and Alternatives

Promotion

In order to sell units, we need to show the benefits of the B100 brewer first-hand.

As addressed earlier, we plan to accomplish this through product demonstrations in

alternate venues such as professional conventions, airports, affluent shopping malls, and

high-end appliance shows. We also plan on offering referral programs and discounts

which will help raise awareness and product loyalty.

In 2005, the KAD referral program no longer existed, but we feel that in 2003 it

would have been a very effective way to push to the B100 brewer to the “Keurig-awares”

6
Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50

36
in the OCS market (Spangler). Now that the product has been out for more than two

years and alternative, lower-priced brewers are offered by Keurig, the benefits of such a

program are not as high.

Packaging

The main problem with packaging lies in deciding between the one-cup and two-

cup approaches. We feel that the one-cup approach is Keurig’s best option because it

appeases GMCR, decreases the chance for customer dissatisfaction, and simplifies the

product for the consumer.

Place

Keurig needs to use an exclusive marketing approach in the OCS market,

meaning that sales are only through KADs’ specializing in particular geographic areas

(McCarthy 311). We feel this is important because the KADs’ territories are mostly

independent of one other, allowing closer relationships between the KAD representatives

and the office managers. However, in the at-home market, we are not only marketing

exclusively, since the cups are available through the KADs and on Keurig’s and roasters’

Web sites. We feel it is important to sell through Web sites, as well, because the only at-

home consumers the KADs sell to are office workers in their districts. There will be

other consumers who do not work in an office that maintains a KAD relationship, and

they will need a channel through which to purchase the brewer and cups.

It is important to maintain both direct and indirect channels in the at-home

market. One reason is that the KADs have established relationships with office managers

and will initially push the brewer sales to office workers. According the Bob Spangler, a

KAD through Purefact, the OCS market is a very valuable source of at-home sales

because the customers have already experienced the benefits of a Keurig coffee system.

37
After the KADs sell to the workers, those new Keurig buyers will continue the

promotion. Their positive experiences with the B100 will prompt the new owners to

spread the word of the product to friends, family, and neighbors in order to get $25 off

their purchase of K-Cups through our proposed referral program.

Price

Pricing the brewer is a main concern of Keurig. Based on the sales projections,

we could breakeven or profit at the prices of $199, $249, and $299. We chose to price

the brewer at $249, because it is much easier to price high and lower later. Also, at the

$249 price, Keurig can cover their manufacturing costs without having to depend on K-

Cup sales. Then, the K-Cup profits can be put towards research and development of less

expensive brewers that can later be sold to the mass market through retailers. One of

Keurig’s main objectives for the years to come should be to not only lower brewer costs

but to also create partnerships with high-end retailers to sell the Keurig at-home brewers.

We feel retailers like Williams-Sonoma, Crate & Barrel, and other high-end home stores

are viable candidates for such partnerships.

The pricing of the K-Cups is also of concern to Keurig. Based on the market

research, we feel that our target market would be willing to pay $0.55 per K-Cup. This

price will still give the KADs pricing control in the OCS market, and the price will allow

Keurig and the roasters to make a higher profit per K-Cup.

VIII. Conclusion

With Keurig’s success in the office coffee market, a “logical business extension”

does, indeed, seem to be the at-home coffee market (Anderson 6). Their shareholder,

GMRC, presented some very relevant and important concerns regarding the company’s

B100 brewer launch. We agree that the one-cup approach is much simpler and

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economical for the roasters and consumers, and we have decided to provide solutions that

will appease GMCR and make the introduction of Keurig’s product into the at-home

market much smoother. We have proposed a fair and realistic pricing strategy for the

B100 at $249 and K-Cups at $0.55. We feel these prices will allow Keurig to effectively

enter the gourmet at-home coffee market while providing profits to be put toward future

promotion in the retail market and the development of lower-priced one-cup brewers.

We have also offered some recommendations and ideas regarding Keurig’s at-home

brewer marketing. These include focusing on their target market and promotional

strategies. The opposing group has very good ideas, but we feel our recommendations on

pricing and promotion of the B100 are the correct actions for Keurig to take at this time.

IX. Comments on Presenting Opposing Group’s Paper

Below are various statements found throughout the opposing group’s paper that

we feel either are not accurate or need further discussion.

Page 3 – 4: “In the up-scale sector Braun and Bunn were some of the companies

heightening pressure in the single-cup division.”

The case states that Braun and Bunn are companies heightening pressure in the

single-cup division. Nowhere in the case does it say that these companies are single-cup

brewer competitors.

Page 4: “This made our $200 manufacturing costs look outrageous.”

The presenting group is assuming that manufacturing costs are $200. However,

we are supposed to be proposing solutions at this moment in time. According to the case

on page 11, the latest reports show manufacturing costs as $220. While the

manufacturers are trying to lower their costs to $200, they have not yet achieved this

goal.

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Page 5: “In addition to the desire for simplicity and the limited time before launch,

this would allow office managers to have access to K-Cups in stores, just in case they

were to run out between orders.”

Page nine of the case states that Keurig does not have the resources to enter the

retail market at this time. Also, KADs and office managers are under a contractual

agreement. This means that office managers can only buy from KADs. The office

system could be removed if managers purchased K-Cups anywhere else.

Page 6: “They now would not have to accommodate for the production of a second

cup line.”

This statement contradicts page nine and ten of the case which states, “These two

portion packs would be manufactured on the same packaging lines.”

Page 6: “If companies do not have trust in their employees they need to restructure

their hiring requirements.”

This is a major digression to their paper. This is virtually impossible. You cannot

screen employees to tell if they are going to take something home from the office. We

realize that this point was made as a solution to employee theft of K-Cups, but Keurig has

no control over, nor do they care how companies handle their hiring of employees. This

is not a solution that Keurig can implement.

Page 7: “Going by survey results the best price for the B100 would be $199.99.”

Page seven of the case states, “An acceptable price range for the brewer was

determined to be in the $129 - $199 range.” The presenters state that the survey results

give a ‘best price’ of $199.99. However, this is not specifically stated in the case.

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Page 8: “The mail-in rebates would be for 20 percent off the retail price of $199.99”

Throughout this paper, the presenting group assumes Keurig will immediately be

distributing their product through mass retail channels. However, the case plainly states

on page nine, that Keurig does not have the resources to distribute through retail channels

right now. Their entire paper is based on an incorrect assumption that was clearly stated

in the case material.

Page 8 – “Keurig machines are brewing about 125 million cups of coffee

annually…”

Page four of the case states, “Keurig shipped 125 M K-Cups in 2002, with total

shipment since launch (1998) of 340 M.” Therefore, the presenting group should say, “In

2002, they shipped 125 million cups…”

Page 10: “According to Keurig’s research, the average coffee drinker consumes a

little over three cups of coffee per day. Assuming that same amount of coffee will be

consumed, we calculated a yearly cost of the in-home system to be roughly $304 as

compared to coffeehouse purchases of $312.”

According to Keurig’s marketing research, as stated on page eight of the case,

research shows the average coffee drinker consumes 2.25 cups of coffee per day and not

a little over three. This would also change the presenting group’s calculations.

Page 11: “Internet sales, however, eliminate the need for the mark-up for the KAD

or in-store profit, but add the cost of shipping and handling, a cost that could be

passed on to the consumer.”

There are shipping costs associated with KADs. Also, you cannot eliminate

mark-ups because whoever is selling the product on the internet site will still mark-up in

order to make a profit.

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Page 12: “If using two different types of cups, we would have to price the

residential Keurig-Cup higher than the commercial K-Cup based on the expected

volume and the informal contracts in place between the KADs and the business

owner or manager.”

We disagree with this statement because it is possible to not price the Keurig-

Cups higher than the K-Cups. While our price suggestion is higher than the KADs, it is

based more on market demand. There is nothing stopping the KADs from increasing

their price to match our suggested $0.55.

Page 13: “One of our recommendations for promoting this product using the

demonstration aspect was to create a promotional video loop that can be played at

higher-end retailers such as Bed, Bath, & Beyond and Linens N Things.”

First, Keurig cannot enter the retail market at this time. So with that in mind, why

would these two stores agree to run a promotional video on a product they cannot profit

from? Secondly, the presenting group plans on using testimonials from office managers

whose offices utilize the Keurig system. We feel the average consumer would relate

better to an actual at-home user who has experienced the benefits of the Keurig at-home

system than to an office manager.

Page 14: “We thought that commercials would not be the best way to promote our

product since it is a “demonstration-driven product.”

This is a contradiction to their ideas on promoting the product as stated in the

beginning of the paragraph as well as on page 15 of their paper. If a product is

demonstration-driven, it would make more sense to advertise with television commercials

than to advertise in newsprint.

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Page 14: “We also decided that college students would also be a good target market

for our product.”

Based on the case material and other research, we do not feel this is anywhere

near Keurig’s target market of high-end, gourmet coffee drinkers. Even in the interview

with Kathy Kelly, the Director of Customer Services At-Home Division, it states, “Our

focus is and always has been based on a high income demographics and gourmet coffee

drinkers.”

Page 15: “Also, the first 20,000 would come packaged with the filter that allows the

consumer to use their own coffee grounds and not just the K-Cups.”

While this is a good idea, it would increase production and development costs to

create these filters. In 2005, these filters exist, but at the time of the B100 launch, they

did not.

Page 15: “We think it would be a good idea to branch out into tea and hot chocolate

in order to meet the demands of our extended target market.”

The launch of a tea line (T-Cups) was already in the works when the case was

written.

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X. Keurig Authorized Dealer Interview

Mr. Robert Spangler, Purefact Sales Representative

Purefact
355 West Maiden Lane
St. Joseph, MI 49085
Ph: (269) 208-3669

The following questions and responses collected through a phone interview with Keurig
Authorized Dealer, Bob Spangler at 2:15 PM Wednesday February 22, 2006.

Question: You are a Keurig Authorized Dealer, correct?

Answer: Yes, through Purefact I am authorized to sell Keurig coffee brewers in

offices and homes.

Question: How popular is the B100 brewing model in homes today?

Answer: From my experience, the B100 brewer is sold almost exclusively to small
offices. The price of this brewer is significantly much higher than our
other models. At-home buyers opt for the lower priced B40 Elite, B50
Ultra, and B60 Special Edition models because they are much less
expensive.

Question: How do you handle K-Cup sales for the brewers you sell to at-home
consumers?

Answer: There is a contractual agreement between Purefact and the customer that
stipulates that all K-Cup sales for their individual brewers must be
purchased through Purefact for the life of the Brewer.

Question: Did the B100 ever use a cup different from the K-Cup called a Keurig-
Cup?

Answer: Not that I am aware of. All offices and at-home brewers use the same
cups. Only the K-Cups will fit into the brewers.

Question: How much do you charge your at-home customers for K-Cups?

Answer: It varies based on their coffee consumption. Someone who drinks less
coffee per year will be charged a slightly higher price for the K-Cups
through Purefact than someone who drinks three to four cups per day. The
pricing difference is only a few cents however, so it is not a problem
between customers.

Question: One of the main concerns of office managers is their fear of K-Cup theft if
the brewers in the office coffee system (OCS) use the same cups as the at-

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 home brewers. The two-cup approach was proposed to deal with this
issue. We felt that a possibility for eliminating the possibility of office
theft might be to install a vending system in offices for the K-Cups. We
noticed that the B100 and other OCS brewers are vending compatible.
How does the vending work and is it successful in the offices?

Answer: The presence of a K-Cup vending machine in offices reduces the office
consumption of coffee by at least 50%. For example, if a small office
using the B100 typically goes through 20 K-Cups a day prior to the
installation of a Keurig K-Cup vending machine, their consumption will
drop to below ten K-Cups per day. Therefore, while the vending machine
may eliminate or drastically reduce the ability for an employee to steal K-
Cups, the machine more importantly reduces the benefits of having a
Keurig one-cup brewer in your office because employees do not like nor
want to pay for in-office coffee.

Question: In reading our case, Keurig’s management had presented a marketing idea
to implement a KAD referral program to help penetrate the OCS market
with the at-home B100 brewer. Is or has there ever been such a program
in place?

Answer: No, there are no referral programs sponsored by Keurig. Purefact is a

distributor of the brewers, but our clients are our own.

Copy of thank you note mailed to Bob Spangler on 2/24/2006:

Front:

Inside:

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 Works Cited

1. Anderson, Eric T. “Keurig At Home: Managing a New Product Launch.”

Harvard Business School. 28, February 2005.

2. Davids, Kenneth. “At What Cost Convenience? Testing the New Single-Serve
Coffee Systems.” January 2004.
http://www.coffeereview.com/article.cfm?ID=83

3. Home Café. http://www.homecafe.com

4. Jordan, Bradford D., Stephen A. Ross, and Randolph W. Westerfield.

Fundamentals of Corporate Finance. 6th Ed. Boston: McGraw-Hill Irwin,
2003.

5. Keurig, Incorporated. http://www.keurig.com/

6. McCarthy, Jerome E. and William D. Perreault Jr. Basic Marketing: A Global-

Managerial Approach. 15th Ed. Boston: McGraw-Hill Irwin, 2005.

7. Melitta, USA. http://www.melitta.com

8. Senseo. http://www.senseo.com

9. Sherry, Cheryl. “Coffee shops look to fill caffeine cravings.” The Post-Crescent.
24 Mar. 2002.
http://www.wisinfo.com/postcrescent/news/annual/annual_2001791.shtml

10. Spangler, Bob. Keurig Authorized Dealer, PureFact. Phone interview. 22, Feb.
2006.

11. Starbucks. Phone inquiry. Circle Tower, Indianapolis, IN. 22, Feb. 2006.

12. Starbucks. Phone inquiry. Illinois Center, Chicago, IL. 22, Feb. 2006.

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