Keurig has been successful in selling its coffee brewing system to the office coffee segment (OCS) of the US market. This success led its leaders to ponder entering the consumer market. While making the move might seem like a reasonable next step in the development of the company core business, it also presents unique challenges. The biggest of those challenges concerns the danger of losing the existing OCS business due to a possible disruption of the unique distribution channels that the company relies on for OCS. The management also has to decide on the appropriate pricing scheme for its new brewer, which is further complicated by the proprietary nature of the coffee cup (aka K-Cup) that comes with it.
Calculating the brewer price
In calculating the price for the brewer we must consider the full picture. In particular, the proprietary nature of the company business inevitably ties the profits on the brewer and the profits on the coffee that comes with the brewer. More specifically, the total profit per customer: Profit=Profitbrewer+Profitcoffee
It should be notes here that the aforementioned profit model is by no means unique to Keurig, and can be observed in other industries, like computers (where the profits are oftentimes split across hardware and software) or printers (where the profits are split across hardware and cartridges). Writing out the above formula further, we get:
(2) Profit=(Pricebrewer-Costbrewer)×Qbrewer+Margincoffee×Qbrewer (3) Profit=(Pricebrewer-(Costbrewer-Margincoffee))×Qbrewer The last equality (3), although follows immediately from the previous one (2), illustrates an important conceptual point, namely: profit margins gained on coffee sales can offset the costs of a brewer. Also, given the nature of their coffee business (royalties), the margins on coffee sales are virtually equivalent to profits (no “costs” are incurred in order to...