Corben Inc. Decision On Launching Zaturn Or Promoting Crunz

Corben Inc. Decision on Launching Zaturn or Promoting Crunz

Corben Inc. has a successful brand named Crunz in a market valued at $4 billion, with current sales of $400 million, a contribution margin of 30%, and annual fixed costs of $20 million. The company is considering introducing a new brand, Zaturn, which would compete in the same market. Zaturn's projected annual fixed costs are $40 million, and it is expected to capture 10% of the market, with a contribution margin of 40%. Half of Zaturn's sales are anticipated to cannibalize sales of Crunz.

Alternatively, Corben Inc. can choose to allocate the $40 million promotional budget to enhance Crunz instead of launching Zaturn. This promotional effort is expected to boost Crunz's sales by 50%. Both brands are priced the same, so sales increase directly translate into revenue increases. The key question is: should the company invest $40 million in promoting Crunz or launch Zaturn and incur its fixed costs? The decision hinges on the profitability and strategic considerations related to these options.

Analysis of Launching Zaturn

First, we analyze the financial impact of launching Zaturn. Zaturn is projected to capture 10% of the market size of $4 billion, meaning sales of:

Sales of Zaturn = 10% of $4 billion = $400 million

Given Zaturn's contribution margin of 40%, its contribution profit is:

Contribution from Zaturn = 40% of $400 million = $160 million

Fixed costs for Zaturn are $40 million annually, leading to an operating profit of:

Operating profit from Zaturn = $160 million - $40 million = $120 million

However, half of Zaturn's sales are expected to cannibalize Crunz's existing sales, reducing Crunz's revenue by:

Cannibalized sales = 50% of Zaturn sales = 50% of $400 million = $200 million

Since Crunz's contribution margin is 30%, the contribution lost from cannibalized sales is:

Loss in contribution = 30% of $200 million = $60 million

Additionally, Zaturn's launch imposes fixed costs of $40 million, raising total fixed costs to:

Additional fixed costs = $40 million

Now, we evaluate the net effect on Crunz's profitability:

  • Original Crunz contribution margin: 30% of $400 million = $120 million
  • Loss due to cannibalization: $60 million
  • Remaining contribution from Crunz after cannibalization: $120 million - $60 million = $60 million
  • Additional fixed costs from Zaturn: $40 million
  • Net profit from launching Zaturn: $120 million (contribution from Zaturn) - $40 million (fixed costs) = $80 million (excluding cannibalization effects)

But, the overall impact must consider the loss in Crunz's contribution. The net effect on company profits is:

Net effect = Zaturn profit + (Crunz contribution after cannibalization) - initial Crunz contribution

Calculating the total contribution after introduction:

Contribution from Zaturn: $160 million

Less: contribution lost from Crunz due to cannibalization: $60 million

Remaining contribution from Crunz after cannibalization: $120 million - $60 million = $60 million

Total contribution after Zaturn launch: $160 million + $60 million = $220 million

Cost of fixed expenses for both brands: $40 million (Zaturn fixed costs) + $20 million (existing fixed costs) = $60 million

Net profit from Zaturn launch: $220 million - $60 million = $160 million

However, this simplistic summation ignores the fact that Crunz's contribution reduces by $60 million due to cannibalization. The incremental profit attributable to launching Zaturn is therefore the profit from Zaturn minus the reduction in Crunz's contribution:

Incremental profit = $120 million (Zaturn contribution) - $60 million (lost contribution from Crunz) = $60 million

Analysis of Promoting Crunz

Alternatively, allocating the $40 million promotional budget to Crunz could increase its sales by 50%. Current sales of Crunz are $400 million; a 50% increase results in additional sales of:

Additional sales = 50% of $400 million = $200 million

The incremental contribution from this increase is computed as:

Additional contribution = 30% of $200 million = $60 million

The fixed costs associated with this promotional activity are $40 million, leading to an increased net contribution of:

Net contribution increase = $60 million - $40 million = $20 million

Since the original fixed costs are $20 million, the net profit after promotion is:

New total contribution from Crunz after promotion = original contribution ($120M) + net increase ($20M) = $140 million

Comparison and Conclusion

To compare both strategies, we consider the net incremental benefits. Launching Zaturn yields an incremental profit of approximately $60 million after accounting for cannibalization, fixed costs, and contribution margins. Investing in promotion for Crunz results in an increase of about $20 million in profits.

While launching Zaturn might seem more profitable based purely on contribution margins, strategic factors such as market positioning, brand cannibalization effects, and long-term brand health should influence the decision. The cannibalization effect significantly reduces Crunz's success, and the high fixed costs associated with Zaturn elevate risk.

Given these considerations, investing the $40 million in promoting Crunz appears to be the more prudent choice. It enhances existing brand value without the risks associated with launching a new competitor that may erode current profitability. Moreover, focusing on strengthening Crunz’s market position can provide sustainable growth, especially considering the cannibalization factor limiting Zaturn's net benefits.

In conclusion, the company should allocate the $40 million to promote Crunz rather than launch Zaturn. This strategy maximizes current profitability, minimizes risk from brand cannibalization, and supports long-term brand stability.

References

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