BASIC MARKETING 18th Edition by Jerome McCarthy William Perreault, Joseph Cannon

Exercise 21

Pure and Sparkling Water, Inc. (PSW)
Mike Wolfe established his company, Pure and Sparkling Water, Inc. (PSW), to market a product designed to purify drinking water. The product, branded as the PURITY II Naturalizer Water Unit, is produced by Environmental Control, Inc., a corporation that focuses primarily on water purification and filtering products for industrial markets.
Pure and Sparkling Water is a small but growing business. Mike started the business with an initial capital of only $20,000, which came from his savings and loans from several relatives. Mike manages the company himself. He has a secretary and six full-time salespeople. In addition, he employs two college students part-time; they make telephone calls to prospect for customers and set up appointments for a salesperson to demonstrate the unit in the consumer's home. He has built a small Web site that primarily provides detailed information and allows customers to request a call from a salesperson. By holding spending to a minimum, Mike has kept the firm's monthly operating budget at only $4,500-and most of that goes for rent, his secretary's salary, and other necessities like computer supplies and telephone bills.
The PURITY II system uses a reverse osmosis purification process. Reverse osmosis is the most effective technology known for improving drinking water. The device is certified by the Environmental Protection Agency to reduce levels of most foreign substances, including fluoride, mercury, rust, sediment, arsenic, lead, phosphate, bacteria, and most insecticides.
Each PURITY II unit consists of a high-quality 1-micron sediment removal cartridge, a carbon filter, a sediment filter, a housing, a faucet, and mounting hardware. The compact system fits under a kitchen sink or a wet bar sink. A PSW salesperson can typically install the PURITY II in about a half hour. Installation involves attaching the unit to the cold water supply line, drilling a hole in the sink, and fastening the special faucet. It works equally well with water from a municipal system or well water, and it can purify up to 15 gallons daily. PSW sells the PURITY II to consumers for $395, which includes installation.
The system has no movable parts or electrical connections, and it has no internal metal parts that will corrode or rust. However, the system does use a set of filters that must be replaced after about two years. PSW sells the replacement filters for $80. Taking into consideration the cost of the filters, the system provides drinking water at a cost of approximately $.05 per gallon for the average family.
There are two major benefits from using the PURITY II system. First, water treated by this system tastes better. Blind taste tests confirm that most consumers can tell the difference between water treated with the PURITY II and ordinary tapwater. Consequently, the unit improves the taste of coffee, tea, frozen juices, ice cubes, mixed drinks, soup, and vegetables cooked in water. Perhaps more important, the PURITY II's ability to remove potentially harmful foreign matter makes the product of special interest to the growing number of people who are concerned about health and the safety of the water they consume. For example, there is growing controversy surrounding public fluoridation of drinking water-and many consumers are looking for filters that remove fluoride.
The number of people with health and safety concerns is growing. In spite of increased efforts to protect the environment and water supplies, there are still many problems. Hundreds of new chemical compounds-ranging from insecticides to industrial chemicals to commercial cleaning agents-are put into use each year. Some of the residue from chemicals and toxic waste eventually enters water supply sources. Further, floods and hurricanes have damaged or completely shut down water treatment facilities in some cities. Problems like these have led to rumors of possible epidemics of such dread diseases as cholera and typhoid-and more than one city has recently experienced near-panic buying of bottled water.
Given these problems and the need for pure water, Mike believes that the market potential for the PURITY II system is very large. Residences, both single-family homes and apartments, are one obvious target. The unit is also suitable for use in boats and recreational vehicles; in fact, the PURITY II is standard equipment on several upscale RVs. And it can be used in taverns and restaurants, in institutions such as schools and hospitals, and in commercial and industrial buildings.
There are several competing ways for customers to solve the problem of getting pure water. Some purchase bottled water. Companies such as Ozarka deliver water monthly for an average price of $.60 per gallon. The best type of bottled water is distilled water; it is absolutely pure because it is produced by the process of evaporation. However, it may be too pure. The distilling process removes needed elements such as calcium and phosphate-and there is some evidence that removing these trace elements contributes to heart disease. In fact, some health-action groups recommend that consumers not drink distilled water.
A second way to obtain pure water is to use some system to treat tapwater. PURITY II is one such system. Another system uses an ion exchange process that replaces ions of harmful substances like iron and mercury with ions that are not harmful. Ion exchange is somewhat less expensive than the PURITY II process, but it is not well suited for residential use because bacteria can build up before the water is used. In addition, there are a number of other filtering and softening systems. In general, these are less expensive and less reliable than the PURITY II. For example, water softeners remove minerals but do not remove bacteria or germs.
Mike's first year with his young company has gone quite well. Customers who have purchased the system like it, and there appear to be several ways to expand the business and increase profits. For example, so far he has had little time to make sales calls on potential commercial and institutional users or residential builders. He also sees other possibilities such as expanding his promotion effort or targeting consumers in a broader geographic area.
At present, PSW distributes the PURITY II in the 13-county gulf coast region of Texas. Because of the Robinson-Patman Act, the manufacturer cannot grant an exclusive distributorship. However, PSW is currently the only PURITY II distributor in this region. In addition, PSW has the right of first refusal to set up distributorships in other areas of Texas. The manufacturer has indicated that it might even give PSW distribution rights in a large section of northern Mexico.
The agreement with the manufacturer allows PSW to distribute the product to retailers, including hardware stores and plumbing supply dealers. Mike has not yet pursued this channel, but a PURITY II distributor in Florida reported some limited success selling the system to retailers at a wholesale price of $275. Retailers for this type of product typically expect a markup of about 33 percent of their selling price.
Environmental Control, Inc., ships the PURITY II units directly from its warehouse to the PSW office via UPS. The manufacturer's $200 per unit selling price includes the cost of shipping. PSW only needs to keep a few units on hand because the manufacturer accepts faxed orders and then ships immediately-so delivery never takes more than a few days. Further, the units are small enough to inventory in the back room of the PSW sales office. Several of the easy-to-handle units will fit in the trunk of a salesperson's car.
Mike is thinking about recruiting additional salespeople. Finding capable people has not been a problem so far. However, there has already been some turnover, and one of the current salespeople is complaining that the compensation is not high enough. Mike pays salespeople on a straight commission basis. A salesperson who develops his or her own prospects gets $100 per sale; the commission is $80 per unit on sales leads generated by the company's telemarketing people. For most salespeople, the mix of sales is about half and half. PSW pays the students who make the telephone contacts $4 per appointment set up and $10 per unit sold from an appointment. A growing number of leads are coming from the company's Web site, largely due to search ads placed on Google and Yahoo!
An average PSW salesperson easily sells 30 units per month. However, Mike believes that a really effective and well-prepared salesperson can sell much more, perhaps 50 units per month.
PSW and its salespeople get good promotion support from Environmental Control, Inc. For example, Environmental Control supplies sales training manuals and sales presentation flip charts. The materials are also well done, in part because Environment Control's promotion manager previously worked for Electrolux vacuum cleaners, which are sold in a similar way. The company also supplies print copy for magazine and newspaper advertising and tapes of commercials for radio and television. Thus, all PSW has to do is buy media space or time. In addition, Environmental Control furnishes each salesperson with a portable demonstration unit, and the company recently gave PSW three units to be placed in models of condominium apartments.
Mike has worked long hours to get his company going, but he realizes that he has to find time to think about how his strategy is working and to plan for the future.
Evaluate Mike Wolfe's current marketing strategy for Pure and Sparkling Water. How do you think he's doing so far, and what should he do next? Why?