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|370 PART 3 Designing a Customer Value-Driven Strategy and Mix
customers to purchase a company’s products, but when price in-
creases, so does the product’s contribution margin, making each
sale more profitable. Thus, sales can drop and the company can
still maintain the same profitability as before the price hike.
11-13 If the company’s original contribution margin was 40 per-
cent, calculate the new contribution margin if price is
increased 10 percent. Refer to Appendix 2, Marketing
by the Numbers, paying attention to endnote 6 on the
Video Case Hammerpress
Printing paper goods may not sound like the best business to get
into these days. But Hammerpress is a company that is carving
out a niche in this old industry. And Hammerpress is doing it by
returning to old technology. Today’s printing firms use computer-
driven graphic design techniques and printing processes. But
Hammerpress creates greeting cards, calendars, and business
cards that are hand-crafted by professional artists and printed
using traditional letterpress technology.
When it comes to competing, this presents both opportunities
and challenges. While Hammerpress’s products certainly stand
out as works of art, the cost for producing such goods is con-
siderably higher than the industry average. This video illustrates
how Hammerpress employs dynamic pricing techniques in order
to meet the needs of various customer segments and thrive in a
competitive environment.
Company Case Coach: Riding the Wave of Premium Pricing
Victor Luis stood looking out the window of his office on
34th Street in Manhattan’s Hell’s Kitchen neighborhood. It had
been just over a year since he had taken over as CEO of Coach,
Inc., a position that had previously been held by Lewis Frankfort
for 28 years. Under Frankfort’s leadership, it seemed Coach could
do no wrong. Indeed, over the previous decade, the 73-year-old
company had seen its revenues skyrocket from about $1 billion
to over $5 billion as its handbags became one of the most cov-
eted luxury items for women in the United States and beyond. On
top of that, the company’s $1 billion bottom line—a 20 percent
net margin—was typical. Coach’s revenues made it the leading
handbags seller in the nation. The brand’s premium price and
profit margins made the company a Wall Street darling.
Right around the time Luis took over, however, Coach’s for-
tunes began to shift. Although the company had experienced
promising results with expansion into men’s lines and interna-
tional markets, it had just recorded the fourth straight quarter of bags also became known for innovative features and bright col-
declining revenues in the United States, a market that accounted
for 70 percent of its business. North American comparable sales
were down by a whopping 21 percent over the previous year.
Once the trendsetter, for two years in a row Coach lost market
share to younger and more nimble competitors. Investors were
jittery, causing Coach’s stock price to drop by nearly 50 percent
in just two years. After years of success, it now seemed that
Coach could do little right.
Artisanal Origins
In a Manhattan loft in 1941, six artisans formed a partner-
ship called Gail Leather Products and ran it as a family-owned
business. Employing skills handed down from generation to
11-14 price change explanation in which the analysis is done
by setting price equal to $1.00. (AACSB: Communica-
tions; Analytic Reasoning)
Determine by how much sales can drop and let the
company still maintain the total contribution it had when
the contribution margin was 40 percent. (AACSB: Com-
munication; Analytic Reasoning)
After viewing the video featuring Hammerpress, answer the
following questions:
11-15 How does Hammerpress employ the concept of dy-
namic pricing?
11-16 Discuss the three major pricing strategies in relation to
Hammerpress. Which of these three do you think is the
company’s core strategic strategy?
11-17 Does it make sense for Hammerpress to compete in
product categories where the market dictates a price
that is not profitable for the company? Explain.
generation, the group handcrafted a collection of leather goods,
primarily wallets and billfolds. Five years later, the company hired
Miles and Lillian Cahn—owners of a leather handbag manufac-
turing firm—and by 1950, Miles was running things.
As the business grew, Cahn took particular interest in the dis-
tinctive properties of the leather in baseball gloves. The gloves
were stiff and tough when new, but with use they became soft
and supple. Cahn developed a method that mimicked the wear-
and-tear process, making a leather that was stronger, softer,
and more flexible. As an added benefit, the worn leather also
absorbed dye to a greater degree, producing deep, rich tones.
When Lillian Cahn suggested adding women’s handbags to the
company’s low-margin line of wallets, the Coach brand was born.
Over the next 20 years, Coach’s uniquely soft and feminine
cowhide bags developed a reputation for their durability. Coach
ors, rather than the usual browns and tans. As the Coach brand
expanded into shoes and accessories, it also became known
for attractive integrated hardware pieces—particularly the silver
toggle that remains an identifying feature of the Coach brand to-
day. In 1985, the Cahns sold Coach to the Sara Lee Corporation,
which housed the brand within its Hanes Group. Lewis Frankfort
became Coach’s director and took the brand into a new era of
growth and development.
Under Frankfort’s leadership, Coach grew from a relatively
small company to a widely recognized global brand. This growth
not only included new designs for handbags and new product
lines, but a major expansion of outlets as well. When Frankfort
assumed the top position, Coach had only six boutiques located
within department stores and a flagship Coach store on Madison