Sunday, April 6, 2008

Case: Marketing to Generation Y

Executive Summary: Alloy, Inc. participates in merchandise ( brands and recognized teen brands) and advertising & sponsorship business with primary customer is generation Y, a demographic segment in the United States comprising of ages between 12 and 20. The fierce competition as a result of the product life cycle is in growth stage, the gradually increasing operating expenses, irregular growth of company with so much relying on distribution method requires the company to review its business model and consider allying with AOL. In fact, AOL would be the most important source of traffic/reference to Alloy website. AOL proposal will represent a significant opportunity, else a significant threat if competitors seizes this opportunity.

SWOT Analysis: Being a leading company providing community, content, and commerce to Generation Y, operating for both online and offline through an old-fashioned catalog that comes in the mail, and large amounts of capital soon available with upcoming IPO are the major strengths of Alloy. The company's opportunities are AOL's offer to set up a strategic alliance and Alloy's outsourcing technique to reduce the operating cost. However, Alloy's highly technological distribution method, eventually disposed to a much faster life cycle is a threat. In addition, if competitors have a chance to receive AOL’s promotional deal and fashion trends of today are unpredictable then tomorrow are red lights for company's investment.

Business Model: There are four segments made up merchandize sales which are the main revenue, accounted for about 90% of Alloy revenue (the rest 10% is from advertising and sponsorship): response from past customers, response from new names acquired by buying names from others resources, response from swapped names and response from people who request to receive e-Zine. To evaluate which segment is the profit-engine, let’s refer to details calculation in Appendix A. The stimulation results show that the response from past buyers and swapped name contribute to generate profit and cover fixed expenses. In contrast, the response from new names segment leads to negative contribution margin so this method of expansion is costly and ineffective. The response from e-zine segment has small contribution to profit but it will be potential source of generating revenue in the future if the number of names or traffic to Alloy’s websites increases.

Without an alliance with AOL, Alloy is believed to make a reliable amount of profit as there will be more growth left. However, AOL as a giant internet service provider can help increase sites visits, registrations, online orders and customer database. Accepting AOL's offer, Alloy then has to pay unusual amount of money for being AOL teen shopping site. But if Alloy won’t, its major competitor iTurF will seize this opportunity and certain potential and current market share will be lost. Before Alloy comes up with a new more effective way to acquired new name, short- and medium-term alliance with AOL is a workable option.

Marketing strategy: If we compare Alloy and Delias, they operate the business with different brand strategies but it’s hard to measure how much value each brand can create. As a whole, Alloy can create brand values for its customers. It has the objective and value to create a community: a dynamic boy-girl interaction. It’s an opportunity for girls to talk to boys and vice verse to deliver music, fashion and lifestyle. This value can attract more visitors to Alloy website and build customer loyalty rapidly and efficiently.

Alloy could add one more C to make its Web becoming 4C - commerce, content, community and convergent media for teens by offering increasingly in movies, music, advice on their dreams, sex, love, building on-line fashion room where teens can get fashion advice and discussion and fostering an environment of trust for teens by providing comfortable atmosphere in discussing to sexuality, body image, faith, and substance abuse. Offering customers point system through on line games can also augment the rate of visit to Alloy web and promote the sales. Increasing the sponsorship for "fun" or "humorous" based project should be implemented because fun is a key in effective communications with teens. Fun can translate into products, events, marketing, and basically any contact teens have a brand or message.

Some Alternatives and Considerations: With a large amount of capital soon available from the upcoming IPO, Alloy can establish an additional distribution channel which is more reliable by owning stores or warehouse and handling order fulfillment so that we can reduce outsourced order fulfillment costs of 8% (6$/75$). However, the time taken to settle the retail stores will be long and public image will be not favorable and fixed costs and inventory cost will be higher.

In corporation with the AOL, Alloy should make a business contract for short term first (e.g. one year contract) so that it will not be threatened by the iTurF. Later on, when a more efficient way to acquire and attract new traffic to be available, the company will switch to that. Alloy can maintain catalog sales to past buyers, swapped names and e-Zine sales while reducing catalog sales to new names and increasing on-line sales. The huge operating expenses which are assumed to include primarily advertising and outsourcing cost should be reduced; especially mass media communication expense can be replaced by utilizing effectively the traffic offer by the AOL, and the launch of customer loyalty programs such as point system. Implementing market penetration strategy, Alloy should strengthen collaboration with a well-known publisher of direct-mail catalog that universities and college use to reach prospective students to penetrate Y generation market.

APPENDIX A: Calculation for profit contribution from each segment

To assess which segment makes money, we calculate the contribution margin of each segment by 1,000 names. In our calculation, we assume that: each response is equal to an order, each order is $75, gross margin is 50%, contribution margin is the difference between order revenue and variables costs which include costs of good sold, costs of order fulfillment, costs of acquiring new names and catalog costs. We ignore selling and administrative costs per order because these costs are very difficult to trace to each order and each name.

1. Responses from past buyers

1000 names x 3% response rates = 30 orders

2. Responses from new names 1000 names x 1.5% response rates = 15 orders

3. Responses from swapped names 1000 names x 3% response rates = 30 orders

4. Responses from e-zine’s recipients 1000 names x 25% opened x 1% response rates = 2.5 orders


30 x 75 = 2250

15 x 75 = 1125

30 x 75 = 2250

2.5 x 75 = 187.5

Less COGS (50% of sales)





Less Catalog Costs





Less Order Fulfillment Costs

30 x 6 = 180

15 x 6 = 90

30 x 6 = 180

2.5 x 3 = 7.5

Less costs of acquiring names





Contribution Margin=revenue-variables costs

2250-1125-450-180 = 495

1125-562.5-450-90-100 = -77.5

2250-1125-450-180 = 495

=187.5-93.75-7.5 = 86.25

Contribution Margin per Name

495/1000 = 0.495

-77.5/1000 = -0.0775

495/1000 = 0.495

86.25/1000 = 0.08625

APPENDIX B: Situation Analysis

I. Stage of PLC (Product Life Cycle)

Based on the industries participates in (Merchandise: brands and recognized teen brands and Advertising & Sponsorship) with primary customer is generation Y females, secondary customers are generation Y males, brand-name merchandise manufacturers, retailers targeting generation Y, we can estimate that the market is in Growth Stage as depicted in the following figure

II. SWOT Analysis

1. Strengths

Growth stage of the core and secondary industries

Large amounts of capital soon available with upcoming IPO

2. Weaknesses

Various type of competitors: (a) Branded merchandise retailer: retail outlet, online retailers; (b) Advertising providers: websites, magazines

Dependence on assumption that emerging technology will in fact emerge

3. Opportunities

Purchase of AOL’s promotional deal

Generation Y is increasing in size and spending provisions

Reduction in outsourcing to reduce costs

4. Threatens

Competitors agreeing to AOL’s promotional deal

Competition is expected to increase as PLC is maturing, market will be fragmented
APPENDIX C: Comparisons between Alloy and Delias

Delias Inc Inc

Sales through print catalog

Sales through offline and online

Order fulfillment from warehouses complex, and conventional retail stores

Distribution based company (relied on quick & reorder to control the inventory.

Concentrated on marketing and merchandising issues.

Receive orders through telephone and advise program when ask

Telephone order and order processing are outsourced

Lack of fashion advice via telephone

Complex set of brands and marketing methods

Promoting a single brand strategy, but sales come from labels like Stationwagon and Local 212

Employees under 30 years old

- Web based advertising

- Allied with Net companies and promote service offering areas

Not mentioned

- Advertising & Sponsorship

- Website advertising

Banner-ads, targeted advertising

Links to similar sites

- Sponsorships

- Magazine advertising

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