Eco7 Motor Oil Case Study

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1. What is the consumer behavior pattern in terms of purchase of Motor Oil?
2. What is Avellin’s current position in the PCMO industry? Elaborate deeply on the consumer perceptions of Avellin as well as the channel strategy used by them.
3. What strategic role does Eco7 Play for Avellin? What expectations should Avellin have from the customer in terms of willingness to purchase a green oil?
4. What should be the Go-To-Market Strategy for Avellin? Highlight especially the pricing decisions and the channel decisions and the implication each will have on the other.

HBS Professor John Quelch and writer Sunru Yong prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

J O H N Q U E L C H

S U N R U Y O N G

 

 

Eco7: Launching a New Motor Oil

In March 2014, Aaron Jonnerson, vice president of marketing for the automotive division of Avellin Corporation, was planning the launch of Eco7, a new environmentally friendly motor oil. Consumer interest in “green” automobile technology, such as hybrids or electric vehicles, had increased steadily. Most research and development focused on improving fuel efficiency, alternative energy sources, or reducing emissions. There had been little innovation in the motor oil used to maintain engines. Only Sevoline, a competitor to Avellin, had introduced a motor oil, SevoGreen, which was manufactured from recycled oils. It had generated significant buzz within the industry and initial sales penetration of channel partners had shown promise, but the green motor oil market was clearly in its infancy.

Jonnerson believed that Eco7 offered performance and cost advantages over SevoGreen and could help grow Avellin’s business in the passenger-car motor oil (PCMO) market. During the past decade, the “do-it-yourself” segment had shrunk dramatically as more consumers began to use professional oil-change services. Many consumers viewed motor oil as a commodity product. Car dealers and mass merchandisers had also grown their share of sales. In contrast, the “fast-lube” channel—comprising service outlets focused on quick oil changes—had peaked. This was of concern to Avellin, which had a strong customer base among independent fast-lube stores. Only the national fast-lube chains, most of which were affiliated with motor oil manufacturers, had seen meaningful revenue growth.

Although Avellin remained the number three player in branded motor oil, its market share had fallen slightly, making Eco7 an important product launch. As he presented the product concept to the board, Jonnerson, knowing the career implication of this launch, spoke confidently of Eco7’s prospects: “Despite recent challenges in the motor oil market, Avellin remains a well-respected, innovative company that consumers trust. We have a great platform to launch a new product, and Eco7 is a tremendous offering that is expected to result in profitable growth. This innovation will strengthen our customer relationships and create new momentum in our motor oil business.”

Avellin had experienced sluggish growth since 2005. It had fought a takeover bid in 2007 by SinoPLT, a foreign oil and gas company. The resulting management buyout kept Avellin independent, but had saddled it with significant debt and interest payments. In 2013, Avellin’s net income was only 4% on total revenues of $2.2 billion.

 

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916-507 | Eco7: Launching a New Motor Oil

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PCMO was a significant part of Avellin’s business, so expectations were high for Eco7. Despite his confident message to the board, Jonnerson worried about the launch: “Consumers are not excited by motor oil, and building momentum for Eco7 will be difficult. What positioning and pricing will work with channel partners and resonate with consumers?”

Company Background

Founded in the United States in 1936 as an oil refiner, Avellin had diversified into industrial and specialty chemicals manufacturing. In 1995, Avellin divested its petroleum division, exiting the lower- margin business of refining and marketing fuels, within which it lacked the scale to compete with its large, integrated competitors. Avellin then focused on its remaining divisions: Industrial Materials, which sold resins and adhesive technologies, and Automotive, which sold lubricants and other automotive care products to commercial and consumer markets. Approximately 60% of Avellin’s revenues and 40% of its profits came from the automotive division.

In 2014, Avellin operated ten lubricant blending and packaging plants in the United States and seven regional distribution centers. Like its competitors, Avellin had its own fast-lube chain, AvellinAuto. Within the automotive division, PCMO accounted for nearly 65% of revenues, with gross margins of 20% to 22%. The remaining revenues came from motor oil sales to commercial fleet managers (e.g., trucking companies) and other automotive chemicals, such as brake fluid and coolants.

The Market for Passenger Car Motor Oil

Motor oil is used to lubricate internal combustion engines in automobiles, reducing the wear on moving parts and cooling the engine by carrying heat away. The market for PCMO manufacturers in the United States, excluding service revenues, was approximately $10.5 billion in 2012. Key drivers of the market included car sales, mileage, and frequency of maintenance. The industry was mature, and analysts expected annual growth of no more than 2% through 2020.

The performance of a PCMO was gauged by how well it provided lubrication under different conditions, including low temperatures when the engine was first started and very high temperatures as the vehicle was running. A higher quality lubricant could be used longer before it broke down and needed to be replaced. PCMOs came in three basic categories: conventional, full synthetic, and synthetic blend. Of these, the most widely used was conventional motor oil. It met performance specifications and, at $2.50 to $4.00 per quart, was the most affordable motor oil. Full synthetic motor oil also used petroleum as its base material, but was further refined and modified and had more additives to boost performance.

Synthetics offered greater longevity and withstood high temperatures more effectively than did conventional oil. They could be used in any vehicle, but were often specified for higher performance vehicles that generated more engine heat. Proponents of synthetic oil argued that its higher price (from $5.50 to $9.00 per quart) was offset by the oil’s longevity, which allowed consumers to change oil less frequently. Even so, synthetic oils accounted for less than 20% of industry sales because of their high price point. Synthetic blends offered moderately better performance at a slightly higher cost. Leading manufacturers invested in continued product development, but most innovations offered only modest improvements to existing products and typically went unnoticed by consumers.

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PCMO Consumers

Most PCMO consumers viewed oil changes as a nuisance that cost them time and money. In addition, most of them were price sensitive, and very little price growth was expected for either PCMO manufacturers or oil change providers. Traditionally, car owners were advised to get an oil change every 3,000 miles or three months, whichever came first. Delaying an oil change for too long would reduce a car’s performance and eventually lead to engine damage. As engine design and motor oils had improved, oil changes were required less frequently. Automotive manufacturers’ guidelines varied by vehicle, but newer cars could be driven much farther before requiring an oil change: typically 5,000 miles with conventional oil, over 7,500 miles with some synthetic blends, and over 10,000 miles with the highest performing full synthetics. Service providers had no incentive to encourage infrequent changes, however, and most continued to recommend more frequent oil changes than automobile manufacturers deemed necessary. In 2013, the average consumer drove nearly 4,500 miles before getting an oil change.

Consumers of motor oil fell into two broad segments: do-it-yourself (DIY) and do-it-for-me (DIFM). The DIY segment comprised consumers who changed their own motor oil. These consumers purchased PCMO in bottles from mass merchandisers, convenience stores, automotive specialty stores, or online. In contrast, the DIFM consumer segment used professional service providers. Through the 1980s, PCMO was predominantly a DIY market in the United States. The growth of low-cost DIFM options, however, as well as changing consumer demographics and behavior, had led to a shift away from DIY. In 2000, the split between DIY and DIFM was approximately 50/50. DIFM accounted for 75% of all oil changes.

The DIY segment was younger overall than the DIFM segment and more likely to live in smaller towns or rural areas. On average, DIY consumers were slightly less affluent, favored trucks and sports utility vehicles, and were more cost-conscious when it came to automotive maintenance. They were most likely to purchase their motor oil from a mass merchandiser, such as Walmart, or an automotive parts store, such as AutoZone or Advance Auto Parts. They tended to know more about their vehicles and had a better understanding of the differences between motor oils.

The typical DIFM consumer was usually older, had more education and a higher income, and was more likely to live in a large metropolitan area. DIFM consumers tended to prefer foreign cars and luxury vehicles, and were more likely to drive fuel-efficient diesel or hybrid cars. They were less likely than DIY consumers were to do any maintenance on vehicles. DIFM consumers also relied on professionals for routine maintenance such as tire rotations, brake service, and tune-ups.

Surveys indicated that most vehicle owners understood the importance of regular oil changes and knew the leading PCMO brands. Most DIFM consumers, however, could not explain the product classifications (conventional, full synthetic, and synthetic blend) and could not recall what brand of motor oil they had last purchased. One fast-lube operator commented, “Our customers are just happy to know they’re doing an oil change on time. Most of them don’t worry much about the details.”

PCMO Distribution

PCMO manufacturers sold products directly and through wholesale distributors. Approximately 25% of industry sales went directly to large retail accounts, such as the national tire dealer chains and mass merchandisers. For sales to other retail and DIFM service outlets, manufacturers relied on a network of wholesale distributors, which helped manufacturers by maintaining strong relationships with local fast lubes, car dealers, repair shops, and specialty stores and by providing effective, timely

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916-507 | Eco7: Launching a New Motor Oil

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order fulfillment and service. While distributors were usually not exclusively bound to a single PCMO brand, most carried only a few brands. This focus allowed them to benefit from exclusive sales territories, volume discounts, and incentive programs that manufacturers offered.

Branded fast-lube outlets were affiliated with a specific PCMO brand and offered this brand exclusively. Independent DIFM outlets, like wholesale distributors, usually offered a limited number of brands or focused on private label in order to benefit from bulk purchase discounts and manufacturer incentives. The DIFM service provider would then steer its customers to a preferred brand. When the installer purchased in bulk, the average gross margin on oil changes—excluding labor and overhead—was approximately 55% for branded PCMO and 65% for private label.

PCMO Service Providers

DIFM consumers could choose from five types of service providers:

Fast lubes. Also known as “quick lubes,” these outlets offered few other services besides oil changes. As the name suggested, the value proposition was the speed with which the oil change service could be completed—often in just thirty minutes. The largest national fast-lube chains were owned and branded by the major PMCO manufacturers; these accounted for approximately 30% of the 17,000 fast- lube outlets in the U.S. and had enjoyed nearly all the growth in this distribution channel over the last decade. A typical fast-lube outlet performed 1,200 oil changes per month and generated $650,000 to $700,000 in annual sales. Customers using fast lubes cared most about the convenience of the location, the speed of the service, and the professionalism of the installer.

Oil change-plus. “Oil change–plus” outlets were usually specialty stores focused primarily on a specific product or service, such as tires, mufflers, or brakes, rather than on motor oil. Typically, to attract more customers and maximize capacity utilization, they also offered oil-change services or tire rotations, which vehicle owners required more frequently than other services. The average oil change–plus store performed 40% to 50% the number of oil changes provided by an average fast-lube outlet.

Repair shops. These were typically small, independent outlets offering auto mechanic services and sometimes tire changes or gasoline sales. Their share of automotive maintenance services had declined in favor of lower-cost, higher-volume outlets.

Car dealers. Car dealers focused on the sale or lease of vehicles and usually provided after-sales service, particularly as part of the vehicle warranty. Dealers already provided predetermined maintenance checks as recommended by the vehicle manufacturer and had the diagnostic equipment specific to a given make and model. Because vehicle quality had improved and repair revenues had declined, dealers had become more likely to promote their services for routine maintenance, such as oil changes. For their part, customers appreciated having a “one-stop shop” for all maintenance and knew that the oil change would be done in strict accordance with the manufacturer recommendation.

Mass merchandisers and warehouse clubs. Mass merchandisers and clubs were large-format retail chains that sold clothing, household goods, food, and electronics. Most offered automotive care products for DIY consumers and also provided basic auto services for the DIFM segment. DIFM oil changes were priced very competitively and generated little profit for the retailers, but drove customers to these stores, where they could shop while they waited for the service to be completed.

 
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HubSpot

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Decision Focus:  If you were Halligan and Shah, what would you do to ensure that HubSpot becomes to marketing what salesforce.com is to sales?  Why would you take these actions?  And what keep you up at night about your plan?

Preparation Questions:

  1. Do you agree with HubSpot that the “rules of marketing” have changed?  If so, how?  Is inbound marketing the answer?  Why or why not? (Suggestion:  Identify the benefits and risks involved with inbound marketing and compare/contrast with outbound marketing.)
  2. Who should HubSpot target?  Is HubSpot finding and serving the right set of customers?  Given its position as a start-up company, should it widen its focus to serve any customers that comes it way?  Or narrow their target, by focusing exclusively on either Own Ollies or Marketer Marys? Or by focusing exclusively on either B2B or B2C customers?
  3. Analyze the customer lifetime value (CLV) of the different customer groups to inform your decision.  The basic formula for calculating the CLV of a HubSpot customer is:

CLV = [(monthly profit) * (customer lifetime in months)] – (acquisition cost)

The case provides the churn rate which can be used to calculate the customer lifetime in months.

  1. Does HubSpot have the right set of products for its targets?
  2. Does HubSpot have the right pricing strategy? Does the software-as-a-service (SaaS) pricing model work for both Marketer Marys and Owner Ollies?  Should HubSpot try to immediately capture more value for either of these customers?
  3. Are Halligan and Shah being too stubborn by not doing any outbound marketing? Ort should they continue to practice what they preach by focusing on inbound marketing alone?

These responses should reflect the material that is presented in the case, in the readings, and the opinions of the student when appropriate.  Briefs should be limited to three pages

HubSpot: Inbound Marketing and Web 2.0

None of [the old rules of marketing] are true anymore. The Web has transformed the rules, and you must transform your marketing to make the most of the Web-enabled marketplace of ideas.

— David Meerman Scott, author of The New Rules of Marketing and PR

Business was good at HubSpot. Founders Brian Halligan and Dharmesh Shah were thrilled with the progress their young company had made in the two years since they began their journey to convince corporate America that the rules of marketing had changed. To be successful in the marketplace, HubSpot needed to be much more than just a software company. Its founders had to become evangelists, preaching a new way of doing business that would fundamentally change how marketers reached their customers. To their great pleasure, Halligan and Shah were finding a willing audience for their ideas. HubSpot was now considered a thought leader in the Web 2.0 space, coining the term “inbound marketing” to describe marketing strategies and practices that pulled prospective customers toward a business and its products, through the use of Web 2.0 tools and applications like blogging, search engine optimization, and social media.

Halligan and Shah realized that their business was at a crucial juncture. They had just reached the noteworthy milestone of 1,000 customers, attaining this level of critical mass by practicing what they preached. HubSpot had built its business by turning its back on traditional marketing methods and was solely using innovative inbound techniques to acquire customers. Looking ahead, the founders wanted to accelerate their growth rate and increase profitability. Ironically, they were grappling with many of the same issues that their customers faced when implementing inbound marketing practices.

Halligan and Shah realized that they would need to work through these issues in order to achieve their goals for the company. First, they would need to decide which customers to serve, pulling the best opportunities from the diverse pool of customers who were contacting them. Second, they would need to make some decisions about their current pricing model to entice new customers to the company and to maximize the profitability of existing customers. Third, they would need to assess whether they could achieve enough scale through inbound marketing efforts, or whether they needed to supplement their inbound programs with traditional, interruptive outbound programs. This was more than a test of HubSpot as a company; it was a test of the inbound marketing business philosophy. If HubSpot couldn’t scale its own business using inbound marketing, then how could it convince its customers that inbound marketing would work for them?

Founding HubSpot

The two HubSpot founders met at the Massachusetts Institute of Technology (MIT). As early and eager students of Web 2.0, Halligan and Shah recognized the transformative power the Internet possessed for changing the way small businesses operated. After graduation, Halligan joined Longworth Venture Partners, a venture capital firm with an expertise in technology. As he worked with start-up companies, he recognized an issue with which they all struggled—how to harness the Internet to build a business. Halligan, like many of his clients, came from a traditional sales and marketing background, working for the high-tech companies Groove Networks and Parametric Technology Corporation. However, at Longworth, he began to realize that the traditional marketing and sales methods he had previously employed were losing their effectiveness in the new Web 2.0 world. Shah also grew up in the technology sector, holding a number of management and development positions in technology companies. Prior to forming HubSpot, Shah was founder and chief executive officer (CEO) of Pyramid Digital Solutions, an enterprise software company and the winner of three Inc. 500 awards, which was acquired by SunGard Data Systems. Shah also authored OnStartups.com, a top-ranking blog and online community for entrepreneurs.

Halligan and Shah founded HubSpot in 2006. With Halligan’s marketing, sales, and venture capital expertise and Shah’s technological knowledge and experience as a successful entrepreneur, the two were a winning combination. Halligan became the CEO and served as HubSpot’s evangelizing front man. Shah became the chief software architect and focused on product development. On the strength of their business plan, Halligan and Shah attracted premier financial partners. After initially self-funding the business, Halligan and Shah raised $5 million from General Catalyst, a Cambridge-based venture capital firm, in 2007. Less than a year later, the team raised an additional $12 million from Matrix Partners, a venture capital firm with offices in Boston and Silicon Valley. For a young start-up, HubSpot had a solid financial foundation.

Halligan and Shah strove to create a distinct culture at HubSpot. They headquartered the company near MIT in Cambridge, Massachusetts, a hotbed of activity for high-tech start-ups, and they staffed up with young, eager MIT graduates who were immersed in Web 2.0 culture. The HubSpot office buzzed with energy. The sleek, minimalist architecture contrasted with the animated and passionate young team, who craved a fast pace. The team battled over business with the same gusto that they battled over the last slice of pizza.

Inbound Marketing

HubSpot built software products that helped companies execute inbound marketing programs to supplement or replace their traditional outbound programs. In the current environment, outbound marketing’s effectiveness was diminishing as consumers, feeling bombarded by the daily deluge of commercial messages, began tuning out. Increasingly, direct mail, trade shows, and telemarketing were yielding less new business. In contrast, companies were finding that search engines, blogs, and social media were generating new business at higher rates. These communication programs were more consistent with the inbound marketing approach. As HubSpot explained on its corporate blog:

Outbound marketing is about pulling people away from their dinner, or family, or TV and interrupting their lives. Do you really think you are important or interesting enough for them to want to talk to you instead of doing whatever they were doing when you interrupted them? They have not invited you into their home, and they certainly do not happen to enjoy being interrupted. Instead of spending your whole day interrupting people and hoping they pay attention, try setting up a blog and writing interesting content, so that people want to hear what you have to say and come find you when they’re interested in your products.

Inbound marketing is a collection of marketing strategies and techniques focused on pulling relevant prospects and customers toward a business and its products. Inbound marketers offered useful information, tools, and resources designed to attract prospective customers to the company during the time when prospects were actively engaged in a search for a particular product or service. The informative content that the inbound marketer produced was used to entice prospects to interact with the company and begin a relationship with it. As HubSpot’s vice president of marketing Mike Volpe explained, “Instead of interrupting people that don’t care, why not help those who want what you’re offering to find you? We have found that building interesting tools is a more effective marketing tool than doing advertising. Things like this get people curious and draw them in.” This new approach to marketing complemented the way consumers were actually making purchasing decisions: by using Internet search, online blogs, and social networking sites like Facebook and Twitter to learn about products and services before they bought them. HubSpot preached this new way of marketing:

Instead of interrupting people with television ads, inbound marketers create videos that potential customers want to see. Instead of buying display ads in print publications, they create their own blog that people subscribe to and look forward to reading. Instead of cold calling, they create useful content and tools so that people call them looking for more information. Instead of driving their message into a crowd over and over again like a sledgehammer, they attract highly qualified customers to their business like a magnet.

To be maximized, inbound marketing required three distinct skills. The first was the ability to write compelling content that would attract customers to the business. According to HubSpot, this content had to be useful to customers and not just a promotional message:

Whole Foods publishes recipes, profiles of their vendors, forums and a lot more. Across all of these mediums they use the right tone. Their content is useful first, and promotional second, not the other way around. This means that their customers find them when they want to know how to make oatmeal cookies, when they want to learn more about where their apples come from or when they want to watch a cooking show.

The second skill was the ability to distribute that content so that it was easily found by prospective customers using search engines, which required a sophisticated understanding of search engine optimization. The third was the ability to attract and engage a community of followers who interacted with the content, added their thoughts to it in an ongoing dialogue, and disseminated it to others. Firms that nurtured an active audience gained credibility in the marketplace, because it was the support of an audience that conferred expertise in a particular area.

In contrast to traditional outbound marketing, in which a business’s message was pushed to a mass audience that contained many who were not in the market for the product, inbound marketing was designed to create content that pulled in only those customers who were interested in the product. This created marketing efficiencies. According to Mark Roberge, vice president of sales for HubSpot, inbound marketing blended marketing and sales: “One of our salespeople calls it ‘smarketing’—we really blend it together so much more.” Volpe explained this concept further in an interview with RainToday.com: “Our salespeople hear things like ‘Oh, HubSpot. I’ve been meaning to talk to you guys,’ or ‘Oh, I just watched your webinar yesterday. I had a couple of questions.’ So it’s the opposite of a cold call. It’s like getting a call from one of your friends because we’ve already built a relationship. We really don’t do any cold calling.”

Volpe estimated that a lead generated using inbound marketing cost five to seven times less than a lead generated by outbound marketing. Businesses had increased the portion of their marketing budgets dedicated to inbound marketing, particularly in business-to-business (B2B) industries, where

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509-049 HubSpot: Inbound Marketing and Web 2.0

37% of the marketing budget was spent on inbound marketing and 30% was spent on outbound marketing. Given its lower costs and increased efficiencies, inbound marketing allowed small businesses to compete with larger firms in a way that had never been possible in the pre-Internet world dominated by mass media. Small businesses had realized that inbound marketing helped level the playing field and were more aggressively allocating their budgets to inbound marketing techniques.

The HubSpot Product

Embodying the philosophy of Web 2.0, the HubSpot Web-based software product was a complete inbound marketing system, designed to help businesses attract prospects, qualify their potential, and convert them into paying customers. The goal was to enable a firm to generate more qualified leads, to generate those leads more efficiently, and to convert them into sales. HubSpot’s user-friendly product allowed even those who were not familiar with Web 2.0 to build and manage a thriving inbound marketing program. The software included templates to design content for websites, blogs, and social networking sites; tools to help customers optimize their exposure on the Internet; tools to help customers solicit and engage the right customers; and tools to analyze their results.

Content Design

HubSpot offered its customers a content management system (CMS), software that made creating and editing online content easy. Further, HubSpot’s CMS allowed small businesses to add interactivity, the hallmark of Web 2.0, to their old “brochureware” websites. Predesigned templates helped customers create their corporate websites, providing guidelines for creating Web pages, blogs, online forms, and landing pages. The templates were designed to be turnkey so that customers without HTML programming knowledge could easily publish content online and have that content be search-engine-friendly. HubSpot’s Keyword Grader scanned the Internet and returned an analysis of the keywords relevant to the company’s business that were driving online search results. Including these keywords in their content, companies could improve their organic search results, making it more likely that potential customers would find their content. Steve Douglas, president and creative director for The Logo Factory, explained how search engine optimization (SEO) worked for customers:

I had been doing SEO all wrong when I came to HubSpot, trying to optimize my site for the wrong keywords. With HubSpot, I’m now able to see the words people are actually using to find my products and services. I’m able to see which words have the greatest search volume in search engines, helping me choose the right words to optimize my site. HubSpot has helped me be a lot smarter about how I optimize my site and track my progress. (HubSpot, Customer Quotes, 2009)

Exposure Optimization

The HubSpot product contained a series of tools designed to help customers make their published content more visible on the Internet. These included SEO tools that graded the firm’s content based on its likelihood to be included early in the search results that were returned when a potential customer searched through Google, Yahoo, or other search engines. The SEO tools graded the company’s website, its key landing pages, and its blogs, and made suggestions for improving them to increase exposure. HubSpot’s Link Grader analyzed the links a firm had on its website to see which ones were generating the most inbound traffic. The Link Grader also analyzed links to competitors’ websites to see which ones were driving customers to them instead of to the firm. HubSpot customer Noel Huelsenbeck, president of the telecom expense management software firm Vocio, gushed:

I love the HubSpot software. With just a little page optimization I’ve already gotten great results and my traffic and keyword rankings continue to improve steadily. I’m about to sign a deal from a company that typed in one of our top keywords for which we are now the #1 organic result, thanks to HubSpot! That one deal will pay for all the money spent with HubSpot three times over. On top of that, the support is incredible. The HubSpot team had dedicated their time, even at off hours, to get my site up and optimized. The application is great, but it’s the people that make this company stellar. (HubSpot, Customer Quotes, 2009)

Lead Tracking and Intelligence

The HubSpot software had marketing intelligence analytics for tracking the interactions customers had with the firm’s content. This enabled firms to analyze which of their inbound marketing programs were working to generate qualified leads, by telling them where potential customers were coming from and how they were engaging with the company. Firms could generate an interaction profile for each customer by tracking the pages they viewed and the types of forms they completed. Firms could use this information to qualify prospective customers according to their potential. For example, HubSpot itself used the lead tracking software to construct its sales funnel (see Exhibit 1). Information about each customer allowed HubSpot to qualify some of its visitors as “prospects,” then “leads,” and then “opportunities” based on the behaviors they exhibited while on the site.

Team Jodi, a real estate firm, had seen a significant increase in business, claimed owner Jodi Bakst:

The traffic to my site increased by 97% in November, by an additional 62% in December, by an additional 31% in January and we’re on track for another big increase in February. In real estate, the absolute number of leads is way down. But what I’m looking at is the percentage of good leads. The percentage of good leads is actually going up right now and I attribute it to all of the hard work I am doing, 90% of which I learned from HubSpot. (HubSpot, Customer Quotes, 2009)

HubSpot used a software-as-a-service (SaaS) pricing strategy for its product. Rather than paying a large up-front fee, customers paid a smaller monthly fee (between $250 and $500), much like a gym membership. HubSpot’s low cost and ease of use for Web 2.0 novices were its competitive advantages. Volpe explained the difference between HubSpot and one of its competitors, Eloqua:

Eloqua is really expensive and complicated. It is awesome for larger enterprises. Everyone we talk to that uses Eloqua says, “If you can get it to work, it’s super powerful, but you have to give up your firstborn child to pay for it and you need to hire a full-time employee to run it because they have all these scripting languages and all this really, really difficult stuff.”

HubSpot’s customers were required to purchase a $500 onboarding package, which bought them four hours of HubSpot consulting. During this time, consultants helped customers through a process designed to kickstart their inbound marketing program: (1) setting up the software, (2) using the SEO features to get found, (3) converting prospects to leads to customers, (4) analyzing their results, and (5) institutionalizing the process so that it could be repeated. Once the original consulting hours were depleted, customers were on their own, unless they purchased additional consulting time at a cost of $500 for four hours. Customers were also given access to Success.HubSpot, which provided Internet marketing training and resources. Halligan described the HubSpot product as much more than a piece of software; it was a system of tools and training (see Exhibit 2):

HubSpot is a complete inbound marketing system that will help you get found by more prospects and convert more of them into paying customers. We use the word “system” intentionally. HubSpot is more than software. We have a complete inbound marketing

methodology comprised of best practice guides, training materials, software tools, a community and support. Plus, HubSpot is hosted on demand software, meaning that you don’t need any IT staff to get started. We don’t just give you a new marketing tool. We teach you to be an expert in how to use it.

HubSpot’s products had garnered acclaim that drove buzz for the company. In 2008, HubSpot received the W3 Silver Winner Award in branding and marketing and the MITX Impact Award for innovative business strategy. HubSpot’s Website Grader was an official honoree for the “Best Websites in IT Hardware/Software” category in the 12th Annual Webby Awards. In February 2009, HubSpot was named in the top 10 of PromotionWorld’s “Best SEO Companies” ranking.

HubSpot’s Marketplace

Halligan and Shah envisioned that HubSpot would become the market leader of the industry space carved out by software companies and consulting firms focused on helping businesses fill and manage their customer funnel. The term “customer funnel” metaphorically described the critical processes firms undertook to attract prospective customers to their business; qualify those prospects to determine which ones had the highest probability of converting to paying customers; and, finally, close the sale. The customer funnel was divided into three main activity areas. Most of HubSpot’s competitors chose to play in only one of those areas, although some offered integrated services that spanned all three (see Exhibits 3 and 4).

Creating Traffic

The goal in the top part of the customer funnel was to attract large numbers of prospective customers. Firms used marketing programs to capture attention and interest to feed prospects into the funnel. Firms offered information, contests/sweepstakes, or free consulting on their websites to entice prospective customers. To receive the information or to participate in a contest, prospects filled out an online form that asked them for their contact information and other valuable information, such as budget available for the purchase and estimated purchase timing. HubSpot’s competitors in this area included consultants who built online advertising, websites, blogs, and a social media presence for companies, as well as software companies with SEO products that helped companies maximize their likelihood of getting found by consumers using search engines.

Analyzing and Qualifying Leads

The goal in the middle of the customer funnel was to assess the potential of different prospective customers brought in by the lead-generation programs. Selling a customer required an investment of human and financial resources, and firms wanted to ensure that they were targeting these resources to prospects who were most likely to convert to customers. Many prospects brought in through lead generation had a low probability of becoming customers, and firms could save substantial money if they could identify those customers early and weed them out. The lead-qualification process focused on finding customers with potential to pass along to the sales force. HubSpot’s competitors in this area included consultants and software companies with proprietary methods for rating and ranking prospects based on historical analysis of the company’s current customers and conversion rates.

Closing the Sale

The goal in the bottom of the customer funnel was to convert prospects into customers. One player, Salesforce.com, dominated this segment, providing easy-to-use customizable software that

helped firms create a database of their prospects and track their conversion progress in real time. Salesforce.com’s software had become the industry standard for managing and tracking sales efforts.

Halligan and Shah hoped that HubSpot could dominate the lead-generation and analysis/ qualification stages of the customer funnel, just as Salesforce.com dominated the stage devoted to closing the sale. They claimed, “HubSpot could be to marketing what Salesforce.com is to sales.”

Filling HubSpot’s Customer Funnel

By 2009, HubSpot had 1,000 very diverse customers. Practicing what it preached, HubSpot had attracted these customers through inbound marketing. HubSpot used several different tactics to drive prospects into the funnel. First, the company had a robust website that attracted more than 300,000 unique visitors in 2008. The website featured white papers, webinars, podcasts, and a blog that provided information about Web 2.0 and inbound marketing strategies. HubSpot created and managed an 8,000-member LinkedIn group called Pro-Marketers, dedicated to marketing professionals who were interested in learning about Web 2.0 and inbound marketing. Employees came together every Friday to host their own television show, HubSpot TV, a live streaming podcast (also available on iTunes) that featured interactive commentary on topical events. HubSpot also produced YouTube video spoofs that changed the lyrics of popular songs like “You Oughta Know” by Alanis Morissette to sell the inbound marketing concept. The most popular of these spoofs was viewed more than 50,000 times. A video entitled “Cold Calling Is for Losers,” which humorously showed the futility of outbound marketing techniques, was viewed more than 35,000 times.

The HubSpot team was encouraged to build the company’s own Web 2.0 presence to supplement corporate activities. Many employees blogged and participated on social media sites such as Twitter to promote HubSpot. Inbound marketing was a passion for the HubSpot team members, who used every avenue they could to evangelize it to whoever would listen. The company website claimed, “At HubSpot, we live and breathe inbound marketing. We know a lot about it. We love to teach. We’ll make you an expert.”

HubSpot’s most successful inbound marketing program was its freeware, small software programs that were available for free and accessible on the Internet. Three commonly used programs were the Website Grader, the Twitter Grader, and the Facebook Grader. All were designed to provide useful information to prospective customers and introduce them to HubSpot. The graders allowed users to evaluate how well their websites, Twitter accounts, and Facebook profiles were performing. For example, Website Grader analyzed a company’s website, rated it versus other sites on the Internet, and offered suggestions for improvements. Users who accessed the free Web tools often completed a lead form expressing interest in other offerings, which fed them into HubSpot’s customer funnel. By 2009, more than 650,000 websites, 22,000 Facebook profiles, and 2 million Twitter accounts had been graded by the free tools. The freeware had also generated a lot of positive press and online buzz.

Volpe explained how all these activities fed HubSpot’s funnel: “We think about the size of the community we’ve built. It includes people on our e-mail list, people that subscribe to our feed in iTunes, people that subscribe to our blog, people that follow one of our accounts on Twitter, people that are fans of our page on Facebook. It’s sort of how many fans we have cultivated in the world.”

When HubSpot was just getting started, the sales force called on all leads coming into the funnel. HubSpot sold to any customer who was interested in buying its products. This helped achieve the critical mass the fledgling venture needed to survive. However, as the number of prospective customers grew, HubSpot began carefully qualifying leads before turning them over to the sales force. HubSpot constantly updated its lead-rating algorithm based on its success with converting different types of prospects and on the varying customer retention rates experienced postsale.

By 2009, the company was weeding out almost 50% of the leads in its funnel. Low-quality leads were given no further attention. The remaining 50% were rated on a scale of 1 (low probability of conversion) to 10 (high probability of conversion). Of the rated leads, 63% were graded with scores ranging from 7 to 10, making them a high priority for the sales force’s attention. The selling process was fairly involved and focused on a salesperson guiding a prospect through an online product demonstration; closing a sale took between 30 and 45 days from the point of initial contact to the final sale.

Since HubSpot’s inbound marketing did not target a specific type of customer, HubSpot found itself attracting a diverse set (see Exhibits 5 and 6). HubSpot’s customers came from many different industries, including professional services, health care, software, real estate, and construction materials. They included businesses selling to other businesses (B2B), as well as businesses selling directly to consumers (B2C). Two different types of customers were visible: small business owners and marketing professionals working in larger firms. HubSpot affectionately dubbed these two types “Owner Ollie” and “Marketer Mary.”

Owner Ollie: The Small Business Owner Customer

Owner Ollies made up 73% of HubSpot’s customer portfolio. Owner Ollies owned small businesses with 1–25 employees. Owner Ollies were busy, as they were simultaneously managing the human resources (HR), marketing, sales, operations, and finance areas of their companies. Given their companies’ small size, they did not have a dedicated marketing professional on staff and thus did most of the marketing themselves. Owner Ollies were curious about Web 2.0 and inbound marketing but had not made investments in consulting, software, or programs in this area. Their primary objective was to generate more leads for their businesses; Owner Ollies were focused on feeding the tops of their customer funnels. Time and resources were scarce, and Owner Ollies wanted quick, simple solutions to help them generate leads, because leads were the lifeblood of their small businesses. Owner Ollies were fairly easy to sell; HubSpot’s cost to acquire this type of customer was around $1,000. As Volpe explained, “Ollie doesn’t even think about marketing most of the time. He’s thinking about finance and HR and there is a leak in the pipes in the office. He’s got all kinds of stuff to worry about. He typically doesn’t shop around and try to find any other software competitive to HubSpot. He gets on the phone, he decides if he likes it, he gives you his credit card number and he’s like, ‘Great, let’s do it.’”

Marketer Mary: The Marketing Professional Customer

Marketer Marys made up 27% of HubSpot’s customer portfolio. Marketer Marys were marketing professionals working in companies that ranged from 26 to 100 people. Unlike Owner Ollies, who tended to work alone on marketing, Marketer Marys were supported by a marketing team. As marketing professionals, Marketer Marys were more educated than Owner Ollies about Web 2.0 and were looking for assistance with running their programs, evaluating their results, and justifying their return on investment to senior management. Marketer Marys often had Web consultants who designed websites and programs. Hence, Marketer Marys were more interested in the analytics and reports that HubSpot provided. Marketer Marys ran many more inbound marketing programs than Owner Ollies, and needed more robust and sophisticated tools to design them and measure their results. Marketer Marys had more money to spend on products like HubSpot but were harder to reach and had a longer selling cycle, because they often had to get approval from managers higher up in their organizations. HubSpot’s cost to acquire this type of customer was $5,000.

As these two customer segments emerged in the customer base, HubSpot tweaked its product, developing two different versions, each with features designed to better serve the needs of either Owner Ollies or Marketer Marys (see Exhibit 7).

HubSpot took good care of its customers. Jonah Lopin headed up the HubSpot services group, known as the Customer Happiness Department. Lopin and his team quickly realized that the customers HubSpot was serving were very diverse, making it difficult to standardize processes across customers. Different customers had different familiarity and comfort with Web 2.0 tools. B2C companies were much more sophisticated Web 2.0 users than B2B companies, and many found that HubSpot’s content templates were too rudimentary for their needs. Most B2C companies already had highly performing websites and a strong social media presence, and had engaged Web 2.0 consultants and agencies to work with them prior to coming to HubSpot. In contrast, most B2B customers had little to no experience with Web 2.0 and no other agencies or consultants supporting their efforts. They required more attention from Lopin and his team during start-up and during their lives as customers.

The second difference was that B2B customers seemed to derive greater value from inbound marketing than B2C customers did. Many of the B2B customers sold products or services that were complex, which required buyers to undergo in-depth learning prior to purchase. Blogs, podcasts, webinars, and other Web 2.0 programs that explained the product served as valuable inputs into a customer’s decision-making process and were effective feeders of B2B customer funnels. The buying processes associated with the B2B companies were much more complex than those associated with B2C companies, due to a longer decision-making cycle involving multiple stakeholders at the buying firm. Because of this, B2B customers were more selective about whom they focused their sales forces’ attentions on and derived great value from the lead-qualification analysis that HubSpot provided.

The third difference was that Owner Ollies were less knowledgeable and sophisticated than Marketer Marys. Owner Ollies also derived greater initial value than Marketer Marys. Volpe explained, “The great part about Ollie is that we can actually have a much larger impact on his overall business than we can with Mary. It saves him a ton of money and he is getting a much better customer flow. It has fundamentally changed his business.”

Lopin also saw differences in the customer retention data, as the churn rate (the rate at which customers canceled their HubSpot subscriptions) varied across segments. The results of his analysis are listed in Table A (also see Exhibit 8). Although Marketer Marys were a harder sell up front, they stayed longer than Owner Ollies. Lopin speculated that usage of the monthly analytics and reporting was driving her longer customer life. Owner Ollies were focused on using SEO to increase visitors to their websites. They derived much of their value in the first few months as a customer. Once Owner Ollies thought they were “done” optimizing, they would cancel their HubSpot subscription.

Investigating further, Lopin realized that customers who hosted their websites on HubSpot’s content management system (CMS) had lower churn rates than customers who hosted with other companies. Lopin urged the sales force to push the CMS service to new customers. As a result, an increasing number of Owner Ollies were migrating their websites to HubSpot. In 2009, 13% of Owner Ollies selected HubSpot to host their site, paying an initial fee of $500, which covered 12 hours of HubSpot consulting designed to make the migration process painless. In contrast, only 2% of Marketer Marys hosted their websites with HubSpot.

Finally, Lopin saw differences in the amount of time different types of customers were willing to put into using the HubSpot software. To derive meaningful results from the software, customers needed to consistently invest 10 hours per week to it. This was a significant time investment, particularly for Owner Ollies. Customer Geoff Alexander, president of Geoff Alexander & Company, a telesales training company, explained: “It took a couple of hours to mash through all the training, but the key to HubSpot is putting the time into it. Without HubSpot, I just would have winged it. The investment required for HubSpot is actually a lot like paying for web intelligence school. I was ignorant of the nuts & bolts of SEO and online lead generation for years. Now I’m making up for it.” (HubSpot, Customer Quotes, 2009).

Some of HubSpot’s current customers were not putting in the time, as shown in Table B. Fifteen percent of current customers had not logged in to the HubSpot software over the past 12 weeks.

When customers complained that HubSpot was not working for them, the first thing the customer service team looked at was the amount of time the customer was spending on HubSpot. As Lopin explained, “It’s like saying that your gym isn’t working. People say ‘I joined a gym six months ago and I’m still kind of out of shape, and it’s not working.’ No, it’s like, you’re not working out. There’s no question that inbound marketing is effective, it’s just that you’ve got to do the work.”

HubSpot customers who were using the software were seeing results (see Exhibit 9). Dedicated users experienced a burst of increased leads in the first six months after using the software, a result of the creation of inbound marketing programs. Over time, the growth rate in leads diminished, but customers continued to gain value by focusing on efficiently rating and following up on the leads with the most potential.

Scaling Up

While their employees were celebrating breaking the 1,000-customer mark, Halligan and Shah were not resting on their laurels, realizing that they still had a lot of work to do. The founders knew that they needed to quickly scale up the HubSpot business. Their venture partners saw huge market potential for HubSpot and looked for the company to make significant inroads into small and medium-size businesses. Table C lists the number of small and medium-size businesses in the United States that formed HubSpot’s market potential.

Volpe was excited about the opportunity:

We’re growing fast, there’s a market there. We’re trying to get as big as we can as fast as we can. We have this gigantic vision for what the product should do and it is relatively broad. And I think it’s why we think that the market we are going after is potentially very, very large and today, our product is a small, small fraction of what it needs to be. The company is still small. We’ve got only so many engineers and we can only build things so fast and that whole process in matching the product to the market and building the right features at the right time is difficult. Sales and marketing have been ahead of the product and we just need to continue to focus on the product and hope that it will catch up more.

As they looked back at their achievements, Halligan and Shah realized that the inbound marketing that built their business presented them with challenges that they would have to overcome to reach the next level. While traditional marketers prospected for new customers based on a predetermined target market that was strategic, inbound marketers fished for customers, took what they caught, and then figured out who their actual market was. This left HubSpot with a very diverse customer base and made strategic planning more difficult. Different types of customers valued different features, and prioritizing items in the long list of potential software updates proved challenging. A mix of customers also added layers of complexity and cost to the sales and customer service areas of HubSpot. Halligan and Shah wondered if they should continue to throw a wide net to attract all different types of customers or if they should narrow their focus to a particular target market. Roberge believed that HubSpot needed to refine its focus:

If we picked one type of customer to focus on, we would likely get to success faster. Ollie and Mary speak different languages, have different needs. Now, we are choosing between them and dividing our development resources. There are certain applications that are specific to Ollie and they would be designed and implemented differently. And then it affects customer support and how well we really get to know our customer, understand them, and then ace the product.

Halligan and Shah debated which segments were the best customer segments to cater to. Was it the B2C or B2B market? Was it Owner Ollies or Marketer Marys? HubSpot employees disagreed about who was more profitable over the long term. Roberge placed his bets on Marketer Marys: “I think there are more Ollies out there, but I think we can get more money out of Mary. There’s a lot of macroeconomic risk associated with Ollie because there are a lot of small businesses that are just bad business models, they are risky during recessions.” Others argued that Ollies were likely to stick around longer, especially when they were using the content management system. Narrowing the target market presented challenges for an inbound marketing company. HubSpot was already ignoring 50% of the leads brought in by its inbound marketing programs. This selectivity seemed at odds with the founders’ desire to grow quickly. Shouldn’t HubSpot sell to anyone who wanted to buy the product?

Halligan and Shah also wondered if their current pricing strategy was effective. While the software-as-a-service (SaaS) monthly pricing model seemed to be the right way to capture maximum value from customers and provide a reliable income stream for HubSpot when it started, the patterns in customer churn rates were showing that some customers were obtaining the initial burst of value from the software and then canceling it within the first several months. Halligan and Shah wondered whether they were leaving money on the table by not charging more for the HubSpot software up front or locking in customers for longer periods. The diverse customer base also presented opportunities and challenges for pricing, which made Halligan and Shah consider if the two products and price points they had developed to address the Owner Ollie and the Marketer Mary market segments were adequate, given those segments’ different business needs and sensitivity to price.

Finally, an internal debate raged within HubSpot about the role of outbound marketing programs going forward. Looking at aggressive growth targets, some employees, including Roberge, were itching to supplement the inbound marketing tactics with traditional outbound marketing programs, including targeted telemarketing and traditional advertising. Roberge lamented:

Most sales organizations are responsible for doing their own lead generation for prospects. We have to wait for the inbound marketing programs to bring leads to us. I’m not allowed to cold-call prospective customers because HubSpot’s been preaching inbound marketing and publishing these videos and webinars about how cold calling is “for losers.” If someone then gets a cold call from someone on my team, that can hurt our brand. So I am actually restricted from doing outbound prospecting, which makes things more challenging for me, because I own the sales number and I have to sit back and be dependent on what marketing brings to me. So, yeah, I think we are hindering scale a little bit by not creating outbound marketing programs.

Looking at their growth rates, Halligan and Shah realized that they would have to push things up a notch to achieve their long-term goals (see Exhibit 10). However, the founders were as committed to inbound marketing for their own company as they were for their customers. Volpe, in an interview with RainToday.com, explained, “If we couldn’t make inbound marketing work for our own company, then we shouldn’t be selling software that helps other companies do it.” Though the founders’ vision was centered around inbound marketing, the reality was that most businesses— including HubSpot customers—would likely have a mix of inbound and outbound marketing.

 
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Questions Retailing

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1-Why is human resource management more important in retailing than in manufacturing firms?

2-Some retailers have specific employees (merchandise assistants) assigned to restock the shelves and maintain the appearance of the store. Other retailers have sales associates perform these tasks. What are the advantages and disadvantages of each approach?

3-How can national retailers like Best Buy and Victoria’s Secret, which both use a centralized buying system, make sure that their buyers are aware of the local differences in consumer needs?

4-Assume that you’re starting a new restaurant that caters to college students and plan to use college students as servers. What human resource management problems would you expect to have? How would you build a strong organization culture in your restaurant to provide outstanding customer service?

5-What HR trends are helping meet employees’ needs, increase job satisfaction, and lower turnover?

6-What is a Customer Relationship Management (CRM) program? Describe one CRM that you have participated in as a customer.

7- Why do retailers want to determine the lifetime value of their customers? How does past customer behavior help retailers anticipate future customer retention?

8- Why are most frequent-shopper programs ineffective in terms of building loyalty? What can be done to make them more effective?

9- What are the different approaches retailers can use to identify customers by their transactions? What are the advantages and disadvantages of each approach?

10-How do on-the-job, Internet training, and classroom training differ? What are the benefits and limitations of each approach?

11-Many large department stores and specialty stores are changing their salespeople’s reward system from a traditional salary to a commission-based system. What problems can commission based systems cause? How can department managers avoid these problems?

12-Discuss how retailers can reduce shrinkage from shoplifting and employee theft.

13-Drugstore retailers, such as CVS, place diabetic test strips and perfume behind locked glass cabinets and nearly all over-the-counter medicines behind Plexiglas panels. These efforts are designed to deter theft. How do these security measures impact honest customers.

 

 

14-For each of these services, give an example of a retailer for which providing the service is critical to its success, then give an example of a retailer for which providing the service is not critical: (a) personal shoppers, (b) home delivery, (c) money-back guarantees, and (d) credit.

15-Review Retailing 18.2 about customer service at Zappos. How does Zappos create such a positive culture among its service personnel?

16- Consider a situation in which you received poor customer service in a retail store or from a customer service provider. Did you make the store’s management aware of your experience? Whom did you relay this experience to? Have you returned to this retailer? For each of these questions, explain why you did what you did.

17-How can retailers provide high quality personalized service? Use an ophthalmologist’s office that also sells eye glass frames and fills prescriptions for contact lenses as your example. How does this compare with the service provided with 1-800 CONTACTS online or in-store with their bricks and mortar partner, Walmart?

 
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Principles Of Accounting II

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Hello everyone, I have an Assignment for you today. This assignment must be DONE by Tuesday, August 11, 2020, no later than 10 pm. By the way, I need this assignment to be PLAGIARISM FREE & a Spell Check when completed. Make sure you READ the instructions CAREFULLY. Now without further ado, the instructions to the assignments are below:

Instructions
Cookie Creations (Chapters 9 and 10)

This assignment will focus on the Cookie Creations case study from Chapter 9 (page 9-37) and Chapter 10 (page 10-42) of your textbook. There are two parts to this assignment. Review the case situations for each part (i.e., in each chapter), and then complete the instructions.

Part I

One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit.

Natalie comes to you for advice. She asks you to address the questions below.

  1. Curtis has given me a set of his most recent financial statements. What calculations should I do with the data from these statements, and what questions should I ask him after I have analyzed the statements? How will this information help me decide if I should extend credit to Curtis?
  2. Is there an alternative other than extending credit to Curtis for 30 days?
  3. I am thinking seriously about being able to have my customers use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card?

The following transactions occurred in June through August 2020.

June 1: After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,150 (cost of mixer $620).

June 30:  Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a 1-month, 8.35% note receivable.

July 31: Curtis calls Natalie. He indicates that he is unable to pay today but hopes to have a check for her at the end of the week. Natalie prepares the journal entry to record the dishonor of the note. She assumes she will be paid within a week.

Aug. 7: Natalie receives a check from Curtis in payment of his balance owed.

Instructions:

  • Answer Natalie’s questions in a Word document.
  • Prepare journal entries for the transactions that occurred in June, July, and August in an Excel spreadsheet. Round to the nearest dollar. Note that the company uses a perpetual inventory system. Use the Part I Excel Template (which will be attached below) to record your transactions.

To reiterate, you will write your responses to Natalie’s questions (1–3) in a Word document, and you will complete the journal transactions in an Excel spreadsheet. Your responses to Part I (Natalie’s questions) should be a minimum of one page in length, and you will add your responses for Part II to this document before submitting.

Part II

Natalie is also thinking of buying a van that will be used only for business. The cost of the van is estimated at $36,500. Natalie would spend an additional $2,500 to have the van painted. In addition, she wants the back seat of the van removed so that she will have a lot of room to transport her mixer inventory as well as her baking supplies. The cost of taking out the back seat and installing shelving units is estimated at $1,500. She expects the van to last 5 years, and she expects to drive it for 200,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates that at the end of the 5-year useful life, the van will sell for $7,500. Assume that she will buy the van on August 15, 2020, and it will be ready for use on September 1, 2020.

Natalie is concerned about the impact of the van’s cost on her income statement and balance sheet. She has come to you for advice on calculating the van’s depreciation.

Instructions:

  1. Determine the cost of the van.
  2. Prepare three depreciation tables for 2020, 2021, and 2022: one for straight-line depreciation (similar to the one in Illustration 10-9), one for double-declining balance depreciation (Illustration 10-13), and one for units-of-activity depreciation (Illustration 10-11). Use the Part II Excel Template (which be attached below) to determine depreciation. For units-of-activity, Natalie estimates that she will drive the van as follows: 15,000 miles in 2020; 45,000 miles in 2021; and 50,000 miles in 2022. Recall that Cookie Creations has a December 31 year-end.
  3. What impact will the three methods of depreciation have on Natalie’s balance sheet at December 31, 2020? What impact will the three methods have on Natalie’s income statement in 2020?
  4. What impact will the three methods of depreciation have on Natalie’s income statement over the van’s total 5-year useful life?
  5. What method of depreciation would you recommend Natalie use, and why?

Use the same Word document that you used to record your Part I responses (one page in length), and add your responses for the Part II questions (1–5), which should be one page in length.

In summary, you will submit one Word document containing your responses for Parts I and II (two-page minimum) and two Excel spreadsheets containing Natalie’s journal transactions from Part I and the depreciation tables from Part II. You will upload a total of three files to Blackboard (one Word document and two Excel spreadsheets).

There are no resources required for this assignment; however, your Word document should be formatted using APA Style.

There are several attachments below first four are screen shot from the text book and basic examples of how to calculation Methods (from Chapter 9 & 10). The next attachment is the Excel Template for part one of the assignment that must complete. Then Study Guide will be the next attachment. Following the study will be the second template for part 2 of the assignment. And remember the response for both part 1 & 2 of the assignment goes in one Word document (Two pages minimum in total for both responses – APA style). Complete both complete both templates in there own separate documents. NO PLAGIARISM NO PLAGIARISM!!!!!!

 
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