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Catalina Marketing

Essay by 24  •  August 27, 2010  •  2,438 Words (10 Pages)  •  1,869 Views

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History

Catalina Marketing Corporation was founded in 1983 by five friends, Tom Mindrum, Mike O'Brien, George Off, Mike Scroggie and Brian Yeatman, while on a boating trip to Catalina Island in Southern California. The five friends were remarkably similar, though different. All five had experience in the consumer research field. All five had strong areas (whether research, computer technology or sales) at which they excelled. All five were looking for a new line of work that would be challenging and most importantly, paid well. The five came up with an idea to use the new scanner technology at grocery stores to gather information and print a coupon for a rival product.

The five friends knew it would not be easy to found their own business. They unanimously decided to name Mike O'Brien as their first Chief Executive Officer (CEO) due to the fact that he was the only one in the group who was not currently employed and could dedicate the most time to the project. O'Brien was also the most out-going and the best salesperson in the group with the best business connections. All knew they could trust O'Brien to keep all their interest at hand. All five contributed $40,000 (for a total initial investment of $200,000) in order to set up the company. George Off and Mike Scroggie worked together to come up with a software that could collect and analyze the information to print coupons based upon the Universal Product Code (UPC) bar code. The idea was to come up with a means of modifying the only programmable POS (point of sale) system of the day, an IBM 3650, to print coupons once given a cue. A small family run chain in Rochester, New York (Wegmans) gave Catalina permission to test it's "Coupon Solution" in their stores. The son of the owner, Danny Wegman, signed the contract for this test pilot.

O'Brien got to work in using his extensive contacts to find clients to sign up for a test of the scanner-coupon idea. He signed eight clients (Coca-Cola, Coke Foods, General Mills, L'EGGS, Tropicana, Ralston Purina, Kraft and Hills Bros. Coffee, and Procter & Gamble) to make initial investments of $30,000 each for a total of $240,000.

The Coupon Solution test program finally began in early 1984. The early coupons were printed on the backs of the register tape by the stores existing dot-matrix printers. George Off would often travel to Rochester to make sure the program was running smoothly. However, when Bob Wegman, the owner of the grocery chain, returned from his winter home in Jamaica, he was doubtful of the value of the program. Like many after him, Wegman was not impressed with the idea of giving someone a coupon for an item after they made a purchase. George Off got to work on a new concept that would validate Catalina's value.

George Off wrote the first software that could scan and validate coupons in the country. Using Catalina's exciting software capabilities, Off was able to prove to Wegman Catalina coupons were valuable. By the second month of testing the coupon validation software, data showed The Coupon Solution averaged a redemption rate of fourteen percent, far better than the traditional freestanding insert coupons (they only generated a redemption rate of four percent). Wegman allowed Catalina to complete their contract as signed by his son.

Money was getting tight so O'Brien sought to expand the number of chains serviced with the help of venture capital. Since none of the five founders knew anything about venture capitalists, they went to the public library to get a list of the most promising listings. PacifiCorp in Portland, Oregon was sent videotape of the coupon-scanning system in action. That caught the eye of Diane Walker, director of PacifiCorp's venture capital arm. After meeting with Mike O'Brien and speaking with George Off, Walker approved the financing of the Coupon Solution Program for $1.3 million.

Even though Catalina Marketing now had a substantial bank account, money was tight in the early years. Catalina's employees saved money by keeping their expenses (rent, office supplies, furniture, etc.) low and limiting spending. All employees pitched in to work were needed including the CEO. It was not uncommon for a sales person to deliver coupon paper and unload data from the PC hard drive during a routine visit (there was no such thing as modems at that time). Catalina spent all it's resources on technology and equipment for expansion stores. After proving to be successful handling popular South California grocers, Ralph's and Boys, Catalina signed more grocery chains to their list of customers.

Eventually, Catalina Marketing had manufacturers calling them. A former Anaheim sales manager remembers receiving a phone call from a Proctor & Gamble representative saying, " Look, I don't know what your company does, but I know our company has got to do it. So how do I start a program?"

Price

Catalina Marketing clearly has the market advantage when it comes to pricing their product. Since Catalina has gone through the effort to patent their software and hardware, it is nearly impossible to compete with the services they offer. Catalina Marketing charges retailers a one fee for installation of thermal coupon printers, a PC and all hardware necessary to connect the PC to store's existing scanners. Retailers agree to use the "Checkout Coupon" program for a minimum of five years. In return, Catalina pays retailers a small fee for each coupon printed and supplies them with coupon paper at no cost. This aspect of the business is not profitable.

Catalina Marketing's main source of revenues is selling manufactures a "lifecycle" on its Network. A lifecycle is a non-interrupted 4-week period in which a manufacturer is purchases advertisement. A coupon or message is printed when a trigger UPC is scanned at the point of sale. A manufacturer is allowed to purchase as many lifecycles they desire. For example, Coca-Cola can purchase five lifecycles for Diet Coke, which means their coupon prints for 20 weeks. The manufacturer is guaranteed to be the only advertiser in their category. Therefore, as long as Coca-Cola renews their contract, Catalina will not sell lifecycles to PepsiCo for Diet Pepsi or Pepsi One. However, Coca-Cola can set a purchase of a PepsiCo product to be a trigger for a coupon print. Catalina Marketing also receives a fee from the manufacturer for every coupon redeemed. Since the "Checkout Coupon" program boast a high redemption rate, this is also very profitable to Catalina Marketing.

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