The question in the case is whether Kim should spend the fresh (2nd round) VC financing in Marketing and scale up the business or should focus the resources on fine tuning the existing product. Our recommendation is that the company should allocate around 70% of $4mn in marketing spend and 30% in product development and fine tuning the existing one. This recommendation is primarily based on the fact that the company should maximize the first mover advantage and develop barriers to entry by reducing the cost of goods sold with the help of economies of scale and eventually reducing the sales price so as to be competitive and not let others to enter the space.
This is mainly because the business model is very easily replicable and thus create the risk of being thrown out of business in the long run. Moreover, the product development and fine tuning is largely replicable irrespective of the number of customers and each customer could be segmented based on the 4 bins Kim and Nolan came up with. With reference to the spend, the company should focus on Email marketing, Sophisticated social media, developing sophisticated search mechanics, promoting the deals websites advertising and also advertising through blogs.
However, it is worthwhile a mention that though emails and network affiliates program involves huge spends, they are directly proportional to the amount of business the firm does or the customer acquisition. The company may run the risk of:
1.Exposing the activities and products in addition to the business model by scaling up the marketing spends and bringing unprecedented levels of transparency to customers along with the firms competitors and potential competitors
2.Exponentially increase the customer retention and acquisition costs by developing multiple layers of acquisition costs
3.May negatively affect the performance and reputation of the firm if the customers have complaints about the product However the firm may mitigate these risks by:
1.Acquiring maximum amount of market share and create growth in the market size. Thus, creating barrier to entry as a result of low selling price and variety of product match. This is mainly because the idea is substantially untapped and the product is simultaneously acceptable. The firm must target to tap as much market as possible before any new or existing player takes it over.
2.The increasing customer retention and acquisition costs could also be countered by lowing the COGS as a result of economies of scale and effecting the retention by further lowering the selling price without affecting the margins much.
3.Negative reputation due to customer complaints could be countered with the help of product development and fine tuning the existing products and ideas based on customer needs and value system. This could be done by implementing the CRM with the help of 30% of the additional funds raised in the 2nd round.
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