Keurig: Managing a New Product Launch By ... - Franklin College

Keurig: Managing a New Product Launch 

By: Melissa Bockhold 

Heather Coddington 

Laura Duerstock 

Ali Wampler 

March 1, 2006

TABLE OF CONTENTS 

I. Introduction……………………………………………………………………3 

II. Assumptions…………………………………………………………………...4 

III. History………………………………………………………………………....5 

IV. SWOT Analysis 

1. Two-Cup Approach……………………………………………………….6 

2. One-Cup Approach………………………………………………………..7 

V. The Coffee Market 

1. Market Analysis/Needs/Growth…………………………………………...8 

2. Competition………………………………………………………………..9 

VI. Keurig Marketing Strategy 

1. Target Market…………………………………………………………….11 

2. Product 

i. K-Cups (or Keurig Cups)...…………………………………….14 

ii. B100 Brewer...…………………………………………………15 

iii. 

3. Place 

Product Life Cycle……………………………………………..16 


ii. B100 Brewer...…………………………………………………17 

iii. Market Segmentation…………………………………………..18 

4. Promotion 


ii. 

5. Pricing 

B100 Brewer...…………………………………………………19 

i. K-Cup (or Keurig-Cup)……..………………………………….21 

ii. B100 Brewer...….……………………………………………...26 

VII. Problematic Issues and Alternatives…………………………………………36 

VIII. Conclusion…………………………………………………………………...38 

IX. Comments on Opposing Group’s Paper……………………………………..39 

X. Keurig Authorized Dealer Interview………………………………………...44 

XI. Works Cited………………………………………………………………….46 

2

I. INTRODUCTION 

Everyone has a morning ritual while getting ready for the day’s activities. Some 

people exercise. Some people shower. Some people help get their children ready for 

school. Some people watch the news or listen to traffic reports. Some people drink 

coffee. In fact, in 2001, 20 million Americans drank gourmet coffee on a daily basis 

(Sherry). 

Keurig, Inc. was founded on the idea that coffee lovers should be able to brew and 

enjoy one perfect cup of coffee at time. With the establishment of gourmet coffee houses 

like Starbucks, consumers began stretching their pocketbooks a bit more by spending on 

average $1.50 or more for a cup of gourmet coffee (Anderson 4). This change in 

consumer behavior opened the door for Keurig to offer gourmet coffees by the single-cup 

in offices in 1998. Keurig noticed that from 1996 to 2000 gourmet coffee sales increased 

by 40 percent in the U.S. at-home coffee market. This statistic persuaded Keurig’s 

management to develop an at-home, one-cup coffee brewer specifically for gourmet 

coffee lovers (Anderson 15). 

Keurig’s development progress toward the launch of their first at-home brewing 

model was stunted in February of 2003, six months prior to the release date of the brewer, 

by company shareholder Green Mountain Coffee Roasters Inc. This paper will address 

Green Mountain Coffee Roasters’ concerns and provide recommendations and alternative 

solutions to problematic pricing and marketing dilemmas. In addition to our analysis, we 

are going to examine the presenters’ approach and critique the options they suggest. 

3

II. Assumptions 

In analyzing the marketing strategies and launch options of Keurig, Inc., we are operating 

under the following assumptions: 

• Surveys and market testing were completed with professional services and 

accurately reflect the current feelings of the consumers at the time of testing. 

• The description of the coffee drinkers/customers is correct. 

• Keurig is outsourcing the manufacturing of their brewers. 

• Keurig has already incurred design and manufacturing cost of their Keurig-Cup 

and brewer of $700,000 ($400,000 for development of the new cup-based 

technology, and $60,000 per Keurig-Cup packaging line, assuming one line per 

each of Keurig’s five roasters). 

• The manufacturer of the B100 included all variable and fixed costs in their 

calculation of the unit costs for manufacturing the B100 brewer. 

• The costs of the B100 brewer, as reported by the manufacturer, are $220 at the 

time of Mr. Lazaris’ meeting with GMCR management. The manufacturer is 

attempting to lower those costs to $200, but this has not yet been achieved. 

4

III. History 

Timeline of Keurig, Inc. and the North American Coffee Market 

Mid- 

1940s 

1960s 

Mid- 

1990s 

• Peak of coffee consumption (16.5 pounds per capita) 

• Popularity of soft drinks causes coffee consumption to decline 

• All-time low of coffee consumption (6.1 pounds per capita) 

1992 • Keurig’s inception 

Late 

1990s 

1998 

2000 

2001 

2002 

2003 

• Gourmet coffeehouses reinvigorate the market 

• Keurig introduces its single-cup brewing system (B2000 model); 8 varieties of coffee 

offered 

• 14.8% of brewer distributors offer a single-cup system for the Office Coffee Service 

(OCS) market 

• 44.8% of brewer distributors offer a single-cup system for the OCS market 

• Filterfresh establishes relationship to market Keurig’s commercial brewer, thus creating a 

system with greater variety of coffees and teas 

• (February) Ownership structure changes; three largest shareholders become Van Houtte, 

Inc. (28%), Green Mountain Coffee Roasters, Inc. (42%), and Memorial Drive Trust 

• John Whoriskey joins Keurig as the GM of the at-home Division 

• Keurig’s roaster partners ship more than 125 million K-Cups 

• Total K-Cup shipment since the launch rises over 340 million 

• Keurig begins working on a line of teas (T-Cups); the first line is to be “Celestial 

Seasonings” brand teas 

• OCS market reaches $3.46 billion in total revenue 

• Keurig’s total number of brewers shipped across North America reaches 33,000 

• 20 million Americans are drinking gourmet coffee on a daily basis 

• (February) Keurig sets plans to launch B100 system in the at-home market 

• Total single-cup brewer placement in the OCS market reaches 143,200 

• Keurig increases roaster partnership to five, thus providing the largest variety of coffees 

for a single-cup brewing system 

5

IV. SWOT 

1. Two-Cup Approach with Brewer 

Strengths 

• Does not threaten the KADs and the OCS market 

• Increases control of pricing – specifically for the Keurig-Cup 

• Increases the likelihood of managers’ participation in in-office promotions of the 

Weaknesses 

Keurig at-home system, because the differentiation would prevent theft of K-Cups 

provided for office consumption. 

• Don’t confuse the buyer. Similarity between cups can cause confusion between 

which cup goes with which brewer. 

• Increased inventory for roasters 

• Lack of demonstration ability in retail sector – Keurig-Cups not available for 

purchase in retail stores 

• Lack of resources to properly market and sell brewer and Keurig cup in retail 

outlets 

Opportunities 

• No change or continued growth in OCS market = more available resources for 

Threats 

expanding distribution of at-home market into the retail sector 

• Brewer pricing does not decrease and competition enters with a lower pricing 

strategy; Keurig suffers large losses. 

6

• The brewer pricing is so high that breakeven sale point is not met, making Keurig 

rely on Keurig-Cup sales to make up for losses from brewer sales. This scenario 

results in the brewer becoming loss leader. 

• Possibility of threatening the OCS market, which is Keurig’s cash cow 

2. One-cup Approach with Brewer 

Strengths 

• Allows quick entry into the at-home market before competition 

• Less customer confusion 

• Roasters not required to keep two separate cup inventories (one inventory for 

OCS market and one for at-home market) 

• Roasters’ production levels will probably increase with the increase in demand, 

Weaknesses 

since the at-home market will include KADs and at-home consumers. 

• Could result in alienation of the OCS K-Cup channel 

• Decrease in control of pricing with the KADs 

Opportunities 

• If Keurig is able to enter the market quickly, then they have more opportunity and 

time to come out with smaller and cheaper brewers. 

• Easier to enter the retail market in the future because of less overall costs 

Threats 

• Brewer pricing does not decrease and competition enters with a lower pricing 

strategy; Keurig suffers loss of market share. 

• Lack of resources to market and sell brewers and cups through retail outlets at 

time of launch 

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• OCS users experience losses from K-Cup theft and thus it is not economical for 

offices to use the Keurig system. 

V. The Market 

As shown in our diagram below, the overall coffee market is vast and growing. 

The gourmet coffee market generates around $7 billion dollars in sales annually. 

According to these statistics, there is a market, in terms of amount of coffee consumed, 

for Keurig’s single-cup brewer. However, Keurig is not the only company with their eye 

on the single-cup market. Several others are seeing the growth potential and are 

developing their own at-home one-cup brewers. This section will delve more into the 

coffee market as a whole and the competition that is challenging Keurig. 

1. Market Analysis/Needs/Growth 

2000 Total Retail Coffee Market ($ in billions) 

Ot her, 

4.6 billion 

A way f rom Home - Gourmet , 3.9 

billion 

A t Home - Gourmet , 

3.1 billion 

At Home - Retail, 

6.9 billion 

(Anderson 6) 

8

2. Competition 

In the Away-from-Home single-cup market, Keurig has two primary competitors: 

Filterfresh Coffee Service, Inc. and Flavia. Filterfresh, subsidiary of Van Houtte, Inc., 

was the pioneer of the one-cup coffee brewing system, introducing the technology in the 

1980s. Although Filterfresh was the first to introduce a single-cup brewer, their system 

left much room for improvement. The hopper it used made clean-up and reloading coffee 

beans necessary (Anderson 5). Keurig’s introduction of the K-Cup enhanced the one-cup 

system to something better and more convenient for users. Similar to Keurig’s system, 

Flavia’s focus is also on ease of use. Flavia offers a variety of twenty-four coffees in 

individual, foil-sealed Filterpacks (Anderson 6). 

In the at-home single-cup market, Keurig faces greater competition. Both Salton 

and Sara Lee plan to enter the at-home market, and there is speculation that both Procter 

& Gamble and Nestlé may do so as well. The pricing of Procter & Gamble, Nestlé, and 

other competitors’ brewers and coffee pods is much lower than the proposed pricing of 

Keurig’s. They also plan to sell through mass retail and grocery outlets (Anderson 8-9). 

Salton’s home model retails at $49, Sara Lee’s at $70, and Procter & Gamble is expected 

to price similarly upon entering the market (Anderson 8). Keurig does not currently have 

the resources to compete in these retail markets, so one of Keurig’s challenges is in 

creating meaningful product differentiation to bring their brewer to the up-scale market. 

9

In looking at the following exhibit, we can see that there is stiff competition in the 

general coffee market: 

Chock Full o' Nuts 

3% 

Private Label 

8% 

Community Coffee 

2% 

Tetley 

2% 

Starbucks 

4% 

Nestle 

5% 

2000 Coffee Market Share 

Other 

8% 

Philip Morris/Kraft 

32% 

Proctor & Gamble 

36% 

(Anderson 18) 

Together, Procter & Gamble and Philip Morris/Kraft hold 68% of the entire 

market, although they primarily target the non-gourmet coffee consumer (Anderson 18). 

Keurig must utilize a marketing strategy that creates a competitive advantage, thus taking 

away market share from other companies and attracting those customers to gourmet 

coffee and brewing systems. 

While the entire coffee market seems to be an oligopoly with Procter & Gamble 

and Philip Morris/Kraft as the main competitors, Keurig is targeting a more up-scale 

audience of gourmet coffee drinkers. Here, it is important to define the relevant target 

market and competitors within that market. In the gourmet sector of the coffee market, 

perfect competition does not exist; not all products offered are exactly the same. Instead, 

10

this is monopolistic competition. Products and whole marketing mixes contain 

differences between companies, models, and pod systems. This gives the competitors 

pricing options (McCarthy 96). 

In this monopolistic competition, Keurig’s K-Cup (or Keurig-Cup) system and 

brewer match up very well against the competition. Keurig has some significant 

advantages over the competition; there are, however, areas in which Keurig trails. For 

example, when comparing the brewers of Flavia and Melitta, a subsidiary of Salton, the 

main difference is in the size of cup brewed. Melitta and Flavia both offer the user a 

choice between a strong five-ounce cup and a weaker eight-ounce cup. Keurig’s B100 

only offers the eight-ounce choice (Davids). However, Keurig is viewed to have the 

upper hand over these two companies because they offer the consumers a greater variety 

of coffees and a better quality coffee with every cup. 

In the up-scale sector of multi-cup brewers, competition includes Cuisinart, 

Krups, Braun, DeLonghi, and Bunn (Anderson 8). The consumers of these up-scale 

brewers are those that Keurig will target and attempt to show the appeal of one-cup 

technology. 

VI. Keurig Marketing Strategy 

All companies need a marketing strategy upon entering a new market. In 

Keurig’s case, they had a successful marketing strategy for the OCS market already in 

place by the time they decided to break into the at-home market. Below, we will discuss 

Keurig’s approach to marketing their B100 brewer. 

1. Target Market 

As Keurig decided whether or not to launch their product into the at-home market, 

they looked at the statistics for the United States retail at-home coffee market. The 

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esults were very promising. In 1996, gourmet coffee sales were at $2,200 million. Four 

years later, in 2000, the gourmet coffee sales had increased by 40 percent to $3,100 

million. Also, in 2000, approximately 320 million pounds of gourmet coffee were sold in 

the United States, a 25.5 percent increase in pound consumption by volume from 1996. 

These large boosts in the market’s gourmet coffee area proved to Keurig that this market 

was and would continue to quickly expand. Keurig needed to find out if their single-cup 

brewer would be accepted by gourmet coffee consumers (Anderson 15). 

Year 

2000 

1999 

1998 

1997 

1996 

U.S. Retail At-Home Coffee Market 

2200 

0 500 1000 1500 2000 2500 3000 3500 4000 4500 

2500 

Coffee Sales ($ in millions) 

2800 

3000 

3100 

3815 

3800 

3975 

3905 

4205 

Gourmet 

Mass Market 

12

Year 

2000 

1999 

1998 

1997 

1996 

255 

270 

290 

U.S. Retail At-Home Coffee Market 

320 

310 

0 100 200 300 400 500 600 700 800 900 

Pound Volume (in millions) 

840 

830 

850 

845 

850 

Gourmet 

Mass Market 

From 1999 to 2001, Keurig carried out market research studies to determine the 

acceptability of their product to the at-home consumer. The research was conducted in 

several different formats. There were intercept and internet surveys, surveys of current 

OCS users, and focus groups of at-home test users (Anderson 7). 

The results of the intercept surveys, whose respondents had to drink at least one 

cup of gourmet coffee per day, showed that over 75 percent would consider purchasing a 

system like Keurig’s. The internet survey also proved that a demonstration of the Keurig 

model increased the likelihood of a sale from 75 to 90 percent. The same people, who 

saw the demonstration, indicated that they would pay $0.55 for a K-Cup and $130 for the 

B100 brewer. For more information on pricing, see section VII. The internet-based 

survey helped identify Keurig’s “core customer” group as younger males (Anderson 7). 

Through intercept, internet, and home use surveys, Keurig was able to determine 

the key factors in marketing their brewer and K-Cups. Key elements identified through 

demonstration during the intercept surveys included quick brewing time and minimal 

clean-up. The same key elements were identified during the internet-based survey. The 

13

home use testers, who had a commercial brewer placed in their home, not only identified 

speed and clean-up as key attributes but also taste consistency, coffee variety, and 

cleanliness of preparation (Anderson 7-8). 

Now that Keurig is aware of which market and type of consumer to target, as well 

as which aspects of their product are most valued, they can move ahead with their 

marketing plan of the at-home B100 brewer. 

2. Product 

i. K-Cup (or Keurig Cup) 

Keurig’s patented K-Cup is a unique portion system that contains ground coffee 

beans and filter paper. A variety of coffees are available for the system, reflecting the 

selection available in gourmet coffeehouses. In 1998, when Keurig launched their 

commercial brewer, they offered eight varieties of coffee. In 2003, Keurig is now able to 

offer the largest variety of coffees for any single-cup system in the market. K-Cups are 

produced by five roasters packaging six total brands, thus making available over 75 

varieties of coffee (Anderson 2). Keurig is also planning to launch a variety of teas, T- 

Cups (Anderson 4). 

During the February progress meeting with GMCR’s management, the executives 

of Green Mountain expressed some concerns to Mr. Lazaris about the details of the B100 

launch. GMCR is Keurig’s strategic partner and business investor. The concerns 

included GMCR’s fear of complicating the production of portion packs with the two-cup 

approach. This would also affect inventory levels and warehousing. GMCR was also 

fearful that customer dissatisfaction would result from using the wrong portion pack in a 

Keurig brewer. The management team expressed their wishes to keep a one-cup 

14

approach based on their desire for “long-term simplicity” and the ability to move quickly 

into the one-cup, at-home brewing market (Anderson 10). 

We feel Keurig has a strong argument against a universal K-Cup. The company 

is fearful that office managers in the successful OCS market, an important marketing 

channel for the at-home system, will not support Keurig’s using the same K-Cup for the 

home brewer. This fear exists because employees owning an at-home Keurig system 

could be enticed to steal K-Cups from the office’s supply (Anderson 10). The proposed 

two-cup system increases the likelihood of office managers to participate in promotion of 

the Keurig at-home system because the threat of K-Cup theft would be eliminated. 

However, the proposed K-Cup (OCS)/Keurig-Cup (at-home) package 

differentiation has some problems. First, the color of the cups will be different, tan for 

at-home and white for away-from-home (Anderson 9). We feel the color distinction is 

necessary if the two-cup approach is chosen, but the two colors chosen by Keurig are too 

similar and the buyer would be easily confused. There is potential for customer 

dissatisfaction if the wrong cup is purchased and used in the wrong brewer. 

We agree with GMCR management after looking at the benefits of using the 

existing commercial portion pack, the K-Cup, in both the away-from-home and at-home 

markets. The main benefits are that the buyer will not be confused by the two-cup 

approach and roasters will not have to have two separate inventories for Keurig products. 

ii. B100 Brewer 

The new B100 model from Keurig is a revolutionary new single-cup brewing 

system targeting at-home users. Entering the at-home market with this model is 

important for Keurig, as coffee makers represent one of the largest volumes of small 

appliances sold for use in the home (Anderson 6). A key element of this brewer is that it 

15

provides the user a significant amount of control over the amount of coffee and the 

temperature and pressure of the water. This results in the perfect cup of coffee every 

time. The flavor profile from each roast of coffee is recreated on a consistent basis. 

Also, the speed of brewing a cup of coffee, “perfection in under a minute,” is a key factor 

for the potential success of Keurig’s at-home brewing system (Anderson 3-4). 

iii. Product Life Cycle 

Keurig’s B100 is currently in the introduction phase of the product life cycle. 

Although they have been in the OCS market since 1998, the B100 is designed for the at- 

home market. Keurig is entering a new market and a new product life cycle. Generally, 

in the introduction stage, companies generate losses because financial resources are 

focused on promotion, product, and place to establish the new product in the market 

(McCarthy 271). 

3. Place 

i. K-Cup (or Keurig-Cup) 

I 

KADs provide a variety of coffees to offices for their Keurig OCS system. Each 

KAD has entered into direct relationships with one or more roasters to purchase K-Cups 

and subsequently sell them to office managers. 

II 

I) Introduction 

II) Growth 

III) Mature 

IV) Decline 

III 

IV 

16

As stated earlier, Keurig does not yet have the resources to sell either their brewer 

or coffee in mass retail outlets. Instead, a controlled distribution strategy must be 

utilized. Roasters will sell Keurig-Cups in direct (to consumers) and indirect (to KADs) 

markets. KADs will, in turn, sell the cups directly to OCS employees owning an at-home 

system (Anderson 10). 

Keurig’s rapid penetration into the OCS market and the use of many reliable 

distributors and KADs has given the company a good reputation. This, in turn, makes 

entering the at-home market on the coattails of the office market a viable business 

opportunity. We believe that the distribution channel that Keurig is proposing for the 

two-cup approach is logical, yet problems arise when dealing with the roasters’ concerns 

about its complexity. We agree with GMCR that it appears the two-cup approach would 

be inefficient when the goal is to keep production and inventory costs down. Keurig’s 

competition is already pricing below the K-Cup prices at which KADs sell to the OCS 

market. If production and inventory costs were to increase, the cost of the K-Cups would 

also likely increase, causing concern for a potential decrease in cup sales. 


KADs play the primary role in serving the OCS market. Commercial brewers are 

purchased by KADs from Keurig at wholesale prices ranging from $500 to $1,000 and 

are placed in offices for free or for a low rental fee in exchange for ongoing coffee sales. 

The KAD is then responsible for ongoing maintenance and repairs to the brewer 

(Anderson 5). 

Another major distribution problem that Keurig faces is in their lack of existence 

in retail channels. Keurig needs to quickly find a viable means through which to launch 

17

the sale of the B100 into retail outlets. The only current option is “e-commerce-enabled” 

Web sites. (Anderson 9). 

iii. Market Segmentation 

We segmented the coffee market into a comparison between the price of the 

brewer and the varieties of cups/pods offered. As shown below, Keurig has its own 

niche. While they are the highest in price, they also have over 75 varieties of coffees 

and teas. Procter & Gamble 1 , Salton, and Sara Lee are all clustered in the same 

segment of the market. Their brewers are cheaper in price compared to Keurig, but 

P&G offers the greatest variety with only 15 coffees and teas available. 

Limited Variety 

Legend 

Keurig 

P & G 

Salton/Melitta 

Sara Lee/Senseo 

High Price 

Low Price 

1 Procter & Gamble does not currently manufacture brewers, but according to the case, if they decide to 

introduce a brewing system, they will price similarly to Salton and Sara Lee. The brewer pods they 

package are compatible with other brands’ single-serve coffee systems. 

Wide Variety 

18

4. Promotion 


We feel the best promotional activity for K-Cups is to offer discounts when 

buying cups. For example, a discount could be offered through free shipping and 

handling when total cup purchases are over a certain dollar amount. Another possibility 

is to offer 25 cups at regular price and half off on the second 25 purchased. 


The market research commissioned by Keurig shows that the best way to gain 

interest in the system is through demonstrations; 90% of those surveyed indicated that the 

demonstration increased their likelihood of buying the product. The key factors of 

interest to promote include convenience, quick brewing, ease of use, and minimal clean- 

up, all of which are sources of dissatisfaction with at-home users’ current systems. 

Through the internet-based survey, it has been shown that the B100’s core customers are 

younger males. The key elements Keurig must implement into its promotion strategy for 

the B100 include being one of the first entrants into the at-home market, being portrayed 

as a single-cup pioneer, and enhancing its visibility in the up-scale market (Anderson). 

Keurig’s B100 system has the potential to seize a large portion of their target 

market if it is promoted well. One strength of Keurig’s promotional strategy is that they 

are aiming to be the first entrant into the at-home gourmet coffee market. They believe 

that being the single-cup pioneer will enhance the system’s visibility in the up-scale 

market. Another strength of Keurig’s promotional strategy is that by partnering with five 

different roasters, they can offer the largest variety of coffees and teas in the at-home 

market. 

19

While these factors strongly support Keurig’s promotional strategy, there are 

several weaknesses with the rest of the plan. One such weakness is that they do not use 

their slogan or the origin of their company name to their advantage. “Deliciously 

Simple” is a great slogan that emphasizes the two major themes of coffee advertising: 

‘good taste’ and ‘positive stimulation’ (Anderson 6). The slogan also touches on the fact 

that the system is very easy to use. In addition, the word ‘Keurig’ is Dutch for 

‘excellence.’ Having your company’s name associated with excellence can be another 

great marketing tool. 

Keurig is currently not doing everything it can to target its core customers. 

Promotion needs to be geared toward these younger males. One way to achieve this 

would be to buy advertising space on various Web sites, from sports to stock and 

financial sites. Since market research has shown that demonstrations are a significant 

way to increase system interest and purchasing potential, Keurig needs to utilize this 

avenue. Although it is stated in the case that Keurig does not currently have resources to 

sell through retail chains, which are prime locations for demonstrations, perhaps they 

should set up demonstrations at professional conventions, airports, affluent shopping 

malls, and high-end appliance shows. 

There are also two promotional activities that Keurig can offer to their buyers in 

order to increase their customer base. The first promotional offer is a referral program. 

When a first-time buyer goes onto Keurig’s Web site to purchase K-Cups or a brewer, 

there would be a place to type in the name of the person who referred them. That referral 

person and the new Keurig B100 owner would then receive $25 in free K-Cups. The 

second promotional offer would be to utilize point of purchase sites in the OCS market 

20

y giving $50 instant rebates to entice buyers to invest in the Keurig system for their at- 

home enjoyment (Anderson 19). 

5. Pricing 


When looking at the results of Keurig’s market research, it is evident that those 

coffee drinkers consuming two or more cups per weekday are more willing to pay a 

higher price for each cup of coffee than those coffee drinkers consuming only one cup 

per weekday. These results can be confirmed by looking at the following bar graphs. 

The first graph, K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption, displays 

the willingness of one-cup and 2+ cups per weekday coffee drinkers to pay for a K-Cup 

(or Keurig-Cup). These results show that 2+ cups per weekday coffee drinkers are much 

more willing to pay higher prices for their cups of coffee than the one-cup drinkers. 

While this survey includes only those consumers who were very or somewhat likely to 

purchase the system, we can see that there is a significant difference between the 

responses for the two coffee drinking sectors (Anderson 16). 

K-cup (or Keurig-cup) Pricing 

$0.55 + 

$0.50-$0.54 

$0.45-$0.49 

$0.40-$0.44 

$0.35-$0.39 

$0.30-$0.34 

$0.25-$0.29 

5.1 

K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption 

14.6 

16.7 

20.5 

22 

28.2 

30.7 

33.6 

0 10 20 30 40 50 60 70 80 

41.5 

41 

48.2 

Cumulative Percentage of Respondents 

58.5 

60.3 

75.6 

1 Cup/Day 

2+ Cup/Day 

21

We can further show that 2+ cups per weekday drinkers are more willing to pay a 

higher price for their individual cups of coffee by looking at the next two graphs 

comparing K-Cup (or Keurig-Cup) pricing and brewer pricing between one-cup and 2+ 

cups per weekday consumers. These graphs suggest that those 2+ cups per weekday 

coffee drinkers, who are more willing to pay a higher ($130+) price for a brewer, are also 

more willing to pay a higher price for their cups of coffee (Anderson 16). 

K-Cup (or Keurig-Cup) Pricing 

K-Cup (or Keurig-Cup) Pricing 

$0.50+ 

$0.40-$0.49 

$0.30-$0.39 

< $0.30 

Don't Know 

$0.50+ 

$0.40-$0.49 

$0.30-$0.39 

< $0.30 

Don't Know 

0 

0 

1.2 

2.4 

2.4 

2.4 

Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption 

(1 Cup/Day Consumption) 

4.7 

5.9 

5.9 

5.9 

7.1 

8.2 

9.4 

10.6 

0 5 10 15 20 25 30 35 40 

0 

0 

Percentage of Respondents 

Brewer & K-Cup (or Keurig-Cup) Pricing Based on Coffee Consumption 

(2+ Cups/Day Consumption) 

1.9 

2.5 

5.2 

5.3 

5.7 

6.2 

6.3 

6.3 

8.9 

9.5 

10.1 

9.9 

0 5 10 15 20 25 

Percentage of Respondents 

34.1 

22.2 

$130 

$100-$129 

< $100.00 

$130+ 

$100-$129 

< $100 

22

Since the survey of the B100 system showed that at-home coffee consumption 

increased with the presence of the Keurig brewer, we can assume K-Cup (or Keurig-Cup) 

sales will also be higher than the average of what one consumer drinks per day without 

the Keurig system. The survey showed that per day consumption averaged out to 

approximately 2.25 cups per day with the Keurig system (Anderson 7-8). While in this 

survey K-Cup (or Keurig-Cup) pricing did not seem to be an issue, from the other market 

research conducted we can see that those gourmet coffee drinkers consuming 2+ cups of 

coffee per day are more willing to pay a higher price for the K-Cups (or Keurig-Cups). 

By looking at the graph above we see that they are also more willing to pay $130+, the 

higher price for the brewer (Anderson 16). 

From these analyses and the results of the K-Cup (or Keurig-Cup) pricing based 

on consumption survey, it seems like the ideal price for a K-Cup (or Keurig-Cup) in the 

at-home market is $0.55 per cup. 

This price would benefit Keurig, the KADs, and the office managers regardless of 

whether a one-cup or two-cup approach is used. Currently KADs are able to buy K-Cups 

from the roasters at a price of $0.25 and sell the K-Cups to office managers for $0.40 - 

$0.50 per K-Cup. From the $0.25 paid to the roasters, Keurig is paid a $0.04 royalty on 

each cup sold (Anderson 5). If the at-home K-Cups (or Keurig-Cups) are sold at a price 

of $0.55 to the at-home users through either the roasters or Keurig, the incentive to office 

managers to buy K-Cups from the roasters or Keurig is eliminated because they can buy 

more cheaply through the KADs. This pricing strategy gives the KADs pricing power in 

their OCS market. 

Based on the market research it appears that regardless of whether Keurig decides 

on a one-cup or two-cup strategy, the pricing of the at-home portion pack should be 

23

$0.55. As stated earlier, if the one-cup option is chosen, the office managers and KADs 

will still have the benefit of a favorable price discrimination strategy by Keurig. While 

the KADs have no real incentive not to increase their K-Cup pricing to match that of the 

online selling price of $0.55, a rise in the price of K-Cups would probably deter office 

managers from buying a large amount of K-Cups or investing in Keurig’s OCS at all. 

However, if the KADs are able to increase the price of the K-Cups they sell to the OCS 

market to $0.55, there is still no incentive for the office managers to buy from any place 

other than their KAD. According to Keurig Authorized Dealer Bob Spangler, all Keurig 

brewers sold, leased, or used through KADs are done so through contractual agreements 

in which the user can only buy brewer supplies through the KADs. If an office manager 

were to buy K-Cups directly from a roaster or Keurig, it would be a breach of contract 

and grounds for removal of the Keurig system. These contracts not only protect the 

KADs sales of K-Cups, but they also protect the users because the contracts stipulate that 

the KADs are responsible for all maintenance and repairs to the brewers while they are in 

use. 

On the other side of this pricing arrangement, at-home B100 users not in contract 

with a KAD will be able to purchase their K-Cups for the price of $0.55 through Keurig 

or a licensed roaster. While this price is above the price set by the KADs, it seems to be a 

consensual point in all the surveys conducted by Keurig. The market we are targeting 

with the Keurig at-home brewing systems are connoisseurs of coffee. These people know 

what they want and like in a cup of coffee. Keurig’s large variety of coffees and teas 

enables pricing power in their K-Cups to appeal to these consumers. Keurig can impose 

a higher price for their coffee because the variety offered is one of the most important 

aspects of the K-Cup appeal. Of course, if the K-Cups were priced lower, the quantity of 

24

K-Cups sold have the potential to be higher, and the lower price per cup of coffee might 

entice other people to invest in the Keurig at-home brewing system. 

If Keurig would decide to go ahead with the planned two-cup strategy, the pricing 

for the at-home system Keurig-Cup should also be $0.55. This pricing is optimal for the 

same reasons as for the one-cup option. The price of the K-Cup would still be left to the 

discretion of the KADs, but since the Keurig-Cup would not be a substitute for the K-Cup 

in the OCS market, there is no real foreseeable pricing competition between the two 

different cups. A con to this option would be that consumers, investing in the Keurig at- 

home system, could opt to buy through KADs, decreasing profits that Keurig and the 

roasters could make through direct Keurig-Cup sales. 

Other K-Cup (or Keurig-Cup) Pricing Options 

One option in the pricing of cups not discussed above is to price the K-Cups (or 

Keurig-Cups) at a level similar to their competition. Market competitors like Salton, 

whose pods sell for $0.25, and Senseo, whose pods sell for $0.20 each, are marketing 

their gourmet coffees at a much cheaper price (Anderson 9). However, these pod prices 

are sometimes deceiving because the Senseo machine requires two pods to create one 

eight-ounce cup of coffee. If Keurig were to price their cups at the Salton price of $0.25 

the KADs would not make any money from the sales; the wholesale price of the K-Cups 

from the manufacturer is $0.25, and Keurig would receive less than their current $0.04 

royalty. If Keurig were to price around $0.40 to be competitive with the Senseo pods, 

sales would be better but still inconsistent with the cup demand. As we have stated 

before, our main target market is focused on the serious gourmet coffee drinker averaging 

a little more than two cups per day, and, according to market research, almost five times 

25

as many people were willing to pay $0.50 for the cups than they were $0.40 (see bar 

graph on page 23). 

Either way, if Keurig would decide to price lower to be more competitive, the 

profit margins for all parties involved, except the roasters, would decrease. Yet since two 

of Keurig’s roasters are shareholders, Green Mountain Coffee Roasters, Inc. and Van 

Houtte, they would also suffer from Keurig’s decreased profit margins. This drop in 

profits could also cause the KADs to not participate in the KAD referral program for the 

B100, and if the KADs do not help with marketing the B100 to the “Keurig-awares” in 

the OCS market, projected sales for the brewer will be very disappointing. Keurig is very 

dependent upon their KADs to help promote the B100 through word-of-mouth with their 

clients, so they need to focus on a pricing strategy that will not only meet the demands of 

the potential B100 coffee consumers but that is non-threatening to the KADs. A pricing 

strategy that is focused on their competition is not the way to meet this objective. 


Keurig’s goal is to use value pricing in order to set a fair price level for their 

marketing mix that will give the target market superior value through convenience, speed, 

taste assurance, and variety. The benefits of Keurig’s value pricing strategy is in giving 

their customers pleasant surprises in convenience and speed of coffee preparation while 

continuing to provide a consistently great-tasting gourmet coffee. Keurig’s definition of 

their target market, up-scale gourmet coffee drinkers, is very important in the 

development of their pricing strategy (Anderson 6). Also vital to their pricing strategy is 

the recognition and analysis of the competition within the retail at-home coffee market 

(see Section V-2). 

26

According to Keurig’s marketing materials, a flexible pricing policy is being used 

at point-of-sale displays to entice OCS users to purchase the at-home system to fulfill 

their pre- and post- work coffee cravings. It appears that the pricing objective of Keurig 

is oriented toward sales. Their primary goal concerning the at-home market is to be the 

leader and pioneer in the up-scale, single-cup gourmet coffee brewing category. To help 

achieve their sales-oriented goals, Keurig plans to use push money allowances with their 

KADs through a KAD referral program. These proposed allowances will include a 

$15.00 compensation for each at-home brewer sale attributed to the KADs OCS accounts. 

In addition, the KAD will also receive a two-cent-per-K-Cup (or Keurig-Cup) annuity on 

subsequent coffee sales that Keurig makes to that customer for three years (Anderson 12). 

So, for example, if a B100 customer drinks on average one cup of coffee per day for three 

years, a KAD will profit $21.90 over the three year annuity period. Therefore a KAD 

will, on average, make $36.90 per customer for each B100 sold through their OCS 

accounts. In the fourth quarter of 2003, when the B100 is scheduled to launch, it is 

expected that 60% of the KADs will participate in the joint marketing program, with 

expected sales of two brewers for each office where advertising is placed. Therefore, 

each KAD is expected to make at least $74.00 per office if they participate in the joint 

marketing program with Keurig. This profit does not include the spread KADs receive 

through the sale of K-Cups (or Keurig-Cups) to the clients. 

The pricing of the brewer is a great concern for Keurig executives. Early market 

research has shown that consumers will pay greater attention to the pricing of the brewer 

and will have direct impact on consumers’ willingness to buy into the Keurig system. In 

price testing of the brewer, various prices were tested and also recommended by 

participants. Those participants who actually experienced a demonstration of the B100 

27

and were informed that the average price of high-quality coffee makers sold in the range 

of $69 - $149, responded with a willingness to pay more than $130 for the brewer. In 

another survey given to daily coffee drinkers over the internet, a price point of $149.99 

was tested. This survey resulted in a 9% positive return identifying those core-customers 

who would “definitely buy” or “probably buy” a system like the B100. Follow-up 

questions to this internet survey found that the average price these core-customers would 

pay for such a system was actually $125. Finally, an at-home use test was conducted in 

the homes of gourmet coffee drinkers with a commercial model brewer. During this test, 

an acceptable price range for the brewer was found to be in the $129-$199 range. A price 

exceeding $200 was found to be a price point at which consumers began to view the 

brewer as a luxury purchase, requiring more consideration prior to purchasing (Anderson 

7-8). 

Costs involved with the production of the at-home system, with a two-cup 

approach, were found to be $400,000 for the development and design of the necessary 

tooling to thermoform the new cup bases for the Keurig-Cups and another $60,000 per 

roaster of K-Cups and Keurig-Cups for new parts for the packaging lines to enable 

production of both cup types. With five licensed roasters, total costs of the new Keurig- 

Cup system with the B100 are $700,000. This is a sunk cost that should be omitted from 

cup pricing considerations because Keurig incurs the cost regardless of which cup 

approach is chosen. However, these costs should be factored into Keurig’s breakeven 

analysis for the B100 brewer because the costs will be paid by Keurig regardless (Jordan 

313). 

Past experiences with a former at-home brewer designed by Keurig, the B1000, 

provided insight into worrisome high costs and design issues from Keurig’s 

28

manufacturing partner. Even with the knowledge gained from past mistakes and 

problems with the B1000, the most recent costs reported for the B100 from the 

manufacturing partner were projected to be $220 per brewer. With costs at $220 per 

brewer, breakeven quantities for brewer sales are as follows for the key price points of 

$249 and $299 (Anderson 11): 

Parameter Values: 

Breakeven Analysis 

Unit Sales Price $249.00 

Fixed Costs: $700,000.00 

Unit Costs $220.00 

Breakeven Quantity 24138 

Quantity Cost Revenue Profit 

0 $700,000.00 $0.00 -$700,000.00 

10000 $2,900,000.00 $2,490,000.00 -$410,000.00 

15000 $4,000,000.00 $3,735,000.00 -$265,000.00 

20000 $5,100,000.00 $4,980,000.00 -$120,000.00 

23000 $5,760,000.00 $5,727,000.00 -$33,000.00 

24000 $5,980,000.00 $5,976,000.00 -$4,000.00 

24138 $6,010,360.00 $6,010,362.00 $2.00 

25000 $6,200,000.00 $6,225,000.00 $25,000.00 

30000 $7,300,000.00 $7,470,000.00 $170,000.00 

40000 $9,500,000.00 $9,960,000.00 $460,000.00 

70000 $16,100,000.00 $17,430,000.00 $1,330,000.00 

100000 $22,700,000.00 $24,900,000.00 $2,200,000.00 

29








0 $700,000.00 $0.00 -$700,000.00 

5000 $1,800,000.00 $1,495,000.00 -$305,000.00 

8000 $2,460,000.00 $2,392,000.00 -$68,000.00 

8861 $2,649,420.00 $2,649,439.00 $19.00 

10000 $2,900,000.00 $2,990,000.00 $90,000.00 

15000 $4,000,000.00 $4,485,000.00 $485,000.00 

20000 $5,100,000.00 $5,980,000.00 $880,000.00 

25000 $6,200,000.00 $7,475,000.00 $1,275,000.00 

30000 $7,300,000.00 $8,970,000.00 $1,670,000.00 

40000 $9,500,000.00 $11,960,000.00 $2,460,000.00 

70000 $16,100,000.00 $20,930,000.00 $4,830,000.00 

100000 $22,700,000.00 $29,900,000.00 $7,200,000.00 

Keurig and the B100 manufacturing partner are hopeful that, with additional 

engineering efforts, the production costs can be reduced to $200.00. Another breakeven 

analysis is shown below for the key price points with unit costs at $200.00: 

30









0 $700,000.00 $0.00 -$700,000.00 

10000 $2,700,000.00 $2,490,000.00 -$210,000.00 

14000 $3,500,000.00 $3,486,000.00 -$14,000.00 

14286 $3,557,200.00 $3,557,214.00 $14.00 

15000 $3,700,000.00 $3,735,000.00 $35,000.00 

20000 $4,700,000.00 $4,980,000.00 $280,000.00 

25000 $5,700,000.00 $6,225,000.00 $525,000.00 

30000 $6,700,000.00 $7,470,000.00 $770,000.00 

40000 $8,700,000.00 $9,960,000.00 $1,260,000.00 

70000 $14,700,000.00 $17,430,000.00 $2,730,000.00 

100000 $20,700,000.00 $24,900,000.00 $4,200,000.00 

120000 $24,700,000.00 $29,880,000.00 $5,180,000.00 







0 $700,000.00 $0.00 -$700,000.00 

5000 $1,700,000.00 $1,495,000.00 -$205,000.00 

7000 $2,100,000.00 $2,093,000.00 -$7,000.00 

7071 $2,114,200.00 $2,114,229.00 $29.00 

10000 $2,700,000.00 $2,990,000.00 $290,000.00 

15000 $3,700,000.00 $4,485,000.00 $785,000.00 

20000 $4,700,000.00 $5,980,000.00 $1,280,000.00 

25000 $5,700,000.00 $7,475,000.00 $1,775,000.00 

30000 $6,700,000.00 $8,970,000.00 $2,270,000.00 

40000 $8,700,000.00 $11,960,000.00 $3,260,000.00 

70000 $14,700,000.00 $20,930,000.00 $6,230,000.00 

100000 $20,700,000.00 $29,900,000.00 $9,200,000.00 

31

The price point of $199 is below the $220 (or hopefully $200) production costs of 

the brewer. If the B100 is sold at a price of $199, the loss on the brewer would be 

expected to be made up through K-Cup or Keurig-Cup sales. If Keurig relies on the sale 

of cups to make up for pricing the brewer below cost, the B100 would become a loss 

leader. The K-Cup (or Keurig-Cup) price of $0.55 will be used with the assumption that 

the owner of the B100 would consume, on average, 2.25 cups of coffee per day with their 

B100 system five days a week. The annual coffee sales are included in the breakeven 

analysis at the price of $199; otherwise, there would be no level of brewer sales that 

would result in a profit. Obviously, if the annual projected coffee sales are included in 

the above breakeven analyses at the unit sale prices of $249 and $299, the breakeven 

quantity would be lower for Keurig than they appear to be above, but those figures are 

not really important since both price points are higher than the unit costs of each brewer 

for the analyses. 




Annual Projected 

Coffee Sales $175.50 2 





0 $700,000.00 $0.00 -$700,000.00 

4000 $1,580,000.00 $1,498,000.00 -$82,000.00 

4531 $1,696,820.00 $1,696,859.50 $39.50 

5000 $1,800,000.00 $1,872,500.00 $72,500.00 

10000 $2,900,000.00 $3,745,000.00 $845,000.00 

20000 $5,100,000.00 $7,490,000.00 $2,390,000.00 

40000 $9,500,000.00 $14,980,000.00 $5,480,000.00 

70000 $16,100,000.00 $26,215,000.00 $10,115,000.00 

100000 $22,700,000.00 $37,450,000.00 $14,750,000.00 

2 Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50 

32










0 $700,000.00 $0.00 -$700,000.00 

4000 $1,500,000.00 $1,498,000.00 -$2,000.00 

4012 $1,502,400.00 $1,502,494.00 $94.00 

5000 $1,700,000.00 $1,872,500.00 $172,500.00 

10000 $2,700,000.00 $3,745,000.00 $1,045,000.00 

20000 $4,700,000.00 $7,490,000.00 $2,790,000.00 

40000 $8,700,000.00 $14,980,000.00 $6,280,000.00 

70000 $14,700,000.00 $26,215,000.00 $11,515,000.00 

100000 $20,700,000.00 $37,450,000.00 $16,750,000.00 

The benefits of an investment in the B100 brewing system are great for the 

gourmet coffee lovers who flock to Starbucks, Dunkin’ Donuts, Seattle’s Best, and 

Caribou Coffee to satisfy their cravings before work every morning. The average 

gourmet coffee drinker in downtown Chicago, IL, who drinks 2.25 cups of coffee per 

weekday, would spend an estimated $936 on coffee per year (IL Starbucks). 3 In the 

Chicago market, an investment in the Keurig system would allow the consumer to pay for 

the B100 brewer and X number of years of K-Cups (or Keurig Cups) at a price of 

$0.55/cup. For example, if the brewer is sold at $249, the consumer could buy the B100 

and 3.91 years of equivalent coffee in K-Cups and spend the same amount of money as 

one year’s worth of coffee consumption at an average downtown Chicago, IL, Starbucks. 

3 The average price of an 8 oz. black Starbucks’ coffee in downtown Chicago, IL is $1.47 plus tax (tax rate 

of 9%). Someone who drinks 2.25 cups/weekday would spend $936 ($14.7*1.09*2.25 cups/weekday*5 

days*52 weeks). 

33

Brewer Price Years of K-Cups 

$199 4.20 

$249 3.91 

$299 3.63 

In the Indianapolis market, the same comparison can be made. The average 

gourmet coffee drinker in Indianapolis, IN, who drinks 2.25 cups of coffee per weekday, 

would spend an estimated $625.95 on coffee per year (IN Starbucks). 4 

Brewer Price Years of K-Cups 

$199 2.43 

$249 2.15 

$299 1.86 

Therefore, while the Keurig brewing system may appear to be a pricey 

investment, it is clear that the consumer would be saving money by making his/her own 

cup-by-cup gourmet coffee instead of traveling to a gourmet coffee provider such as 

Starbucks. 5 

A lower price of $199 for the brewer does appear to be appealing to consumers. 

A price below $200 does not trigger a luxury purchase mentality in the consumer. Also, 

since Keurig is in the introductory stage of the B100, often profits are lower since more 

money is spent by the company on promotion, product, and place development 

(McCarthy 271). However, we feel the price of $199 is not ideal because Keurig would 

be relying on the sales of K-Cups (or Keurig-Cups) to cover the expenses for 

manufacturing the B100. This is a very risky decision. If the sale of K-Cups (or Keurig- 

Cups) does not live up to the expected levels, Keurig’s profits will decrease. Also, if the 

demand for the at-home system is lower than expected and Keurig must lower the price 

of the brewer to move the product, a decrease in the selling price would put the brewer at 

an even larger loss for the company and shareholders. 

4 The average price of an 8 oz. black Starbucks’ coffee in downtown Indianapolis, IN is $1.00 plus tax (tax 

rate of 7%). Someone who drinks 2.25 cups/weekday would spend $625.95 ($1.00*1.07*2.25 

cups/weekday*5 days*52 weeks). 

5 Savings do not include travel time and gasoline. 

34

From our breakeven analyses above, it seems that the optimal price for the brewer 

would be $249 based on our focused price points. It appears to be Keurig’s best option to 

price higher than their manufacturing costs so, after meeting their breakeven quantities, 

all additional sales contribute to the profits of the company. While Keurig’s management 

is concerned that they may not have enough time to lower the price of the brewer once it 

is out in the market, it seems that this is a risk that is worth taking (Anderson 11). By 

pricing the brewer at $249, all profits can be put toward research and development efforts 

to lower the production costs of the B100 and to develop subsequent one-cup brewers at a 

lower price to appeal to other markets. The profits of the B100 will give Keurig the 

opportunity to draw in a broader consumer base and hopefully will enable Keurig to 

develop new target markets with lower-priced one-cup brewers. On the other hand, 

pricing above $200 forces consumers to think harder about making a B100 brewer 

purchase. It is important for Keurig to use price as an indicator of superiority without 

putting themselves out of the market entirely. We feel that Keurig’s at-home brewer will 

be a luxury item for most consumers willing and able to invest, so a $200 luxury- 

indicator can be considered irrelevant to our target consumers. 

Currently, with the production costs of the B100 at $200-$220, it does not seem 

within the capabilities of Keurig to price the brewer at $149. A price of $149 would 

force the company to rely too heavily on K-Cup (or Keurig-Cup) sales. Based on the 

breakeven analysis below with annual projected coffee sales again at $175.50 per 

consumer, Keurig would have to sell 6,699 brewers to people that will drink at least 2.25 

cups per weekday to break even on their investment in the B100. This is even riskier 

than using the $199 price. It seems that building up equity to put toward R&D would be 

35

a much better option for Keurig to enable them to later meet the needs of the consumers 

in the market of $149 one-cup brewers. 










0 $700,000.00 $0.00 -$700,000.00 

5000 $1,800,000.00 $1,622,500.00 -$177,500.00 

6000 $2,020,000.00 $1,947,000.00 -$73,000.00 

6699 $2,173,780.00 $2,173,825.50 $45.50 

10000 $2,900,000.00 $3,245,000.00 $345,000.00 

15000 $4,000,000.00 $4,867,500.00 $867,500.00 

20000 $5,100,000.00 $6,490,000.00 $1,390,000.00 

25400 $6,288,000.00 $8,242,300.00 $1,954,300.00 

30000 $7,300,000.00 $9,735,000.00 $2,435,000.00 

40000 $9,500,000.00 $12,980,000.00 $3,480,000.00 

70000 $16,100,000.00 $22,715,000.00 $6,615,000.00 

100000 $22,700,000.00 $32,450,000.00 $9,750,000.00 

VII. Problematic Issues and Alternatives 

Promotion 

In order to sell units, we need to show the benefits of the B100 brewer first-hand. 

As addressed earlier, we plan to accomplish this through product demonstrations in 

alternate venues such as professional conventions, airports, affluent shopping malls, and 

high-end appliance shows. We also plan on offering referral programs and discounts 

which will help raise awareness and product loyalty. 

In 2005, the KAD referral program no longer existed, but we feel that in 2003 it 

would have been a very effective way to push to the B100 brewer to the “Keurig-awares” 

6 Annual Projected Coffee Sales: ($0.55-$0.25)*2.25 cups/weekday*5 days*52 weeks = $175.50 

36

in the OCS market (Spangler). Now that the product has been out for more than two 

years and alternative, lower-priced brewers are offered by Keurig, the benefits of such a 

program are not as high. 

Packaging 

The main problem with packaging lies in deciding between the one-cup and two- 

cup approaches. We feel that the one-cup approach is Keurig’s best option because it 

appeases GMCR, decreases the chance for customer dissatisfaction, and simplifies the 

product for the consumer. 

Place 

Keurig needs to use an exclusive marketing approach in the OCS market, 

meaning that sales are only through KADs’ specializing in particular geographic areas 

(McCarthy 311). We feel this is important because the KADs’ territories are mostly 

independent of one other, allowing closer relationships between the KAD representatives 

and the office managers. However, in the at-home market, we are not only marketing 

exclusively, since the cups are available through the KADs and on Keurig’s and roasters’ 

Web sites. We feel it is important to sell through Web sites, as well, because the only at- 

home consumers the KADs sell to are office workers in their districts. There will be 

other consumers who do not work in an office that maintains a KAD relationship, and 

they will need a channel through which to purchase the brewer and cups. 

It is important to maintain both direct and indirect channels in the at-home 

market. One reason is that the KADs have established relationships with office managers 

and will initially push the brewer sales to office workers. According the Bob Spangler, a 

KAD through Purefact, the OCS market is a very valuable source of at-home sales 

because the customers have already experienced the benefits of a Keurig coffee system. 

37

After the KADs sell to the workers, those new Keurig buyers will continue the 

promotion. Their positive experiences with the B100 will prompt the new owners to 

spread the word of the product to friends, family, and neighbors in order to get $25 off 

their purchase of K-Cups through our proposed referral program. 

Price 

Pricing the brewer is a main concern of Keurig. Based on the sales projections, 

we could breakeven or profit at the prices of $199, $249, and $299. We chose to price 

the brewer at $249, because it is much easier to price high and lower later. Also, at the 

$249 price, Keurig can cover their manufacturing costs without having to depend on K- 

Cup sales. Then, the K-Cup profits can be put towards research and development of less 

expensive brewers that can later be sold to the mass market through retailers. One of 

Keurig’s main objectives for the years to come should be to not only lower brewer costs 

but to also create partnerships with high-end retailers to sell the Keurig at-home brewers. 

We feel retailers like Williams-Sonoma, Crate & Barrel, and other high-end home stores 

are viable candidates for such partnerships. 

The pricing of the K-Cups is also of concern to Keurig. Based on the market 

research, we feel that our target market would be willing to pay $0.55 per K-Cup. This 

price will still give the KADs pricing control in the OCS market, and the price will allow 

Keurig and the roasters to make a higher profit per K-Cup. 

VIII. Conclusion 

With Keurig’s success in the office coffee market, a “logical business extension” 

does, indeed, seem to be the at-home coffee market (Anderson 6). Their shareholder, 

GMRC, presented some very relevant and important concerns regarding the company’s 

B100 brewer launch. We agree that the one-cup approach is much simpler and 

38

economical for the roasters and consumers, and we have decided to provide solutions that 

will appease GMCR and make the introduction of Keurig’s product into the at-home 

market much smoother. We have proposed a fair and realistic pricing strategy for the 

B100 at $249 and K-Cups at $0.55. We feel these prices will allow Keurig to effectively 

enter the gourmet at-home coffee market while providing profits to be put toward future 

promotion in the retail market and the development of lower-priced one-cup brewers. 

We have also offered some recommendations and ideas regarding Keurig’s at-home 

brewer marketing. These include focusing on their target market and promotional 

strategies. The opposing group has very good ideas, but we feel our recommendations on 

pricing and promotion of the B100 are the correct actions for Keurig to take at this time. 

IX. Comments on Presenting Opposing Group’s Paper 

Below are various statements found throughout the opposing group’s paper that 

we feel either are not accurate or need further discussion. 

Page 3 – 4: “In the up-scale sector Braun and Bunn were some of the companies 

heightening pressure in the single-cup division.” 

The case states that Braun and Bunn are companies heightening pressure in the 

single-cup division. Nowhere in the case does it say that these companies are single-cup 

brewer competitors. 

Page 4: “This made our $200 manufacturing costs look outrageous.” 

The presenting group is assuming that manufacturing costs are $200. However, 

we are supposed to be proposing solutions at this moment in time. According to the case 

on page 11, the latest reports show manufacturing costs as $220. While the 

manufacturers are trying to lower their costs to $200, they have not yet achieved this 

goal. 

39

Page 5: “In addition to the desire for simplicity and the limited time before launch, 

this would allow office managers to have access to K-Cups in stores, just in case they 

were to run out between orders.” 

Page nine of the case states that Keurig does not have the resources to enter the 

retail market at this time. Also, KADs and office managers are under a contractual 

agreement. This means that office managers can only buy from KADs. The office 

system could be removed if managers purchased K-Cups anywhere else. 

Page 6: “They now would not have to accommodate for the production of a second 

cup line.” 

This statement contradicts page nine and ten of the case which states, “These two 

portion packs would be manufactured on the same packaging lines.” 

Page 6: “If companies do not have trust in their employees they need to restructure 

their hiring requirements.” 

This is a major digression to their paper. This is virtually impossible. You cannot 

screen employees to tell if they are going to take something home from the office. We 

realize that this point was made as a solution to employee theft of K-Cups, but Keurig has 

no control over, nor do they care how companies handle their hiring of employees. This 

is not a solution that Keurig can implement. 

Page 7: “Going by survey results the best price for the B100 would be $199.99.” 

Page seven of the case states, “An acceptable price range for the brewer was 

determined to be in the $129 - $199 range.” The presenters state that the survey results 

give a ‘best price’ of $199.99. However, this is not specifically stated in the case. 

40

Page 8: “The mail-in rebates would be for 20 percent off the retail price of $199.99” 

Throughout this paper, the presenting group assumes Keurig will immediately be 

distributing their product through mass retail channels. However, the case plainly states 

on page nine, that Keurig does not have the resources to distribute through retail channels 

right now. Their entire paper is based on an incorrect assumption that was clearly stated 

in the case material. 

Page 8 – “Keurig machines are brewing about 125 million cups of coffee 

annually…” 

Page four of the case states, “Keurig shipped 125 M K-Cups in 2002, with total 

shipment since launch (1998) of 340 M.” Therefore, the presenting group should say, “In 

2002, they shipped 125 million cups…” 

Page 10: “According to Keurig’s research, the average coffee drinker consumes a 

little over three cups of coffee per day. Assuming that same amount of coffee will be 

consumed, we calculated a yearly cost of the in-home system to be roughly $304 as 

compared to coffeehouse purchases of $312.” 

According to Keurig’s marketing research, as stated on page eight of the case, 

research shows the average coffee drinker consumes 2.25 cups of coffee per day and not 

a little over three. This would also change the presenting group’s calculations. 

Page 11: “Internet sales, however, eliminate the need for the mark-up for the KAD 

or in-store profit, but add the cost of shipping and handling, a cost that could be 

passed on to the consumer.” 

There are shipping costs associated with KADs. Also, you cannot eliminate 

mark-ups because whoever is selling the product on the internet site will still mark-up in 

order to make a profit. 

41

Page 12: “If using two different types of cups, we would have to price the 

residential Keurig-Cup higher than the commercial K-Cup based on the expected 

volume and the informal contracts in place between the KADs and the business 

owner or manager.” 

We disagree with this statement because it is possible to not price the Keurig- 

Cups higher than the K-Cups. While our price suggestion is higher than the KADs, it is 

based more on market demand. There is nothing stopping the KADs from increasing 

their price to match our suggested $0.55. 

Page 13: “One of our recommendations for promoting this product using the 

demonstration aspect was to create a promotional video loop that can be played at 

higher-end retailers such as Bed, Bath, & Beyond and Linens N Things.” 

First, Keurig cannot enter the retail market at this time. So with that in mind, why 

would these two stores agree to run a promotional video on a product they cannot profit 

from? Secondly, the presenting group plans on using testimonials from office managers 

whose offices utilize the Keurig system. We feel the average consumer would relate 

better to an actual at-home user who has experienced the benefits of the Keurig at-home 

system than to an office manager. 

Page 14: “We thought that commercials would not be the best way to promote our 

product since it is a “demonstration-driven product.” 

This is a contradiction to their ideas on promoting the product as stated in the 

beginning of the paragraph as well as on page 15 of their paper. If a product is 

demonstration-driven, it would make more sense to advertise with television commercials 

than to advertise in newsprint. 

42

X. Keurig Authorized Dealer Interview 

Mr. Robert Spangler, Purefact Sales Representative 

Purefact 

355 West Maiden Lane 

St. Joseph, MI 49085 

Ph: (269) 208-3669 

The following questions and responses collected through a phone interview with Keurig 

Authorized Dealer, Bob Spangler at 2:15 PM Wednesday February 22, 2006. 

Question: You are a Keurig Authorized Dealer, correct? 

Answer: Yes, through Purefact I am authorized to sell Keurig coffee brewers in 

offices and homes. 

Question: How popular is the B100 brewing model in homes today? 

Answer: From my experience, the B100 brewer is sold almost exclusively to small 

offices. The price of this brewer is significantly much higher than our 

other models. At-home buyers opt for the lower priced B40 Elite, B50 

Ultra, and B60 Special Edition models because they are much less 

expensive. 

Question: How do you handle K-Cup sales for the brewers you sell to at-home 

consumers? 

Answer: There is a contractual agreement between Purefact and the customer that 

stipulates that all K-Cup sales for their individual brewers must be 

purchased through Purefact for the life of the Brewer. 

Question: Did the B100 ever use a cup different from the K-Cup called a Keurig- 

Cup? 

Answer: Not that I am aware of. All offices and at-home brewers use the same 

cups. Only the K-Cups will fit into the brewers. 

Question: How much do you charge your at-home customers for K-Cups? 

Answer: It varies based on their coffee consumption. Someone who drinks less 

coffee per year will be charged a slightly higher price for the K-Cups 

through Purefact than someone who drinks three to four cups per day. The 

pricing difference is only a few cents however, so it is not a problem 

between customers. 

Question: One of the main concerns of office managers is their fear of K-Cup theft if 

the brewers in the office coffee system (OCS) use the same cups as the at- 

44

home brewers. The two-cup approach was proposed to deal with this 

issue. We felt that a possibility for eliminating the possibility of office 

theft might be to install a vending system in offices for the K-Cups. We 

noticed that the B100 and other OCS brewers are vending compatible. 

How does the vending work and is it successful in the offices? 

Answer: The presence of a K-Cup vending machine in offices reduces the office 

consumption of coffee by at least 50%. For example, if a small office 

using the B100 typically goes through 20 K-Cups a day prior to the 

installation of a Keurig K-Cup vending machine, their consumption will 

drop to below ten K-Cups per day. Therefore, while the vending machine 

may eliminate or drastically reduce the ability for an employee to steal K- 

Cups, the machine more importantly reduces the benefits of having a 

Keurig one-cup brewer in your office because employees do not like nor 

want to pay for in-office coffee. 

Question: In reading our case, Keurig’s management had presented a marketing idea 

to implement a KAD referral program to help penetrate the OCS market 

with the at-home B100 brewer. Is or has there ever been such a program 

in place? 

Answer: No, there are no referral programs sponsored by Keurig. Purefact is a 

distributor of the brewers, but our clients are our own. 

Copy of thank you note mailed to Bob Spangler on 2/24/2006: 

Front: 

Inside: 

45

Works Cited 

1. Anderson, Eric T. “Keurig At Home: Managing a New Product Launch.” 

Harvard Business School. 28, February 2005. 

2. Davids, Kenneth. “At What Cost Convenience? Testing the New Single-Serve 

Coffee Systems.” January 2004. 

http://www.coffeereview.com/article.cfm?ID=83 

3. Home Café. http://www.homecafe.com 

4. Jordan, Bradford D., Stephen A. Ross, and Randolph W. Westerfield. 

Fundamentals of Corporate Finance. 6 th Ed. Boston: McGraw-Hill Irwin, 

2003. 

5. Keurig, Incorporated. http://www.keurig.com/ 

6. McCarthy, Jerome E. and William D. Perreault Jr. Basic Marketing: A Global- 

Managerial Approach. 15 th Ed. Boston: McGraw-Hill Irwin, 2005. 

7. Melitta, USA. http://www.melitta.com 

8. Senseo. http://www.senseo.com 

9. Sherry, Cheryl. “Coffee shops look to fill caffeine cravings.” The Post-Crescent. 

24 Mar. 2002. 

http://www.wisinfo.com/postcrescent/news/annual/annual_2001791.shtml 

10. Spangler, Bob. Keurig Authorized Dealer, PureFact. Phone interview. 22, Feb. 

2006. 

11. Starbucks. Phone inquiry. Circle Tower, Indianapolis, IN. 22, Feb. 2006. 

12. Starbucks. Phone inquiry. Illinois Center, Chicago, IL. 22, Feb. 2006. 

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