Toro Company S No Risk Program: Case Study
Case Study Review of The S’No Risk Program
Argosy University
Abstract
This paper is a review the case study “The Toro Company S’No Risk Program” by David E. Bell (1994). The company had specialized in outdoor machines since 1914, starting with tractor engines then later adding lawn mowers and eventually snowthrowers, of which accounted for 10-15% of sales. Toro sold product to many dealers such as hardware stores and Marshall Field, typically selling about two-thirds of yearly snowthrower sales during November, December, and January. After years of exceptionally high sales, winters became milder and sales plummeted and Toro needed to rethink their sales approach. After consideration, Toro made the decision to work with an insurance company, …show more content…
American Home Assurance Company, that would pay customers if snowfalls were below average to boost sales because potential buyers were concerned their machines would not get ample use. This is a review of that instance and other risks of the program to Toro, the insurance company and the consumers.
The S’No Risk program was named quite fittingly, it included the word “risk.” Anytime a new program is started, there will always be risk involved.
Management writer, Peter Drucker (1974) said:
To try to eliminate risk in business enterprise is futile. Risk is inherent in the commitment of present resources to future expectations. Indeed, economic progress can be defined as the ability to take greater risks. The attempt to eliminate risks, even the attempt to minimize them, can only make them irrational and unbearable. It can only result in the greatest risk of all: rigidity. (p. 374)
Risk does not single any one out, all parties typically accrue some amount of risk and Toro’s S’No Risk program was no different. The insurance company, the consumers and Toro itself all took on some risk.
American Home Assurance Company offered to “meet all claims resulting from the [S’no risk] campaign in exchange for a premium equal to 2.1% of the retail value of snowthrowers covered” (Bell, 1994). They were taking the risk on the weather; if it snowed they would have to pay a lot of money according to the agreement. Another thing they did not anticipate was the success of the program and therefore extended an offer to Toro in 1983 at too low of a
rate.
The plan was that each snowthrower customer of Toro during the summer and fall of that year would receive a full refund of the suggested retail price if the total winter snowfall was less than 20% of the average according to 172 government-run weather stations (Bell, 1994). If the snowfall was 30% of the average, the customer would receive a 70% refund, if 40% below average then 60% refunded, and 50% below average resulted in a 50% refund. In addition, customers were able to keep the snowthrower.
Toro’s sales for 1983 were $240,966,000 so they owed $5,060,286, or 2.1%, to American Home Assurance Company. Typically Toro would offer a 10% discount promotion that in 1983 would have cost $24,096,600. The S’No Risk program produced a savings of over $19,036,314 for Toro. From a consumer’s perspective, a way that Toro could have restructured the program would be to create a credit program in order to qualify. A one-year credit plan directly with Toro would allow low monthly payments at no interest to the consumer but Toro could build in a 2.1% servicing fee to be paid up front. The qualifying products cost between $270-1,500, depending on make, model, and suggested retail price for the area so the fee for the consumer would range between $5.67-31.50 (Bell, 1994). This cost is minimal to the consumer but when multiplied by numerous purchases across the country, this could give Toro an opportunity to save even more money.
The consumer’s risk is relative to each person. Some may have decided that they were making this purchase then found out about the campaign only to be unaffected by the by the change, it only decreased their risk. Others needed to determine the likelihood of it snowing below average by at least fifty percent. Dealers posted the local historical averages according to 172 weather stations but many more factors would affect the probability such as the future weather predictions for the season.
Consider the following decision matrix:
Their best option for the insurance company to retain the business of Toro is to gradually increase the cost to balance out the losses from lack of snow that first year. They could also create a fail safe such as setting a payout limit. The cost comparison from 2.1% from their typical 10% discount offer could propel Toro back into a booming business again so it was of utmost importance to Toro to keep costs low so profitability increased. In the program’s first year, if the weather was at least as snowy as the historical average, Toro would not have to fulfill the insurance claims. Marketing director, Dick Pollick, was rightly concerned that the next year “customers might be less enthusiastic about the program when they learned that only a few customers had ‘collected’ the previous year” (Bell, 1994). I think this promotion would be most effective if used infrequently, perhaps every few years for a milestone anniversary year sale.
As a consumer, this program seems appealing. I would have to consider the fact that even if I need a new snowthrower, I could be risking 10% more this year because in previous years, the 10% discount was guaranteed. If I wanted to decrease my risk, I should wait to purchase until a guaranteed discount is back because I could end up paying full price if it snows at the level of historical averages. If it’s another year of below average snowfall, I could possibly have my machine paid for but the likelihood of that happening is minimal. The program does seem appealing because there are four chances to benefit from the program, when snowfalls are below average by 20, 30, 40 and 50 percent.
Overall this program was success for Toro. They increased cash flows by 7.9% by using the 2.1% insurance rather than the 10% fall discount program. The snowfall that year was minimal so only 2 locations were paid out at the 50% level, which was a success for the insurance company as well. Consumers should never purchase something based on the “deal” or discount alone so because they purchased a snowthrower and will have it for years to come, it was a successful purchase for them as well though one could argue that because Toro did not run their 10% fall discount program, the customer actually was not successful because they paid full price.
References
Bell, D. E. (1994, March 7). The Toro Company S’no Risk Program. Harvard Business School, No. 9-185-017. Retrieved from https://cb.hbsp.harvard.edu/cb/pl/28009378/28009380/2e42492f4568676d91a853b25827f5a0
Drucker, P.F. (1974). The Manager and the Management Sciences in Management: Tasks, Responsibilities, Practices. London: Harper and Row. Retrieved from https://digitalbookshelf.argosy.edu/#/books/9781269148719/content/id/ch11fn1
Argosy University
Abstract
This paper is a review the case study “The Toro Company S’No Risk Program” by David E. Bell (1994). The company had specialized in outdoor machines since 1914, starting with tractor engines then later adding lawn mowers and eventually snowthrowers, of which accounted for 10-15% of sales. Toro sold product to many dealers such as hardware stores and Marshall Field, typically selling about two-thirds of yearly snowthrower sales during November, December, and January. After years of exceptionally high sales, winters became milder and sales plummeted and Toro needed to rethink their sales approach. After consideration, Toro made the decision to work with an insurance company, …show more content…
American Home Assurance Company, that would pay customers if snowfalls were below average to boost sales because potential buyers were concerned their machines would not get ample use. This is a review of that instance and other risks of the program to Toro, the insurance company and the consumers.
The S’No Risk program was named quite fittingly, it included the word “risk.” Anytime a new program is started, there will always be risk involved.
Management writer, Peter Drucker (1974) said:
To try to eliminate risk in business enterprise is futile. Risk is inherent in the commitment of present resources to future expectations. Indeed, economic progress can be defined as the ability to take greater risks. The attempt to eliminate risks, even the attempt to minimize them, can only make them irrational and unbearable. It can only result in the greatest risk of all: rigidity. (p. 374)
Risk does not single any one out, all parties typically accrue some amount of risk and Toro’s S’No Risk program was no different. The insurance company, the consumers and Toro itself all took on some risk.
American Home Assurance Company offered to “meet all claims resulting from the [S’no risk] campaign in exchange for a premium equal to 2.1% of the retail value of snowthrowers covered” (Bell, 1994). They were taking the risk on the weather; if it snowed they would have to pay a lot of money according to the agreement. Another thing they did not anticipate was the success of the program and therefore extended an offer to Toro in 1983 at too low of a
rate.
The plan was that each snowthrower customer of Toro during the summer and fall of that year would receive a full refund of the suggested retail price if the total winter snowfall was less than 20% of the average according to 172 government-run weather stations (Bell, 1994). If the snowfall was 30% of the average, the customer would receive a 70% refund, if 40% below average then 60% refunded, and 50% below average resulted in a 50% refund. In addition, customers were able to keep the snowthrower.
Toro’s sales for 1983 were $240,966,000 so they owed $5,060,286, or 2.1%, to American Home Assurance Company. Typically Toro would offer a 10% discount promotion that in 1983 would have cost $24,096,600. The S’No Risk program produced a savings of over $19,036,314 for Toro. From a consumer’s perspective, a way that Toro could have restructured the program would be to create a credit program in order to qualify. A one-year credit plan directly with Toro would allow low monthly payments at no interest to the consumer but Toro could build in a 2.1% servicing fee to be paid up front. The qualifying products cost between $270-1,500, depending on make, model, and suggested retail price for the area so the fee for the consumer would range between $5.67-31.50 (Bell, 1994). This cost is minimal to the consumer but when multiplied by numerous purchases across the country, this could give Toro an opportunity to save even more money.
The consumer’s risk is relative to each person. Some may have decided that they were making this purchase then found out about the campaign only to be unaffected by the by the change, it only decreased their risk. Others needed to determine the likelihood of it snowing below average by at least fifty percent. Dealers posted the local historical averages according to 172 weather stations but many more factors would affect the probability such as the future weather predictions for the season.
Consider the following decision matrix:
Their best option for the insurance company to retain the business of Toro is to gradually increase the cost to balance out the losses from lack of snow that first year. They could also create a fail safe such as setting a payout limit. The cost comparison from 2.1% from their typical 10% discount offer could propel Toro back into a booming business again so it was of utmost importance to Toro to keep costs low so profitability increased. In the program’s first year, if the weather was at least as snowy as the historical average, Toro would not have to fulfill the insurance claims. Marketing director, Dick Pollick, was rightly concerned that the next year “customers might be less enthusiastic about the program when they learned that only a few customers had ‘collected’ the previous year” (Bell, 1994). I think this promotion would be most effective if used infrequently, perhaps every few years for a milestone anniversary year sale.
As a consumer, this program seems appealing. I would have to consider the fact that even if I need a new snowthrower, I could be risking 10% more this year because in previous years, the 10% discount was guaranteed. If I wanted to decrease my risk, I should wait to purchase until a guaranteed discount is back because I could end up paying full price if it snows at the level of historical averages. If it’s another year of below average snowfall, I could possibly have my machine paid for but the likelihood of that happening is minimal. The program does seem appealing because there are four chances to benefit from the program, when snowfalls are below average by 20, 30, 40 and 50 percent.
Overall this program was success for Toro. They increased cash flows by 7.9% by using the 2.1% insurance rather than the 10% fall discount program. The snowfall that year was minimal so only 2 locations were paid out at the 50% level, which was a success for the insurance company as well. Consumers should never purchase something based on the “deal” or discount alone so because they purchased a snowthrower and will have it for years to come, it was a successful purchase for them as well though one could argue that because Toro did not run their 10% fall discount program, the customer actually was not successful because they paid full price.
References
Bell, D. E. (1994, March 7). The Toro Company S’no Risk Program. Harvard Business School, No. 9-185-017. Retrieved from https://cb.hbsp.harvard.edu/cb/pl/28009378/28009380/2e42492f4568676d91a853b25827f5a0
Drucker, P.F. (1974). The Manager and the Management Sciences in Management: Tasks, Responsibilities, Practices. London: Harper and Row. Retrieved from https://digitalbookshelf.argosy.edu/#/books/9781269148719/content/id/ch11fn1