Nest Protect Marketing Plan

Adam Koch & Chris McKenzie Marketing Plan- Nest Protect 12/17/13
Meet Nest Protect.

Executive Summary
Considered the “Father of the iPod”, Tony Fadell left Apple in 2008 to found the
connected device company Nest Labs. Nest Protect is unlike any smoke or CO2 alarm on
the market and provides consumers with more than an alarm; it’s intelligent. Nest
Protect delivers information to its users that enhances safety and provides convenience
in an attractive, stylishly designed, easy to install device.
Technology in the smoke alarm industry has remained relatively unchanged over
the last decade. However, there has been a proliferation of “smart” devices over the
same period of time that has converted ordinary every day gadgets to tech-infused
versions on steroids capable of much more and easy integrated into daily life through
wireless apps on our phones and computers. Some examples of these app-enabled
accessories include the Nike FuelBand activity tracker, iGrill Cooking Thermometer, and
even an iSmartAlarm Home Security System. There is significant opportunity to increase
effectiveness in the market through products designed to leverage wireless technology.
Nest Protect is a combination of hardware (intelligent alarm) and software (app-
enabled) that consumers will be excited to install. Nest protect tells homeowners
exactly where and what the problem is, such as, “smoke is detected in the living room.”
It also eliminates frustrations with current alarms, such as, the annoying chirps and false
alarms during cooking. The app-enabled device is easy to set up on a smart phone
allowing users to monitor their home from just about anywhere.
The fire and smoke alarm market in the U.S. is about $1.4 billion in annual sales,
made up of smoke detectors, heat detectors, and fire alarm control panels. About

20.9% of sales in the market are for residential buildings, representing nearly $300
million in potential sales annually. Based on our projections, it is reasonable that Nest
Protect could reach $23.2 million in sales and $11.6 million in profit in its first year on
the market by reaching a 5% market share in its first twelve months. Distribution is
established with 5,000 stores ready to sell Nest Protect as soon as it launches. Online
sales are expected to be strong as well based on experience with our other product,
Nest Learning Thermostat.
Nest Protect offers better design and functionality than any other smoke or CO2
alarm product on the market. It’s better positioned to exceed consumer expectations
by offering form and function in a way that has never been combined in this market.
Nest Labs has proven its ability to deliver on both fronts when we launched Nest
Learning Thermostat. We will deliver that same level of quality to impact the smoke
alarm market the same way we did the home temperature control market.
This marketing plan outlines our key strategies for a successful product launch to
meet our objectives of 5% market share within 1 year. Our focus will be on upper class
homeowners who have a particular interest in design and cutting edge technology. For
these customers we must primarily emphasize the unique technological elements of the
Nest Protect along with the sleek design of the product, with a secondary focus on how
the Nest Protect is a more safe solution than traditional alarms. We have advocated a
mix of messaging channels that is focused more on digital media and public relations but
also includes traditional advertising channels such as print advertising. We see the bulk
of our sales coming through online channels including our own website, Amazon and

the websites of traditional brick and mortar retailers such as WalMart and Home Depot.
For the largest retailers in the home goods category including those listed above, we
must also establish a presence in their retail stores. Finally we are advocating a price
point of $130/unit, well above any price currently seen in the market. This price is a
reflection of the quality of our product and its position as a quantum leap beyond
anything currently provided, and aligns with our strategy of focusing on profits initially
as we target early adopters.

Industry Analysis
Analysis of factors, trends and firm posture highlight relevant insights into the
fire and smoke alarm manufacturing industry macro-environment. A publication by
Security Distributing & Marketing identifies three ongoing changes to the smoke and fire
alarm industry: 1) shift in spending for new construction and retrofits, 2) innovative
technologies (including new codes and standards) and 3) increased importance of mass
communicationi
.
The United States economic improvement led to a moderate recovery of new
home construction, which helped to bring the industry back to steady revenue growthii
.
Additionally, the National Fire Protection Association recommends replacing smoke
alarms every 10 years, with 1 in each bedroom, 1 outside the bedroom area that can be
heard through closed doors, and a minimum of 1 on each floor. Improved economic
conditions provide increased disposable income to replace aging alarms in current
homes. Traditionally, smoke and fire alarms incorporated audio and/or visual outputs
into the devices. Technological advancements in wireless capability mean that
additional audio and visual features are now available. Regulatory changes to
commercial buildings now require low-frequency sounding devices, which are
reportedly more effective at waking “hearing or alcohol impaired”iii
people than high-
frequency sounders. Finally, in an Internet era accustomed to 24-hour news and instant
answers, a movement towards mass communication is gaining popularity among
schools and there is potential to impact the home market as well.

A demand market analysis reveals an industry in a mature life cycle stage with
projected annual growth of 3.8% from 2012-2017 in well-established product segments.
Technologic advancements are expected to contribute to an increase in profit as a
percent of revenue from 10.2% to 11.5% (2012-2017).iv
It is estimated that “70% of fire
and smoke detectors are installed in new buildings, including single- and multi-family
housing units, offices, retail establishments, and schools.”v
This suggests that industry
growth is closely correlated to the new construction sector. Products and services in the
industry totaled $1.4B in 2012 with 48.3% from fire alarm control panels, 28.8 from heat
detectors, and 22.9% from smoke detectors (Figure 1). Looked at another way, the
$1.4B is broken down into 32.5% commercial buildings, 27.4% Industrial buildings,
20.9% residential buildings, 14.1% Government, and 5.1% exports (Figure 2).vi
Alternatively, a supply market analysis suggests minimal threat of new entrants
with 3.5% growth in new firms over next five years ending 2017.vii
There are economies
of scale across products with relatively low margins. The cost of entry could be
classified as medium with some up front fixed costs for manufacturing, but not too large
relative to other industries. Intellectual protection of new technology responsible for
trends in higher revenues and profits over the next few years may provide more difficult
barriers to entry versus traditional basic core technology. This shift in technology is
likely to increase supplier power as well. Electronic components represent a much
larger product cost than does the plastic housing and assembly. Wireless functionality
and smart-phone applications are available through fewer suppliers than other
components with limited ability to change suppliers or substitute products. Firms can

maximize their supply chain by focusing on supplier relationships to reduce costs. There
is limited ability to substitute products (smoke detectors versus heat detectors) since
they are regulated and required by state and local building requirements. It is more
likely that products would be complimentary with both smoke detectors and fire alarm
panels being installed in commercial and possibly residential buildings too. Buyer power
varies by customer segments. In the commercial, industrial, and Government space, it is
likely that few buyers with very large orders can exert power through contracts and
volume discounts for a more homogeneous product with greater price sensitivity than
the residential or international markets. Residential customers looking to replace aging
products have much smaller orders and may be willing to pay a premium for extras
versus simply looking to meet local building code. Competitive rivalry is medium with
low-medium switching costs for new systems or alarms. There are multiple competitors
that produce products in all product and service segments. Similar to buyer power,
customer loyalty can vary by segment with greater amount of loyalty in the commercial,
industrial, and Government markets due to long-term contracts, relationships, and
upfront costs of vetting product quality and specifications. Residential customers have
lower customer loyalty since the cost of replacing smoke detectors is low with minimal,
if any, switching costs.
Customer Analysis
The specific customer desired set of features and benefits largely depends on the
product category (smoke detectors, heat detectors, fire alarm control panels) and
consumer characteristics (commercial, industrial, residential, Government, exports).

Product mix also varies across the different consumer characteristics. The decision-
making process and types of needs are affected by these same factors. The commercial
and industrial markets are likely dominated by functional needs with symbolic needs
also playing a role. These two customer groups are largely driven to meet federal, state,
and local environmental and health and safety laws and regulations through the
functional benefits of the products and services.viii
Symbolic needs are also important
because the symbolic benefits reflect commitment to quality and safety for the people
who live or work where they are installed. This is accomplished by purchasing known,
reputable brands with a high degree of trust and reliability. The functional and symbolic
needs felt generate a search of firms that offer products that meet those needs. The
consideration set may be further reduced to firms with preferred vendor status or
previous relationships depending on the number still in the competitive set. A request
for proposal can aid the decision-making process by facilitating comparison between
competitors across key metrics. This process is very similar for the Government, but
may have additional requirements specific to Government contracts. Residential
customers will still have a strong affinity for functional features and benefits, but they
will have greater hedonic needs with experiential benefits that may outweigh symbolic
needs and benefits (Figure 4). The buying process is relatively simple with residential
customers either replacing aging products in their home or they replace currently
working products because they were motivated to move from a current state to a new
desired state. New technology can increase the intensity of the need enough that

consumer aspirations are raised to a point where the consumer will replace current
equipment and services early.
Competitor Set Definition
Product form competitors are those competitors who make smoke, fire, and CO2
alarms most similar in attributes to the Nest Protect. Major competitors include Tyco,
Kidde, First Alert, and BRK brands with some additional smaller players, such as,
Atwood, Fire Sentry, Onelink, and Universal Security Instruments. Specific products
include individual or combined smoke and CO2 alarms that are battery or hard wired.
Category competitors include Kidde and Honeywell who both offer smoke and fire
safety products that are different from combination smoke and CO2 alarms. Generic
competitors offer products that address similar consumer needs, but use different
technology, such as, a fire extinguisher or home escape ladder. Budget competitors are
alternatives that are similar in price, but fill different needs. In this case, they could be
similarly priced home items like wallpaper or home lighting (Figure 3).
Competitor Analysis
While there are a number of smaller players in the CO2
and smoke alarm
marketplace, for the most part the industry is dominated by two large, well established
players, Kidde and First Alert/BRK. A detailed analysis of these two competitors and
their main products follows, along with an internal look at Nest’s own strengths and
weaknesses.
With strong sales and a long history in the industry, Kidde Fire Protection is the
market leader in the smoke alarm/ CO2 marketplace. The firm was established by

Walter Kidde nearly 100 years ago and built its operations to a multi-billion dollar
business whose products are sold around the globe to both residential and commercial
markets. In addition to smoke alarms the firm offers several other solutions tailored to
the fire safety space including fire extinguishers and security systems. The firm
developed strong relationships with several high profile clients, perhaps most notably
the U.S. Military. In 2005 Kidde was sold to United Technologies Corporation, one of the
100 largest companies in the world (revenues of $58B for 2012). Kidde joined with
Chubb Fire and Security to form the UTC Climate, Control and Security division, a group
that accounted for sales of $17B in 2012. In addition to its huge resources, and strong
relationships with customers, Kidde also is augmented by a very strong distribution
network, as its products can be found in all of the most significant locations where fire
safety products are sold, including Home Depot, Wal-Mart, Amazon and Lowe’s
amongst others.
The firm cites technological innovation as a source of its advantage, pointing to
its large investment in R&D to ensure a continual introduction of new products and
features. Kidde can point to some successes on this front, most recently, the
rechargeable battery solution which allows for a 10 year life span for their alarm and
which allows for the elimination of the low battery chirp which is a source of annoyance
for most customers. However, the pace of technological innovation appears to be slow
for the organization in general with many of their products being the same solutions
that were offered over a decade ago.

From a marketing standpoint Kidde seeks to play up its strengths as outlined
above. The primary focus is an appeal to fear, warning potential buyers about the
importance of fire safety protection and the implications of making a bad choice. The
firm highlights its own track record including its long history as a fire safety provider and
its strong client base, with the implication that if the product is good enough for the US
Military, it’s good enough for your children. The product features, including the long
battery life and easy silence button are only played up as a secondary focus of the
product. The firm advertises in print, online, over the radio and on TV and uses a mix of
“real stories” (where families talk of how a Kidde alarm saved their lives) and celebrity
endorsements (country music singer Craig Morgan is a spokesperson), to sell their
products. Both the company’s website and marketing materials in general come across
as dated.
Kidde offers a variety of smoke alarms in the battery powered, wired and more
recently wireless space. The products generally retail from about $20-$75 depending on
feature set. The wired and wireless solutions offer interconnectivity so that if one alarm
goes off, those in other rooms will also signal. The wireless solution offers the
additional advantage of ensuring that the system will stay live in the case of an electrical
outage (which may often precede a fire). A summary of significant products offered by
both Kidde and First Alert is attached as Figure 5.
First Alert/BRK shares many of the same characteristics of Kidde and is also a
large and formidable competitor. Like Kidde, First Alert/BRK has a long history, having
been established as BRK in 1958. The company focuses on fire and safety to both the

residential market (First Alert is aimed directly towards this base) and to the commercial
market (BRK markets here). Like its main competitor, First Alert sells a broad suite of
products that offer fire safety and protection including extinguishers, flash lights,
ladders, and security systems. First Alert further resembles Kidde in that it is a
subsidiary of a very powerful parent company, in this case the consumer goods firm
Jarden which includes brands as diverse as Oster and Yankee Candle. All told, Jarden
revenues for 2012 were approximately $6.7B, with BRK/First Alert sales estimated at
approximately $480M. Distribution looks to be a source of strength for First Alert
relative to others in the industry (with the exception of Kidde) as First Alert solutions
can be found in the largest retail and online sites. Finally, like Kidde, First Alert has
sought out key partnerships to help burnish its reputation as a solution the consumer
can trust. The most significant partner for First Alert is the U.S. Fire Administration.
First Alert also takes an approach to marketing that focuses first on fear
mongering (warning of CO2 – “The Silent Killer”) and then on product features. First
Alert likes to play up their role as a technological innovator whose solutions ensure
greater accuracy on their alarms and allow for quicker notification of potential
emergencies throughout the home. The firm is quick to play up its photoelectric
technology, which they claim gives off fewer false alarms, and the interconnectivity of
the systems which allows for someone in another part of the home to become aware
quicker of a possible fire. First Alert also advertises its products as long-lasting, much
like its main competition. Two areas where First Alert/ BRK seeks to differentiate itself
vs. Kidde are on its design and on ease of install. The latter is hardly mentioned in

Kidde’s materials but feature prominently in collateral from First Alert. First Alert also
seems to be the only major player in the space to focus on the look of its products as
part of its marketing message; “Safety with a Sense of Style” is one of the firm’s slogans.
In spite of this message, and the focus on technology, like Kidde, the firm’s website and
marketing efforts come across as staid and not particularly compelling.
First Alert offers a suite of products in the battery, wired and wireless space
tailored to the residential market that run between $20 and $70. The most significant
products the company offers are included in Figure 5.
In comparison to these major competitors, Nest offers several areas for
differentiation along with many limitations that will need to be addressed. From a
design perspective the nest solution is unquestionably a superior offering to anything
currently in the field. Our R&D group offers us an opportunity to position ourselves as a
leader in an industry where the rate of technological change has been traditionally slow,
and to react more quickly to the needs of our customers. Our marketing also could be a
source of advantage in an industry that has seen little to brag about on this front.
Finally, with our recent success in the thermostat market, and the background of our
founder and his role in creating the design of the IPod, Nest has the ability to introduce
a coolness factor to a market that the word cool has never been associated with before.
Finally, from a product standpoint, our solution does a better job of addressing some of
the customers’ primary complaints about current options in the smoke alarm space,
including false alarms and annoying chirps.

While Nest is far from a start-up at this point, both First Alert and Kidde dwarf us
in size and have substantial resources to dedicate to protecting their positions in the
market. The strong relationships Kidde and First Alert should not be underestimated
and while we should be able to get our product into most retail outlets, it is not as
certain that we can ensure on it being as prominently displayed or promoted. The
history of the two companies is also formidable, and unlike a thermostat, it’s not clear
that customers would be willing to risk their safety with an untested solution. Finally in
an industry that has become mostly commoditized and where the best-selling solutions
typically retail for about $30, a price point of over $100 represents a significant increase.
The price difference becomes even more significant when one considers that the typical
home may require 3-4 alarms throughout it.
Limitations to Analysis
The above analysis is based on the best research available to us given several
restraints. We were unable to gain detailed information on sales data (or other key
financials) for First Direct or Kidde or conduct a detailed study of their operations. We
were unable to conduct a detailed study of potential customers that might include
surveys, focus groups, conjoint analysis, perceptual mapping etc. Therefore there is
limited demographic data on customers or buying behavior. Some back of envelope
calculations around market size in terms of units can be made based on industry sales
by segment and average selling price or new & existing homes and estimated
replacement churn.

SWOT
SWOT ANALYSIS Kidde First Alert/BRK Nest
STRENGTHS Brand reputation, resources (people &
money), distribution, relationships with key
endorsers, some technology (rechargeable
battery), established incumbant
Brand reputation, resources (people &
money), distribution, relationships with
key endorsers, some technology
(photoelectric monitoring), strong #2 in
market share
R&D, design, marketing, brand
reputation (cutting edge/
cool)
WEAKNESSES Design, marketing, old/ outdated solutions,
R&D
Somewhat limited on design, products
typically less well liked that Kidde,
marketing, design
Expensive, no track record for
safety, no partnerships in
safety market
OPPORTUNITIES Growth in new construction, introduction of
newer technologies, new overseas markets
Build client satisfaction, enter into new
partnerships, promotion of newer
technologies, growth in new construction,
expand overseas
Creation of high-end market,
appeal to design focused
consumer, capitalize on
current user base for
thermostats
THREATS New technologies, price wars, regulatory
changes
Kidde continuing to build market share
(BRK had been leader), design gets
eclipsed
Copycat technologies,
disinterest in new price point
for solutions

Marketing Objectives
Objectives at different levels of the organization should align with each other to
achieve overall corporate objectives. It is important to have the individual product
objectives answer the question “Where do we want to go?” Growth and profitability
are two of the most common ways to define product objectives. However, growth can
be defined in terms of either sales revenues or market share. Steve Johnson, director
materials and procurement, stated that the “vision for Nest is to be in front of the
industry across the board – not only reacting to what is familiar, but probing into areas
that go beyond what anyone else is doing.” Innovation plays a significant role in the
identity of Nest Labs, so it is likely to be seen in their creative and marketing campaigns
as well.
The customer segment Nest Protect should initially target is the residential
buildings market, primarily made up single-family homes, townhouses, condos, and
multi-family units, such as, apartment buildings. This represents 20.9% of the $1.4
billion overall market, or $292.6 million dollars. Using Figure 1 to further refine the
market potential, if we assume a similar breakdown of product type across each
category in Figure 2, then smoke and heat detectors represent the most likely
substitutes for the Nest Protect. These two product segments represent 51.7% of the
market overall market. Apply that to the $292.6 million residential segment gives a
potential market of roughly $151.3 million. Figure 5 shows typical pricing between $20-
$40 which means the number of units sold a year in this market may be between 3.8 -
7.6 million units.

In this segment, Nest should look to exploit competitive vulnerabilities around
technology, ease of use, and relevance (coolness factor). Functionally, there is little
difference between Nest Protect and other models on the market in terms of their
ability to detect smoke or CO2 and emit an alarm. However, Nest Protect differentiates
itself by adding features that others do not through integration with other Nest Protect
alarms in the home, web-enabled apps, and style. Nest Protect is currently priced at
$129 for either the white or black models. The features and benefits are the same
between both. Tony Fadell is the founder and CEO of Nest Labs. Tony came from Apple
where he led the team that created the first 18 generations of the iPod and first 3
generations of the iPhone. Since Nest Labs is venture capital owned, it is difficult to get
actual numbers related to development and investments in R&D, marketing, etc. We
can, however, use information about margins related to the iPhone to make some
educated estimates around margins that will refine our objectives. One UBS report puts
the margins of the iPhone between 45-55%.ix
Assuming some of that is related to
contracts based on scale and learnings over time, it is reasonable to assume that
margins have been preserved over time even though the price of the iPhone has come
down. This is a typical trend in technology-based products. If we assume a 50% margin
for Nest protect, then each unit produces roughly $65 in profit and has an equal amount
in costs. Nest could use their data on the number of thermostats they have sold and the
size of that market to make some estimates around market share penetration over time;
however, we will need to make much less sophisticated estimates. Since this is a
mature market, with general category growth estimated at only 3.8%, we will calculate a

conservative, moderate, and aggressive estimate for Nest Protect using the midpoint for
annual units sold of 5.7 million units. This number is then broken down into quarterly
sales and includes the growth factor. Profit is defined as revenue minus cost to
produce. It does not account for other operational expenses, such as, SG&A or PPE
expenses.
There is no customer segment per se that is not currently being served, however, there
is opportunity to further segment the current market by targeting customers who wants
more from their current alarm in terms of features and style. Nest Protect should look
to penetrate the current market by at least 5% at the end of the next twelve months.
We believe this is ambitious enough to be realistic, but not too aggressive to be
impossible to accomplish. Nest Protect is currently set to launch in 5,000 stores across
the US, Canada, and UKx
. The above estimates require 18 (conservative), 36 (moderate),
and 70 (aggressive) units sold in each store and does not account for additional units
sold online. Five-percent of the market over the next year is only 295,000 units, and it’s
hard to see that Nest would expect to sell fewer than 30-40 units on average at each
store across the 5,000 stores and have another 1/3 to 1/2 of its sales come from online
Conservative Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
Market Share
(30% growth quarter-to-quarter)
1.00% 1.30% 1.69% 2.20% 1.61%
Units sold 14,792 19,229 24,998 32,497 91,515
Revenue $1,908,104 $2,480,535 $3,224,695 $4,192,103 $11,805,436
Profit (@50% margin) $954,052 $1,240,267 $1,612,347 $2,096,052 $5,902,718
Moderate Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
Market Share
1.50% 2.25% 3.38% 5.06% 3.16%
Units sold 22,187 33,281 49,921 74,882 180,271
Revenue $2,862,155 $4,293,233 $6,439,849 $9,659,774 $23,255,011
Profit (@50% margin) $1,431,078 $2,146,616 $3,219,925 $4,829,887 $11,627,506
Aggressive Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
Market Share
2.00% 3.60% 6.48% 11.66% 6.16%
Units sold 29,583 53,249 95,849 172,528 351,209
Revenue $3,816,207 $6,869,173 $12,364,511 $22,256,119 $45,306,010
Profit (@50% margin) $1,908,104 $3,434,586 $6,182,255 $11,128,060 $22,653,005

retail. Since Nest Protect knows that its price is fixed at $129, they can use market share
by units as an effective way to quantify the number of units they need to sell to reach
profitability, their main goal. Since many of their expenses are spread out across the
firm and shared between the Nest Learning Thermostat and Nest Protect, it is tough to
know what overall profitability looks like. It is reasonable to assume that the backing
venture capital firms would like to see profitability reached rather quickly.
Secondary objectives can include building brand equity in Nest Labs which will
benefit the Learning Thermometer and future products, identify product enhancements
to Nest Protect for future models, and innovative new product ideas in the same or
adjacent product categories.
Segmentation, Targeting, Positioning
Ideally it would be great to do perceptual mapping, regression and conjoint
analysis to identify specific consumer preferences, perceptions and choices. This would
help to understand consumers and competitors and aid in segmentation, targeting, and
positioning. The residential market can be segmented into different groups of
consumers with similar needs. This may include homeowners and landlords, single-
family and multi-family units, singles, couples, families with children, tech savvy, higher
income, educated, price sensitive, etc. We then want to narrow down the different
segments to ones where Nest Protect aligns favorably. Three different approaches can
be taken here to help with this. It makes sense for Nest to take a concentrated strategy
by focusing on specific segments and leaving the other segments to competitors. An
undifferentiated strategy would treat all segments equally, which for a product selling 2-

4 times current pricing would not make sense. A differentiated approach would sell a
different product (or set of features) to different consumers, but Nest Protect is not
designed like this.
Owner-occupied make up 66% of housing units versus 34% renter-occupied.
68% of the 105 million owner-occupied households are considered “family households”
and 32% have children under the age of 18 yearsxi
. Based on a concentrated strategy,
Nest Protect should target upper-class homeowners who are families with or without
children, considered to be tech savvy, stylish, and appreciate convenience. The product
positioning would then be aligned to the targeted segment and should frame the
product’s image and offer in the target consumers’ minds and is differentiated from
competitors. Nest Protect can change the rules of the game by focusing on new critical
points of differentiation:
“For homeowners who value safety, convenience, and style, Nest
Protect is a smoke and CO2 alarm that offers unrivaled functionality
and design by creating an alarm that thinks before it alerts and gives
you information, not just alarms.”
The impact on brand equity for Nest Protect is minimal since the product is just
launching, however, for Nest Labs who is still trying to establish itself in the market, the
impact can be rather significant. They already launched the Learning Thermostat
successfully and the introduction of another commodity-type product, infused with the
latest and greatest technology with a premium price that people are willing to pay adds
credibility to the mission and focus of Nest Labs. This increases the equity of the firm,

adds credibility to future product launches, and generates a possible sustainable
competitive advantage difficult for competitors to imitate.
Marketing Programs
Given the above stated objectives for market share and building of brand equity and our
description of our tech-savvy target customer an integrated approach to marketing
which will combine both traditional media elements and make use of more modern
technologies will be essential to ensuring a successful launch. Detailed
recommendations for the marketing mix follow.
Pricing: Given our desire to truly differentiate the Nest Protect as an item unlike
anything that has been seen in the industry before it will be important for us to price the
Nest Protect as a premium item. As noted above, the lack of data on the firm makes it
difficult for us to form a complete picture of the cost to produce this item but we have
estimated our COGS at somewhere around $65 based on looking at the past experience
of our CEO during his time at Apple. To set an upper limit on willingness to pay, we
considered the benefits that our target customer would be gaining from Nest Protect
(convenience, peace of mind/safety, and style) and attempted to estimate what these
qualities would be worth to a customer who might need to buy 3 or 4 units per
household to replace their current solution. While more data in the form of focus
groups, surveys etc. would have been beneficial here, we believe that setting willingness
to pay at $150 (a premium of about $120 per unit over current solutions) is realistic for
the upper-class customer we will be targeting.

Given this price range of $65-$150 we feel the $130 price point currently being
offered by the company on its website to be a good price for the Nest Protect. We
advocate this skimming strategy based on this being a technology product which, like
most tech products will have a reasonable percentage of early adopters willing to pay a
considerable premium to be the first to acquire the latest and greatest solution.
Additionally, as stated above, our desire to be positioned in the marketplace as a
revolutionary creation requires us to price the Nest Protect far outside the traditional
price range for smoke and CO2
detectors. Finally given our goal of profits in the short
term, since this is still a start-up venture, with heavy investment in R&D and marketing
as we look to develop additional products, the higher price point supports a focus on
margins in the near term to allow for future growth.
Distribution: Given our goal of at least 5% market share within 12 months, Nest Protect
will need to utilize a variety of distribution channels to reach our target customers. It is
essential for us to be in front of the customers where they traditionally buy smoke
detectors, so we need to strive to have presence in major retail channels like Home
Depot, Lowe’s, Target and WalMart. Given the consideration of customers who typically
shop in these retail outlets, most notably a focus on price, it seems unlikely that we can
expect to reach sales targets by focusing primarily on these locations. Other traditional
outlets for smoke alarm purchases include local hardware and convenience stores.
Given the need for extensive sales forces in order to reach these localized stores and the
typical customer profile for these stores we do not advocate for this as a distribution
channel at this time.

Given the limitations of traditional channels for sales when considering the Nest
Protect, we must look to alternate channels that would favor our targeted demographic.
For the tech savvy customer we are positioning ourselves towards, this would mean
electronics stores such as Best Buy and leveraging our relationship with Apple to have
the product sold in their stores as well. Nest Thermostat is currently sold in both of
these locations and Nest Protect must have presence in these locations too.
Finally, given the more affluent, more technical consumer we are targeting, we
foresee a far greater percentage of our sales coming through internet sales. In addition
to the online stores of the companies listed above, we need to have heavy sales through
Amazon.com, which may prove to be our most important relationship. Investment in
our website to allow for orders to be easily purchased and received will also be
essential.
Customer Relationship Management: One of the elements the Nest Protect must both
leverage and build upon in the passion of the Nest community. Unlike any of our
competitors Nest has a dedicated “fan base” for our firm that actively advocates for and
supports Nest solutions. This is promoted through the “Nest Community” section of our
website where we actively seek suggestions from our users. Managing expectations of
this active community will be key to ensure that they continue to support and
recommend the product as word-of-mouth will need to be a key driver of sales for Nest.
Outreach to this base of users through mailings (anyone who has purchased a Nest
product on our website should be enrolled in the mailing list, and efforts should be
made to obtain information on others who purchase our products by making it easy for

them to register for mailings as part of the product setup process), discounts and
notifications of future releases should be part of the marketing program. In addition,
efforts to link the Nest Protect with Nest Thermostat and future releases will help to
promote advocacy for the Nest company as a whole and build the brand. In total,
building advocates for our products and creating a Nest Community in the mold of
Apple, Nike and other great brands is far more significant to our marketing strategy than
it would be for any of our current competition.
Website: For a company positioning itself as a technological leap forward, and targeting
tech users, the website must be a reflection of this position. As we’re also appealing to
people’s design sensibility, elegance of our website design will also speak to our ability
to create beautiful products. We should ensure that our website reflects the qualities
our brand reflects. Simplicity of design, ease of use (in terms of finding information and
ordering products) and technological sophistication should be readily apparent to users
of our site. The website must also be a source of advertising for our products and
videos which double as ads should be hosted here (and reposted on our YouTube
channel). Since PR and buzz are key to our success as well, the site must be frequently
updated to reflect any positive press the product and firm have received.
Messaging/Advertising/Promotion- Unlike most of competitors in the market, we will
hope to have a pull based sales strategy which requires us to expend significant
resources on advertising and brand building. Our price premium that we intend to
charge for the Nest Protect should leave significant money over for our advertising
budget as a percentage of revenues. Understanding that a significant share of revenues

must be set towards R&D as well, we recommend setting advertising budget at 17.5% of
forecasted sales or about $4.1M given stated moderate goal of 5% market share by EOY.
In considering how to allocate this budget we took into account threshold
amounts to be spent in order to generate ROI, where our target customer goes for
information and our goals for the marketing program in terms of both sales and brand
equity. We quickly determined that based on our ad budget, the effectiveness of a
television campaign would be limited, as it would not allow us to target prospective
users as well as we would like and it would be cost prohibitive to produce and later air
an ad with any frequency. Radio, while cheaper also suffers from many of the same
limitations. In terms of traditional media, we believe that advertising in magazines to
build awareness among our target market would prove more effective and recommend
placing advertisements in periodicals that appeal to techies (such as Wired), up-scale
homeowners (such as Better Homes & Garden) and Good Housekeeping, which appeals
to both parents and homemakers. While traditional media is effective, it is also
expensive and we recommend a split between traditional and digital at 57% and 43%,
respectively.
As important to us as traditional media for advertising will be online advertising.
Significant ad dollars should be allocated towards paid search, with additional set asides
for web banners on sites visited by our target marketplace and expenditure also made
towards SEO. It will be essential for web users in the market for a smoke alarm to be
able to become aware of and learn quickly about Nest Protect. We recommend making
internet paid search the largest segment of our digital advertising budget, at 24%.

Promotional budget also must be a key part of our marketing expense.
Specifically, significant money must be allocated towards PR efforts and getting positive
write-ups in as many locations as possible both on and off-line. Perhaps nothing did
more to boost Nest Thermostat sales than having it featured on the Ellen DeGeneris
show. Similar efforts to generate positive buzz for Nest Protect must be made. Online,
we will want to focus on getting promoted by key technology sites such as Gizmodo,
CNET, and Lifehacker. Developing relationships with other key opinion makers in the
technology space on the internet should also be made a priority and we could consider
sponsorships of key podcasts by sources such as TedTalks, Wired and NPR tech talk to
also gain visibility. For homeowners and parents, attention should also be paid to
recommendation sites like Angie’s list and Consumer Reports.
As this is a “buzz” product, special events should also be a component of our
promotional strategy. We will want to have a presence at key trade shows and should
also allocate advertising dollars to guerilla marketing events such as the recent fire truck
tour used during the product launch.
We have allocated significant budget towards trade promotions and store
displays as we will need to rely on our product being featured and prominently
displayed at major retail channels. As we do not want to compromise the cost of the
product to ensure that it viewed as a premium item, we don’t recommend allocating
budget for coupons and will want to work to ensure that our sales channels use the
trade promotion dollars as Nest intends.

In terms of messaging, primary emphasis in all advertising should be focused on
the distinguishing characteristics of the Nest Protect- specifically its coolness of design
and intelligence making for a more pleasant home experience. Most of our competition
is well established in the safety space but rates quite poorly where we excel most. We
must highlight this difference in all our messaging, emphasizing the ease of shutting off
a false alarm, the lack of annoying beeps and the sleek way the Nest Protect fits into the
design of the home. At the same time, Nest Protect must pass a certain threshold for
safety to even get in the consideration set for customers and getting endorsements of
safety professionals will be necessary if we hope to build a user-base beyond early
adopters.
Marketing Budget
The market budget below outlines how resources would be spent. It required a
number of reasonable “best” guesses to calculate CPM and other costs. It captures the
spirit of the types of marketing campaigns and weighting of each even if it is not exact.

Contingency Plans
Should it become apparent that sales are not tracking towards our forecasts,
there are several approaches we could take depending on our analysis of the reason for
the shortcoming. The first thing we would look to is whether product awareness was
where it needed to be. If there was a lack of knowledge of the products existence, our
first suggestion would be to increase ad spend in traditional media or baring the budget
for this, to look to additional promotional events to gain exposure. A closer look at the
message also might be required at this point as well. Our analysis is that consumers are
interested in the design and usability of their alarms and willing to pay a premium on
this, but if this fails to register, the messaging could shift to place greater emphasis on
the safety aspects of Nest Protect, and how our solution could translate to saving lives.

We also could reconsider our decision how much to promote the product at the
distributor level, as incentives may need to be offered to ensure that the product
receives prominent placement within the retail channels. It seems likely that online
sales need to remain our primary avenue for moving the product. However, offering
trade promotions might allow for increased margins at the distributor level and thus
increased efforts within our sales channels. We are hesitant to adjust our pricing as it
will be difficult to maintain our margins and our brand equity if the product becomes in
any ways commoditized, but if sales fail to materialize, short term discounts can be
looked into.
Finally we must plan for the product not being as well received as Nest Thermostat. At
the end of the day, word of mouth is what we hope to be our biggest advantage in
penetrating the alarm market. If we start to hear less than favorable impressions within
our Nest community or reviews on online sites such as Amazon look to be anything
other than overwhelmingly positive, we need to be able to react quickly to address and
adjust to the issues.

Figure 1:
Figure 2:
$676.2
$403.2
$320.6
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Total Revenues = $1.4B
Products and services segmentation
(2012)
Smoke detectors
Heat detectors
Fire alarm control panels
32.5%
27.4%
20.9%
14.1%
5.1%
Total Revenues = $1.4B
Commercial buildings
Industrial buildings
Residential buildings
Government
Exports

Figure 3:
Figure 4:
Paint & wallpaper
Lighting
Small appliances
Alarm systems
Surveillance cameras
Home escape ladder
Door & window locks
Smoke detectors
Fire alarm control panels
Heat detectors
Fire estinguishers
Kidde CO2 & Smoke Alarm
First Alert Combo Alarm
Onelink Wireless Smoke &
CO2 Alarm
Smoke & CO2 Alarm
Fire Safety
Safety Products
Home items
Fire & smoke alarm
customers
Commercial,
Industrial, Gov't
Meet federal, state,
local laws
++ Functional &
symbolic needs
Complex buying
process
Residential
Functional++,
symbolic needs+,
hedonic needs+
Opportunity to raise
aspirations of
consumer to new
desired state
Simplified buying
process
Exports
Canada, UK, Mexico
(significant growth),
Korea, China (new),
Malaysia (new)
Functional, symbolic,
and hedonic needs
vary by region

Figure 5:
Product Name Price Features Promoted Amazon Rating
Amazon Sales
Rank
Kidde KN-SMFM-i Silhouette Hardwire
Low Profile Smoke Alarm $85
Rechargeable Batteries, Easy Install,
Interconnectivity, hush feature-- push button to
silence, design (note-- no CO2) 4 stars (74 reviews) 68
Kidde 1279-9999/RF-SM-AC Hardwire
Smoke Alarm with Battery Backup,
Interconnectable $45
Interconnectivity, blinking red light to show it
works, hush feature 4.5 stars (45) 61
Kidde KN-COSM-IB Hardwire
Combination Carbon Monoxide and
Smoke Alarm with Battery Backup and
Voice Warning, Interconnectable (also
comes as a battery operated option) $30
Talking Warning (plus chrip), Interconnectivity,
blinking red light to show it works, hush feature 4.1 stars (490)
1
(Note- Battery
operated is #2
seller)
Kidde KN-COSM-XTR-B Nighthawk
Combination Carbon Monoxide, Fire,
and Smoke Intelligent Alarm $35
Talking alarm- alerts to location ("Breakthrough
Technology"), smoke-fire-co2, hush feature 4.5 stars (159) 6
Kidde Model Pi9010 Dual Sensor,
Battery Operated Photoelectric /
Ionization Smoke Alarm $18 Reliable battery- combo smoke/fire, hush alarm 3.5 stars (176) 8

First Alert SC9120B Hardwire
Combination Smoke/Carbon Monoxide
Alarm with Battery Backup $35
Interconnectivity, Easy install, Ionization,
Microprocessor controlled for few nuisance
alarms, battery backup- works during outages,
separate visual and audible warnings for CO2 and
smoke 4 stars (316) 3
First Alert SCO5CN Battery Operated
Combination Carbon Monoxide/Smoke
Alarm $30
uses an electrochemical carbon monoxide sensor-
the most accurate technology available, different
sounds for smoke, co2, low battery 3.5 stars (110) 9
First Alert SCO403 Alarm Combination
Pack $20 2 units, silencer (all basic features) 4.5 stars (30) 11
First Alert PC900 Combo $40 Slim/design; photoelectric technology Not Rated Not Known
First Alert SCO501CN-3ST (Series
SCO500) ONELINK Battery Operated
Combination Smoke and Carbon
Monoxide Alarm with Voice Location $70
Wireless integration, talking-tells you where
danger is, photoelectric technology, easy install 4 stars (109) 14

i
SDM State of the Market Report
ii
IBIS World: Fire & Smoke Alarm Manufacturing in the US
iii
SDM Fire Alarm Notification Appliances
iv
IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 11.
v
vi
IBIS World Fire & Smoke Alarm Manufacturing in the US, December 2012, p. 12)14.
vii
viii
ix
http://appleinsider.com/articles/13/09/30/iphone)5s)demand)healthy)margins)for)5s)
and)5c)higher)than)iphone)5)analyst)says last accessed 12)14)13.
x
http://bigstory.ap.org/article/nest)labs)tries)smarten)smoke)detectors last accessed 12)
14)13.
xi
http://www.infoplease.com/us/census/data/demographic.html last accessed 12)14)13

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