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SafeBlend Technologies: Pricing, Competition & Hydraulic Fracturing Overview

SafeBlend Technologies – Company Snapshot

  • Founded & led by CEO Sam Dudley (age 37).
  • Core product: all-natural fracturing-fluid additive used in hydraulic fracturing (“fracking”).
  • Largest customer: Bristol Natural Gas (BNG).
  • 2011 forecasted revenue: \$64.9\text{ million}
    • Represents a 47\% jump vs. 2010.
    • Revenue growth formula shown for clarity: \text{Growth}=\frac{R{2011}-R{2010}}{R_{2010}}=0.47.
  • Current pricing contract with BNG expires February 2012; negotiations now under way for the entire 2012 calendar year.

Immediate Managerial Challenges for Sam Dudley

  • Pricing dilemma #1 – 2012 contract:
    • Whether to drop price today in anticipation of competitive bids up to 50 % lower from new “green” competitors.
  • Pricing dilemma #2 – 2013 contract forward-look:
    • If SafeBlend loses share in 2012, can it still submit a 2013 quote that is both competitive & profitable?
  • Strategic balance: short-run revenue protection vs. long-term market position & profitability.

Competitive Landscape

  • Surge of new suppliers of “green” fracturing additives → prepared to discount heavily for 2012 contracts.
  • Market entry driven by rapid growth in shale gas exploration + demand for environmentally safer fluids.
  • Dudley expects vigorous competitive bids directly to BNG.

Regulatory Environment & Demand Outlook

  • Proposed U.S. Federal Regulations (see Exhibit 1) moving toward law:
    • Mandatory public disclosure of all chemical & non-chemical components in fracturing fluids.
    • Parallel adoption of similar rules at various U.S. state levels.
  • Implication: operators will prefer all-natural or fully disclosed formulations.
    • Dudley projects SafeBlend demand to double by Q2 2013 once regulation passes.

Hydraulic Fracturing Industry Overview

  • Hydraulic Fracturing (“fracking”) = Technique to extract natural gas trapped in shale rock.
  • Three high-level stages:
    1. Site set-up & drilling (wells often ≈ 13,000 ft deep).
    2. Injection of pressurized “fracturing fluid” to crack shale & release gas.
    3. Gas capture & production as fissures are propped open.
  • Conventional vs. Unconventional reservoirs:
    • Conventional = easy access.
    • Unconventional (deep gas, coal-bed methane, tight gas, shale gas) = require expensive, sophisticated extraction.

Fracturing-Fluid Composition & Environmental Concerns

  • Typical 2009 formula: 99 % water + sand, 1 % chemical additives.
    • Sand (proppant) keeps cracks open.
    • Chemical additives: anti-bacterial, anti-corrosion, viscosity modifiers, etc.
  • Environmental risks:
    • Underground leaching → groundwater contamination.
    • More likely: above-ground spills during handling/storage.
    • Growing public & regulatory scrutiny on chemical disclosure → drives preference for natural formulations like SafeBlend.

Shale-Gas Production Data & Forecasts

  • Late 1990s: Fracking becomes economically viable after decades of U.S. government-funded R&D.
  • 2000 – 2006: Shale-gas output grew at ≈ 17\% CAGR.
  • 2006 – 2020: Avg annual growth ≈ 48\%, enabled by tech advances in drilling, gas capture, and transport.
  • Share of shale gas in total U.S. natural-gas production:
    • 2009: 16\%.
    • 2035 projection: 47\%.
  • Macro context: U.S. natural-gas consumption & production both at all-time highs.

Financial & Numerical Highlights Recap

  • Forecast revenue 2011: \$64.9\text{M} (47 % YoY).
  • Potential competitor discount: up to 50 % vs. SafeBlend’s current price.
  • Expected SafeBlend volume spike: 2× by Q2 2013 if disclosure laws enacted.

Strategic Considerations & Possible Courses of Action

  • Price-cut Strategy (short-term defense)
    • Pros: Retain BNG account, block competitors, maintain volume.
    • Cons: Compress margins, set lower reference price, difficult to raise later.
  • Value-based Pricing (emphasize natural/regulated fit)
    • Leverage impending regulation, long-term cost of non-compliance for BNG, reputational risk mitigation.
  • Dual-tier Offering
    • Introduce “standard” additive at lower cost + premium natural variant.
  • Contract Flexibility Clauses
    • Volume commitments, indexed price escalators tied to regulation passage.
  • Scenario Forecasting—Simplified Equation
    • Profit impact of price cut: \Delta \pi = (P2-P1)Q + (Q2-Q1)P_2 - \Delta C
    • Must model competitor entry & fixed-vs-variable cost structure.

Ethical, Philosophical, & Practical Implications

  • Transparency in chemical disclosure aligns with broader ESG expectations.
  • SafeBlend’s natural formula can reduce externalities and potential legal liabilities for gas producers.
  • Balancing shareholder returns with environmental stewardship.

Connections to Marketing & Prior Coursework

  • Illustrates price elasticity, competitive bidding, and first-mover advantage in a B2B market.
  • Regulation as an external macro factor influencing STP (Segmentation-Targeting-Positioning).
  • Case typifies value-based vs. cost-plus pricing discussions from previous lectures.