01.08.00 LMKmethod

Calculating the gross margins and reflections so far

• For our 5-year plan, we now calculate the gross margin, at the same time getting the total sales volume. We add only one ingredient: a price erosion factor.

• Reason behind price erosion factor: Increased competition forces a lower price. The figure of 5% per year is here chosen arbitrarily.

• All other figures are from previous sheets.

01.08.00 LMKmethod

Reflections on the result of gross margin in 5-year plan so far

• With these market estimates, and no export organization, we get after 5 years a yearly gross margin of

18,15181199

01.08.00 LMKmethod

5-year plan for Sales andGross margin

• So this is the end of this project ! ?Budget for X-product Company Inc. 0 0 0 0 0 0

0 0 Year 0 0 0 0Item Param. 2001 2002 2003 2004 2005Market estimates 0 0 0 0 0 0A Norway 0 2000 2400 2900 3600 4300Scandinavia 0 0 0 0 0 0Great Britain 0 0 0 0 0 0USA 0 0 0 0 0 0B Percentage of the population we reach 0 2 % 5 % 20 % 30 % 50 %C Percentage that buys our product 0 5 % 10 % 15 % 20 % 20 %Products sold 0 2 12 87 216 430

Sales price per unit, with price erosion5 % 0,162 0,162 0,154 0,146 0,139Total sales for Norway 0,324 1,941 13,372 31,539 59,647Cost of sales per unit, from product price sheet0,097 0,097 0,097 0,097 0,097Total cost of sales for Norway 0,193 1,158 8,396 20,844 41,495Gross margin for Norway 0,131 0,783 4,976 10,695 18,152

01.08.00 LMKmethod

Why should this project be killed?

• 1 The sums are too small to sustain anything resembling a decent business.

• 2 It is not likely that calculations for the other markets will yield better results

• At this point in the story, the author wonders what to do with the example, and decides to make some further assumptions about the project to save him from doing the slides over again

01.08.00 LMKmethod

Further assumptions to save the case from the wastebasket

• 1 The productX is physically very small so it can easily be sent by air-mail world over

• 2 The produxtX is international in nature, not requiring any written material inside or outside the box (except in english)

• 3 The productX is immediately appealing to individuals browsing on the Internet

• Thus we will sell on the Internet ! And add a line with Internet Sales without further deliberations

01.08.00 LMKmethod

Internet Sales

• How can we estimate the number beeing sold by a WEB-site ?

• 1 We must get traffic, i.e.exposure for the product• 2 This is obtained at a cost

– by advertizing, – by editorial writings, and – by word-of-mouth among certain internet

communities

01.08.00 LMKmethod

Internet sales 2

• We try the following market scaling argument: We estimated a market in year 2000 for Norway of 2000 people, which is .05% of population. Internet-enabled world population is roughly Europe 100, America 100, Asia 100 mill, Sum 300 mill people, so our market ww is 300 000, to which we can apply our reach and buy percentages

01.08.00 LMKmethod

Internet Sales 3, new spreadsheet

ProductX Company Inc. Internet Project

2001 2002 2003 2004 2005Total fresh internet market, % increase 0,1 300 000 330 000 363 000 399 300 439 230Percentage reached 2 % 5 % 10 % 15 % 20 %Persentage buying 5 % 10 % 15 % 20 % 20 %Units sold 300 1 650 5 445 11 979 17 569Sales price, ex vat, price erosion 5 % 0,5 0,5 0,48 0,45 0,43Unit cost of sales, learning curve red. 10 % 0,1 0,09 0,08 0,07 0,07Total sales 150 825 2 586 5 406 7 532Total cost of sales 30 149 441 883 1 190Gross margin 120 677 2 145 4 523 6 342

01.08.00 LMKmethod

Summing up so far, gross margin from e-sales

• End user price 500• Cost of sales 100• Market 300 000,

incr.10%• Reach ultimately 20%• Buying 20%• Realistic ???• Worthwhile???