Case Prep Marketing Math

8/10/2019 Case Prep Marketing Math

1/28

Keith E. Niedermeier, Ph.D.


2/28

! Case Preparation

! Marketing Planning Process

! Structuring a Case Analysis

! Marketing Math!

Unit Contribution (Fixed and Variable Costs)! Margin Analysis

!

Break-Even Volume

!

Market Share

! Profit Impact

!

Customer Lifetime Value!

Sunk and Opportunity Costs

! Examples


3/28

Situation Analysis

Possible Strategic

Options

Implementation

Consumers

Collaborators

Company

Context

Competitors

Evaluate Target Markets &Positioning Options

Price, Product, Promotion, Place

4Ps

5Cs


4/28

! Trends! Market Share

! Sales Volume

! Costs

!

Customer Tastes/Beliefs

! Opportunities! New Product

! New Market

!

Change Marketing Mix

! Competitive Threat

What ischanging?

What iscausing the

change?


5/28

! Use Course Frameworks to Guide Analysis:

! 5 Cs:Customer, Competition, Company,Collaborators, Context

! SWOT: Strengths, Weaknesses, Opportunities,Threats

! 4 Ps: Product, Price, Place, Promotion

! Marketing Math: Unit Contribution, Break-Even,Market Share, Customer Lifetime Value


6/28

! Consider Alternatives! No Action

!

Defend by comparison to likely actions

! Specify information needed for future acts

!

Action!

Defend by action to no action, other options

! Specify 4Ps

!

Be Realistic!!

Consider company resources and constraints! Stay within the timeframe of the case! Discuss implementation


7/28

! Step 1: Analyze the Problem! Use course frameworks

! Step 2: Identify Core Problem! Look at Trends, Opportunities, Competitive Threats

!

Step 3: Evaluate and Decide! Choose a course of action

! Defend it compared to other alternatives

! Specify implementation and tactics


8/28

! Unit Contribution

! Variable and Fixed Costs

! Margin Analysis

! Break-Even Volume! Market Share

! Profit Impact

! Customer Lifetime Value

! Sunk and Opportunity Costs


9/28

! Variable Costs! Change with volume of production

!

Manufacturing, shipping, sales commissions

! Fixed Costs! Stay the same regardless of level of production

!

Executive salaries, rent, insurance, other overheadexpenses

Unit Contribution = Revenue per unit Variable Costs per unit


10/28

!

The Wharton Store sells a T-shirt for $15, which theypurchase from American Apparel for $7.50. AmericanApparel pays $2 for fabric, $0.50 for ink, and incurs laborcosts of $1 per shirt. There is also a flat annual fee of

$10,000 dollars for rental of the t-shirt display cases.

! What are the unit contributions for The Wharton Store andAmerican Apparel?

!

The Wharton Store Unit Contribution:

! American Apparel Unit Contribution:



11/28

! Percent of selling price associated with profit

! What are the profit margins for The WhartonStore and American Apparel?! The Wharton Store:

! American Apparel:

Margin = Unit Contribution / Revenue per Unit


12/28

Retail Price

Price charged toconsumer

Manufacturer

Price

Wholesale Price

Manufacturer

Variable Costs

Cost ofproduction

RETAILER

MANUFACTURER

Analyze the margins through the value chain.

10.00

5.00

2.00


13/28

! Break-Even Volume (BEV) is the number ofunits you need to produce to cover total fixed

costs

! Use BEV to make decisions about newinvestments

Break-Even Volume = Fixed Costs / Unit Contribution


14/28

! The unit contribution of a Bridge Caf plainbagel is $0.50. Management is considering

adding a new display case for plain bagels,which costs $200. How many bagels doesBridge Caf have to sell to break even on thisinvestment?



15/28

! Generally, Market share refers to sales but it canhave multiple definitions:

! Sales/Revenue Market Share: The percentage of salesaccounted for by that firm, within the product category.

! Volume Market Share: The percentage of units accountedfor by that firm, within the product category.

! Customer Market Share: The Percentage of customersthe firm has relative to the total customers

Firm Sales / Total Market Sales

Firm Units Sold/ Total Market Units Sold

Firm Customers/ Total Customers


16/28

! Toyota sold 178,500 Priuses in 2007, of350,000 hybrids in the US, giving it a marketshare of 51%.! However, 16M cars were sold in the US in 2007.

!

How large is the Prius overall market share?

Firm Units Sold/ Total Market Units Sold


17/28

! Impact of a product on company profits

! Using this expression, one can also compute

the number of units that must be made andsold to achieve a specific profit target.

! Bridge Caf sells 500 plain bagels after

buying the new display case. What is its profitimpact?

Profit = (Unit Contribution*Units Sold) Fixed Costs


18/28

!

CLV: the value of the entire stream of purchases that thecustomer would make over a lifetime of patronage.

!

Annual Profit per Customer: Average amount that a typicalcustomer would spend with the business, with expensessubtracted! Unit Contribution * Units per customer per year

!

Years as Customer: Typical length of time a customerspends with company

Not all customers stay with a product the same length of time orhave the same annual profit. You may need to calculate separateCLVs for different years or different groups of customers to answersome questions.

CLV = Annual Profit per Customer* Years as Customer


19/28

! Note that this is heavily simplified CLV. Itdoes not account for:!

Discounting profits over time! Retention Rate (mortality/attrition)

! Segments with different values/lifetimes


!#$& '+=

+

()*=ri

rmi

rmt t

t

1)1(1

m = margin

i = discount rater = retention rate


20/28

! P&G sells diapers to new parents. Newparents are typically diaper customers for 3

years. Each new set of parents buys 30 packsof diapers a year, at an average price of $15per pack. P&G receive 10% of the retail priceas their unit contribution.

! What is the lifetime value of each new parent?



21/28

! $960 Annual Margin - 90% Retention 10%discount rate! CLV = (960)*(0.9)/(1+0.1-0.9) = $4320

! $960 Annual Margin - 80% Retention 10%discount rate

! CLV = (960)*(0.8)/(1+0.1-0.8) = $2563

!

$960 Annual Margin - 70% Retention 10%discount rate! CLV = (960)*(0.7)/(1+0.1-0.7) = $1680


22/28

! Cost items are considered sunk when moneyhas already been spent!unrecoverable

!

Items usually included here are market research,R&D expenses that have already occurred in the

past

! Why are they sunk?! Because you have already spent the money! Theres no turning back to say We shouldnt spend

money on these! Therefore, it cannot be a factor in your decisions moving

forward because no matter the course of action, themoney is gone.


23/28

! Margin Analysis:understand where incentives lie! Retailer margins show you what products retailers push

or want to feature.! Manufacturer margins show you which products are

driving profits

! Break-Even Analysis: make decisions about newinvestments and product lines

! Market Share:understand the competitive

position of the firm

! Customer Lifetime Value:the dollar value of acustomer, beyond a single sale


24/28

!

Premium: the % of manufacturer price (retailercost) that is added to get to the retail price! Note the difference from margin

!

Depreciation: a method for accounting largefixed costs over time. Straight-line depreciationsimply divides the total investment by the years itshould be depreciated across.

! Return on Investment: ratio of net profit to theinvestment used to make the net profit


25/28


Margin = Unit Contribution / Revenue per Unit


Market Share = Firm Sales / Total Market Sales

(Market share can also be calculated for units or customers)

Profit = (Unit Contribution*Units Sold) Fixed Costs



26/28

! Gucci is considering discontinuing its sunglassline. Gucci receives a unit contribution of $285for each pair of sunglasses. Each year, Guccisells 2,000 pairs. The manufacturing costs are

$50K for the plant, $100K in salaries, $50K forads, and $120K for licensing.

!

What is the profit impact of this line?


27/28

! Loyal Verizon customers spend an average of$720 annually on phone service. Verizongives each customer an annual $50 servicecredit, and spends $190 per customer per

year on expenses related to service. A loyalcustomer spends an average of 5 years withthe company.

! What is the CLV of a typical Verizoncustomer?


28/28

Documents

Case Prep Marketing Math