EXAM I REVIEW

Questions:- Multiple choice requiring memorization of key concepts - Short answer, testing practical application- Quantitative analyses, open ended

Materials:- Class lectures- Cases

Marketing Strategy

- What is marketing? What is strategy? How do they differ? - What is a marketing strategy? - How do truly customer- centric firms differ from traditional firms? - What performance metrics are applicable to customer-centric firms? - What is Abercrombie & Fitch planning to do with its logos and how does this differ from

Defye`s strategy? Is it effective?

- What are 5 Cs? What kind of analysis is performed for each C? - Be familiar with cost leadership, differentiation, and focused (niche) strategies- What is PEST analysis, name examples for each factor- What are Porter`s 5 forces

Amazon, Google, Apple, Facebook Case:- How did the big four companies (Amazon, Google, Apple, Facebook) evolve over time?

What markets do they presently compete in? - What are these companies` core competencies? - Where do you see the industry going over the next several years? - In 1980s how did the computer industry restructure? What caused this shift?

Segmentation and Positioning

- What is segmentation and how does it differ from target audience? - If I give you an example of a product/brand be sure to be able to develop potential

consumer segments, target audience, and positioning. - How do firms develop target markets? What segmentation criteria are frequently used? - What criteria/measures are used when evaluating attractiveness of different segments? - I may give you an example of two or three segments and have you evaluate which should

be selected as a target market. - When do companies use segmentation? - Why is segmentation not all it is cracked up to be? What are the common pitfalls that

companies fall into? - Why is While Foods planning to launch a new chain? Who is the target audience?

- In your opinion, should Whole Foods launch is new chain under existing brand name or a new name? Pending on your recommended strategy, what cannibalization rate would you expect?

- What is Customer Relationship management? - I may give you an example of an income statement for different segments and ask you

identify problematic segments and where you see potential problems. - How profitable is customer loyalty? What are some of the issues with loyalty that firms

face?-

Clean Edge Case:- Building on the Clean Edge razor case, what impact does innovation have on firms,

industries, and consumers? How does innovation impact product life cycle? - Be familiar with product-company and product-market fit in assessing new product

opportunities. I may give you an example of a new product and have you assess its fit with the company`s current offering and/or competitors

- What is cannibalization and how do various strategic decisions influence the extent of cannibalization (e.g., brand name, target market, product mix, distribution)?

- Be able to interpret profit and loss statements. I may give you an example and ask you to interpret it.

- What is contingency planning? Assume that you plan to launch Clean Edge as a niche product. However, due to the fears of what may happen in the mainstream market, you want to have a contingency plan in place that would enable you to enter mainstream market quickly, if necessary. What would be the main elements of your contingency plan?

HubSpot Case:

- What is inbound marketing and how does it differ from outbound marketing? - What challenges arise when firms use only inbound marketing to generate sales? - What is the customer funnel and how are new technologies influencing the way

salespeople operate? - Building on the HubSpot case, how does selection of a target market change firms`

pricing, product mix and advertising/promotion?- Building on the HubSpot case, what can companies do to increase Customer Lifetime

Value?

Strategic Product and Brand Management

- What are branded, augmented and global products? - What is a brand and why do firms invest so much money into building them? What may

be some disadvantages of having strong brands? - What is the war of the Budweisers about? - What is brand equity and what drives it? - What mistake did Eco-Me make in terms of their branding?

- Can firms maintain brand control in an online world? What can firms do to improve their brand image online and minimize potential negative impact of negative reviews/comments?

- What are multiproduct branding, multibranding and private label? What are the differences, strengths and weaknesses of each? Name examples.

- Why is P&G shedding more than half of its brands? Is this a smart strategy? - What are the different types of product innovations? - New products can be launched into new or existing markets within new or existing

brands. What are the benefits and risks of each strategy? When should firms pursue what strategy?

- Why do new products fail?

Stella Artois Case: - What are some of the international and strategic issues that firms need to consider when

launching global brands? (building on the Stella Artois case)- What are the benefits and drawbacks of developing global brands? - What is Interbrew`s corporate strategy (operations, markets, brands)? How does this

strategy influence the firm`s ability to build a global brand? - Compare the strategy of ABinBev that already owns multiple brands and plans to further

expand by acquiring SABMiller with P&G that is selling off its brands to remain competitive. How do you explain the opposing strategies of these giants? In your opinion, is it smart for ABinBev to acquire SAB Miller (e.g., will it be too big)? Alternatively, is it smart for P&G to get rid of half of its brands?

- How does capacity utilization (ability to change production locations, expand/downsize) influence firm competitiveness?

Mountain Man Case:

- What are the different aspects that firms need to consider when launching new products? - How does the way small firms (such as Mountain Man) compete and make strategic

decisions differ from the way large firms (such as ABInBev) do it?- How can having a strong brand hinder brand extensions? - Should Mountain Man Brewing Co introduce a light beer? - In the Mountain Man case, what additional factors influence cannibalization apart from

stealing sales from its core brand? In your opinion, what cannibalization rate is reasonable?

- Apart from launching a brand extension, what other strategic options for growth do firms have?

Marketing Metrics

- What are break even and sensitivity analyses?- What are the different types of costs?- What is the difference between net profit margin and unit margin- What are customer acquisition costs, customer lifetime value, and customer equity?

Practice Problems

1. A company is selling a new product that retails for $25. The cost information for the new product is as follows:

Overhead expenses $175,000Advertising $100,000Raw materials $5/unitLabor $3/unitSales salaries $150,000Commissions $1.50/unit

a. What is the contribution margin per unit? b. What volume must be sold for the company to break-even on this product (both in

units and dollar?)c. What happens to break-even volume (in both units and sales) if management

decides to cut the price by 20%? d. What happens to break-even volume if management decides to run additional

advertising that will cost the firm additional $50,000?

2. Management has determined that their product should be sold to consumers at the retail price of $29.99. To manufacture the product, the firm spends $7.50/unit for materials and labor. The company expects that retailers will require a 25% margin in order to carry the product and wholesalers will require a margin of 18%.

a. What price should the producer (or manufacturer) charge to wholesalers? b. What is the contribution per unit for the product for the manufacturer? What

percentage margin does the manufacturer realize?

3. A firm has 3 products that it currently offers for sale. Product 1 sells for $22/unit and has a variable cost of $10/unit. Product 2 sells for $10/unit with variable cost of $4/unit. Product 3 sells for $3/unit with variable costs of $2/unit. Fixed costs are $120,000 for Product 1, $60,000 for Product 2, and $30,000 for Product 3. The total unit volume is 20,000 for Product 1, 35,000 for Product 2 and 50,000 for Product 3.

a. Which product is most profitable? By how much?

Product 1 Product 2 Product 3Unit PriceUnit VCFixed CostUnit Sales

Unit Margin%Margin

Product 1 Product 2 Product 3 TotalRevenueVariable CostsFixed CostsNet Profit

4. Snapple is considering adding a new flavor tea to their product line – an energy drink that tastes like tea. Based on past experience they know that the sales of their current products will be impacted by the introduction of new flavors. Before launching their new tea, they want to understand the financial implications of cannibalization. Past research suggests that half of the demand for the new drink will come from the demand for the other products (i.e., cannibalized sales). Consider the following information:

Product Selling Price Variable Cost Demand Forecast Demand lost if new product is launched

Lemon Tea 0.99 0.30 5,000 500Diet Raspberry Tea

0.99 0.35 6,000 400

Cherry Pomegranate Tea

0.99 0.45 2,500 350

Energy Tea (new product)

1.99 1.30 2,000

a. How much can Snapple expect their sales volume to increase by introducing the new energy drink?

A. Before introduction of Energy Tea

Products $Margin Sales (unit) Total Margin ($)Lemon TeaDiet Raspberry TeaCherry Pomegranate TeaTotal

B. After introduction of Energy Tea

Products $Margin Sales (unit) Total Margin ($)Lemon TeaDiet Raspberry Tea

Cherry Pomegranate TeaEnergy Tea (new product)Total

C. Comparison

Sales (unit) Total Margins ($)after Energy Tea introductionbefore Energy Tea introduction

b. What will the increase in profits likely be? c. If the fixed costs associated with launching the new drink are $4,000, should

Snapple go forward with the launch?

5. What is the CLV if the cost of acquisition is $100, the average customers spend $200/year, the cost of providing the service is $80/year, and most customers stay with the firm for 10 years?

SOLUTIONS ARE PROVIDED ON THE NEXT PAGE

SOLUTIONS --- SOLUTIONS --- SOLUTIONS

Practice Problem Solutions

1. A company is selling a new product that retails for $25. The cost information for the new product is as follows:

Overhead expenses $175,000Advertising $100,000Raw materials $5/unitLabor $3/unitSales salaries $150,000Commissions $1.50/unit

a. What is the contribution margin per unit?

Unit Margin = Price – VC = 25- (5+3+1.50) = 25 – 9.50 = $15.50%Margin = Unit Margin/ Price = 15.50 / 25 = 62%

b. What volume must be sold for the company to break-even on this product (both in units and dollar?)

Units to Break Even = Total Fixed Costs/ $Margin per unitUnits to Break Even = (175,000+100,000+150,000)/15.50 = 425,000/15.50 = 27,419.35 units

Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 425,000/0.62 = $685,483.87Or Break Even Units*Price = 27,419.35*25 = $685,483.87

c. What happens to break-even volume (in both units and sales) if management decides to cut the price by 20%?

Original Price = $25Price Cut = 25*0.2 = $5New Price = 25-5 = $20The new Unit Margin = 20-9.50 = $10.50(you can also subtract $5 from your unit margin)%Margin = 10.50/20 = 52.5%

Units to Break Even = Total Fixed Costs/ $Margin per unitUnits to Break Even = 425,000/10.50 = 40,476.19 units

Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 425,000/0.525 = $809,523.8Or Break Even Units*Price = 40,476.19*20 = $809,523.8

d. What happens to break-even volume if management decides to run additional advertising that will cost the firm additional $50,000?

The new Fixed Costs = 425,000+50,000 = 475,000

Units to Break Even = Total Fixed Costs/ $Margin per unitUnits to Break Even = 475,000/15.50 = 30,645.16 units

Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 475,000/0.62 = $766,129OrBreak Even Units*Price = 30,645.16*25 = $766,129

2. Management has determined that their product should be sold to consumers at the retail price of $29.99. To manufacture the product, the firm spends $7.50/unit for materials and labor. The company expects that retailers will require a 25% margin in order to carry the product and wholesalers will require a margin of 18%.

a. What price should the producer (or manufacturer) charge to wholesalers?

Retail selling price = $29.99Retail margin = 25%Unit margin = 29.99*0.25 = $7.49Retail purchase price = 29.99 – 7.49 = $22.5

Wholesale selling price = $22.5Wholesale margin = 18%Unit margin = 22.5*0.18 = $4.05Wholesale purchase price = = 22.5- 4.05 = $18.45

Manufacturer price = $18.45/unit

b. What is the contribution per unit for the product for the manufacturer? What percentage margin does the manufacturer realize?

Unit Margin = Price – VC = 18.45 – 7.50 = $10.95%Margin = Unit Margin/ Price = 10.95 /18.45 = 59.34%

3. A firm has 3 products that it currently offers for sale. Product 1 sells for $22/unit and has a variable cost of $10/unit. Product 2 sells for $10/unit with variable cost of $4/unit. Product 3 sells for $3/unit with variable costs of $2/unit. Fixed costs are $120,000 for Product 1, $60,000 for Product 2, and $30,000 for Product 3. The total unit volume is 20,000 for Product 1, 35,000 for Product 2 and 50,000 for Product 3.

a. Which product is most profitable? By how much?

Product 1 Product 2 Product 3Unit Price 22 10 3Unit VC 10 4 2Fixed Cost 120,000 60,000 30,000Unit Sales 20,000 35,000 50,000

Unit Margin 12 6 1%Margin 54.5% 60% 66.67%

Revenue = Price*Unit SalesVariable Costs = Unit VC*Unit SalesNet Profit = Revenue – Variable Costs – Fixed Costs

Product 1 Product 2 Product 3 TotalRevenue 440,000 350,000 150,000 940,000Variable Costs 200,000 140,000 100,000 440,000Fixed Costs 120,000 60,000 30,000 210,000Net Profit 120,000 150,000 20,000 290,000

Product 2 is most profitable by $30,000 relative to product 1.

4. Snapple is considering adding a new flavor tea to their product line – an energy drink that tastes like tea. Based on past experience they know that the sales of their current products will be impacted by the introduction of new flavors. Before launching their new tea, they want to understand the financial implications of cannibalization. Past research suggests that 62.5% of the demand for the new drink will come from the demand for the other products (i.e., cannibalized sales). Consider the following information:

Product Selling Price Variable Cost Sales (unit) Cannibalized Sales

Lemon Tea 0.99 0.30 5,000 500Diet Raspberry Tea

0.99 0.35 6,000 400

Cherry Pomegranate Tea

0.99 0.45 2,500 350

Energy Tea (new product)

1.99 1.30 2,000

a. How much can Snapple expect their sales volume to increase by introducing the new energy drink?

A. Before introduction of Energy Tea

$Margin = Selling Price – Variable costTotal Margin = $Margin* Sales

Products $Margin Sales (unit) Total Margin ($)Lemon Tea 0.69 5,000 3450Diet Raspberry Tea 0.64 6,000 3840Cherry Pomegranate Tea

0.54 2,500 1350

Total 13,500 $8,640

B. After introduction of Energy Tea

Sales = Sales – Cannibalized Sales

Products $Margin Sales (unit) Total Margin ($)Lemon Tea 0.69 4,500 3,105Diet Raspberry Tea

0.64 5,600 3,584

Cherry Pomegranate Tea

0.54 2,150 1,161

Energy Tea (new product)

0.69 2,000 1,380

Total 14,250 $9,230

C. Comparison

Sales (unit) Total Margins ($)after Energy Tea introduction

14,250 9,230

before Energy Tea introduction

13,500 8,640

750 590

Snapple can expect their sales volume to increase by 750 units.

b. What will the increase in profits likely be?

The increase in profits will by $590.

c. If the fixed costs associated with launching the new drink are $4,000, should Snapple go forward with the launch?

No. The fixed costs are much higher than increase in total margins.

5. What is the CLV if the cost of acquisition is $100, the average customers spend $200/year, the cost of providing the service is $80/year, and most customers stay with the firm for 10 years?

AC = $100m = 200-80 = $120L = 10

CLV = m*L – AC = 120*10-100 = $1,100