Project 1: Marketing

An Introduction

Goal

Your goal is three-fold: To find the price of a particular product

that will maximize profits. Determine the number of units that will

be sold at the optimal price. Determine the maximum profit that is

expected from the sales of your particular product.

Definitions Market: A market is people or

organizations with purchasing power and willingness and authority to buy

Product: Good or service bought and sold

Marketing/Marketing Research

Product differentiation is very important in marketing “What makes this any different from

product X?” Market can be segmented by age,

culture, and interest. http://www.ama.org

Marketing Mix -- Components

1. Product Planning2. Distribution3. Promotion – Advertisements

4. Pricing This is what we are interested in

Competition Monopoly: Amount of product

depends on price set. There are few perfect (pure)

monopolies – usually occur in government regulated services such as gas and electric

Sometimes the above examples are called natural monopolies

Competition Perfect Competitor: Amount sold

does not affect the good’s price Example (from text): Small farmer

planting wheat or soybeans. Shifting to either affects neither price at all.

Where do we fit? Our company has temporary

monopoly power for our product. This means that we have a new

product that does not have an exact competitor

The functions To achieve the goal of the project, we will

need to look at different mathematical functions Recall: What is the definition of a function?

We have 4 in particular that we will need to study Demand, Cost, Revenue, and Profit

• Note the units on each of the axes for all of the functions

Note: We are assuming that we are looking at a monopolistic situation

Demand Function, D(q) Gives the unit price, D(q), at which a

company can charge in relation to the total quantity (q) of the product that it sells at that price

Demand curve, which is the graph of D(q), is generally downward sloping Why?

Demand Curve Recall: What does it mean for a

curve to be downward sloping? As quantity goes down, what

happens to price? As quantity goes up, what happens

to price? What should our curve look like?

Demand Curve We can look at the curve and see at what unit

price we can sell a specified number of items When the unit price is high, the total quantity we sell is

low When the unit price is low, the total quantity we sell is

high For our purposes we are going to assume that the

maximum quantity that can be sold is where the curve intersects the q-axis.

Unit price, D(q)

(in $)

Total quantity (q)

Demand Curve, D(q)

Perfect Competitor vs. Monopoly

For a perfect competitor, if you plot price against quantity sold you get a constant function. Why?

What will the two curves look like plotted against each other?

Unit price, D(q) (in $)

Perfect Competitor

Quantity (q)

MonopolistDemand Curve, D(q)

Revenue Function, R(q) To determine the total revenue you will

receive from selling a product, you multiply the total number of goods sold by the unit price of the goods R(q)=D(q)*q

Now, if you sell a small amount for a high price, you will have a small revenue

If you sell a large amount for a low price, you will have a small revenue

What does the curve look like?

Revenue Curve We can look at the total revenue that is

produced when a specified number of items is sold

Our graph, starts out low, gets high, and then goes low again

Quantity (q)

Total Revenue (in $)

Revenue Curve, R(q)

Cost Function, C(q) When you are making goods, you

will incur costs There are two types:

Fixed Costs: Incurred even if units are not produced

Variable Costs: Unit-based production• Examples: labor, lighting, etc.

What does the curve look like?

Cost Curve We can look at the total costs that

are incurred when a particular number of goods are produced The more goods that are produced, the

higher the total cost

Quantity (q)

Total cost (in $)

Cost Curve, C(q)

Profit Function, P(q) When does a company make a profit?

When the revenue exceeds the costs Thus, the profit function is total revenue

minus total cost or P(q) = R(q) – C(q). When the difference is positive, the company

has made a profit When the difference is negative, the company

has lost money What does the curve look like?

Profit Curve When a small number of units are produced, the

total cost will be more than the total revenue Hence, you will have a negative difference

As the number of units produced is increased, the total cost starts to reach the total revenue It eventually reaches it (break-even point) and then

exceeds it, reaching a maximum point After the maximum point is reached it can only

decrease This means that if you start making more and more

units, your costs exceed your revenue again – hence a negative difference

Profit Curve How does this translate to a graph?

Quantity (q)

Total profit (in $)

Profit Curve, P(q)

Class Project: Save-it-All! Save-it-All! developed and patented a new

type of computer drive, SXL Features reliability, compact size, and the ability

to store 500 MB of information Under the conditions of the patent, Save-it-

All! has the exclusive right to produce and market the new technology during the next three years, giving them temporary monopolistic power*.

* This will be an assumption for our project

Questions to Answer

1. How should they price SXL such that it will produce a maximum profit during the coming year?

2. How many drives can they expect to sell?

3. How much profit might they realize from sales?

Research Save-it-All!’s marketing department did

research on potential buyers Estimates that there are 120 million potential

customers in the national market during the coming year

Studied 6 test markets to determine the fraction of the potential buyers who would actually buy SXL at various price levels

Assumption: From past experience, they will assume that SXL will have a quadratic demand function

Information In Marketing Data.xls, you have the

results from the test markets You also know the costs of production

Fixed overhead costs of $21,600,000 during coming year

Variable costs:• First 500,000 drives -- $115 per drive• Next 600,000 drives -- $100 per drive• Rest of the drives -- $90 per drive

Pricing & Production Using the information that is given, Save-it-

All! wants to analyze the pricing and production of the product, SXL They want to know a price in order for them to

achieve maximum profit They want to know how many they will sell at the

optimal price They want to know the maximum profit expected They want to know how sensitive the profit is to

changes in optimal quantity They want to know what the consumer surplus will

be if the profit is maximized

Advertising and Capital Additionally, Save-it-All! wants to know the

following: What profit can they expect if the unit price of

the drive is $154.49? How much should they pay for advertising if the

campaign increases demand for the drives by 10% at all price levels?

How would the 10% increase in demand effect the optimal price?

Would it be smart if they put $4m into training and streamlining if it reduces the variable production costs by 7% for the coming year?

Your project Go on-line and get the team data (in an

Excel file) It contains test market data and production

cost estimates Also, it has 9 questions that will need to be

answered at the end of the project Assume that your company has

temporary monopolistic power for the next 3 years

Preliminary Report We will follow the course syllabus

Everyone will go on the same day – order of presentation will be random

Casual dress (no shorts, wrinkled shirts, low cut or short shirts/skirts, flip-flops)

Each team will present for about 5-10 minutes Bring a hard copy of your slides for me (handout

– 4 slides per page) Be prepared for computer mishaps – have

backup or hard copy of slides

Preliminary Report Introduce your company and your job

descriptions (your choice – be creative) Come up with a unique product that makes

sense with the prices given Remember product differentiation

Know basic terms and assumptions Do not give list of definitions but work into

presentation Present the data Give an initial guess for the max profit

How?

Initial guess of max profit For each test market, you should

calculate the following:

This calculation gives you the number of units in the potential national market

Multiply that number by the price for that test market This gives you the total revenue for each

particular test market

Number of units (National Market Size)

Market Size

Initial guess of max profit Now, you will need to know the total cost for

each test market You already know the fixed cost Determine the variable cost for each amount of units

(you have 8) by using the variable cost information given

Total cost = Fixed Cost + Variable Cost Once you have the total cost for each test

market, subtract it from the total revenue from that test market.

The greatest number will be your initial guess