MKTG 376 Exam 3
Example of total costs: Production - $2,000,000 to make 400,000 units Advertising budget - $1,000,000 Materials - $4 per unit Labor - $6 per unit
$3,000,000 + (400,000 x $10) = $7,000,000 Total costs
markup example: 50% markup on $10 vc =
$5 --> (10*1.5) = $15 price
margin example $15 price with vc $10=
$5 --> 5/15= 33.3%
penetration rate
% of the relevant population that has purchased a given brand or category at least once in the time period under study
Remember 50% markup means:
(10 * 1.5) = $15 price 33.3% margin on $15 price with variable cost of $10 = 5/15
Price premium (%)=
(Brand A price - benchmark price) / benchmark price can show signs of shortages, or excess inventories
target profit break-even =
(FC + target profit) / contribution margin %
If your costs are $3 each and you sell 50,000 products at $10 What is Total Revenue?
(P x Q)=TR 10 * 50000 = $500,000
elasticity=
(Percentage change in quantity demanded) / (Percentage change in price)
Prices - Allround $5.49 Besthelp $4.59 Calculate price premium - Specified competitors
(Your price - their price)/their price (5.49 - 4.59)/4.59= .196 or 19.6% Use average price charged (Besthelp 4.59 + Dripstop 4.09 + Dryup 4.79 + Effective 4.09 + Extra 4.09)/5 (5.49 - 4.33)/4.33 = .268 or 26.8%
% margin =
(selling price - cost) / selling price or $ margin / selling price
markup % =
(selling price - cost) /cost
Unit margin tells what?
- how profitable each unit is
total cost
- total expense incurred by a firm in producing and marketing a product. total cost is the sum of fixed and variable costs
Why do we need metrics?
-"if you can't measure it, you can't manage it" -marketing departments are becoming sophisticated, data driven organizations -you will be expected to understand and be able to work with many of the metrics in the real world
revenue breakeven =
-FC/ (unit contribution / selling price) -Breakeven in units * unit price
BDI example
-For example, Doodle pencils has sales of 10 pencils per-capita in Missouri and 8 pencils per-capita in the U.S. as a whole. -Doodle's BDI in Missouri is 125 % or 1.25 (10 / 8). Jamie Sharper, the salesperson for the Missouri region, says he deserves a raise of at least 10% due to his superior performance compared to the average salesperson in the U.S. Based on this BDI analysis, it would seem like Jamie has a good point. What else might we want to consider? (BDI/CDI)
Opportunities, Performance, and Accountability
-Marketers must know new opportunities and the investment to realize them -marketers must quantify the value of products, customers, and distribution channels under various pricing and promotional scenarios -marketers are held accountable for ramifications of their decisions.
What is margin?
-a sales margin is the difference between selling price and cost, typically stated as a percentage of selling price or as per unit basis -margins are vital for almost all marketing decisions as a key factor in pricing, return on market spending, earnings forecasts, and analysis of customer profitability -
Category development index (CDI)
-an index of how well a category performs within given market segment, relative to its performance in the market as a whole. at or below average -per capita basis
total contribution
-difference between revenues and VC
Brand Development Index and Category Development Index
-help identify strong and weak segments (usually demographic and geographic) for particular brands or categories of goods or services. strong per captia sales potential - recommend expansion or predict sales
relative market share
-indexes a firm's or brand's market share against its leading competitor. this provides managers with a measure to compare the relative market positions of their brands across markets - it was popularized in 1960s by Boston Consulting Group
Why is Market share important?
-indicator of how a brand is doing relative to competition -includes not only a customer's assessment of a brand's value proposition, but also other factors that influence sales such as advertising and distribution. -Unit sales relative to competition also may have an impact on unit costs if higher volumes of production lead to lower production costs. This may provide a competitive advantage to a company.
profit based sales targets
-managers often start a program with an idea of the dollar profit they desire and want to know what sales levels will be required to reach it. -marketers are expected to generate volumes that meet the target profits, often revising sales targets as prices and costs change.
What is a marketing metric?
-measuring system that quantifies a trend, dynamic, or charcteristic -a single number that can be relatively easily calculated and tracked over time, given availability to the right data -allow for consistent measurement of things that have been proven to matter for the assessment to performance and goals
break even analysis
-not a loss, but zero -selling enough to just cover FC -each sale contributes to covering FC is the difference between unit price (rev) and unit VC (unit contribution) -marketers like to know how high sales have to be to "breakeven"
benchmarks
-price of a specified competitor -price premium=(Your price - Their price)/ (Their Price) -Average Price Charged: -Price Premium = (Your price - Ave price)/ Ave Price
Brand development index (BDI)
-quantifies how well a brand is performing within a specific group of customers, compared with its average performance among all consumers -per capita basis
margin as a percentage of costs
-some industries, like retail, calculate margin as a % of costs, not of selling prices
Average Price Charged
-the simple unweighted average price of the brands in the category. -Price Premium = (Your price - Ave price)/ Ave Price
total profit =
-total revenue - total cost -(unit volume x unit price) - (unit volume x unit variable cost + total fixed cost) - [unit volume x (unit price - unit vc)] - total fixed cost - unit volume x unit contribution - total fixed cost - total contribution - total fixed cost
Penetration
-two key measures of a product's "popularity" are penetration rates and penetration share
Price Elasticity
-used to measure market responsiveness to changes in price -measures the responsiveness of the quantity demanded to a small change in price
In some markets ______ market share might be a leading market position.
20%
Revenue break-even = what level of sales are needed to cover FC?
= FC / contribution margin %
Break even example continued part 4/4 Unit Volume* 55.8 Unit Selling Price (SP)** 3.84 Promotional Allowance (PA) 27.9 Cost of Goods Sold (GOGS) 54 Unit Variable Cost (VC)*** 1.47 Total Marketing Expenses+ (Promo., Adv., Sales Force, Admin.) 25.8 Fixed Costs 56
A competitor has dropped its price by $0.50 causing you to consider matching their price cut. What would be your new break-even? Using the marketing budget break-even formula: ___56.0 + 25.8____ = 81.8 = 43.7M Units (3.84 - 0.50) - 1.47 1.87 Therefore, if the selling price was reduced by $0.50 (from $3.84 to $3.34), 43.7M units (or 9.2 million additional units) would need to be sold in order to break even.
EXAMPLE: A retailer sells gourmet pickles for $8 a jar. The retailer's percentage margin is 25%. The wholesaler's percentage margin is 33%. The manufacturer's percentage margin is 50%. What is the manufacturer's cost
Backward chain the margins using the formula Cost = SP * (1 -% Margin) Retail Cost = Retail Price * (1 -Retail Margin) = $8 * (1 -.25) = $6, Retail Cost (or Wholesale SP) = $6. Wholesale Cost = Wholesale Price * (1 -Wholesale Margin) = $6 * (1 -.33) = $4, Wholesale Cost (or Manufacturer SP) = $4. Manufacturer Cost = Manufacturer SP * (1-Manufacturer Margin) = $4 * (1-.50) = $2, Manufacturer Cost = $2
Break even Example Continued part 2/4 Unit Volume* 55.8 Unit Selling Price (SP)** 3.84 Promotional Allowance (PA) 27.9 Cost of Goods Sold (GOGS) 54 Unit Variable Cost (VC)*** 1.47 Total Marketing Expenses+ (Promo., Adv., Sales Force, Admin.) 25.8 Fixed Costs 56
Break-Even (Units) = Fixed Costs (FC) / (Unit Selling Price (SP) - Variable Costs per Unit (VC) ) 56/ (3.84 - 1.47) = 56/2.37 = 23.6 M units If add 25.8 marketing expenses, how many units above 23.6 M would be necessary to break even????? 56 + 25.8 / (3.84-1.47) = 81.8/2.37 = 34.5 M units 34.5 - 23.6 = 10.9 M more to cover expenses
Swiss entrepreneur Herr Zeitgeist buys watch faces from Italy for 5 Euros, buys watch mechanisms for 15 Euros from Spain, and hires assembly in Portugal for 10 Euros per watch. His only other expense is 100,000 Euros he pays the ad agency to place ads in in-flight magazines to build the Zeitgeist brand. Herr Zeitgeist sells each watch for 50 Euros to airport duty-free shops, earning the retailer an 80% margin. What is his breakeven volume?
Breakeven (units) = Fixed Costs / (Selling Price -Var. Cost) Therefore, substituting in our values: By reading the information provided, we see that fixed costs are 100,000 Euros, and variable costs are 5+15+10 = 30 Euros per watch. BE (units) = 100,000 / (50 -30) = 100,000 / 20 = 5,000 watches.
examples of elastic
Examples of elastic demand include restaurant meals (2.3), foreign travel (4.0), and automobiles (1.2-1.5). -Price high Purchase fewer items -Price low Purchase more items
Unite breakeven=
FC / (selling price - VC)
Unit breakeven = how many unit sales need to be made to cover FC?
FC / Unit contribution
total costs=
FC+VC (which is quantity x unit VC)
Bobby makes and sells belts for $225 each. He has determined that his fixed costs are $8,000, Average variable costs per buckle are $145. What is his break-even point in UNITS and in $?
FC/(P-AVC) = BE units ($8,000)/($225 - $145) = 100 units 100 units x $225 = $22500 Break even revenue
CDI Example
For example, if there are 30 pencils per-capita sold in Missouri compared to 25 pencils per-capita in the U.S. as a whole, the pencil CDI for Missouri would be 120% or 1.2 (30 / 25). measure of performance for the salesperson would be BDI / CDI for the region. For Doodle in Missouri, this is 125% / 120%, = 104%. Using this measure we see that the salesperson is doing better than average, but only 4% better, not 25% better.
What should you know?
Know your price compared to competitors (Above, equal to or below). By what %? What promotional allowances/discounts are given and their effect on pricing. If available, be sure to compare your discounts to competitors because customers will. Reducing a discount (from 30% to 15%) may result in more revenues, but may upset customers. It's a price increase to them.
Q=
MWB * (1 - P/MRP)
EXAMPLE Q1, P1 5 $90 Q2, P2 3 $110
MWB = Q1 - (Q2-Q1/P2-P1) * P1 5 - (3-5/110-90) * $90 5 - (-2/$20)* $90 = 5 + 9 = 14 MRP = P1 - (P2-P1/Q2-Q1) * Q1 (Omitted in text formula $90 - (110-90/3-5) * 5 $90 - ($20/-2)*5 $90 + $50 = $140 Q = MWB * (1 - P/MRP) Q = 14 * (1- P/140)
Market Share
One of the fundamental measures used in marketing. -measures the sales of brand or product relative to the overall size of the market. -calculated using units or revenues, and both measures may have important implications for a company. -the difference between units and revenues is price
MRP=
P1 - (P2-P1/Q2-Q1) * Q1
MWB=
Q1 - (Q2-Q1/P2-P1) * P1
retail cost
RSP * ( 1 - % retail margin)
Cost =
SP * (1 - margin%)
some examples of inelastic
Some examples of inelastic demand include salt (0.1), gasoline (0.2), coffee (0.25), and physician services (0.6). -Almost same quantity, regardless of price
price of a specified competitor
The simplest -- comparison of a brand's price to that of a direct competitor -price premium=(Your price - Their price)/ (Their Price)
Target Profit Pricing - Involves setting an annual target of a specific dollar volume of profit.
To calculate a target profit price for a picture frame store: UVC = $22; FC = $26,000; Target Profit = $7,000; Q = 1,000. Profit = Total Revenue - Total Cost = (P × Q) - [FC + (UVC × Q)] $7,000 = (P × 1,000) - [$26,000 + ($22 × 1,000)] $7,000 = 1,000P - $48,000 1,000P = $55,000 P = $55
two types of break-even analysis:
UNITS or REVENUES
Unit Market Share=
Unit sales / total market unit sales
Revenues=
Units sold x Price
Break even data Example part 1/4 Unit Volume* 55.8 Unit Selling Price (SP)** 3.84 Promotional Allowance (PA) 27.9 Cost of Goods Sold (GOGS) 54 Unit Variable Cost (VC)*** 1.47 Total Marketing Expenses+ (Promo., Adv., Sales Force, Admin.) 25.8 Fixed Costs 56
VC = (PA + COGS) = (27.9 + 54)/55.8 = 1.47 Units 55.8 * Unit Volume found in the COMPANY Sales report ** Unit Price = Manufacturer Sales / units = $214.3 M / 55.8 M units *** Unit Variable Costs, Promotion Allowance from COMPANY Income Statement + Total Marketing Expenses from COMPANY Income Statement ++ Fixed Costs from COMPANY Income Statement
total vc=
Vc * units sold
EXAMPLE: A manufacturer sells electric staplers for $5.00 each to a distributor. The distributor's dollar margin is $2.00. The distributor sells to a retailer. The retailer's dollar margin is $3.00. What is the retail sales price to the consumer?
We know that $ Margin = SP -Cost and also that that the distributor's cost is equal to the manufacturer's selling price, or $5.00. The distributor's $ Margin is given as $2.00, so the distributor's selling price = $5.00 + $2.00 = $7.00. The distributor's selling price of $7.00 is also the cost to the retailer. Therefore, the retailer's selling price to the consumer is the retailer's cost plus the retailer's $ margin, or $7.00 + $3.00, or $10.00.
EXAMPLE A manufacturer sells watches for $20 each. His percentage margin is 25%. What is his cost?
We know that Cost = Selling Price * (1 -% Margin) Therefore, substituting in our values: Cost = $20 * (1 -25%) Cost = $20 * (1 -.25) Cost = $20 * .75 Cost = $15
:If a firm receives $100 revenue from selling 5 units of a product, and pays $25 in total variable costs, then what is the contribution and contribution margin (%) of each unit?
We know that Total Revenues = Selling Price per unit * Units Sold $100 = SP * 5; Selling Price = $100/5 = $20 and Total Variable Costs = Unit Variable Costs * Units Sold $25 = Unit Variable Costs * 5; Unit Variable Costs = $5 and Unit Contribution = SP per unit -VC per unit Unit Contribution = $20 -$5 = $15 and Contribution Margin % = Contribution / Selling Price Contribution Margin % = $15 / $20 = 75%
prices at each level can be calculated on gross basis, or net of discounts, rebates, and coupons:
When dealing with distributors or retailers, there are likely to be substantial differences between manufacturer selling prices (retail purchase prices) depending on whether they are adjusted for discounts and allowances.
Some of the types of questions that contribution analysis can help answer include:
Will our unit prices cover unit variable costs? •Will the additional contribution cover our fixed costs and make a "profit"? •How much can we afford to pay marketing to sell an additional unit? •If an advertisement cost $1,000, how many units will we need to sell to make it worthwhile? •What kinds of commission programs are feasible for our salespeople?
Break even example continued part 3/4 Unit Volume* 55.8 Unit Selling Price (SP)** 3.84 Promotional Allowance (PA) 27.9 Cost of Goods Sold (GOGS) 54 Unit Variable Cost (VC)*** 1.47 Total Marketing Expenses+ (Promo., Adv., Sales Force, Admin.) 25.8 Fixed Costs 56
You have requested an additional $8,000,000 from Senior Management to run an advertising campaign. What is the new break-even level of sales? Using the marketing budget break-even formula: 56.0 + (25.8 + 8) = 89.8 = 37.9M Units 3.84 - 1.47 2.37 Therefore, if the advertising budget is increased by $8 million (from 25.8 million to 33.8 million), 37.9 M Units (or 3.4 million additional units) would need to be sold in order to break-even.
target volume (#) =
[FC ($) + Target Profits ($)] / contribution per unit ($)
target revenue ($) =
[FC ($) + target profits ($)] / contribution margin (%)
Market Share calculation only consider what?
actual sales, not potential customers who ultimately decided against purchasing
market spending examples
advertising or sales are examples of market spending
Relative market share=
brands market share ($ or units) / largest competitors market shares ($ or units)
Channel margins
can be expressed on per- unit basis or as % of selling price
unit
can vary in size, shape, packaging, and quantity- for example, a sheet of paper, pad of paper, a small box of paper, a ream of paper, a case of reams, or a skid of cases
slope
change in Q/ change in P
contribution margin %
contribution per unit / selling price per unit
selling price =
cost * (1 - margin %)
selling price =
cost x (1+ markup %)
supplier selling price ($) =
customer selling price ($) - customer margin ($)
breakeven in units=
dollar break-even / unit price
Dollar sales
dollar sales = average price x quantity sold
if minor price changes have a major impact on demand, demand is?
elastic
A price elasticity of 2.5 is
elastic, meaning the percentage change in quantity demanded is greater than the percentage change in price.
y= mx + b
formula used to draw line
Elasticity demand is greater than or less than 1?
greater
in the markets unresponsive to price change, demand is ?
inelastic
A price elasticity of 0.5 represents
inelastic demand, which means the percentage change in quantity demanded is less than the percentage change in price. -The less elastic the demand, the more it pays for the seller to raise the price.
Brands penetration share
is determined by comparing that brand's customer population to the number of customers for its category in the relevant market as a whole.
Price premium or relative price
is the % by which a products selling price exceeds (or falls short) a benchmark price established for a similar product or basket of products
profit
is the difference between total revenues and total costs
inelastic is greater than or less than 1?
less
market as a percentage of sales (%) =
market spending / revenue
The most important difference to remember between markup and margin is?
markup % is applied against cost, whereas margin % is applied against the selling price
Examples of approximately unitary elasticity
movies (0.90) and private education (1.1).
Price slope is almost always what?
negative
Market Share Penetration=
number of who purchased / total population
payback period
period of time required to recoup the funds expended in an investment; the time required for an investment to reach break even
formulas for linear demand functions use what format
quantity=slope * price +MWB
average price per unit ($) =
revenue ($) / units sold (#)
break-even in units with revenue
revenues/ selling price
Dollar market share (%)
sales / totally industry sales
Revenue Market share=
sales rev / total market sales rev
$ margin=
selling price - cost
Unit margin ($) =
selling price per unit ($) - coster per unit ($)
Contribution per unit =
selling price per unit - VC per unit
fixed cost
sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.
variable cost
sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold
3 or 4 Firm concentration ratio=
sum of the market shares of the leading 3 or 4 competitors in the market
customer selling price ($) =
supplier selling price ($) / [1 - customer margin (%)]
Target revenues ($) =
target volume (#) * selling price per unit ($)
markup or margin?
terms are not interchangeable. markup refers to the practice of adding a % to costs in order to calculate selling prices
market concentration
the degree to which a relatively small number of firms accounts for a large proportion of the market
max reservation price
the lowest price at which the quantity demanded equals zero, where y+ 0, above this price, no one will buy!
reservation price
the price above which a customer will not buy a product. also known as max willingness to pay
percent good value
the proportion of customers who perceive a product to represent a good value, that is, varying a selling price below their reservation price
max willing to buy (MWB)
the quantity that customers will buy when the price of a product is zero, an artificial concept used to anchor a linear demand function, where x = 0
Market penetration considers what?
the total population of a market
total costs=
total Fc + total vc
Break even happens when?
total contribution equals FC. Profits and losses at this point equal zero
margin (%) =
unit margin ($) / selling price per unit ($)
total variable cost=
unit volume (#) x variable cost per capita ($)
low rates of market penetration may indicate what?
unmet potential demand for products of low interest in the product category as a whole within the selected population.
Unit variable cost=
vc/q
VC cost will decrease with what?
volume, this might occur due to impacts such as volume discounts or economies of scale
On the linear graph MWB is where?
where P=0
on linear graph MRP is where
where Q= 0
Example of Market share calculation
your sale / industry sales = xx.x% (use one decimal) Beer: bud light 37 --> 37/100 coors light 19 --> 19/100 miller light 19 --> 19/100