Analysis for Marketing Decisions

1. Analysis for Marketing Decisions Measuring Marketing Effectiveness Mkt 599

2. Outline • Channel Margins • Contribution Analysis • Break-Even Analysis • Cost Classification • Sales Response

3. Channel Margins One Intermediary - Retailer Consumer Price or Retail Selling Price (RSP) Margin Cost Price

4. Channel Margins One Intermediary - Retailer Consumer Price or Retail Selling Price (RSP) Margin Cost Price Manufacturer’s Selling Price (MSP)

5. Channel Margins One Intermediary - Retailer RSP m 0 < m < 1 MSP RSP x (1 - m)

6. Channel Margins One Intermediary - Retailer RSP RSP = $ 1.25 m = 0.2 or 20% m MSP MSP = $1.25 x (1 - 0.2) = $1.00 RSP x (1 - m)

7. Channel Margins Three Intermediaries : Retailer - Jobber - Wholesaler RSP m1 JSP RSP x (1 - m1) m2 WSP JSP x (1 - m2) m3 MSP WSP x (1 - m3)

8. Channel Margins Three Intermediaries : Retailer - Jobber - Wholesaler RSP m1 JSP m2 WSP MSP = RSP x( 1 - m1) x(1 - m2) x(1 -m3) m3 MSP

9. Channel Margins Markup versus Margins • Equivalent in absolute terms • No consensus • Markup based on cost price • Margin based on selling price

10. Channel Markups Three Intermediaries : Retailer - Jobber - Wholesaler RSP 0 < u < 1 u1 JSP u2 WSP RSP = MSP x( 1 + u3) x(1 + u2) x(1 + u1) u3 MSP

11. Channel Margins • Problem A company sells a calculator to brokers for $6.40, who mark it up by 4% and sell it to wholesalers, who in turn sell it to retailers. Wholesalers and retailers take margins of 10 and 35 percent respectively. What is the consumer price?

12. Channel Margins • Answer MSP x (1 + u3) = RSP x (1 - m2) x (1 - m1) $6.40 x (1.04) = RSP x (0.65) x (0.90) {$6.40 x (1.04)}/ {(0.65) x (0.90)} = RSP = $11.38

13. Contribution to Indirect Costs & Profits - CICP or P Sales Revenue = Price x Quantity pQ

14. Contribution to Indirect Costs & Profits - CICP or P Variable Costs = Unit Variable Cost x Quantity cQ

15. Contribution to Indirect Costs & Profits - CICP or P Direct Costs = Variable Costs + Direct Fixed Costs cQ + F

16. Contribution to Indirect Costs & Profits - CICP or P Unit Contribution = Price - Unit Variable Cost p - c

17. Contribution to Indirect Costs & Profits - CICP or P • Variable Contribution or Total Contribution • or Gross Contribution • = ( p - c ) Q

18. Break-Even Point • CICP or P = 0 P = ( p - c)Q - F P = 0 ( p - c )Q = F

19. Break-Even Point ( Q* ) • CICP or P = 0 F Q* = ( p - c ) = Direct Fixed Costs / Unit Contribution

20. Required Sales Units ( Q** ) To Achieve Target Contribution (P**) F + P** Q** = ( p - c )

21. PVCM • Percentage Variable Contribution Margin • Gross Margin Percentage p - c PVCM = x 100 p

22. Required Sales Revenue (pQ**)To Achieve target Contribution (P**) F + P** pQ** = p - c p

23. Q** When P** VariesP** = Return on Sales P** = r pQ 0 < r < 1 F Q** = p - c - rp

24. Break-Even Chart cQ + F

25. Break-Even Chart pQ cQ + F

26. Break-Even Chart pQ cQ + F Q** pQ**

27. Cost Classification • Direct Costs • Variable Costs • Direct Fixed Costs • Allocated Costs • Programmed Costs • Indirect Costs • Sunk Costs • Avoidable Costs • Opportunity Costs • Marginal Costs • Traceable Costs • Common Costs

28. Cost ClassificationImportant for Marketers • Direct Costs • Variable Costs • Direct Fixed Costs • Programmed Costs • Allocated Costs • Indirect Costs • Sunk Costs • Avoidable Costs • Opportunity Costs • Marginal Costs • Traceable Costs • Common Costs

29. Some Essentials to Keep in Mind • Know your variable costs • Beware of Allocated Costs They are not variable • Beware of how common costs are “spread” Become familiar with ABC (Activity Based Costing)

30. Variable Cost/UnitWhat c Represents? • Manufacturing • Raw Materials • Labor • Parts • Processing • Marketing • Sales Commissions • Some Promotions • Shipping • Charges for Current Assets

31. Criterion for c • Do these costs vary with output? • Distinguish costs allocated on a per unit basis • c is close to constant marginal cost • c is average variable cost NOT average totalcost

32. Direct Fixed CostsWhat to include in F? • Manufacturing • Direct Overhead • Plant & Equipment Depreciation • Marketing • Advertising, etc. • Sales Force If the product/segment is ababdoned, will these costs disappear? Yes - Include in F No - Include in Indirect Costs

33. Problem: A firm makes two types of jets for skis, Widgets and Gadjets. The production costs per unit for these two items are as follows: Widgets Gadjets Labor @ $10/hour $40 $200 Materials & Parts 300 300 Processing @ $20/hour 200 40 Total Production Cost/Unit $540 $540 The firm makes and sells 1000 units of each product a year. Total overhead costs are $770,000. The selling price for both types of jets is $1,100. Calculate the cost of producing each product using a) a labor time allocation method, and b) a processing time allocation method? Does this make a difference to the product managers?

34. Calculation of Allocation Basis by Method • a) Labor Time Allocation • Widget Time = ($40/$10) x 1000 = 4,000 hours : 17% • Gadget Time = ($200/$10) x 1000 = 20,000 hours : 83% • a) Processing Time Allocation • Widget Time = ($200/$20) x 1000 = 10,000 hours : 83% • Gadget Time = ($40/$20) x 1000 = 2,000 hours : 17%

35. (000s $) Widjets Gadjets Total Labor Allocation Contribution 560 560 1,120 Fixed Costs 130 640 770 Profit 430 ( 80) 350 Processing Allocation Contribution 560 560 1,120 Fixed Costs 640 130 770 Profit ( 80) 430 350

36. Sales Response - Can You Spot it inan Income Statement? • Sales $ 192,000 • Less: Variable Costs 120,000 • Gross Contribution 72,000 • Less: Direct Fixed Costs • Programmed Marketing Costs 20,000 • Advertising $ 10,000 • Sales Promotion 10,000 • Other Direct Fixed Costs 38,000 Contribution to Indirect Costs & Profits $ 14,000 Price = $16 Unit Variable Cost = $10 Strategy - Low Price / Low Promotion

37. Sales Response • Two Levels of • Prices $16 & $24 • Advertising $10,000 & $50,000 • Promotion $10,000 & $50,000 • Eight Marketing Mixes

38. Which Marketing Mix? Mkt. Mix Price Advertising Promotion 1 $16 $10,000 $10,000 2 16 10,000 50,000 3 16 50,000 10,000 4 16 50,000 50,000 5 24 10,000 10,000 6 24 10,000 50,000 7 24 50,000 10,000 8 24 50,000 50,000

39. Find Out Sales Response Mkt. Mix Price Advertising Promotion Quantity 1 $16 $10,000 $10,000 12,400 2 16 10,000 50,000 18,500 3 16 50,000 10,000 15,100 4 16 50,000 50,000 22,600 5 24 10,000 10,000 5,500 6 24 10,000 50,000 8,200 7 24 50,000 10,000 6,700 8 24 50,000 50,000 10,000

40. Which Marketing Mix is the Most Profitable CICP Price Advertising Promotion Quantity $16,400 $16 $10,000 $10,000 12,400 13,000 16 10,000 50,000 18,500 -7,400 16 50,000 10,000 15,100 -2,400 16 50,000 50,000 22,600 19,000 24 10,000 10,000 5,500 16,800 24 10,000 50,000 8,200 -4,200 24 50,000 10,000 6,700 10,000 24 50,000 50,000 10,000

41. Can We Do Better? Market Research & Experimentation or Regress a constant elasticity function on the previous data -2 .125 .25 Q = 100,000 p A X A = Advertising X = Sales Promotion

42. YES! Form a CICP function P = ( p - 10 ) Q - 38,000 - A - X P is now a function of the marketing mix Using a spreadsheet or calculus , p, A, and X can be chosen to maximixe CICP The Optimal Mkt. Mis is (p,A,X) = ($20, $13,000, $26,000) with Q = 10,260 and CICP = $ 26,735