MARK4210, 2014 Spring, L1/L2

[Class #3]

Quantitative Analysis in

Marketing

MARK4210: Strategic Marketing

2014 Spring, Section L1/L2

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Agenda

Basic Terminology and Analysis

Exercise

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The Importance of Quantitative Analysis

Marketing Strategy = Science + Art

• Quantitative analysis forms the scientific aspect

• But you need good judgment to make the final decision

(that’s the art!)

Quantitative analysis is instrumental in making

marketing decisions

• Quantify marketing mix variables

• Provide profit implications of different strategies

• Convincing yourself & management – “how do you make

money”

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Terminology: Fixed Costs

Fixed Costs

• Costs that remain constant

over a range of activity

irrespective of the quantity

produced

Examples:

Total Fixed

Costs

Quantity

“quasi- or

step fixed

costs”

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Terminology: Variable Costs

Variable Costs

• Costs that can be directly

attributed to each additional unit

of production

Examples:

Quantity

Total Variable

Costs

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What do you think – fixed or variable?

Warehouse rent

Advertising

Labor

Machinery

Keep in mind that the same type of cost can be fixed costs or variable costs depending on the specific context.

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Terminology: Unit Contribution and

Margin

Unit Contribution

= Price – Variable Cost

Margin

= (Selling Price - Purchase Price) / Selling Price

Differences

• Unit contribution is usually in dollar amount; margin is usually in percentages

• Unit contribution takes into consideration ALL variable costs

• Margin only takes into consideration Cost of Goods Sold (COGS)

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Analysis: Margins Along the

Channel (1/2)

COGS HKD$40

Selling price to wholesaler HKD$90

(A) Margin??

Purchase price from manufacturer HKD$90

Selling price to retailer HKD$100

(B) Margin??

Purchase price from wholesaler: HKD$100

Selling price to consumer: HKD$130

(C) Margin??

Purchase from retailer at HKD$130

Retailer

Wholesaler

Manufacturer

Consumer

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Retailer

Wholesaler

Manufacturer

Consumer Retail Price: $730

(A) How much does the manufacturer sell it to wholesalers?

(B) What’s the manufacturer’s margin?

Analysis : Margins Along the

Channel (2/2)

COGs: $330

10% margin

20% margin

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Break-Even Analysis

Break-even point is the point of production at which:

Total Revenue = Total Cost

Break-even volume (BEV) is the volume required to

recover total cost

BEV = ???

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Break-Even (BE) Analysis

Volume

Dollars

Break-Even Volume

Total Revenue

Total Cost

Fixed Cost

Loss

Profit

Variable

Cost

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Terminology: Profit Impact

Profit Impact

= Unit Contribution * Units Sold - Fixed Costs

Volume needed for $X Profit Impact

= (Fixed Costs + $X) / Unit Contribution

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Break-Even (BE) Market Share Analysis

Represent BEV as a share of the market

Why do we do market share analysis???

How to assess whether it is feasible or not???

MARK4210, 2014 Spring, L1/L2

Class Exercise

Note on Marketing Arithmetic and Related

Marketing Terms

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Exercise

Horatio Alger has just become product manager for Brand

X. Brand X is a consumer product with a retail price of

$1.00. Retail margins on the product are 33%, while

wholesalers take a 12% margin.

Brand X and its direct competitors sell a total of 20 million

units annually; Brand X has 24% of this market.

Variable manufacturing costs for Brand X are $0.09 per

unit. Fixed manufacturing costs are $900,000.

The advertising budget for Brand X is $500,000. The Brand

X product manager’s salary and expenses total $35,000.

Salespeople are paid entirely by a 10% commission.

Shipping costs, breakage, insurance, and so forth are

$0.02 per unit.

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1. What is the unit contribution for

brand X?

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2. What is Brand X’s break-even

point?

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3. What market share does Brand X

need to break even?

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4. What is Brand X’s profit impact?

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5. Industry demand increase to 23 M; advertising

budget to $1M: (a) If ad budget raised, what is new

Brand X breakeven units?

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5. Industry demand increase to 23 M; advertising

budget to $1M: (b) Brand X units to sell to achieve the

same profit impact?

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5. Industry demand increase to 23 M; advertising

budget to $1M: (c) Brand X’s market share needed to

maintain profit impact?

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5. Industry demand increase to 23 M; advertising

budget to $1M: (d) Brand X’s market share needed for

$1M profit impact?

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6. Retailer margins to 40%, by lower price to retailers

while Wholesaler margins remain 12%: (a) If retailer

margins at 40%, what is Brand X breakeven?

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6. Retailer margins to 40%, by lower price to retailers

while Wholesaler margins remain 12%: (b) Brand X

units to maintain profit impact?

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6. Retailer margins to 40%, by lower price to retailers

while Wholesaler margins remain 12%: (c) Brand X’s

market share to maintain profit impact?

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6. Retailer margins to 40%, by lower price to retailers

while Wholesaler margins remain 12%: (d) Brand X’s

share to generate profit impact of $350,000?

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General Tips & Suggestions

Step 1: Interpret/translate the case question into the

relevant calculation formula:

• Breakdown the question or formula to component parts/steps

• Relate the formula to the available data

• Be comfortable with the step by step process

Step 2: List/summarize the data that is available

• If needed, categorize data into respective items and/or relevant

groups (e.g., fixed costs, var. costs, volumes, prices, etc.)

Step 4: Calculate – label numbers (e.g., $, units, etc.)

whenever you can to keep track, helps ‘check’ calculation

Step 5: Double-check – i.e., use the calculated value in

another related equation to see if it reproduces a known

value

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How do you calculate for the

following? Items Answer Notes

i. Unit Contribution

ii. Margin

iii. Breakeven Volume

iv. Profit Impact

v. Revenue

vi. Cost of Goods