University of Washington EMBA ProgramRegional 20

“Quantitative Analysis for Marketing”

T.A.: Rory McLeod

Basic Quantitative Analysis for Marketing

Fixed, Variable, and Total CostTotal Cost

Fixed Cost

k = variable cost per unit

Total Cost for output level V units = fixed cost + k*V

As you produce more units, the average cost per unit goes down (fixedcosts are spread out over more units).

V

Cost

Volume (Quantity)

Example: Safeco Field TicketsFixed cost = $40,000,000

(player/manager/staff salaries, overhead, etc.)

Variable cost per seat sold (k) = 400(shipping of tickets, custodial staff, maintenance, etc.)

Total # of seats = 46,000

If all seats are sold, variable costs are $18,400,000. Total cost 58,400,000.Total cost per seat if all seats are sold 1,270

If only half of the seats are sold, the total cost per unit is ___, because the fixed costs of $40,000,000 are only covered by sale of 23,000 seats.

(These are made up figures!)

Unit Contribution and Total Contribution

Unit Contribution = P – k (P = price charged)

Total Contribution = (P – k) * V = PV– kV

= Price charged minus variable costs.

This is what you have left over to cover your fixed costs and profit.

Safeco Field Ticket Contribution at $2500 Price

Assume season tickets are sold for $2500 on average.

Unit contribution = $2500 - $400 = $2,100

Total contribution, assuming all 46,000 seats are sold= $2100 * 46,000 = $96,600,000

This tells us that after fixed costs of $40,000,000, we will have a profit of $56,600,000.

If only half of the seats are sold, our total contribution = $2100*23,000 = $48,300,000, leaving us with

a profit of $8,300,000

Safeco Field Ticket Contribution at $2000 price

Assume season tickets are sold for $2000 on average.

Unit contribution = $2000 - $400 = $1600

Total contribution, assuming all 46,000 seats are sold= $1600 * 46,000 = $73,600,000

This tells us that after fixed costs of $40,000,000, we will have a profit of $33,600,000.

If only half of the seats are sold, our total contribution = _________________ leaving us with

a ______________.

Think of the impact of a winning season on your ability to price!

Margin(Financial people like to confuse you!)

$ Margin = Selling price – variable cost

(In this case, Margin is the same as unit contribution)

Beware, margin can often mean different things. Make sure you have clarification of the specific elements included.

% Margin = (Selling price – variable cost) / Selling price * 100% (this shows the % as a whole number instead of a decimal)

Break – Even Volume (BEV)

Total Cost (Fixed Cost + k*V)

BEV

Total Revenue (Price * V)

Volume (Units)

$

Break – Even Volume (BEV)

•BEV is the point at whichTotal Revenue = Total Cost

•Or said differently, you are at break even when Price * V = Fixed cost + (k*V)

•BEV = Fixed cost / (Price – k) Or more simply

•BEV = Fixed cost / Unit contribution

Application of Break Even Analysis to Advertising Expenditure

Example.

An advertising campaign costing $500,000 has been proposedfor Safeco tickets with a unit contribution of $1,600. How manyadditional seats will need to be sold as a result of the campaignin order to justify its costs?? How many at $2,100?

$500,000 / $1600 per seat = 313 seats$500,000 / $2100 per seat = 238 seats

What if the proposed campaign cost $2,000,000? How many seatswould we have to sell to break even at $1,600/seat and $2,100/seat?

It is important to remember…Numbers have more meaning when there is a benchmark against which to compare them.

•Market size•Growth rate•Competitive activity

For example, if we determine that we need to sell 78,125 units of a product to break even…What does this mean for a product that is part of a

•highly competitive, stable market with 150,000 units sold annually

vs.•an emerging, fast-growing market with 1,000,000 units sold annually.

Apollo Systems Exercise

Demand and Forecasting Demand

A Question of Thirst…

Market Potential

• Market potential (Demand) = potential # of buyers * average quantity purchased by a buyer * price

Potential buyers are the people for whom your product is a solution to their need. It is not a function of your manufacturing capacity.

Company Demand Forecast• Company Demand Forecast (Potential): the

amount of sales of the market potential you believe you can capture, relative to that of competitors. – E.g. if you have a superior product, you will have a

higher demand forecast than if your competitors’ products were superior.

• Company Sales Forecast: expected level of company sales based on a chosen marketing plan– this reflects your efforts to take advantage of the company demand forecast.

Forecasting Methods

• 3-stage procedure: prepare a macroeconomic forecast (based on expected inflation, unemployment, interest rates, consumer spending, etc.), followed by an industry forecast, followed by a company sales forecast

• Based on what people say:– Survey of buyers’ intentions/needs– Composite of sales force opinions– Expert opinion

• Put the product into a test market and measure buyer response• Analyze records of past buying behavior and use a statistical

method of projecting this behavior into the future

Business Objectives• Profit (Revenue – Total Cost)• Market Share

– Specify share of what market (global, national, regional, etc.)– Dollars vs. %

• Revenues• Growth• Return on Investment (ROI)

= net income / total investment * 100%

• Return on Equity (ROE) = net income / owners’ equity * 100%

• Return on Assets (ROA)= net income / total assets * 100%

Thank You!