University of Washington EMBA Program North America 5

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University of Washington EMBA ProgramNorth
America 5

• Quantitative Analysis for Marketing
• T.A. Char Popp

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It is a capital mistake to theorize before one
has data. -Sir Arthur Conan Doyle
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Basic Quantitative Analysis for Marketing
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Fixed, Variable, and Total Cost
Total Cost
Cost
k variable cost per unit
Fixed Cost
Volume (Quantity)
V
Total Cost for output level V units fixed cost
kV As you produce more units, the average
cost per unit goes down (fixed costs are spread
out over more units).
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Example Safeco Field Tickets
Fixed cost 40,000,000 (player/manager/st
aff 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!)
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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.
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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 210023,000
48,300,000, leaving us with a profit of
8,300,000
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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
______________.
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Think of the impact of a winning season on your
ability to price!
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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)

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Break Even Volume (BEV)
Total Revenue (Price V)
Total Cost (Fixed Cost kV)
BEV
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Break Even Volume (BEV)

• BEV is the point at which
• Total Revenue Total Cost
• Or said differently, you are at break even
• when Price V Fixed cost (kV)
• BEV Fixed cost / (Price k)
• Or more simply
• BEV Fixed cost / Unit contribution

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Application of Break Even Analysis to Advertising
Expenditure
Example. An advertising campaign costing
500,000 has been proposed for Safeco tickets
with a unit contribution of 1,600. How
many additional seats will need to be sold as a
result of the campaign in 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 seats would we have to sell
to break even at 1,600/seat and 2,100/seat?
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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.

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Apollo Systems Exercise
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Demand and Forecasting Demand
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A Question of Thirst
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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.

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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.

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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

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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

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Thank You!