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Keith E. Niedermeier, Ph.D.
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! Case Preparation
! Marketing Planning Process
! Structuring a Case Analysis
! Marketing Math!
Unit Contribution (Fixed and Variable Costs)! Margin Analysis
!
Break-Even Volume
!
Market Share
! Profit Impact
!
Customer Lifetime Value!
Sunk and Opportunity Costs
! Examples
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Situation Analysis
Possible Strategic
Options
Implementation
Consumers
Collaborators
Company
Context
Competitors
Evaluate Target Markets &Positioning Options
Price, Product, Promotion, Place
4Ps
5Cs
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! Trends! Market Share
! Sales Volume
! Costs
!
Customer Tastes/Beliefs
! Opportunities! New Product
! New Market
!
Change Marketing Mix
! Competitive Threat
What ischanging?
What iscausing the
change?
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! Use Course Frameworks to Guide Analysis:
! 5 Cs:Customer, Competition, Company,Collaborators, Context
! SWOT: Strengths, Weaknesses, Opportunities,Threats
! 4 Ps: Product, Price, Place, Promotion
! Marketing Math: Unit Contribution, Break-Even,Market Share, Customer Lifetime Value
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! Consider Alternatives! No Action
!
Defend by comparison to likely actions
! Specify information needed for future acts
!
Action!
Defend by action to no action, other options
! Specify 4Ps
!
Be Realistic!!
Consider company resources and constraints! Stay within the timeframe of the case! Discuss implementation
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! Step 1: Analyze the Problem! Use course frameworks
! Step 2: Identify Core Problem! Look at Trends, Opportunities, Competitive Threats
!
Step 3: Evaluate and Decide! Choose a course of action
! Defend it compared to other alternatives
! Specify implementation and tactics
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! Unit Contribution
! Variable and Fixed Costs
! Margin Analysis
! Break-Even Volume! Market Share
! Profit Impact
! Customer Lifetime Value
! Sunk and Opportunity Costs
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! Variable Costs! Change with volume of production
!
Manufacturing, shipping, sales commissions
! Fixed Costs! Stay the same regardless of level of production
!
Executive salaries, rent, insurance, other overheadexpenses
Unit Contribution = Revenue per unit Variable Costs per unit
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!
The Wharton Store sells a T-shirt for $15, which theypurchase from American Apparel for $7.50. AmericanApparel pays $2 for fabric, $0.50 for ink, and incurs laborcosts of $1 per shirt. There is also a flat annual fee of
$10,000 dollars for rental of the t-shirt display cases.
! What are the unit contributions for The Wharton Store andAmerican Apparel?
!
The Wharton Store Unit Contribution:
! American Apparel Unit Contribution:
Unit Contribution = Revenue per unit Variable Costs per unit
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! Percent of selling price associated with profit
! What are the profit margins for The WhartonStore and American Apparel?! The Wharton Store:
! American Apparel:
Margin = Unit Contribution / Revenue per Unit
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Retail Price
Price charged toconsumer
Manufacturer
Price
Wholesale Price
Manufacturer
Variable Costs
Cost ofproduction
RETAILER
MANUFACTURER
Analyze the margins through the value chain.
10.00
5.00
2.00
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! Break-Even Volume (BEV) is the number ofunits you need to produce to cover total fixed
costs
! Use BEV to make decisions about newinvestments
Break-Even Volume = Fixed Costs / Unit Contribution
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! The unit contribution of a Bridge Caf plainbagel is $0.50. Management is considering
adding a new display case for plain bagels,which costs $200. How many bagels doesBridge Caf have to sell to break even on thisinvestment?
Break-Even Volume = Fixed Costs / Unit Contribution
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! Generally, Market share refers to sales but it canhave multiple definitions:
! Sales/Revenue Market Share: The percentage of salesaccounted for by that firm, within the product category.
! Volume Market Share: The percentage of units accountedfor by that firm, within the product category.
! Customer Market Share: The Percentage of customersthe firm has relative to the total customers
Firm Sales / Total Market Sales
Firm Units Sold/ Total Market Units Sold
Firm Customers/ Total Customers
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! Toyota sold 178,500 Priuses in 2007, of350,000 hybrids in the US, giving it a marketshare of 51%.! However, 16M cars were sold in the US in 2007.
!
How large is the Prius overall market share?
Firm Units Sold/ Total Market Units Sold
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! Impact of a product on company profits
! Using this expression, one can also compute
the number of units that must be made andsold to achieve a specific profit target.
! Bridge Caf sells 500 plain bagels after
buying the new display case. What is its profitimpact?
Profit = (Unit Contribution*Units Sold) Fixed Costs
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!
CLV: the value of the entire stream of purchases that thecustomer would make over a lifetime of patronage.
!
Annual Profit per Customer: Average amount that a typicalcustomer would spend with the business, with expensessubtracted! Unit Contribution * Units per customer per year
!
Years as Customer: Typical length of time a customerspends with company
Not all customers stay with a product the same length of time orhave the same annual profit. You may need to calculate separateCLVs for different years or different groups of customers to answersome questions.
CLV = Annual Profit per Customer* Years as Customer
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! Note that this is heavily simplified CLV. Itdoes not account for:!
Discounting profits over time! Retention Rate (mortality/attrition)
! Segments with different values/lifetimes
CLV = Annual Profit per Customer* Years as Customer
!#$& '+=
+
()*=ri
rmi
rmt t
t
1)1(1
m = margin
i = discount rater = retention rate
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! P&G sells diapers to new parents. Newparents are typically diaper customers for 3
years. Each new set of parents buys 30 packsof diapers a year, at an average price of $15per pack. P&G receive 10% of the retail priceas their unit contribution.
! What is the lifetime value of each new parent?
CLV = Annual Profit per Customer* Years as Customer
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! $960 Annual Margin - 90% Retention 10%discount rate! CLV = (960)*(0.9)/(1+0.1-0.9) = $4320
! $960 Annual Margin - 80% Retention 10%discount rate
! CLV = (960)*(0.8)/(1+0.1-0.8) = $2563
!
$960 Annual Margin - 70% Retention 10%discount rate! CLV = (960)*(0.7)/(1+0.1-0.7) = $1680
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! Cost items are considered sunk when moneyhas already been spent!unrecoverable
!
Items usually included here are market research,R&D expenses that have already occurred in the
past
! Why are they sunk?! Because you have already spent the money! Theres no turning back to say We shouldnt spend
money on these! Therefore, it cannot be a factor in your decisions moving
forward because no matter the course of action, themoney is gone.
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! Margin Analysis:understand where incentives lie! Retailer margins show you what products retailers push
or want to feature.! Manufacturer margins show you which products are
driving profits
! Break-Even Analysis: make decisions about newinvestments and product lines
! Market Share:understand the competitive
position of the firm
! Customer Lifetime Value:the dollar value of acustomer, beyond a single sale
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!
Premium: the % of manufacturer price (retailercost) that is added to get to the retail price! Note the difference from margin
!
Depreciation: a method for accounting largefixed costs over time. Straight-line depreciationsimply divides the total investment by the years itshould be depreciated across.
! Return on Investment: ratio of net profit to theinvestment used to make the net profit
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Unit Contribution = Revenue per unit Variable Costs per unit
Margin = Unit Contribution / Revenue per Unit
Break-Even Volume = Fixed Costs / Unit Contribution
Market Share = Firm Sales / Total Market Sales
(Market share can also be calculated for units or customers)
Profit = (Unit Contribution*Units Sold) Fixed Costs
CLV = Annual Profit per Customer* Years as Customer
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! Gucci is considering discontinuing its sunglassline. Gucci receives a unit contribution of $285for each pair of sunglasses. Each year, Guccisells 2,000 pairs. The manufacturing costs are
$50K for the plant, $100K in salaries, $50K forads, and $120K for licensing.
!
What is the profit impact of this line?
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! Loyal Verizon customers spend an average of$720 annually on phone service. Verizongives each customer an annual $50 servicecredit, and spends $190 per customer per
year on expenses related to service. A loyalcustomer spends an average of 5 years withthe company.
! What is the CLV of a typical Verizoncustomer?
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