Strategic Marketing Assignment: Marketing Arithmetic Problems

Marketing arithmetic is the term often used to describe financial analysis of marketing decisions.  There are several key applications in strategic marketing:

1. Determining customer lifetime value (e.g. Starbucks case)

2. Mapping the distribution channel

3. Determining break-even sales volume and revenue needed to cover increases in marketing spending or cover the lost margin on price cuts

4. Comparing the profitability of alternative business proposals (e.g. Natureview Farm)

This assignment focuses on applications #2 and #3 above.  Application #2, mapping the distribution channel, consists of first identifying all of the intermediaries between producer and end-customer, followed by determining the typical margins and pricing of each one.   These calculations also help determine the cost of using a channel of distribution to reach end customers.

Application #3, determining break-even sales volume and revenue needed to pay back increases in marketing spending, or to cover the lost margin created by cutting prices, is an extremely powerful tool for analyzing marketing decisions.  The basic ingredients of the calculation include1) the producer's selling price, 2) the producer's unit variable costs and unit contribution, and 3) the fixed expenses of the business, including fixed marketing costs such as advertising, market research, product improvements, marketing staffing, etc.

Breakeven analysis skills are extremely important, since they provide a way to see the business implications of proposed changes in marketing strategy and mix, which often cannot be forecast with accuracy.  Instead of relying on a dubious forecast of revenue, the analysis works backwards to evaluate the revenue or volume that would be required to earn the same income as at present.  The decision then turns on how likely the business is to be able to attain the increase in revenue or volume needed to cover the added expense or lower price.

The assigned reading, "Note on Marketing Arithmetic & Related Marketing Terms," provides an introduction to both of the financial analysis applications, particularly the sections titled "Computation of Margin," and "Discounts and Chain Discounts" on pp.3-5.  The assigned problems for Part 1 appear at the end of the note.

Practice with additional problems is highly recommended, and are available on Owlspace>Session 5> Resources.

Answer all the questions shown below (which are also at the end of the Note on Marketing Arithmetic).    Your answers should clearly show the calculation steps for reaching your answers in a Word file, so I can follow your logic.  Excel may be used if the calculation steps are explicitly shown, i.e. without having to scrutinize the cell formulas.  Number your answers to the exercises so they correspond to the problems.   Finally, please provide the final calculated values for your work in the template at the end of this assignment.

Assignment Problems -

1. What is the unit contribution for Brand X?  (Check your calculation -- this is a critical step that if wrong will cause all subsequent calculations to also be wrong)

a. If the retail price is $1, what is the price the retailer pays per unit to the wholesaler?

b. What is then the price the wholesaler pays the manufacturer (Horatio's company)?

c. Which of the costs of Brand X are variable with respect to the number of units sold?  Which are fixed and therefore not variable with units sold?

2. What is Brand X's break-even point, both in units and in dollars?

3. What market share does Brand X need to break even?

4. What is Brand X's profit impact?

5. Industry demand is expected to increase to 23 million units next year.  An increase in the ad budget to $1 million is being considered.

a. If the ad budget is raised, how many units will Brand X have to sell to break even?

b. How many units will Brand X have to sell in order for it to achieve the same profit impact it did this year?

c. What will Brand X's market share have to be next year for its profit impact to be the same as this year?

d. What will Brand X's market share have to be for it to have a $1 million profit impact?

6. Upon reflection, the product manager decides against increasing the ad budget for the coming year.  Instead, he thinks sales would be increased more if the company gives retailers an incentive to promote Brand X, by temporarily raising their margins from 33% to 40%.  The margin increase would be achieved by lowering the price of the product to retailers.  Wholesaler margins would continue to remain at 12%.

a. If retailer margins are raised to 40% next year, how many units will Brand X have to sell to break even?

b. How many units will Brand X have to sell to achieve the same profit impact next year as it did this year?

c. What would be Brand X's market share have to be for its profit impact to remain at this year's level?

d. What would Brand X's market share have to be for it to generate a profit impact of $350,000?

Final Answers -

1. What is the unit contribution for Brand X?  

a. If the retail price is $1, what is the price the retailer pays per unit to the wholesaler?

b. What is then the price the wholesaler pays the manufacturer (Horatio's company)?

c. Which of the costs of Brand X are variable with respect to the number of units sold?  

d. Which are fixed and therefore not variable with units sold?

2. What is Brand X's break-even point, both in units and in dollars?  

3. What market share does Brand X need to break even?  

4. What is Brand X's profit impact?  

5. Industry demand is expected to increase to 23 million units next year.  An increase in the ad budget to $1 million is being considered.  

e. If the ad budget is raised, how many units will Brand X have to sell to break even?  

f. How many units will Brand X have to sell in order for it to achieve the same profit impact it did this year?

g. What will Brand X's market share have to be next year for its profit impact to be the same as this year?

h. What will Brand X's market share have to be for it to have a $1 million profit impact?

6. Upon reflection, the product manager decides against increasing the ad budget for the coming year.  Instead, he thinks sales would be increased more if the company gives retailers an incentive to promote Brand X, by temporarily raising their margins from 33% to 40%.  The margin increase would be achieved by lowering the price of the product to retailers.  Wholesaler margins would continue to remain at 12%.

e. If retailer margins are raised to 40% next year, how many units will Brand X have to sell to break even?

f. How many units will Brand X have to sell to achieve the same profit impact next year as it did this year?

g. What would be Brand X's market share have to be for its profit impact to remain at this year's level?

h. What would Brand X's market share have to be for it to generate a profit impact of $350,000?

Attachment:- Note on Marketing Arithmetic.rar