quantitative analysis(4210)

MARK4210, 2014 Spring, L1/L2
[Class #3]
Quantitative Analysis in
Marketing
MARK4210: Strategic Marketing
2014 Spring, Section L1/L2

2
Agenda
 Basic Terminology and Analysis
 Exercise

3
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”

4
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”

5
Terminology: Variable Costs
 Variable Costs
• Costs that can be directly
attributed to each additional unit
of production
 Examples:
Quantity
Total Variable
Costs

6
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.

7
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)

8
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

9
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

10
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 = ???

11
Break-Even (BE) Analysis
Volume
Dollars
Break-Even Volume
Total Revenue
Total Cost
Fixed Cost
Loss
Profit
Variable
Cost

12
Terminology: Profit Impact
 Profit Impact
= Unit Contribution * Units Sold - Fixed Costs
 Volume needed for $X Profit Impact
= (Fixed Costs + $X) / Unit Contribution

13
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???

Class Exercise
Note on Marketing Arithmetic and Related
Marketing Terms

15
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.

16
1. What is the unit contribution for
brand X?

17
2. What is Brand X’s break-even
point?

18
3. What market share does Brand X
need to break even?

19
4. What is Brand X’s profit impact?

20
5. Industry demand increase to 23 M; advertising
budget to $1M: (a) If ad budget raised, what is new
Brand X breakeven units?

21
budget to $1M: (b) Brand X units to sell to achieve the
same profit impact?

22
budget to $1M: (c) Brand X’s market share needed to
maintain profit impact?

23
budget to $1M: (d) Brand X’s market share needed for
$1M profit impact?

24
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?

25
while Wholesaler margins remain 12%: (b) Brand X
units to maintain profit impact?

26
while Wholesaler margins remain 12%: (c) Brand X’s
market share to maintain profit impact?

27
while Wholesaler margins remain 12%: (d) Brand X’s
share to generate profit impact of $350,000?

28
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

29
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

quantitative analysis(4210)

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