Overview
Marketing Arithmetic Exercise #1
Your firm has a new product--a device that applies adhesive (glue) in a unique way that might be of great benefit to certain manufacturing firms. Your firm has typically relied on its sales force, but with this new product, you will be going into new markets--your sales force has not been there before. In addition, the product has a relatively low contribution margin ($40.00), making it difficult to justify making direct sales calls. Assume that the only fixed costs you need to cover are your marketing expenses. Consider the following communications methods for informing potential customers about your product: 1. Direct mail You could obtain mailing lists with 22,000 names of possible users for $1205. You could produce and deliver a mailing which would include a letter, a sample of the product, a reply card and a brochure for $3.00 each. You expect a 10% return of the reply cards. You would have an outside telemarketing sales organization make the return calls--they would charge $12.00 per call. 2. Advertising You could use trade journals to reach your target audience (production and packaging engineers). To advertise for one year in seven of these trade journals would cost $100,000. You would encourage responses to the ads by including a reply coupon in the body of the advertisement of by including the product on the multicompany "Bingogram" information request cards. You think you might be able to generate 10,000 inquiries. Any inquiries would be followed up by the same telemarketing organization. What is the break even sales volume you would need for each of these alternatives? What assumptions are being made? How sensitive are your results to these assumptions? Does either alternative seem like a good option?
Marketing Arithmetic Exercise #2 Joe Stich 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 a 24% share 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. 1. What is the unit contribution for Brand X? 2. What is Brand X's break-even point? 3. What market share does Brand X need to break even? 4. What is Brand X's profit impact? [Note profit impact = total contribution – fixed costs] 5. Industry demand is expected to increase to 23 million units next year. Mr. Stich is considering raising his advertising budget to $1 million. 5a. If the advertising budget is raised, how many units will Brand X have to sell to break even? 5b. How many units will Brand X have to sell in order for it to achieve the same profit impact that it did this year? 5c. What will Brand X's market share have to be next year for its profit impact to be the same as this year? 5d. What will Brand X's market share have to be for it to have a $1 million profit impact? 6. Upon reflection, Mr. Stich decides not to increase Brand X's advertising budget. Instead, he thinks he might give retailers and incentive to promote Brand X by increasing their margins from 33% to 40%. The margin increase would be accomplished by lowering the price of the product to retailers. Wholesaler margins would remain at 12%. 6a. If retailer margins are raised to 40% next year, how many units will Brand X have to sell to break even? 6b. How many units will Brand X have to sell to achieve the same profit impact next year as it did this year? 6c. What would Brand X's market share have to be for its profit impact to remain at this year's level. 6d. What would Brand X's market share have to be for it to generate a profit impact of $350,000?