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

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