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University of Washington EMBA Program Regional 20. “Quantitative Analysis for Marketing” T.A.: Rory McLeod . Basic Quantitative Analysis for Marketing. Fixed, Variable, and Total Cost. Total Cost. Cost. k = variable cost per unit. Fixed Cost. Volume (Quantity). V.

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University of Washington EMBA ProgramRegional 20

“Quantitative Analysis for Marketing”

T.A.: Rory McLeod

### Basic Quantitative Analysis for Marketing

Fixed, Variable, and Total Cost

Total Cost

Cost

k = variable cost per unit

Fixed Cost

Volume (Quantity)

V

Total Cost for output level V units = fixed cost + k*V

As you produce more units, the average cost per unit goes down (fixed

costs are spread out over more units).

Example: Safeco Field Tickets

Fixed cost = \$40,000,000

(player/manager/staff salaries, overhead, etc.)

Variable cost per seat sold (k) = 400

(shipping of tickets, custodial staff, maintenance, etc.)

Total # of seats = 46,000

If all seats are sold, variable costs are \$18,400,000.

Total cost 58,400,000.

Total cost per seat if all seats are sold 1,270

If only half of the seats are sold, the total cost per unit is ___, because the fixed costs of \$40,000,000 are only covered by sale of 23,000 seats.

(These are made up figures!)

Unit Contribution and Total Contribution

Unit Contribution = P – k (P = price charged)

Total Contribution = (P – k) * V = PV– kV

= Price charged minus variable costs.

This is what you have left over to cover your fixed costs and profit.

Safeco Field Ticket Contribution at \$2500 Price

Assume season tickets are sold for \$2500 on average.

Unit contribution = \$2500 - \$400 = \$2,100

Total contribution, assuming all 46,000 seats are sold

= \$2100 * 46,000 = \$96,600,000

This tells us that after fixed costs of \$40,000,000, we will

have a profit of \$56,600,000.

If only half of the seats are sold, our total contribution

= \$2100*23,000 = \$48,300,000, leaving us with

a profit of \$8,300,000

Safeco Field Ticket Contribution at \$2000 price

Assume season tickets are sold for \$2000 on average.

Unit contribution = \$2000 - \$400 = \$1600

Total contribution, assuming all 46,000 seats are sold

= \$1600 * 46,000 = \$73,600,000

This tells us that after fixed costs of \$40,000,000, we will

have a profit of \$33,600,000.

If only half of the seats are sold, our total contribution

= _________________ leaving us with

a ______________.

### Think of the impact of a winning season on your ability to price!

Margin(Financial people like to confuse you!)

\$ Margin = Selling price – variable cost

(In this case, Margin is the same as unit contribution)

Beware, margin can often mean different things. Make sure you have clarification of the specific elements included.

% Margin = (Selling price – variable cost) / Selling price * 100% (this shows the % as a whole number instead of a decimal)

\$

Volume (Units)

Break – Even Volume (BEV)

Total Revenue (Price * V)

Total Cost (Fixed Cost + k*V)

BEV

Break – Even Volume (BEV)
• BEV is the point at which
• Total Revenue = Total Cost
• Or said differently, you are at break even
• when Price * V = Fixed cost + (k*V)
• BEV = Fixed cost / (Price – k)
• Or more simply
• BEV = Fixed cost / Unit contribution

Example.

An advertising campaign costing \$500,000 has been proposed

for Safeco tickets with a unit contribution of \$1,600. How many

additional seats will need to be sold as a result of the campaign

in order to justify its costs?? How many at \$2,100?

\$500,000 / \$1600 per seat = 313 seats

\$500,000 / \$2100 per seat = 238 seats

What if the proposed campaign cost \$2,000,000? How many seats

would we have to sell to break even at \$1,600/seat and \$2,100/seat?

It is important to remember…
• Numbers have more meaning when there is a benchmark against which to compare them.
• Market size
• Growth rate
• Competitive activity
• For example, if we determine that we need to sell 78,125 units of a product to break even…
• What does this mean for a product that is part of a
• highly competitive, stable market with 150,000 units sold annually
• vs.
• an emerging, fast-growing market with 1,000,000 units sold annually.

### A Question of Thirst…

Market Potential
• Market potential (Demand) = potential # of buyers * average quantity purchased by a buyer * price

Potential buyers are the people for whom your product is a solution to their need. It is not a function of your manufacturing capacity.

Company Demand Forecast
• Company Demand Forecast (Potential): the amount of sales of the market potential you believe you can capture, relative to that of competitors.
• E.g. if you have a superior product, you will have a higher demand forecast than if your competitors’ products were superior.
• Company Sales Forecast: expected level of company sales based on a chosen marketing plan– this reflects your efforts to take advantage of the company demand forecast.
Forecasting Methods
• 3-stage procedure: prepare a macroeconomic forecast (based on expected inflation, unemployment, interest rates, consumer spending, etc.), followed by an industry forecast, followed by a company sales forecast
• Based on what people say:
• Survey of buyers’ intentions/needs
• Composite of sales force opinions
• Expert opinion
• Put the product into a test market and measure buyer response
• Analyze records of past buying behavior and use a statistical method of projecting this behavior into the future
• Profit (Revenue – Total Cost)
• Market Share
• Specify share of what market (global, national, regional, etc.)
• Dollars vs. %
• Revenues
• Growth
• Return on Investment (ROI)

= net income / total investment * 100%

• Return on Equity (ROE)

= net income / owners’ equity * 100%

• Return on Assets (ROA)

= net income / total assets * 100%