Keith E. Niedermeier, Ph.D.

Case Preparation

Marketing Math

Marketing Planning Process

Structuring a Case Analysis

Unit Contribution (Fixed and Variable Costs)

Margin Analysis
Break-Even Volume
Market Share
Profit Impact
Customer Lifetime Value
Sunk and Opportunity Costs

Examples

Context

Situation Analysis

Competitors

Consumers

Collaborators

5Cs

Company

Possible Strategic
Options

Evaluate Target Markets &

Positioning Options

Implementation

Price, Product, Promotion, Place

4Ps

Trends

Market Share
Sales Volume
Costs
Customer Tastes/Beliefs

Opportunities

New Product
New Market
Change Marketing Mix

Competitive Threat

What is
changing?

What is
causing the
change?

Use Course Frameworks to Guide Analysis:

5 Cs: Customer, Competition, Company,
Collaborators, Context
SWOT: Strengths, Weaknesses, Opportunities,
Threats
4 Ps: Product, Price, Place, Promotion
Marketing Math: Unit Contribution, Break-Even,
Market Share, Customer Lifetime Value

Consider Alternatives
No Action

Defend by comparison to likely actions

Specify information needed for future acts

Action

Defend by action to no action, other options

Specify 4Ps

Be Realistic!

Consider company resources and constraints

Stay within the timeframe of the case
Discuss implementation

Step 1: Analyze the Problem

Use course frameworks

Step 2: Identify Core Problem

Look at Trends, Opportunities, Competitive Threats

Step 3: Evaluate and Decide

Choose a course of action

Defend it compared to other alternatives
Specify implementation and tactics

Unit Contribution
} Variable and Fixed Costs
} Margin Analysis
} Break-Even Volume
} Market Share
} Profit Impact
} Customer Lifetime Value
} Sunk and Opportunity Costs
}

Unit Contribution = Revenue per unit Variable Costs per unit

}

Variable Costs

Change with volume of production

Manufacturing, shipping, sales commissions

Fixed Costs

Stay the same regardless of level of production

Executive salaries, rent, insurance, other overhead
expenses

Unit Contribution = Revenue per unit Variable Costs per unit

}

The Wharton Store sells a T-shirt for $15, which they

purchase from American Apparel for $7.50. American
Apparel pays $2 for fabric, $0.50 for ink, and incurs labor
costs of $1 per shirt. There is also a flat annual fee of
$10,000 dollars for rental of the t-shirt display cases.
What are the unit contributions for The Wharton Store and
American Apparel?

The Wharton Store Unit Contribution:

American Apparel Unit Contribution:

Margin = Unit Contribution / Revenue per Unit

}

Percent of selling price associated with profit

What are the profit margins for The Wharton
Store and American Apparel?
The Wharton Store:
American Apparel:

Analyze the margins through the value chain.

Retail Price

Price charged to
consumer

$10.00

Manufacturer
Price
$5.00
Wholesale Price

Manufacturer
Variable Costs
Cost of
production

$2.00

RETAILER

MANUFACTURER

Break-Even Volume = Fixed Costs / Unit Contribution

}

Break-Even Volume (BEV) is the number of

units you need to produce to cover total fixed
costs
Use BEV to make decisions about new
investments

Break-Even Volume = Fixed Costs / Unit Contribution

}

The unit contribution of a Bridge Caf plain

bagel is $0.50. Management is considering
adding a new display case for plain bagels,
which costs $200. How many bagels does
Bridge Caf have to sell to break even on this
investment?

Generally, Market share refers to sales but it can

have multiple definitions:
Sales/Revenue Market Share: The percentage of sales
accounted for by that firm, within the product category.
Firm Sales / Total Market Sales

Volume Market Share: The percentage of units accounted

for by that firm, within the product category.
Firm Units Sold/ Total Market Units Sold

Customer Market Share: The Percentage of customers

the firm has relative to the total customers
Firm Customers/ Total Customers

Firm Units Sold/ Total Market Units Sold

Toyota sold 178,500 Priuses in 2007, of

350,000 hybrids in the US, giving it a market
share of 51%.
However, 16M cars were sold in the US in 2007.
How large is the Prius overall market share?

Profit = (Unit Contribution*Units Sold) Fixed Costs

Impact of a product on company profits

} Using this expression, one can also compute
the number of units that must be made and
sold to achieve a specific profit target.
}

Bridge Caf sells 500 plain bagels after

buying the new display case. What is its profit
impact?

CLV = Annual Profit per Customer* Years as Customer

}

CLV: the value of the entire stream of purchases that the

customer would make over a lifetime of patronage.
Annual Profit per Customer: Average amount that a typical
customer would spend with the business, with expenses
subtracted
Unit Contribution * Units per customer per year

Years as Customer: Typical length of time a customer

spends with company
Not all customers stay with a product the same length of time or
have the same annual profit. You may need to calculate separate
CLVs for different years or different groups of customers to answer
some questions.

CLV = Annual Profit per Customer* Years as Customer

}

Note that this is heavily simplified CLV. It

does not account for:
Discounting profits over time
Retention Rate (mortality/attrition)
Segments with different values/lifetimes
t

mr
r

t =1 (1 + i)t = m1 + i r

m
i
r

= margin
= discount rate
= retention rate

CLV = Annual Profit per Customer* Years as Customer

P&G sells diapers to new parents. New

parents are typically diaper customers for 3
years. Each new set of parents buys 30 packs
of diapers a year, at an average price of $15
per pack. P&G receive 10% of the retail price
as their unit contribution.
} What is the lifetime value of each new parent?
}

$960 Annual Margin - 90% Retention 10%

discount rate
CLV = (960)*(0.9)/(1+0.1-0.9) = $4320

}
}

}
}

$960 Annual Margin - 80% Retention 10%

discount rate
CLV = (960)*(0.8)/(1+0.1-0.8) = $2563

$960 Annual Margin - 70% Retention 10%

discount rate
CLV = (960)*(0.7)/(1+0.1-0.7) = $1680

Cost items are considered sunk when money

has already been spent unrecoverable
Items usually included here are market research,
R&D expenses that have already occurred in the
past
Why are they sunk?

Because you have already spent the money

Theres no turning back to say We shouldnt spend
money on these
Therefore, it cannot be a factor in your decisions moving
forward because no matter the course of action, the
money is gone.

Margin Analysis: understand where incentives lie

Retailer margins show you what products retailers push
or want to feature.
Manufacturer margins show you which products are
driving profits

Break-Even Analysis: make decisions about new

investments and product lines
Market Share: understand the competitive
position of the firm
Customer Lifetime Value: the dollar value of a
customer, beyond a single sale

Premium: the % of manufacturer price (retailer

cost) that is added to get to the retail price
Note the difference from margin

Depreciation : a method for accounting large

fixed costs over time. Straight-line depreciation
simply divides the total investment by the years it
should be depreciated across.
Return on Investment: ratio of net profit to the
investment used to make the net profit

Unit Contribution = Revenue per unit Variable Costs per unit

Margin = Unit Contribution / Revenue per Unit
Break-Even Volume = Fixed Costs / Unit Contribution
Market Share = Firm Sales / Total Market Sales
(Market share can also be calculated for units or customers)
Profit = (Unit Contribution*Units Sold) Fixed Costs
CLV = Annual Profit per Customer* Years as Customer

Gucci is considering discontinuing its sunglass

line. Gucci receives a unit contribution of $285
for each pair of sunglasses. Each year, Gucci
sells 2,000 pairs. The manufacturing costs are
$50K for the plant, $100K in salaries, $50K for
ads, and $120K for licensing.
What is the profit impact of this line?

Loyal Verizon customers spend an average of

$720 annually on phone service. Verizon
gives each customer an annual $50 service
credit, and spends $190 per customer per
year on expenses related to service. A loyal
customer spends an average of 5 years with
the company.
What is the CLV of a typical Verizon
customer?

Kashi produces a line of organic fruit juices

which retail at Whole Foods for $8 a liter.
Whole Foods takes a 20% margin off the retail
price. Kashis other costs (per liter) include:
$1.55 in raw materials, $0.45 in shipping,
and $0.40 in labor.

What is Kashis unit contribution?

What is Kashis profit margin?