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
V
Volume (Quantity)
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)
Break – Even Volume (BEV)
$
Total Revenue (Price * V)
Total Cost (Fixed Cost + k*V)
BEV
Volume (Units)
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
Application of Break Even Analysis to
Advertising Expenditure
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.
Apollo Systems Exercise
Demand and Forecasting Demand
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
Business Objectives
• 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%
Thank You!