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Participation in class activities, pre class cp depending on readings given. End class cp to give
a reply to a question posed.
Excel file on lms for week one, going to go through that to get a general understanding of
how modelling works.
Will selectively pick topics from the 6 chapters, majorly from 3 and 4. They are based on
methods to explain the data(mean, histograms, standard deviation, etc).
The commitment of software is mostly to excel and R.
Excel file started from LMS.
A business plan for Allegro Market. Have this year’s and next years projected data for the
market.
Formula for calculations are given on the side of the table.
The industry is growing as the project industry sales are increasing. However, the Allegro
company is seeing a reduction in net profit.
The committee is concerned about the declining profits in a growing industry. Your job is to
pitch a proposal for some changes next year.
The first step is identify the problem, why is the net profit decreasing.
Overheads increased and market share remained the same.
Market share has remained the same, but our company sales volume increased. The main
problem is thus that the overheads have increased.
Even though you are doing better in revenue, your cost have increased.
But overhand is out of the marketing peoples hand, so we have to find a different solution.
You can control the price, the advertising budget or the sales force budget for the next year.
These are the things in the marketing peoples control, your control.
Increase the price, but that has a risk. Can substitute values in the model to see.
But by how much should you increase the price?
We can reduce overheads. Shut down an unprofitable business. Reduce the advertising
budget.
But overheads are out of our hands.
Reducing the advertising budget increases the net profit.
Can try to reduce the variable cost of products.
Again, out of our control.
Can increase the price per unit, marginally increasing it will increase the net profit.
But the net profit goes down on increasing the price per unit by 1 point 250 to 251.
Can cut down on distribution costs. Shouldn’t increase the price and decrease the
advertising budget.
But this model does not cater to the change in sales volume.
By increasing the marginal price, we will lose our price sensitive customers. We can reduce
the distribution cost.
But customers may not be able to buy a product because of a lack of distribution, even if
they want to.
We can take in account the yearly inflation. Don’t reduce contact points, increase the price
to improve the profits. Increase the advertising budget as well. This will keep us above
inflation.
Have to provide answers in numbers to the management committee. Model that can be
presented and defended.
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The customer response to the change in price depends on the type of market/product as
well. So price elasticity of the customers matters.
So there are a lot of variable in the market that matter in the decision making process.
Have to keep into account the medium of advertisement. This makes is possible for lower
budget for more advertising return.
Media efficiency and copy effectiveness matter in the decision making.
But since the advertising budget is decreased, market share will decrease, on the other
hand, improving the copy effectiveness will increase it.
Marketing people fight for more advertising budget from the higher management, the
relevant authority is the CMO.
If we increase both price and advertising budget, the market share will remain the same as
the two effects balance out. Net profit increases overall.
We can engage in price discrimination, certain prices for certain segments.
But is price segmentation possible in this market?
We can decrease the price and increase the advertising budget.
This approach also works, so there are different ways to achieve an effect. This
arguementation happens in real life meetings as well.
The heart of the matter is how price, advertising budget and sales force are related to the
market share. This will save us the guessing game. Need a mathematical relationship
between the variables.
It’s guess work in our class excel model.
Decreasing the price can lead to a bad impression for the company. This will be different for
different companies.
That’s an empirical questions, the answer is data dependent.
In the smart sheet of the model, there is a relationship established between the changeable
variables and the company market share. Market share is now a function of the variables of
interest and the parameters.
Now changing the price, ad budget, or distribution budget will automatically change market
share.
Should we make a model for sales volume as well?
Sales depends on the market share, it is market share multiplied by the industry total sales.
Are there no limits on the parameters(advertising budget)? The relationships may not
always be linear.
Better and more detailed models will include these effects, can also include the response to
competitors.
A response model can be calibrated on historical data. It can also be adjusted by using
managerial expertise. A team of managers can also be used, the answers will be averaged
out to be used.
Can also make models according to different scenarios for the customers. Examples what if
our customers are price sensitive vs not.
With numbers, the discussion is now more sophisticated, objectives and based on data.
Now that the link is established, what should we do now?
We can do sensitivity analysis in the solver. This will provide us a answer based on a more
objective approach.
Go to solver, maximize net profit, set the changeable parameters(price, ad, sales force),
values should be greater than zero in the constraints. The method is GRG Nonlinear. The
profit and response functions are non linear.
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Solve and this will provide us the optimal values for price, advertising budget, and sales
force.
But the excel can get stuck on a local minima.
We have done the problem solving but not decision making. So people can disagree on the
managerial judgetment inputs.
If the response function changes then have to run the solver again.
But it’s not recommended to change the managerial judgetment inputs because they are
based on data and experience. Change the decision making variables instead.
Isn’t the price increase too much with the solver solution? Shouldn’t market share be a goal
for the long run?
In our model, With increasing price, the market share goes down, but the gross contribution
margin increases.
We can set market share in the goal of the solver. While net profit can be set as a constraint
that it is greater than or equal to the previous year’s net profit. This model can be used for a
small growing company.
The choice of the model depends on the context in which we are using it.
If price increases above a certain threshold, will this model still stay valid?
To do that, you have to change the model. Change the ranges in the response model.
Incorporate those effects.
Different kinds of response models in week 3 and 4.
ADBUDG response function used in advertising budget decision making.
To include competitior effect or time dynamics(carryover effects), you have to include those
variables in the response function.
Modelling analysis help us defend our decisions, helps to resolve our conflicts. Have to have
a clear objective in the start and define the model according to that. Agree on the parameter
values, they can come from historical data or managerial judgement.
The modelling approach provides a more firmer and objective ground in the decision making
process.
Basics of R in the next week.