Final Exam
Tuesday April 30, 6:30-9:00pm
Georges Auditorium (175 Crow)
• Directions: You may not use notes or text materials in
completing this exam. You can use your own calculator
but not someone else’s. You cannot use a smart phone.
There are 4 sections. The three mini-cases are worth 5
points each and the multiple choice questions are worth a
total of 5 points (1 point each). For the mini-case
problems, be sure to answer the questions in the outlined
boxes. You can use the back of the pages to make
calculations or scribble notes, but
• I will grade information provided in the boxes only.
• Be sure that you respond directly to each question and be
sure that you have completed all of the outlined boxes.
Final Exam
Course Learning Outcomes
At the end of the course, students should be able to:
• Understand how company strengths and
weaknesses and external opportunities and threats
influence the success of a marketing strategy;
• Develop and communicate marketing action plans
that effectively target, attract, and retain profitable
customer segments; and
• Conduct basic quantitative analyses to evaluate the
outcomes associated with alternative marketing
programs.
Sample Final Exam Question: Acquisition Value and Customer Lifetime Value
As the local Time Warner manager, you are considering two promotional campaigns,
one targeting new students and the other targeting new faculty at SMU. The
promotion includes free installation and set-up for new accounts. You normally
charge $20 for setting up a new account, which barely covers the variable costs for
installation, regardless of the type of service. To qualify for free installation,
customers have to agree to a 12-month contract.
Most students purchase the basic package at $20 per month but most faculty
purchase the HDTV package for $50 per month. Variable cost is $10 per month for
basic and $20 for HDTV. To encourage students to upgrade to the HDTV package, you
will offer them 3 months of HDTV for just $30, with the price changing to the normal
$50 after the first 3 months. You think that 50% of the new student accounts will take
advantage of this offer.
There are 3,000 new students and 200 new faculty at SMU every year. The student
promotional campaign will yield a 20% acquisition rate and the faculty promotional
campaign will yield a 50% acquisition rate. To target the 2 groups, you will have to
buy mailing lists and generate a direct mail campaign.
1. Total number of customers targeted
StudentStudentBasic
HDTV
3000
Faculty
200
2. Acquisition rate
20%
3. Total # of customers acquired (#1 × #2, student split
50-50)
300
300
100
4. First-quarter contribution per month (i.e., Price - VC)
10
10
30
3
3
3
6. First-quarter gross contribution (#3 × #4 × #5)
$9,000
$9,000
$9,000
7. Minus installation & set-up costs ($20 × #3)
-$6,000
-$6,000
-$2,000
8. First-quarter net contribution (#6 - #7)
$3,000
$3,000
$7,000
5. Number of purchases per quarter
50%
$10
$10
$70
9. First-quarter net contribution per acquired customer
(#8/#3)
What is the most you would spend per acquired customer for the promotional campaign if you
want a three-month payback? Six-month payback?
To promote the campaign, you will spend $10 per targeted student and $20 per targeted faculty.
You want to calculate the lifetime value of each new student and faculty customer using first-year
expected contribution. Expected retention rates and risk factor (associated with students skipping
out without paying and stealing the equipment) for the 3 customer groups are shown below.
10. First-year per-customer gross contribution
$120
$300
$360
11. Total per-customer acquisition costs (AC) promotion + install
3000*$10/600+$20 3000*$10/600+$20
200*$20/100+$20
$70
$70
$60
12. Retention rate (r)
40%
20%
70%
13. Interest rate (i)
10%
10%
10%
2
3
1
14. Risk factor
15. CLVinfinite lifetime = CM/(i*+1-r) - AC
i* = i × risk factor
16. Increase in Customer Equity
$120/(.2+1-.4)-$70
$80
$300/(.3+1-.2)-$70
$203
$360/(.1+1-.7)-$60
$840
$24,000
$60,818
$84,000
Is the HDTV upgrade offer worthwhile? What is the total increase in the firm’s customer equity?
Channel Margin Arithmetic
After spending $300,000 for research and development, chemists at Diversified
Citrus Industries have developed a new breakfast drink, called Zap, which provides the
consumer with twice the amount of vitamin C currently available in breakfast drinks
using all natural ingredients. Zap will be packaged in an 8-ounce container and will be
introduced to the breakfast drink market, which is estimated to be equivalent to 21
million 8-ounce servings nationally.
A major concern is the lack of funds available for marketing so management has
decided to use newspapers to promote Zap and distribute Zap in major metropolitan
areas that account for 65 percent of U.S. breakfast drink volume. Newspaper
advertising will carry a coupon for $0.20 off the price of the first can purchased. The
retailer will receive the regular margin and be reimbursed for redeemed coupons by
Diversified Citrus Industries. Past experience indicates that for every five cans sold
during the introductory year, one coupon will be returned. The cost of the newspaper
advertising campaign (excluding coupon returns) will be $250,000. Other fixed
overhead costs are expected to be $90,000 per year.
Management has decided that the suggested retail price to the consumer for the 8ounce can should be $0.50. The only unit variable costs for the product are $0.18 for
materials and $0.06 for labor. Retailers demand a margin of 20 percent of the
suggested retail price and distributors a margin of 10 percent of the retailers’ cost.
Channel Margin Arithmetic
1. Wholesale Cost = Manufacturer Price =
$.50 – 20% × $.50 – 10% × ($.50 – 20% × $.50) =
$.50 – $.10
– 10% × ($.40) = $.36
2. Zap contribution per unit
$.36 - $.18 - $.06 - $.20/5 = $.08
3. B/E Volume =
$340,000/$.08 = 4,250,000
4. B/E Share =
4,250,000/13,650,000
= 31%
Net Income (Contribution) = Revenue (Price × Quantity) – Variable Costs (VC) – Fixed Costs (FC)
Final Exam Sample Problem
Price, Promotion, and Demand Elasticity
The group product manager for ointments at American Therapeutic
Corporation was reviewing price and promotion alternatives for two products:
Rash-Away and Red-Away. Both products were designed to reduce skin
irritation, but Red-Away was primarily a cosmetic treatment whereas RashAway also included a compound that eliminated the rash.
The price and promotion alternatives recommended for the two products by
their respective brand managers included the possibility of using additional
promotion or a price reduction to stimulate sales volume. A summary of the
current price, cost, contribution margin (CM), ad spend, and volume for the two
products follows:
Unit price
Variable costs
CM
Ad Spend
Volume
Rash-Away
$2.00
$1.40
$0.60
$200,000
1,000,000
Red-Away
$1.00
$0.25
$0.75
$150,000
1,500,000
Both brand managers included a recommendation to either invest an
incremental $150,000 in advertising or reduce price by 10 percent.
1. What level of unit sales and dollar sales will be necessary to recoup
the $150,000 incremental increase in advertising expenditures.
FC/(P – VC/unit)
FC/CM
= Q required to break even (BEQ)
= Q required to break even (BEQ)
Incremental Q + Original Q
$150,000
= 250,000 + 1,000,000
$0.60
Unit Sales
BER = BEQ * P
1,250,000 × $2.00
Dollar Sales
Rash-Away:
1,250,000
$2,500,000
Red-Away:
1,700,000
$1,700,000
$150,000
= 200,000 + 1,500,000
$0.75
1,700,000 × $1.00
Net Income (Contribution) = Revenue (Price × Quantity) – Variable Costs (VC) – Fixed Costs (FC)
2. What level of unit sales and dollar sales will be necessary to maintain
the level of total contribution dollars if the price of each product is
reduced by 10 percent?
Current Contribution $s
Rash-Away:
$0.60 × 1,000,000 =
$600,000
Red-Away:
$0.75 × 1,500,000 =
$1,125,000
Required Quantity at New Contribution Margin
Rash-Away:
Red-Away:
Rash-Away:
Red-Away:
$600,000
$0.40 × Q =
$0.65 × Q = $1,125,000
Unit Sales
1,500,000
1,730,769
$1.80 × 1,500,000
Dollar Sales
2,700,000
1,557,692
$0.90 × 1,730,769
3. For the two proposed changes, you estimate that demand elasticity
with respect to advertising is .5 and that demand elasticity with respect to
price is -2.0. What would total unit and dollar sales be for each option?
E = %DQ / %DPromo E = .5
E = %DQ / %DPrice
E = -2
.5 = %DQ / (150,000/200,000)
-2.0 = %DQ / -.10
.75 × .5 = %DQ = .375
-.10 × -2.0 = %DQ = .20
DQ = .375 × 1,000,000 = 375,000
DQ = .20 × 1,000,000 = 200,000
Q = 1,000,000 + 375,000
Q = 1,000,000 + 200,000
-2.0 = %DQ / -.10
.5 = %DQ / (150,000/150,000)
-.10 × -2.0 = %DQ
1 × .5 = %DQ
DQ = .20 × 1,500,000 = 300,000
DQ = .5 × 1,500,000 = 750,000
Q = 1,500,000 + 300,000
Q = 1,500,000 + 750,000
$150,000 Increase in Ad Spend
Unit Sales
Dollar Sales
Rash-Away:
1,375,000
$2,750,000
Red-Away:
2,250,000
$2,250,000
10% Price Reduction
Unit Sales
Dollar Sales
Rash-Away:
1,200,000 × $1.80 $2,160,000
Red-Away:
1,800,000 × $.90 $1,620,000
What Do You Recommend?
$150,000 Increase in Ad Spend Breakeven
Unit Sales
Dollar Sales
Rash-Away:
1,250,000
$2,500,000
Red-Away:
1,700,000
$1,700,000
10% Price Reduction Breakeven
Unit Sales
Dollar Sales
1,500,000
Rash-Away:
2,700,000
1,730,769
Red-Away:
1,557,692
$150,000 Increase in Ad Spend Forecast
Unit Sales
Dollar Sales
Rash-Away:
1,375,000
$2,750,000
Red-Away:
2,250,000
$2,250,000
10% Price Reduction Forecast
Unit Sales
Dollar Sales
Rash-Away:
1,200,000
$2,160,000
Red-Away:
1,800,000
$1,620,000
$.75 × 550,000 = $412,500
1,800,000 × $.65 – 1,500,000 × $.75 = $45,000
Rash-Away: Yes to increased ad spend because forecasted sales are
greater than breakeven; no to price reduction…
Red-Away: Might depend on the objective, but increased ad spend appears
to dominate – unit sales, dollar sales, and contribution.
Marketing Process Model
SWOT Analysis Product-Market Definition
Company Customers Competitors Collaborators Context
Competitive Adv. & Capabilities
Market
Segmentation
Creating
Value
Selection &
Targeting
Product/Service
Offering
Promotion/
Communicating
Communication
& Capturing
Value
Customer
Acquisition
Product/Service
Offering Positioning
Place/
Channel
Pricing
Customer
Relationship
Management
Customer
Sustaining
Expansion/Retention
Value
Revenue & Profits
Questions?