Have you ever wondered why a 16-ounce beverage costs only a little more than the 12- ounce serving? Chances are that the company producing the beverage conducted a financial analysis to determine the cost of the beverage versus what the market would bear as far as price.
An important aspect of looking at alternative courses of action in marketing strategy is performing a financial analysis. Before deciding on a course of action, marketing professionals need to understand the economic consequences of each alternative course of action. The Harvard Case Study, “Note on Marketing Arithmetic and Related Marketing Terms” by Star, Heskett, and Levitt (1974), defines several financial terms and explains formulas you might use to calculate the effects of changes to a marketing program. For example, by using the equations in this article, you could determine how many additional units of a product your company would need to sell to maintain profitability if you increase the variable cost associated with manufacturing it.
For this Application, you verify your understanding of several key concepts.
To prepare for the assignment:
Read the Star, Heskett, and Levitt article found in this week’s readings. At the end of the article, read the “Brand X” scenario contained within the Exercises (but do not answer the questions that follow).
Review the calculations contained in the Marketing Arithmetic Calculations spreadsheet in this week’s Readings, which demonstrates how to arrive at the values requested in questions 1 through 4 of the article.
Experiment with changing initial data values listed at the top of the spreadsheet, paying attention to the effects those changes have on the calculated values listed under each question.
Submit by Day 7 the completed Marketing Arithmetic Exercise Calculations spreadsheet. In addition, submit a separate Word document in which you answer the following questions:
If the retail price is fixed at $1.00, what effect does increasing the retail and wholesale margins have on the manufacturer’s selling price? Explain why this is the case.
Define unit contribution in your own words. Is a high or low unit contribution preferable for profitability? Justify your answer.
How do increases in the retail and wholesale margins (again, with a fixed retail price) affect the unit contribution? Be sure to explain why.
If you increase any of the fixed cost factors, what happens to 1) the number of units the company needs to sell to break even and 2) the market share necessary to break even? If fixed costs rise, is this good, bad, or of no importance? Explain your answer.
What change (increase or decrease) to the following factors increases the profit impact and why?
Brand market share
Many marketing decisions have multiple implications. For example, while increasing price improves profit per unit, too large a price increase may decrease unit sales, ultimately decreasing profits overall. Keeping this kind of tradeoff in mind, explain how changes to the three factors mentioned in the prior question could potentially conflict with one another in terms of strategy for increasing the profit impact.
Tips for working with the spreadsheet:
The sheet has been set up so the initial data values remain at the top while you scroll down through the remainder of the sheet. For this exercise, you should only need to edit initial data values, not the formulas in the cells below.
Read the cell comments to the right of cells C25, C32, and C40 for tips on understanding the formulas.