1. Idil Yaveroglu Lecture Notes
Marketing By Numbers
Idil Yaveroglu
Lecture Notes

2. Marketing by the Numbers
Marketing decisions have financial implications
Analysis of these actions guides marketers in making better decisions
Intuition is not enough!

3. Pricing Considerations – Determining Costs
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Fixed Costs
(Overhead)
Costs that do not
vary with sales or
production levels.
Executive Salaries
Rent
Variable Costs
Costs that do vary
directly with the
level of production.
Raw materials

4. Determining Costs
TC = FC + TVC
TC = FC + (UVC)xQ
AC = TC/Q

5. Mark up Pricing Margin = selling price – acquisition price of a good
( also called unit contribution, or markup )
Percent margin = margin / selling price
Mark up Percentage on Selling Price= margin / selling price
Mark up Percentage on Cost = margin / cost
Ex: If a retailer paid $150 for a lawnmower and sells it for $200, what is the markup as a percentage of selling price? what is the markup as a percentage of cost?

6. Mark up Pricing $5 $8 $10 $11 manufacturer’s wholesaler’s retailer’s
$5 $8 $ $11
manufacturer’s wholesaler’s retailer’s
Margin margin margin =
% =
manufacturer’s margin = $3
%37.5

7. Break Even Pricing
“At price X, how many units do we need to sell in order to break even?” (zero profit point)
Profit = TR – TC
TR =PxQ
TC = FC + (UVCxQ)
Profit = PxQ – (FC + UVCxQ)
0 = Q(P - UVC) – FC Q=
At break even price, TR=TC, and profits are zero
Breakeven Point $ TR TC
Profits
Loss FC
P - UVC
Quantity Produced and Sold

8. Break-even analysis chart for a picture frame store
Page #8
Slide 13-46

9. Break Even for Profit Goals
Break even + target profit level
Unit volume = Fixed cost + Profit Goal
Price – Variable Cost

10. Break Even Example
What is the break-even point for the new line of Washburn guitars if the retail price is $329?
Also, Washburn hopes it will achieve target sales of 2,000 units at the $329 retail price, what will its profit be?

11. Profit Pricing
Unit Contribution = Price – Unit variable cost = P – UVC Unit contribution is the amount that each unit contributes to covering fixed costs. Total Contribution = Total revenue – Total variable cost = PxQ – UVCxQ = ( P – UVC ) Q Profit = Total revenue – Total cost = Total contribution – Fixed cost = PxQ – FC – ( UVCxQ) = ( P – UVC ) Q – FC

12. Example Vandelay Ind. sells frozen pizza. Sales figures:
Price ($) Sales (weekly)
What is the price that maximizes total contribution if the unit variable cost is $4?
If FC are $2275/week how many more units would Vandelay have to sell to break even at a selling price of $7.5?

13. LVC Calculation - Example
You own a tennis club where the annual membership fee is $300.
An average club member spends $100 a year at the club (tennis balls, drinks, snacks).
Average percent contribution margin on these expenditures is 60%.
On average people who join the club have a playing career of 6 yrs.
Historically, 80% of the members in a given year rejoin in the following year.
Cost of acquiring a new member is $175.
Annual marketing costs per each existing member is $40.
What is the lifetime value of a tennis member? (assuming a discount rate of d =15%)

14. LVC of a Tennis Member
  Member Contr Cost of Annual Cash Flow Probability Expected
Fee from Acquiring Marketing from Member of being Cash Flow
Expend a new m Cost if Retained retained from Member
Year
$ $175
1 $ $ $40 $ $320
2 $ $ $40 $ $256
3 $ $ $40 $ $205
4 $ $ $40 $ $164
5 $ $ $40 $ $131
6 $ $ $40 $ $105
LVC = $1006 ?
100 spending
60% margin from spending

15. Discounting But, money has a time value
$ we receive one year from now has less value than $ we receive now
[ $1 ] today = [ $(1+d) ] one year from today
or [ $1 / (1+d) ] today = [ $1 ] one year from today
$ two years from now has even less value … 1 / (1+d)2
Discount rate d is firm specific
it depends on the firm’s opportunity cost for money
d : discount rate
1 / (1+d) : discount factor

16. Discounting Assuming d = 15%, or d = 0.15:
discount factor for 1 year : 1 / (1+d) = 0.87
discount factor for 2 years : 1 / (1+d)2 = 0.76
discount factor for 3 years : 1 / (1+d)3 = 0.66
discount factor for 4 years : 1 / (1+d)4 = 0.57
etc.

17. LVC taking into account discounting
  Cash Flow Probability Expected Discount Net Present Value
from Member of being Cash Flow Factor of Expected Cash
if Retained Retained from Mem. Flow from Member
Year
$ $175
1 $ $ $278
2 $ $ $195
3 $ $ $135
4 $ $ $93
5 $ $ $64
6 $ $ $45
LVC = $635