1. Markup as the Conversion Factor in a Two Factor Marketing Machine Ted Mitchell

2. What is the definition of Markup on Price? 1) The cost per unit divided by the price per unit 2) the price per unit divided by the cost per unit 3) the profit per unit divided by the cost per unit 4) the profit per unit divided by the price per unit?

3. The definition is Markup on Price, Mp, is the ratio of Profit per unit divided by the Price per unit Markup on Price = (Profit per unit)/(Price per unit) Mp = (P–V)/P It is an identity; if you know any two of the three elements you can calculate the third.

4. A boy buys an apple for $2 and sells it for $5. What is the percent markup on price? Markup on Price by definition is (P–V)/P Mp = (P–V)/P Mp = ($5-$2)/$5 Mp = $3/$5 = 0.60 = 60%

5. Need to know and understand the markup on price, Mp YOU WILL NEED IT to set a cost-based price that provides the normal target profit.

6. What is a Two-Factor Machine? A car is a Two-Factor Machine It converts gallons of gas into miles travelled Output = Conversion efficiency x Input Miles =(miles per gallon) x (number of gallons) Output can only be improved by changing one or both of the Two-factors that explain distance Miles = Factor 2 x Factor 1 Factor 1: the amount of gas in the input, gallons Factor 2: the efficiency of the conversion, mpg

7. Marketing is easy to Conceptualize As a Two-Factor Marketing Machine It has many possible Outputs: profits, sales, costs, customer awareness, customer satisfaction, etc. Many possible Inputs: servers, hours open, price, product quality, promotion, location, etc. Many possible conversion rates and machine efficiencies: revenue per cup, sales per hour, sales to satisfaction, cups per server, return on sales, markup, etc.

8. R = (R/Q) x Q Output = Conversion rate x Input Revenue = (Revenue per cup) x (Cups Sold) To increase revenue, increase one or both of the two factors Revenue = Factor 2 x Factor 1 Factor 1: quantity of cups sold, Q Factor 2: increase the conversion efficiency, revenue per cup Revenue = (Revenue/Q) x Q R = (R/Q) x Q Revenue = Price per cup x Q

9. Change the Output of the machine from Revenue to Profit

10. G = (G/Q) x Q Output = Conversion rate x Input Gross Profit = (gross profit per cup) x (Cups Sold) To increase gross profit, increase one or both of the two factors Gross Profit = Factor 2 x Factor 1 Factor 1: quantity of cups sold, Q Factor 2: increase the conversion efficiency, gross profit per cup (Gross Profit/Cups Sold) Gross Profit = (Gross Profit/Q) x Q G = (G/Q) x Q Gross Profit = Gross Profit per cup x Q

11. Rates can be treated as Inputs and Outputs Want to improve the rate Gross Profit per cup Consider a marketing machine that uses (Revenue per Cup) as an Input And the (Gross Profit per Cup) as the Output

12. Gross Profit per Cup = Conversion rate x Revenue per Cup Output = Conversion rate x Input Gross Profit per Cup = Conversion Rate x Revenue per Cup (Price-Variable Cost per cup)= Conversion Rate x Price per Cup (P-V) = Conversion Rate x P Conversion Rate = Output/Input = (P-V)/P P–V = (P-V)/P x P (P-V)/P = dollar markup on price, Mp P – V = Mp x P

13. The Two-Factor Marketing Machine That produces profit per cup (P–V) as an output is (P – V) = Mp x P Factor 1: Input is the selling price, P Factor 2: Conversion rate is the markup, Mp It is an identity, if I know any two of three components I can calculate the third.

14. Using the Two Factor Marketing Machine To Improve or explain the output, Profit per unit, (P-V) (P – V) = Mp x P 1) Improve the Input = Increase the price 2) Improve the efficiency of the price conversion in to profits per unit = increase the markup, Mp

15. Compare and Explain Differences 12 oz Cup16 oz cup∆ Input, Price$4.00$5.00 Conversion Efficiency, Mp 95%80% Output, Profit per Unit $3.80$4.00$0.20 Why the difference in profit per unit?

16. Compare and Explain Differences 12 oz Cup16 oz cup∆ Input, Price$4.00$5.00$1.00 Conversion Efficiency, Mp 95%80%-15% Output, Profit per Unit $3.80$4.00$0.20

17. We also use the Two-Factor Model to calculate a selling price that will achieve the target profit per unit

18. Using the Two-Factor Model to Set a Price, P Solving for P means I know the variable cost, V and I know the normal, fair markup I must achieve, Mp P – V = Mp x P P – Mp(P) = V P(1 – Mp) = V P = V/(1 – Mp)

19. You are about to Start a new Café! You have had a lot of experience running a profitable coffee shop? What is your normal price for a 16 oz cup? What is your normal cost to make one cup of organic coffee? What is you normal profit per cup? What is your normal markup percent per cup?

20. A New Coffee flavor Becomes available. It will increase the cost of a 16oz cup to 30¢ a cup. You normally get a 95% markup per cup What selling price do you have to set to get the normal profit per cup that you need to stay in business? P–V = Mp x P P – $0.30 = 0.95P P – 0.95P = $0.30 P(1-0.95) = $0.30 P = $0.30/(1-0.95) P = $0.30/0.05 = $6 per cup