1. UGBA 106 Marketing Section 103 (Tue 11a-12:30p) Section 105 (Tue 2-3:30p) Week 1 – January 19, 2010 © Ravi Shanmugam, 2010

2. Your Host: Ravi Shanmugam The best way to reach me is by email: The best way to reach me is by email: Office hours: TBA Office hours: TBA How I’ll reach you: Weekly emails with announcements Make sure your email address listed in Bearfacts is legit Make sure your email address listed in Bearfacts is legit Bookmark the course website: Bookmark the course website: UGBA 106 Section, Week 1 Welcome to UGBA 106 section shanmuga@haas.berkeley.edu shanmuga@haas.berkeley.edu http://faculty.haas.berkeley.edu/shanmuga/ugba106 http://faculty.haas.berkeley.edu/shanmuga/ugba106 Admin overview Marketing Math Agenda:

3. UGBA 106 Section, Week 1 Tuesday “Case Discussion Class” This is not just an optional review of lecture, but a separate and integral part of the course. This is not just an optional review of lecture, but a separate and integral part of the course. Each week centers around discussion of a case. Each week centers around discussion of a case. 2 things to do to keep on top of cases: Download the reader from www.study.net – it contains all cases used this semester. DON’T xerox/share cases. Download the reader from www.study.net – it contains all cases used this semester. DON’T xerox/share cases.www.study.net Keep an eye on the schedule at the end of the syllabus. Keep an eye on the schedule at the end of the syllabus. Case Discussion…not quite “section” Admin overview Agenda: Marketing Math

4. UGBA 106 Section, Week 1 In section, it’s easier for the following things to happen: You can actually raise your hand and say things. You can actually raise your hand and say things. We can gauge your preparation and participation on a weekly basis. We can gauge your preparation and participation on a weekly basis. As a result, expectations are higher for section. Participation: Come to class prepared and make efforts to participate. Participation: Come to class prepared and make efforts to participate. Attendance: Up to 2 absences allowed – please inform me in advance and submit a “makeup” writeup. Attendance: Up to 2 absences allowed – please inform me in advance and submit a “makeup” writeup. Use your name cards. Use your name cards. Please be on time. Please be on time. Participation: yes, you will Admin overview Agenda: Marketing Math

5. UGBA 106 Section, Week 1 Group presentations: In section 2 weeks from now, you’ll need to form groups of 3- 4 students apiece. Start asking around ASAP. In section 2 weeks from now, you’ll need to form groups of 3- 4 students apiece. Start asking around ASAP. Each group will be randomly assigned a case to present. Each group will be randomly assigned a case to present. Other assignments: Written brief (individual) Written brief (individual) Marketing plan (group of 6) Marketing plan (group of 6) Exam Exam Group presentation and other assignments Admin overview Agenda: Marketing Math

6. UGBA 106 Section, Week 1 “Marketing math”...what is it? Admin overview Marketing Math Agenda:

7. UGBA 106 Section, Week 1 One definition: Marketing math doesn’t need to be complicated! Usually, it’s at a basic calculator/Excel level, but sometimes simple calculations can tell us quite a bit. Usually, it’s at a basic calculator/Excel level, but sometimes simple calculations can tell us quite a bit. “Marketing math”...what is it? Admin overview Marketing Math Agenda: “Simple calculations that help inform strategic decisions made by marketing managers.”

8. A group of Cal students considers opening a hot dog stand in NYC to compete with “Gray’s Papaya”. UGBA 106 Section, Week 1 A Simple Example Admin overview Marketing Math Agenda:

9. A group of Cal students considers opening a hot dog stand in NYC to compete with “Gray’s Papaya”. UGBA 106 Section, Week 1 A Simple Example Admin overview Marketing Math Agenda:

10. UGBA 106 Section, Week 1 Types of costs Fixed costs Fixed costs One-time (i.e. setup costs) One-time (i.e. setup costs) Ongoing or per-period costs Ongoing or per-period costs Variable costs Variable costs Cost that’s incurred when you produce a unit Cost that’s incurred when you produce a unit What do you think are examples of each of these types of cost for “Oski’s Papaya”? Basic concept: Sellers want to “cover their costs”. Admin overview Marketing Math Agenda:

11. UGBA 106 Section, Week 1 Types of costs Fixed costs Fixed costs One-time (i.e. setup costs) One-time (i.e. setup costs) Ongoing or per-period costs Ongoing or per-period costs Variable costs Variable costs Cost that’s incurred when you produce a unit Cost that’s incurred when you produce a unit Note that these can change per unit depending on # units sold Note that these can change per unit depending on # units sold To figure out whether it makes sense to go into the NYC hot dog business, we’ll compare revenue per unit (more on this later) with these costs. Basic concept: Sellers want to “cover their costs”. Admin overview Marketing Math Agenda:

12. Contribution amount = revenue/unit – variable cost/unit. Simple example: If we charge $1/dog and the costs include Simple example: If we charge $1/dog and the costs include $8000 kitchen equipment $8000 kitchen equipment $2000/month rent $2000/month rent $0.50/unit ingredients $0.50/unit ingredients What’s the contribution amount per unit? UGBA 106 Section, Week 1 Contribution, margin, and markup Admin overview Marketing Math Agenda:

13. UGBA 106 Section, Week 1 Contribution amount = revenue/unit – variable cost/unit. Simple example: If we charge $1/dog and the costs include Simple example: If we charge $1/dog and the costs include $8000 kitchen equipment $8000 kitchen equipment $2000/month rent $2000/month rent $0.50/unit ingredients $0.50/unit ingredients What’s the contribution amount per unit? Contribution can also be expressed as margin, as a % of selling price. Above example: Margin = 50% ($0.50 is 50% of $1) Above example: Margin = 50% ($0.50 is 50% of $1) A similar statistic is markup, expressed as a % of cost. Above example: Markup = 100% ($0.50 is 100% of $0.50) Above example: Markup = 100% ($0.50 is 100% of $0.50) Contribution, margin, and markup Admin overview Marketing Math Agenda: $0.50/unit $0.50/unit

14. UGBA 106 Section, Week 1 Contribution amount = revenue/unit – variable cost/unit. Simple example: If we charge $1/dog and the costs include Simple example: If we charge $1/dog and the costs include $8000 kitchen equipment $8000 kitchen equipment $2000/month rent $2000/month rent $0.50/unit ingredients $0.50/unit ingredients What’s the contribution amount per unit? You can use this formula to calculate a desired selling price (i.e. revenue) given variable costs and desired margin: Contribution, margin, and markup Admin overview Marketing Math Agenda: Selling price = Variable cost 1 – [% margin/100] $0.50/unit $0.50/unit

15. UGBA 106 Section, Week 1 Example of a multi-level distribution channel: What are the revenue and variable cost figures for each company? Additional considerations for “revenue” Admin overview Marketing Math Agenda: MANUFACTURER MANUFACTURER RETAILER RETAILER CONSUMER CONSUMER Variable cost/unit = $4 Selling price to retailers = $7.50 Purchase price from manufacturer = $7.50 Selling price to consumers = $8.75 Purchase price from retailers = $8.75

16. UGBA 106 Section, Week 1 Question: What # of units must we sell to “break even”? Break-even volume: the key figure Admin overview Marketing Math Agenda:

17. UGBA 106 Section, Week 1 Question: What # of units must we sell to “break even”? Answer: We must sell enough units that our contribution margin for those units exceeds our per-period fixed costs. Returning to the original example: Contribution = $0.50/unit Contribution = $0.50/unit Per-period fixed costs = $2000/month (rent) Per-period fixed costs = $2000/month (rent) Thus, we need to sell 4000 units/month to cover per-period fixed costs ($0.50 * 4000 = $2000) Thus, we need to sell 4000 units/month to cover per-period fixed costs ($0.50 * 4000 = $2000) One thing to think about: Are there other costs we ignored? Break-even volume: the key figure Admin overview Marketing Math Agenda:

18. UGBA 106 Section, Week 1 Question: Let’s say because of increased competition from Gray’s Papaya, we cut price from $1 to $0.75/dog. How does that change BEV? Answer: Here’s how each of the figures changes. New contribution = $0.75 revenue - $0.50 variable cost = $0.25/unit. New contribution = $0.75 revenue - $0.50 variable cost = $0.25/unit. Per-period fixed costs = $2000/month (rent) Per-period fixed costs = $2000/month (rent) Thus, we need to sell 8000 units/month to cover per-period fixed costs ($0.25 * 8000 = $2000) Thus, we need to sell 8000 units/month to cover per-period fixed costs ($0.25 * 8000 = $2000) Note that a “small” price cut from $1 to $0.75 doubled our break-even volume. Why did this happen? How can changing one number affect the entire picture? Admin overview Marketing Math Agenda:

19. UGBA 106 Section, Week 1 Can we really sell twice as many hot dogs if we cut price by 25 cents? A final question Admin overview Marketing Math Agenda:

20. UGBA 106 Section, Week 1 Can we really sell twice as many hot dogs if we cut price by 25 cents? The answer: “it depends”...on quite a few factors, including: The potential market for hot dogs in NYC The potential market for hot dogs in NYC How well similar hot dog stands have performed in the past How well similar hot dog stands have performed in the past How we can affect our sales through promotions, etc. How we can affect our sales through promotions, etc. Other factors that require experience and intuition on the part of the marketing manager Other factors that require experience and intuition on the part of the marketing manager A final question Admin overview Marketing Math Agenda:

21. UGBA 106 Section, Week 1 Can we really sell twice as many hot dogs if we cut price by 25 cents? The answer: “it depends”...on quite a few factors, including: The potential market for hot dogs in NYC The potential market for hot dogs in NYC How well similar hot dog stands have performed in the past How well similar hot dog stands have performed in the past How we can affect our sales through promotions, etc. How we can affect our sales through promotions, etc. Other factors that require experience and intuition on the part of the marketing manager Other factors that require experience and intuition on the part of the marketing manager Key lesson: A final question Admin overview Marketing Math Agenda: Non-math considerations Marketing math Decisions

22. UGBA 106 Section, Week 1 Turn in your bio sheets before leaving. Turn in your bio sheets before leaving. Start forming your presentation and marketing plan groups. Start forming your presentation and marketing plan groups. Read the British Airways case for next week (on the website), and think about the questions in the case. Read the British Airways case for next week (on the website), and think about the questions in the case. Reminders for next week... Admin overview Marketing Math Agenda: