Transcript (B/E) Sales Change

Springfield Nor’easters
Christopher Baughman, Luiz Eduardo Freitas, Diego Gonzalez, Sarah Gretzinger, Saryn Hoover, Laura Molnar
Michael Rhodes, Gaurang Mehra, Vivek Sharma, Kit Carson and Priyanka Obrai
Segments
38 Game
20 Game
5 Game
1 Game
Die-hard sports Baseball fans and
and baseball fans parents of little
league players
Benefits Sought  Quality
 Quality
(professional
(professional
sport)
sport)
 Joy of Baseball  Joy of Baseball
in the town
in the town
 Intimate
 Ability for young
Setting to see
athletes to learn
up & coming
skills in an
players
intimate setting
 Ability to see  Motivation for
players with a
future
passion for
Baseball
Characteristics  Poorly served  Poorly served
by competition by competition
Families with school
age children and
college students
 Family
Appropriate
Entertainment
 Cheap Outing
 Time spent with
kids
 Easy on campus
entertainment
Entertainment
seekers and college
students
 Entertainment
 Cheap Outing
 Substitute for a
movie
 Easy on campus
entertainment
 Relatively well
served by comp
 Very well served
by competitors
Price sensitivity 
Competition





Target Market
Insensitive

Other sports 
Insensitive
Other Sports
Sensitive
Entertainment
Most sensitive
Entertainment
Conditions for Alternative Pricing Objectives
Product Differentiation Cost Leadership Marketing Differentiation
Skim
Penetration
Neutral
CUSTOMERS •Difficult Comparison
Effect
•Price Quality Effect
•Low Price Sensitivity
•Reference Price Effect
COMPETITION •Sustainable
COSTS
•Little differentiation
•High price sensitivity
•Total Expend Effect
•Large Part of EndBenefit
•Customers are sensitive
to other elements of
the marketing mix
differentiation
•Limited threat of
opportunism
•Limited opportunity
for scale economies
•Low threat brands
•Sustainable cost &
•Large share brands w/ a
resource advantage
lot to lose (Oligopolies)
•Financial strength
•Sustainable mktg mix
•Competitors not willing advantages
to retaliate
•Avoid threat of
•Aggressive small share
retaliation
brands
•Changes in Unit Price
Drive Profit
•Low CMs
•Low Volumes
•Large BE Sales Changes
•At or near capacity
•Changes in volume
drive profitability
•High CMs
•High volumes
•Small BE Sales Changes
•Excess capacity
•Sufficient CM to finance
advertising...
•Costs similar to
competitors
•Little excess capacity
•Incremental capacity is
expensive
Total % Springfield Total % exposed
Exposed* Census Data weighted by
During Past
census data in
Year
each group
College graduate
7%
17%
1.19%
Some college
12%
25%
3.00%
High school graduate
23%
34%
7.82%
Less than high school graduate
39%
24%
9.36%
100%
21.37%
6%
14%
37%
44%
100%
Educational
Composition
of Baseball
Audience # of Tix
18% 3.2
26% 1.9
23% 0.6
33% 0.8
100%
Saurabh Bagaria,, Abhijit Panda, Anshul Singh
Probably attend 1
game
Probably attend 5
games
Probably attend 20
games
Probably attend 38
games
% Population
Adjusted %
who said Would Population who
Attend (from
said Would
survey)
Attend (45%
adjustment)
Predicted
(calculated) %
population who
would attend at
recommended
Price Points of
9/8/7/6
21.00%
9.45%
9.29%
11.00%
4.95%
4.52%
5.00%
2.25%
1.78%
2.00%
0.90%
0.49%
1 Game
5 Games
20 Games
38 Games
Michael Rhodes, Gaurang Mehra, Vivek Sharma, Kit Carson and Priyanka Obrai
•
•
•
•
•
•
•
•
Baseline
Optimistic
Conservative
Market size 131,250
Ticket repurchase 1.4
Probability .65
Capture half of the
households in the poverty
demographic
Excitement for new
baseball team
Capture half the fans that
would travel to Boston
Seen as an equivalent
entertainment value to
other options for families
Team is competitive in
their league
• Market size 144,375 (inc
10%)
• Ticket repurchase 1.8
• Probability .75 (inc 10%)
• Capture majority of
households in poverty
demographic
• Larry Buckingham's
experience in
entertainment drives
marketing to attract more
households
• Team is very competitive in
their league
• Families see this as a
better entertainment
alternative
• Capture majority of fans
that would travel to Boston
to see a sporting event
• Market size 118,125 (dec
10%)
• Ticket repurchase 1
• Probability .55 (dec 10%)
• Capture no households in
the poverty demographic
• Excitement wanes quickly
throughout the season
• Larry Buckingham's lack of
experience in sports
events hampers marketing
efforts
• Families find this to be a
higher priced
entertainment option
• Team is not overly
competitive in their league
• Do not capture many fans
that travel to Boston for
sporting events
Barendse,Stevan;Edsell,Jake;Nureni-Yusuf,Babatunde,Sharma,Suruchi;Mishra,Barti;Wellman,Robert
Our confidence
level
High
Low
Low
11/10/8/7
11/10/8/7
11/10/8/7
Baseline
Optimistic
Conservative
Market Size
# of single
games
Probability of
adoption
131,250
144,375
Price points
118,125
1.4
1.8
1
0.65
0.7
0.5
Attendance
135,194
136,800
99,313
Exp. Profits
$363,824
$318,668
-$7,609
15%
19%
12%
% of Pop
Springfield Key Takeaways
• The value of marketing research in projecting demand and
determining introductory pricing for a new offering.
• The importance of assumptions (e.g., market size and
purchase likelihoods) in driving your decisions and results.
• The value of segmenting the market based on economic
value, purchase motivation, & likely usage rates.
• The importance of clearly defining your offering, your
target customers, and your target competition in
determining competitive advantage.
• The value of the PLC in determining the nature of demand,
competition and competitive advantage.
Market Dynamics over the PLC
CUSTOMERS
COMPETITION
MATURITY
High knowledge
Repeat purchasers
Comparison shopping
Homogeneous dominant
brands
Market share defense
Gains from competitors
COSTS
High contribution
margins
Asset utilization
PRICE
SENSITIVITY
Switching cost effect
Expenditure effect
End benefit effect
HIGH SENSITIVITY
Market share defense
Marketing & production
efficiency
Profitable market
segmentation
Expansion of product
line and price points
Segmentation pricing
MARKETING
OBJECTIVES
PRICING
STRATEGIES
Pricing Strategy & Tactics – Chs. 9-10
Four Steps for Financial Analysis for Pricing
1. Determine the Contribution Margin.
2. Calculate the Break-even Sales Change for a change (or
difference) in price, variable costs, &/or fixed costs.
• Virgin, Healthy Springs Homework & Final
3. Calculate the Profit Implications of sales changes greater
or less than the Break-even Sales Change.
• Virgin, Healthy Springs Homework & Final
4. Create a Breakeven Sales Curve and compare to an
Estimated Demand Curve
• Virgin, Healthy Springs Homework & Final
The Final will also focus on Competitive (Re)actions (next week)
Step 1: Determine The Contribution Margin
PER UNIT Price
TOTAL Sales Revenue
- Incremental Variable Costs
- Total Variable Cost
= Contribution Margin ($, %)
= Total Contribution ($, %)
Why Focus on CM?
– Tool of Competitive Advantage
• Relative advantage (Higher CM% = Greater Advantage)
– Tool for Segmentation Pricing
• Set different prices for different segments
• Can reach more segments
– Indicator of how to drive profitability
• High margin: volume-based strategies (Springfield)
• Low margin: price and bundling strategies (Atlantic)
Identify Incremental Variable Costs
• VARIABLE COSTS ARE ALWAYS INCREMENTAL
• But be careful of averages. The incremental
variable cost for a change in sales is often not
equal to the average variable cost
• Examples:
• Overtime vs. average cost production
• Costs from multiple sources using different technologies
(joint product vs. prime sourcing)
• Average over different types of customers
Identify Incremental Fixed Costs
– Some fixed costs are also incremental for pricing
• They are the fixed costs incurred to implement a change in
pricing (e.g., production capacity increase required for a price
decrease leading to a volume increase).
– Most fixed costs are not incremental
• Since they do not change with a change in price or sales, they are
not incremental. They have no impact on the relative profitability
of alternative pricing strategies
– Examples:
• Product Development Costs
• Advertising
Full costs – which include non-incremental fixed costs – are neither the
actual costs incurred when making additional sales at lower prices, nor the
actual costs saved when making fewer sales at higher prices. They are,
therefore, misleading as a guide to pricing
Costing Discussion Questions
• In the mid 1960s, McDonald's offered their franchisees
breakfast items (e.g., Egg McMuffin) that they could offer in the
mornings when demand for hamburgers and fries was not very
large.
What costs should a franchisee have properly considered in
deciding whether to offer a breakfast menu and in determining
the most profitable prices to charge for breakfast items?
Step 2
Break-even (B/E) Sales Change
Definition: The change that would sustain the same level of
profit contribution at the new price as was achieved at the
original price. A higher level of sales will produce higher
profitability; a lower level of sales, lower profitability.
KEY QUESTIONS
1. By how much must sales volume increase to profit from a
price cut?
2. What loss in sales volume can be absorbed and still
enable us to profit from a price increase?
Incremental Percent Breakeven Sales Changes
% Change in Price
Current Contribution Margin
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
5%
-80%
-75%
-67%
-50%
0%
10%
-67%
-60%
-50%
-33%
0%
100%
20%
-50%
-43%
-33%
-20%
0%
33%
100%
30%
-40%
-33%
-25%
-14%
0%
20%
50%
100%
40%
-33%
-27%
-20%
-11%
0%
14%
33%
60%
100%
50%
-29%
-23%
-17%
-9%
0%
11%
25%
43%
67%
60%
-25%
-20%
-14%
-8%
0%
9%
20%
33%
50%
70%
-22%
-18%
-13%
-7%
0%
8%
17%
27%
40%
80%
-20%
-16%
-11%
-6%
0%
7%
14%
23%
33%
90%
-18%
-14%
-10%
-5%
0%
6%
13%
20%
29%
Price increase: % decrease < the breakeven decrease leads to contribution increase.
Price decrease: % increase > the breakeven increase leads to contribution increase.
Break-even (B/E) Sales Analysis Formulas
Basic Formula (No change in costs):
% B/E unit sales D =
— $DP
$CM’ + $DP
or
— %DP
%CM’ + %DP
B/E Sales Incorporating a Change in Variable Costs (VC):
% B/E unit sales D =
_
($DP - $DVC)
— $DCM
$CM’ + ($DP - $DVC) = New $CM
B/E Sales with Price Change & Incremental Fixed Costs (FC):
B/E sales change =
— $DCM
x Initial unit +
$D in FC
(units)
New $CM
sales
New $CM
B/E sales change =
(percent)
— $DCM
New $CM
+
$D in FC
New $CM x initial unit sales
B/E Sales Analysis for Reactive Pricing:
% B/E unit sales change
=
%DP
for reactive price change
%CM’ + %DP
Step 2
Calculate Break-even (B/E) Sales Change
Basic Formula:
% B/E unit sales change =
Ex: $.50 decrease in price & $4.50 CM’
leads to a 12.5% increase in sales to B/E
- $DP
-(-$.50)
=
$CM’ + $DP $4.50 - $.50
=
$.50
= 12.5%
$4
Also works for %:Ex: 5% ($.50) decrease in $10 price & 45% ($4.50)
CM’ leads to a 12.5% increase in sales to B/E
Basic Formula:
% B/E unit sales change =
- %DP
-(-5%)
=
%CM’ + %DP
45% - 5%
=
5%
= 12.5%
40%
Rule of Thumb: Set up equations where the units of analysis ($, %, Units)
cancel out.
Note that breakeven occurs when price elasticity = 12.5%/-5% = -2.5.
Break-even (B/E) Sales Analysis Formulas
Basic Formula:
% B/E unit sales change =
Ex: $1 increase in price & $3 CM leads
to a 25% decrease in sales to B/E
- $DP
$CM’ + $DP
- $1
-1
=
= -25%
$3 + $1
4
B/E Sales Incorporating a Change in Variable Costs (VC):
% B/E unit sales D =
_
($DP - $DVC)
_ $DCM
=
$CM’ + ($DP - $DVC)
New $CM
=
Ex: 50¢ decrease in price & $4.50 CM’ with a 20¢ decrease in VC leads to
a 7% increase in sales to B/E
_
(-50¢-(-20¢))
=
$4.50 + (-50¢-(-20¢))
_ $ -.30
$ 4.20
≈
7%
Ex: 5% (50¢) decrease in $10 price & 45% ($4.50) CM’ with a 2%
(20¢/$10.00) decrease in VC leads to a 7% increase in sales to B/E
_
-5% - (-2%)
=
45% + (-5% - (-2%))
_ -3%
42%
≈
7%
Breakeven occurs when elasticity ≈ 7%/-5% ≈ -1.4.
Break-even (B/E) Sales Analysis Formulas
Basic Formula:
% B/E unit sales D =
Ex: $1 increase in price & $3 CM leads
to a 25% decrease in sales to B/E
- $DP
$CM’ + $DP
- $1
-1
=
= -25%
$3 + $1
4
B/E Sales Incorporating a Change in Variable Costs (VC):
% B/E unit sales D =
_
($DP - $DVC)
_ $DCM
$CM’ + ($DP - $DVC)
= New $CM
=
B/E Sales with Price Change & Incremental Fixed Costs (FC):
B/E sales change =
_
%DP
x Initial unit + $D in FC
(units)
%CM’ + %DP
sales
New $CM
Ex: 5% decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an
$800 increase in FC requires an increase of 70 unit sales (17.5%) to B/E
_
-5%
x 4000 +
45% - 5%
$800
$4
= 12.5% x 4000 + 20 = 70 units
70/4000= 17.5% increase
Breakeven occurs when elasticity = 17.5%/-5% = -3.5.
Break-even (B/E) Sales Analysis Formulas
Basic Formula:
% B/E unit sales D =
- $DP
$CM’ + $DP
Ex: $1 increase in price & $3 CM leads
to a 25% decrease in sales to B/E
- $1
-1
=
= -25%
$3 + $1
4
B/E Sales Incorporating a Change in Variable Costs (VC):
% B/E unit sales D =
_
($DP - $DVC)
_ $DCM
$CM’ + ($DP - $DVC)
= New $CM
=
B/E Sales with Price Change & Incremental Fixed Costs (FC):
B/E sales change =
_
%DP
x Initial unit + $D in FC
(units)
%CM’ + %DP
sales
New $CM
B/E sales change =
(percent)
_
$DCM
New $CM
+
$D in FC
New $CM x initial unit sales
50¢ decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an $800
increase in FC requires an increase 17.5% to B/E
_
$.50
$4.00
+
$800
= 12.5% + 5% = 17.5%
$4.00 x 4000
Breakeven occurs when elasticity = 17.5%/-5% = -3.5.
Underlying Formula
p’
=
P’×Q’ – VC’×Q’ – FC’
p’ + Dp =
(P’×Q’ + DP×Q’ + P’×DQ + DP×DQ) –
(VC’×Q’ + DVC×Q’ + VC’×DQ + DVC×DQ) (FC’ + DFC)
Dp
=
(DP×Q’ + P’×DQ + DP×DQ) –
(DVC×Q’ + VC’×DQ + DVC×DQ) (DFC)
Dp = 0
=
DQ × (P’ + DP – VC’ – DVC) +
Q’ × (DP - DVC) (DFC)
DQ × (P’ + DP – VC’ – DVC) = -Q’ × (DP - DVC) + (DFC)
DQ
Q’
=
B/E D =
(percent)
- (DP - DVC)
(P’ + DP – VC’ – DVC)
_
$DCM
New $CM
+
+
DFC
Q’×(P’ + DP – VC’ – DVC)
$D in FC
New $CM x initial unit sales
Break-even (B/E) Sales Analysis Formulas
Ex: $1 increase in price & $3 CM leads
to a 25% decrease in sales to B/E
Basic Formula:
% B/E unit sales D =
- $DP
$CM’ + $DP
- $1
-1
=
= -25%
$3 + $1
4
B/E Sales Incorporating a Change in Variable Costs (VC):
% B/E unit sales D =
_
($DP - $DVC)
_ $DCM
$CM’ + ($DP - $DVC) =
New $CM
=
B/E Sales with Incremental Fixed Costs (FC):
B/E sales change =
_
%DP
x Initial unit
(units)
%CM’ + %DP
sales
B/E sales change =
(percent)
_
$DCM
New $CM
+
+ $D in FC
New $CM
$D in FC
New $CM x initial unit sales
B/E Sales Analysis for Reactive Pricing:
% B/E unit sales change
%DP
=
for reactive price change
%CM’ + %DP
Ex: Comp. A increases price
by 10%. Should we follow?
10%
55%
≈ 18%
Unless you expect > 18% increase in demand
at lower price, follow the price increase.
Breakeven occurs when elasticity ≈ 18%/-5% ≈ -3.6.
Step 3: Calculate the Profit Implications
Change in Profit =
[Actual Unit Sales Change - Unit BE Sales Change] x New $CM per unit
or,
Change in Profit =
[Actual % Sales Change - % BE Sales Change] X Baseline Unit Sales x New $CM per
unit
Ex. 10-3: Profit Changes from Baseline
with Simulated Sales Volume Changes
% Actual
Sales D
0%
5%
10%
15%
20%
25%
30%
35%
40%
Unit Actual
Incremental
$ D in
Contribution
FC
Sales D
$ D in Profit
0
($2,000)
$800
($2,800)
200
($1,200)
$800
($2,000 )
400
($400)
$800
($1,200)
600
$400
$800
($400)
800
$1,200
$800
$400
1000
$2,000
$800
$1,200
1200
$2,800
$1,600
$1,200
1400
$3,600
$1,600
$2,000
1600
$4,400
$1,600
$2,800
Ex: 5% decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an
$800 increase in FC leads to an increase of 70 unit sales (17.5%) to B/E
_
-5%
$800
x 4000 +
= 12.5% x 4000 + 20 = 70 units
45% - 5%
$4
70/4000= 17.5% increase
4. Breakeven Sales Curve Calculation with
Incremental Fixed Costs
Breakeven
Elasticity
-1.4
-1.5
-1.7
-1.8
-2
-3.5
-4.0
-4.7
-6.0
Breakeven Sales Curve
Breakeven Sales Curve Compared to
Elastic Demand Curve
Breakeven Sales Curve Compared to
Inelastic Demand Curve
Virgin Case: Customer Lifetime Value (CLV)
Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime
= CM/(i* + 1 – r) – AC
where
CM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factor
r
= retention rate for the customer (segment)
AC = acquisition costs
How valuable/profitable is each customer (segment) given
prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign
given prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
Virgin Mobile
Calculating Average Price Elasticity
E =
ECell phone usage
% D in Unit Sales
% D in Price
(100-300)/Average(100,300)
=
(.22-.12)/Average (.22,.12)
Next Week
• Complete the Healthy Springs exercise & email to
me one hour before class.
Primary Demand Elasticity
+ Selective Demand Elasticity
= Total Demand Elasticity
-1.0
-2.0
-3.0
• Rick Lester from TRG Arts (No Electronics)
• Incorporating Competitor Analysis into Pricing
Decisions