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Quantitative Analysis Review Market Share Analysis Market Share Analysis tells you what proportion of the “market” (in terms of unit or $$ sales) your brand or firm controls. Formula for Market Share: Salesi ( in units or $$) MS i Total Market (or Segment ) Sales Note that market share is always expressed as: – A proportion (e.g. .25) – Or as a percentage (e.g. 25%) Market Share Analysis Under what conditions are within-segment market shares more important than overall market share? Important points: – Market share doesn’t take costs/profit into account – Can have high share, low profit firm/brand – Market share is a comparative statistic Mostuseful when analyzed within the context of the competitive environment. Financial Analysis - Contribution Margins Contribution Margin - Formulas: Total CM = Total Sales -- Total Variable Costs Unit CM = Selling Price -- Unit Variable Cost Contribution Margin tells you how much is left over, after accounting for variable costs to go towards fixed expenses and profit. Contribution Margin Contribution can also be expressed as a percentage of total sales, or the selling price: Total CM % = Total Sales -- Total Variable Costs Total Sales Unit CM% = Selling Price -- Unit Variable Cost Selling Price Expressing CM as a percentage tells you: What percentage of every dollar I earn in sales goes towards covering fixed expenses and profits. Contribution Margin Example: If CM% = 35%, then 35% or 35 cents out of every dollar you earn in sales goes toward covering fixed expenses and profit. Handy relationship: 100% = Variable Costs as + Contribution Margin as a % of sales (price) as a % of sales (price) Example: if VC = 30% of sales, then CM = 70% of sales Contribution Margin is probably the most important financial ratio used in marketing. Why? Profit Margin Formula for profit margin: PM =Total Sales - Total VC - Total Fixed Costs Like CM, PM can be expressed as a % of sales: PM% = Total Sales - Total VC - Total Fixed Costs Total Sales Like CM, PM% tells you what percentage of every dollar you earn represents pre-tax profit. Break-Even Analysis Very important marketing tool. Used for: – New product feasibility – New marketing strategy feasibility – Target profit pricing – Sensitivity Analysis Combined with market share, firms can determine their required break-even market share. Break-even Analysis Basic Formulas: BE (units) = Total Fixed Costs Unit Price - Unit Variable Cost BE ($$) = Total Fixed Costs Contribution Margin % Simple example of decision making based on break- even analysis: Example - Break-even Analysis Firm A has estimated that demand for a new technology in the innovators segment will be 200,000 units next year, and they wish to enter this segment. They have determined: – Sales Promotion = $ 875,000 – Advertising = $4,000,000 $5,175,000 – Sales Reps = $ 300,000 – COGS (variable cost) = $110 per unit – Price to Retailers = $230.00 per unit Example (Continued) What is the break-even point in units? BE Units = $5,175,000 = 43,125 units $230 - $110 What is the break-even point in dollars? BE $$ Sales = $5,175,000 = $9,918,750 ($230 - $110)/230 What is the required break-even market share? BE market share = 43,125 units = 21.56 % 200,000 units Example - Analyzing the Results If all competitors have a 15% share, is this venture feasible? Suppose 15% is the highest market share that Firm A can achieve. What is the lowest price they can charge and still break-even? .15 x 200,000 = 30,000 units which is the BE in units 30,000 = $5,175,000 or, Price = $282.50 P - $110 What would this price mean to the consumer if retailers take a 33% markup? Example (Continued) $230.00 vs. $282.50 Assuming a 33% markup: .33 = Retail Price - $230 so, Price = $343 Retail Price .33 = Retail Price - $282.50 so, Price = $422 Retail Price The higher trade price results in a $79 dollar price increase at the retail level! Breakeven Analysis and Profit Goals Formula for BE volume (units): Unit BE Volume = Fixed Cost ($) + Profit Goal ($) Contribution per unit ($) Formula for BE volume ($): $$ BE Volume = Fixed Cost ($) + Profit Goal ($) Contribution margin What if the profit goal is a % of sales? Markup Analysis and Price Chains Markup = Unit price - unit cost, so at various channel levels: – Retail Markup = Retail Price – Retail COGS – Wholesale Markup = Wholesale Price – Wholesale COGS – Manufacturer Markup = Manf. Price – Manf. Variable Costs Relationships: – 1 level channel: Manf. Price = retail COGS – 2 level channel: Manf price = wholesale COGS Wholesale Price = Retail COGS Formulas Formula for dollar markup: $ Markup = Selling Price - COGS Formula for percentage markup: % Markup = Selling Price - COGS Selling Price Notice that these formulas are the same as our formula for contribution margin. Markup vs. Margins Retailers vs. Manufacturers Markup on price vs. markup on cost. Markup on price is used in order to calculate price chains - Markup on cost is strictly an internal calculation. Importance of Price Chains In the real world, manufacturers MUST have an idea of the retail price of their products: – Competition – Price sensitivity in target market Many marketing strategies impact margins (markups) such as price promotion. Sensitivity analysis Handy Formulas When you know COGS (i.e., variable costs) at one level of the channel, you can determine PRICE at that level using the formula: PRICE = COGS / (1 - Markup %) So, if COGS (i.e. variable costs) were $5.00 and the markup was 20%, then the selling price would be: Price = $5.00 / (1 - .20) = $5.00 / .80 = $6.25 Handy Formulas When you know PRICE at one level, you can determine COGS at that same level: COGS = Price x (1 - Markup) So, if Price = $5.00 and the Markup is 20%, COGS would be: COGS = $5.00 x (1 - .20) = $5.00 x .80 = $4.00 Handy Formulas Both formulas are simply algebraic manipulations of the formula: Markup % = Price - Cost Price Price Chain - Example 1 Retail Price $37.04 Manf. Price $25 Retail COGS $27.78 Manf. VC $10 Retail Markup $9.26 Manf. Margin $15 Retail Markup % 25% Manf. Margin% 60% Wholesale Price $27.78 Wholesale COGS $25.00 Working UP the Chain: Wholesale Markup $ 2.78 Price = COGS (i.e. VC) Wholesale Markup % 10% 1 - Markup% Price Chain - Example 2 Retail Price $80 Manf. Price $54.00 Retail COGS $60.00 Manf. VC $27.00 Retail Markup $20 Manf. Margin $27.00 Retail Markup % 25% Manf. Margin% 50% Wholesale Price $60.00 Wholesale COGS $54.00 Going DOWN the chain: Wholesale Markup $ 6.00 COGS = Price x (1 - MU%) Wholesale Markup % 10% Final Note Concerning Markups Markups work on a per - unit basis (as in previous examples) or for a given product market. Example: Suppose retail sales = $500,000, with retailers taking a 25% markup. What total revenue figure does this represent to the manufacturers? Total Manufacturer $$ = $500,000 x (1 - .25) = $500,000 x .75 = $375,000

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posted: | 11/21/2012 |

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