MARKETING METRICS II

Tools and Techniques

 Margins (AKA “unit contribution”, “contribution
margin”, “gross margin”)

 Breakeven analysis

 Sensitivity analysis
Break-Even with a Profit Goal
No. of Units to achieve = Total Fixed Costs + Dollar Profit Goal
Profit goal $Margin per unit

Suppose a firm has fixed costs of $100,000, the unit

selling price is $30 and the unit variable costs are $18.
How many units must be sold to achieve a dollar profit
goal of $30,000?
Break-Even with a % Profit on Sales
No. of Units to achieve = . Total Fixed Costs .

Profit goal $Margin per unit-unit profit goal

Suppose a firm has fixed costs of $100,000, the unit

selling price is $30 and the unit variable costs are $18.
How many units must be sold to achieve a dollar profit
goal of 15%?
Multiple Product Break Even
 Suppose a company want to simultaneously
introduce 2 new products: a deluxe model and an
economy model. The deluxe model has a unit selling
price of $1,000 and unit variable cost of $500. The
economy model has a unit selling price of $500 and
a unit variable cost of $300. Suppose that the
company expects to sell three economy models for
every one deluxe model. The expected sales mix is
thus 3 to 1. The introductory marketing program is
estimated to be $825,000 for the two models.
Multiple Product Break-Even

Deluxe Economy
Price
Variable Cost
Unit Margin
Fixed Cost
Expected Sales Mix
Multiple Product Break-Even
Calculate weighted average contribution per unit
Model Mix Unit Margin Total Margin
Deluxe
Economy
Total

Total Margin Total Mix Weighted Average

Unit Margin
Multiple Product Break-Even

Deluxe Economy
Price
Variable Cost
Unit Margin
Fixed Cost
Expected Sales Mix
Weighted Average Unit Margin
Tools and Techniques
 Unit vs. total

 Revenue per unit = Price

 Total revenue = Price * Quantity

 Total Margin = Unit Margin * Quantity

 Variable Cost = Unit Variable Cost * Quantity

Related Concept: Net Profit Margin
Revenue
- COGS
Gross Profit Margin
- Selling expenses (other variable costs)
- Fixed costs
Net Profit Margin

 You can use the income statement to calculate the %

margin for the firm.
Margins and Performance
 Evaluating multiple product lines
 A firm has two products (A and B). Product A sells
for $18 with variable costs of $7. Product B sells for
$5 with variable costs of $2.50. Fixed costs are
$170,000 for product A and $30,000 for product
B with sales volume of 20,000 and 40,000 units
respectively.
 Which product is more profitable per unit?
 Which product brings more profit to the firm? By
how much?
Margins and Performance

Product A Product B
Price
Variable Cost per unit
Fixed Cost
Units Sold

Product A Product B
Unit Margin
% Margin
Margins and Performance: Income
Statement
Product A Product B Total
Revenue
Variable Costs
Fixed Costs
Net Profit
Profit as % of
Revenue
Margins and Cannibalization
 Suppose a firm is considering launching a brand
extension. The original product sells for $2.50 with
variable cost of $0.50. The new product will sell for
$2.85 with variable costs of $1. Demand for
original product is 1 million before the brand
extension is launched. However, when the new
product is introduced, 50% of its 1 million units
demanded will come from the original product.
Should the firm launch the new product?
 Margins and Cannibalization

Original Product Brand Extension (new product)

Price
Variable Cost per unit
Sales (units)
Cannibalization
Margins and Cannibalization
Before Brand Extension
Price ($) VC ($) $ Margin Sales (units) Total Margin ($)
Original Product
Total

With brand extension

Price ($) VC ($) $ Margin Sales (units) Total Margin ($)
Original Product
New Product
Total
Margins and Cannibalization
Comparison
Sales (units) Total Margins ($)
With brand extensions Total
– before brand extensions total