EXAM I REVIEW

Questions:
- Multiple choice requiring memorization of key concepts
- Short answer, testing practical application
- Quantitative analyses, open ended
Materials:
- Class lectures
- Cases
Marketing Strategy
-

What is marketing? What is strategy? How do they differ?

What is a marketing strategy?
How do truly customer- centric firms differ from traditional firms?
What performance metrics are applicable to customer-centric firms?
What is Abercrombie & Fitch planning to do with its logos and how does this differ from
Defye`s strategy? Is it effective?

What are 5 Cs? What kind of analysis is performed for each C?

Be familiar with cost leadership, differentiation, and focused (niche) strategies
What is PEST analysis, name examples for each factor
What are Porter`s 5 forces

Amazon, Google, Apple, Facebook Case:

- How did the big four companies (Amazon, Google, Apple, Facebook) evolve over time?
What markets do they presently compete in?
- What are these companies` core competencies?
- Where do you see the industry going over the next several years?
- In 1980s how did the computer industry restructure? What caused this shift?
Segmentation and Positioning
-

What is segmentation and how does it differ from target audience?

If I give you an example of a product/brand be sure to be able to develop potential
consumer segments, target audience, and positioning.
How do firms develop target markets? What segmentation criteria are frequently used?
What criteria/measures are used when evaluating attractiveness of different segments?
I may give you an example of two or three segments and have you evaluate which should
be selected as a target market.
When do companies use segmentation?
Why is segmentation not all it is cracked up to be? What are the common pitfalls that
companies fall into?
Why is While Foods planning to launch a new chain? Who is the target audience?

In your opinion, should Whole Foods launch is new chain under existing brand name or a
new name? Pending on your recommended strategy, what cannibalization rate would you
expect?
What is Customer Relationship management?
I may give you an example of an income statement for different segments and ask you
identify problematic segments and where you see potential problems.
How profitable is customer loyalty? What are some of the issues with loyalty that firms
face?

Clean Edge Case:

- Building on the Clean Edge razor case, what impact does innovation have on firms,
industries, and consumers? How does innovation impact product life cycle?
- Be familiar with product-company and product-market fit in assessing new product
opportunities. I may give you an example of a new product and have you assess its fit
with the company`s current offering and/or competitors
- What is cannibalization and how do various strategic decisions influence the extent of
cannibalization (e.g., brand name, target market, product mix, distribution)?
- Be able to interpret profit and loss statements. I may give you an example and ask you to
interpret it.
- What is contingency planning? Assume that you plan to launch Clean Edge as a niche
product. However, due to the fears of what may happen in the mainstream market, you
want to have a contingency plan in place that would enable you to enter mainstream
market quickly, if necessary. What would be the main elements of your contingency plan?
HubSpot Case:
-

What is inbound marketing and how does it differ from outbound marketing?
What challenges arise when firms use only inbound marketing to generate sales?
What is the customer funnel and how are new technologies influencing the way
salespeople operate?
Building on the HubSpot case, how does selection of a target market change firms`
pricing, product mix and advertising/promotion?
Building on the HubSpot case, what can companies do to increase Customer Lifetime
Value?

Strategic Product and Brand Management

-

What are branded, augmented and global products?

What is a brand and why do firms invest so much money into building them? What may
be some disadvantages of having strong brands?
What is the war of the Budweisers about?
What is brand equity and what drives it?
What mistake did Eco-Me make in terms of their branding?

Can firms maintain brand control in an online world? What can firms do to improve their
brand image online and minimize potential negative impact of negative
reviews/comments?
What are multiproduct branding, multibranding and private label? What are the
differences, strengths and weaknesses of each? Name examples.
Why is P&G shedding more than half of its brands? Is this a smart strategy?
What are the different types of product innovations?
New products can be launched into new or existing markets within new or existing
brands. What are the benefits and risks of each strategy? When should firms pursue what
strategy?
Why do new products fail?

Stella Artois Case:

- What are some of the international and strategic issues that firms need to consider when
launching global brands? (building on the Stella Artois case)
- What are the benefits and drawbacks of developing global brands?
- What is Interbrew`s corporate strategy (operations, markets, brands)? How does this
strategy influence the firm`s ability to build a global brand?
- Compare the strategy of ABinBev that already owns multiple brands and plans to further
expand by acquiring SABMiller with P&G that is selling off its brands to remain
competitive. How do you explain the opposing strategies of these giants? In your opinion,
is it smart for ABinBev to acquire SAB Miller (e.g., will it be too big)? Alternatively, is it
smart for P&G to get rid of half of its brands?
- How does capacity utilization (ability to change production locations, expand/downsize)
influence firm competitiveness?
Mountain Man Case:
- What are the different aspects that firms need to consider when launching new products?
- How does the way small firms (such as Mountain Man) compete and make strategic
decisions differ from the way large firms (such as ABInBev) do it?
- How can having a strong brand hinder brand extensions?
- Should Mountain Man Brewing Co introduce a light beer?
- In the Mountain Man case, what additional factors influence cannibalization apart from
stealing sales from its core brand? In your opinion, what cannibalization rate is
reasonable?
- Apart from launching a brand extension, what other strategic options for growth do firms
have?
Marketing Metrics
-

What are break even and sensitivity analyses?

What are the different types of costs?
What is the difference between net profit margin and unit margin
What are customer acquisition costs, customer lifetime value, and customer equity?

Practice Problems

1. A company is selling a new product that retails for $25. The cost information for the new
product is as follows:
Overhead expenses
Advertising
Raw materials
Labor
Sales salaries
Commissions

$175,000
$100,000
$5/unit
$3/unit
$150,000
$1.50/unit

a. What is the contribution margin per unit?

b. What volume must be sold for the company to break-even on this product (both in
units and dollar?)
c. What happens to break-even volume (in both units and sales) if management
decides to cut the price by 20%?
d. What happens to break-even volume if management decides to run additional
advertising that will cost the firm additional $50,000?
2. Management has determined that their product should be sold to consumers at the retail
price of $29.99. To manufacture the product, the firm spends $7.50/unit for materials and
labor. The company expects that retailers will require a 25% margin in order to carry the
product and wholesalers will require a margin of 18%.
a. What price should the producer (or manufacturer) charge to wholesalers?
b. What is the contribution per unit for the product for the manufacturer? What
percentage margin does the manufacturer realize?
3. A firm has 3 products that it currently offers for sale. Product 1 sells for $22/unit and has
a variable cost of $10/unit. Product 2 sells for $10/unit with variable cost of $4/unit.
Product 3 sells for $3/unit with variable costs of $2/unit. Fixed costs are $120,000 for
Product 1, $60,000 for Product 2, and $30,000 for Product 3. The total unit volume is
20,000 for Product 1, 35,000 for Product 2 and 50,000 for Product 3.
a. Which product is most profitable? By how much?
Product 1
Unit Price
Unit VC
Fixed Cost
Unit Sales
Unit Margin
%Margin

Product 2

Product 3

Product 1

Product 2

Product 3

Total

Revenue
Variable Costs
Fixed Costs
Net Profit
4. Snapple is considering adding a new flavor tea to their product line an energy drink that
tastes like tea. Based on past experience they know that the sales of their current products
will be impacted by the introduction of new flavors. Before launching their new tea, they
want to understand the financial implications of cannibalization. Past research suggests
that half of the demand for the new drink will come from the demand for the other
products (i.e., cannibalized sales). Consider the following information:
Product

Selling Price

Variable Cost

Lemon Tea
Diet Raspberry
Tea
Cherry
Pomegranate Tea
Energy Tea (new
product)

0.99
0.99

0.30
0.35

Demand Forecast Demand lost if

new product is
launched
5,000
500
6,000
400

0.99

0.45

2,500

1.99

1.30

2,000

350

a. How much can Snapple expect their sales volume to increase by introducing the
new energy drink?
A. Before introduction of Energy Tea
Products

$Margin

Sales (unit)

Total Margin
($)

Lemon Tea
Diet Raspberry Tea
Cherry
Pomegranate Tea
Total
B. After introduction of Energy Tea
Products
Lemon Tea

$Margin

Sales (unit)

Total Margin
($)

Diet Raspberry
Tea
Cherry
Pomegranate Tea
Energy Tea (new
product)
Total
C. Comparison
Sales (unit)

Total Margins
($)

after Energy Tea

introduction
before Energy
Tea introduction
b. What will the increase in profits likely be?
c. If the fixed costs associated with launching the new drink are $4,000, should
Snapple go forward with the launch?
5. What is the CLV if the cost of acquisition is $100, the average customers spend
$200/year, the cost of providing the service is $80/year, and most customers stay with the
firm for 10 years?

SOLUTIONS ARE PROVIDED ON THE NEXT PAGE

SOLUTIONS --- SOLUTIONS --- SOLUTIONS

Practice Problem Solutions
1. A company is selling a new product that retails for $25. The cost information for the new
product is as follows:
Overhead expenses
Advertising
Raw materials
Labor
Sales salaries
Commissions

$175,000
$100,000
$5/unit
$3/unit
$150,000
$1.50/unit

a. What is the contribution margin per unit?

Unit Margin = Price VC = 25- (5+3+1.50) = 25 9.50 = $15.50
%Margin = Unit Margin/ Price = 15.50 / 25 = 62%
b. What volume must be sold for the company to break-even on this product (both in
units and dollar?)
Units to Break Even = Total Fixed Costs/ $Margin per unit
Units to Break Even = (175,000+100,000+150,000)/15.50 = 425,000/15.50 = 27,419.35 units
Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 425,000/0.62 = $685,483.87
Or
Break Even Units*Price = 27,419.35*25 = $685,483.87
c. What happens to break-even volume (in both units and sales) if management
decides to cut the price by 20%?
Original Price = $25
Price Cut = 25*0.2 = $5
New Price = 25-5 = $20
The new Unit Margin = 20-9.50 = $10.50
(you can also subtract $5 from your unit margin)
%Margin = 10.50/20 = 52.5%
Units to Break Even = Total Fixed Costs/ $Margin per unit
Units to Break Even = 425,000/10.50 = 40,476.19 units

Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 425,000/0.525 = $809,523.8
Or
Break Even Units*Price = 40,476.19*20 = $809,523.8
d. What happens to break-even volume if management decides to run additional
advertising that will cost the firm additional $50,000?
The new Fixed Costs = 425,000+50,000 = 475,000
Units to Break Even = Total Fixed Costs/ $Margin per unit
Units to Break Even = 475,000/15.50 = 30,645.16 units
Break Even Sales Revenue = Total Fixed Costs/%Margin per unit = 475,000/0.62 = $766,129
Or
Break Even Units*Price = 30,645.16*25 = $766,129
2. Management has determined that their product should be sold to consumers at the retail
price of $29.99. To manufacture the product, the firm spends $7.50/unit for materials and
labor. The company expects that retailers will require a 25% margin in order to carry the
product and wholesalers will require a margin of 18%.
a. What price should the producer (or manufacturer) charge to wholesalers?
Retail selling price = $29.99
Retail margin = 25%
Unit margin = 29.99*0.25 = $7.49
Retail purchase price = 29.99 7.49 = $22.5
Wholesale selling price = $22.5
Wholesale margin = 18%
Unit margin = 22.5*0.18 = $4.05
Wholesale purchase price = = 22.5- 4.05 = $18.45
Manufacturer price = $18.45/unit
b. What is the contribution per unit for the product for the manufacturer? What
percentage margin does the manufacturer realize?
Unit Margin = Price VC = 18.45 7.50 = $10.95
%Margin = Unit Margin/ Price = 10.95 /18.45 = 59.34%

3. A firm has 3 products that it currently offers for sale. Product 1 sells for $22/unit and has
a variable cost of $10/unit. Product 2 sells for $10/unit with variable cost of $4/unit.
Product 3 sells for $3/unit with variable costs of $2/unit. Fixed costs are $120,000 for
Product 1, $60,000 for Product 2, and $30,000 for Product 3. The total unit volume is
20,000 for Product 1, 35,000 for Product 2 and 50,000 for Product 3.
a. Which product is most profitable? By how much?
Unit Price
Unit VC
Fixed Cost
Unit Sales

Product 1
22
10
120,000
20,000

Product 2
10
4
60,000
35,000

Product 3
3
2
30,000
50,000

Unit Margin
%Margin

12
54.5%

6
60%

1
66.67%

Revenue = Price*Unit Sales

Variable Costs = Unit VC*Unit Sales
Net Profit = Revenue Variable Costs Fixed Costs
Product 1
440,000
200,000
120,000
120,000

Revenue
Variable Costs
Fixed Costs
Net Profit

Product 2
350,000
140,000
60,000
150,000

Product 3
150,000
100,000
30,000
20,000

Total
940,000
440,000
210,000
290,000

Product 2 is most profitable by $30,000 relative to product 1.

4. Snapple is considering adding a new flavor tea to their product line an energy drink that
tastes like tea. Based on past experience they know that the sales of their current products
will be impacted by the introduction of new flavors. Before launching their new tea, they
want to understand the financial implications of cannibalization. Past research suggests
that 62.5% of the demand for the new drink will come from the demand for the other
products (i.e., cannibalized sales). Consider the following information:
Product

Selling Price

Variable Cost

Sales (unit)

Lemon Tea
Diet Raspberry
Tea
Cherry

0.99
0.99

0.30
0.35

5,000
6,000

Cannibalized
Sales
500
400

0.99

0.45

2,500

350

Pomegranate Tea
Energy Tea (new 1.99
1.30
2,000
product)
a. How much can Snapple expect their sales volume to increase by introducing the
new energy drink?
A. Before introduction of Energy Tea
$Margin = Selling Price Variable cost
Total Margin = $Margin* Sales
Products

$Margin

Sales (unit)

Lemon Tea
Diet Raspberry Tea
Cherry
Pomegranate Tea
Total

0.69
0.64
0.54

5,000
6,000
2,500

Total Margin
($)
3450
3840
1350

13,500

$8,640

B. After introduction of Energy Tea

Sales = Sales Cannibalized Sales
Products
Lemon Tea
Diet Raspberry
Tea
Cherry
Pomegranate Tea
Energy Tea (new
product)
Total

$Margin

Sales (unit)

0.69
0.64

4,500
5,600

Total Margin
($)
3,105
3,584

0.54

2,150

1,161

0.69

2,000

1,380

14,250

$9,230

C. Comparison
Sales (unit)
after Energy Tea
introduction
before Energy
Tea introduction

14,250

Total Margins
($)
9,230

13,500

8,640

750

590

Snapple can expect their sales volume to increase by 750 units.

b. What will the increase in profits likely be?
The increase in profits will by $590.
c. If the fixed costs associated with launching the new drink are $4,000, should
Snapple go forward with the launch?
No. The fixed costs are much higher than increase in total margins.
5. What is the CLV if the cost of acquisition is $100, the average customers spend
$200/year, the cost of providing the service is $80/year, and most customers stay with the
firm for 10 years?
AC = $100
m = 200-80 = $120
L = 10
CLV = m*L AC = 120*10-100 = $1,100