Sansa MP3 Player

Objectives and Budgeting

Team Members:
Chantelle Williams Hassan Al-Khatib Joi Harris Rachael Georgetown Randy Gappy

MKT 7430 Team 7

2/20/2011

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Table of Contents
Actual Budget ........................................................................................................................ 2 Alternative Method: Competitive Parity ............................................................................... 3 Advertising Response Curve and Optimal Budget ................................................................... 6

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Actual Budget
According to SanDisks 2009 10K report, the company spent $208 million or 5.8% of its revenues on sales and marketing. Advertising expenses for 2009 were $7.0 million; down from $39.9 million in 20081 representing 0.5% and 63% of gross margin respectively. It is worth mentioning the SanDisks notes to consolidated financial statements indicate the company marketing programs include co-op advertising, which may explain a portion of the reduction in expense for this category. Assuming the Sansa product line accounts for only 2% of SanDisks revenues, it would be safe to assume the company devotes very little of its advertising budget to market its MP3 players.

SanDisk Corporation 2009 Annual Report and 2010 Proxy Statement,https://materials.proxyvote.com/Approved/80004C/20100406/CMBO_58844/HTML2/sandisk2010_0091.htm (accessed February 17, 2011) 2 SanDisk Corporation 2009 Annual Report and 2010 Proxy Statement,https://materials.proxyvote.com/Approved/80004C/20100406/CMBO_58844/HTML2/sandisk2010_0091.htm (accessed February 17, 2011)

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Exhibit 1 - SanDisk Financial Data2

Alternative Method: Competitive Parity

One alternate approach SanDisk could look into to determine its advertising budget for the Sansa line is through the competitive parity method. Looking at the top selling MP3 players currently in the market would be a good start to help identify the competition to perform the parity tactic against. The following exhibit by the NPD Group ranks the top 10 MP3 players by unit sales in 2010.

Exhibit 2: Top 10 MP3 Players Ranked By Unit Sales in 20103

http://www.appleinsider.com/articles/11/02/09/apples_ipod_classic_5th_most_popular_media_player_in_2010 _unlikely_to_go_away.html 4 http://www.ithinkdiff.com/the-ipod-has-76-percent-of-mp3-player-market-in-us_7654/ 5 http://news.cnet.com/8301-10805_3-20032076-75.html

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As shown in the exhibit above, Apple clearly dominates the MP3 player market in terms of sales. The lone non-Apple MP3 player appearing on this list is SanDisks own 4GB Sansa Clip+, clinging to the number 10 spot. Besides Apple and SanDisk, the next strongest MP3 Player competitor in terms of market share is Microsofts Zune line. Recently, the Zunes market share has taken a nose dive and its future seems uncertain. In a 2010 report by the NPD Group, it was revealed that Microsoft Zune lines U.S. market share has dipped to 1% while Apple has a commanding 76%.4 Over the first quarter of 2011, rumors have been spreading that Microsoft might eventually nix the Zune brand due to its poor sales and the companys focus shift on the Windows Phone 7 operating system for smart phones.5 Hence, the Apple iPod line may be the only worthwhile competitor for SanDisk to perform the competitive parity method. According to Apples 2010 10-K annual report, the company spent $691 million in total advertising costs, up from $501 million in 2009.6 Despite the staggering number, the advertising costs represent only a mere 1% of the companys total revenue ($65 Billion). Considering that much of Apples 2010 advertising budget was likely spent on the iPhone 4 and cementing their tablet PC entrance with the iPad, its probably safe to assume that the advertisement spending on iPod devices make up less than 1% of their total revenue. The exhibit below reveals the net/unit sales for Apple products in 2010. (Data represents millions of USD)

http://www.macgasm.net/2010/10/28/apple-spent-691-billion-ads-2010/

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Exhibit 3: Apples Net Sales/Unit Sales by Product 7

https://www.apple.com/investor/

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Based on the data, net sales of iPods accounted for 13% of the companys total net sales for the year compared to 19% in 2009. Also, the U.S. makes up approximately 44% of Apples revenue. While likely not the case, lets assume The U.S. also makes up 44% of Apples iPod sales. This would approximate to $3.64 billion U.S. iPod sales in 2010. Assuming a 1% advertising budget, its estimated that Apple is spending around $36.4 million for its iPod devices in the U.S. According to the business website Seeking Alpha, its estimated that the SanDisk Sansas revenue in 2009 was approximately $356 million.8If SanDisk followed Apple and implemented only 1% of its revenue to the advertising budget, it would only amount to $356,000, which is relatively low for an advertising campaign. Since Apple Inc. as a whole generated thirteen times the revenue ($65 billion vs. SanDisks $5 billion), it might make sense for SanDisk to up its advertising budget to thirteen times the amount (13% or $4.628 million).

http://seekingalpha.com/article/188453-sansa-mp3-players-negligible-to-sandisk-s-value

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Advertising Response Curve and Optimal Budget

Advertising and promotion present a significant expense to any organization. It is necessary to determine the budget in advance of spending as well as the potential sales that result from the advertising budget. Exhibit XX displays Sansas actual sales based on an advertising budget between $0 and $120 million. Based on the data below, we can see that there is little increase in sales above the advertising budget of $20 million.

Advertising Budget $0 $5 $120

US PMP Sales 210 245 340

Variable Cost 0.2 0.2 0.2

Actual Sales $138.00 $196.00 $272.00

VC $27.60 $39.20 $54.40

SalesVC/Sales $110.40 $156.80 $217.60

Sales-Based Advertising Response Curve

$300 $250 $200 SALES $150 $100 $50 $$(20) $$20 $40 $60 $80 $100 $120 $140 Actual Sales

ADVERTISING BUDGET (Millions-USD)

Margin 0.80 0.80 0.80

USD Contribution $168.00 $196.00 $272.00

Fixed Cost 20 20 20

Promotion 35 40 45

Profit $113.00 $136.00 $207.00

US PMP Sales 210 245 340

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US - Sales_Optimal Budget
400 300 SALES 200 100 0 $0.00

$50.00

$100.00 BUDGET

$150.00

$200.00

$250.00