University of Washington EMBA Program

Regional 20

Quantitative Analysis for Marketing

T.A.: Rory McLeod

Basic Quantitative Analysis for

Marketing

Fixed, Variable, and Total Cost

Total Cost

Cost

k = variable cost per unit

Fixed Cost
V

Volume (Quantity)

Total Cost for output level V units = fixed cost + k*V

As you produce more units, the average cost per unit goes down (fixed
costs are spread out over more units).

Example: Safeco Field Tickets

Fixed cost

= $40,000,000

(player/manager/staff salaries, overhead, etc.)

Variable cost per seat sold (k)

400

(shipping of tickets, custodial staff, maintenance, etc.)

Total # of seats = 46,000

If all seats are sold, variable costs are
$18,400,000.
Total cost
58,400,000.
Total cost per seat if all seats are sold
1,270
If only half of the seats are sold, the total cost per unit is ___, because
the fixed costs of $40,000,000 are only covered by sale of 23,000 seats.
(These are made up figures!)

Unit Contribution and Total Contribution

Unit Contribution = P k

(P = price charged)

Total Contribution = (P k) * V = PV kV
= Price charged minus variable costs.
This is what you have left over to cover your fixed
costs and profit.

Safeco Field Ticket Contribution at $2500 Price

Assume season tickets are sold for $2500 on average.
Unit contribution = $2500 - $400 = $2,100
Total contribution, assuming all 46,000 seats are sold
= $2100 * 46,000 = $96,600,000
This tells us that after fixed costs of $40,000,000, we will
have a profit of $56,600,000.
If only half of the seats are sold, our total contribution
= $2100*23,000 = $48,300,000, leaving us with
a profit of $8,300,000

Safeco Field Ticket Contribution at

$2000 price
Assume season tickets are sold for $2000 on average.
Unit contribution = $2000 - $400 = $1600
Total contribution, assuming all 46,000 seats are sold
= $1600 * 46,000 = $73,600,000
This tells us that after fixed costs of $40,000,000, we will
have a profit of $33,600,000.
If only half of the seats are sold, our total contribution
= _________________ leaving us with
a ______________.

Think of the impact of a winning

season on your ability to price!

Margin
(Financial people like to confuse you!)
$ Margin = Selling price variable cost
(In this case, Margin is the same as unit contribution)
Beware, margin can often mean different things. Make sure
you have clarification of the specific elements included.
% Margin = (Selling price variable cost) / Selling price *
100% (this shows the % as a whole number instead of a
decimal)

Break Even Volume (BEV)

$

Total Revenue (Price * V)

Total Cost (Fixed Cost + k*V)

BEV

Volume (Units)

Break Even Volume (BEV)

BEV is the point at which
Total Revenue = Total Cost
Or said differently, you are at break even
when Price * V = Fixed cost + (k*V)
BEV = Fixed cost / (Price k)
Or more simply
BEV = Fixed cost / Unit contribution

Application of Break Even Analysis to

Advertising Expenditure
Example.
An advertising campaign costing $500,000 has been proposed
for Safeco tickets with a unit contribution of $1,600. How many
additional seats will need to be sold as a result of the campaign
in order to justify its costs?? How many at $2,100?
$500,000 / $1600 per seat = 313 seats
$500,000 / $2100 per seat = 238 seats
What if the proposed campaign cost $2,000,000? How many seats
would we have to sell to break even at $1,600/seat and $2,100/seat?

It is important to remember
Numbers have more meaning when there is a benchmark against which
to compare them.
Market size
Growth rate
Competitive activity
For example, if we determine that we need to sell 78,125 units of a
product to break even
What does this mean for a product that is part of a
highly competitive, stable market with 150,000 units sold
annually
vs.
an emerging, fast-growing market with 1,000,000 units sold
annually.

Apollo Systems Exercise

Demand and Forecasting Demand

A Question of Thirst

Market Potential

Market potential (Demand) = potential #

of buyers * average quantity purchased by
a buyer * price
Potential buyers are the people for whom
your product is a solution to their need. It
is not a function of your manufacturing
capacity.

Company Demand Forecast

Company Demand Forecast (Potential): the
amount of sales of the market potential you
believe you can capture, relative to that of
competitors.
E.g. if you have a superior product, you will have a
higher demand forecast than if your competitors
products were superior.

Company Sales Forecast: expected level of

company sales based on a chosen marketing
plan this reflects your efforts to take advantage
of the company demand forecast.

Forecasting Methods
3-stage procedure: prepare a macroeconomic forecast (based
on expected inflation, unemployment, interest rates, consumer
spending, etc.), followed by an industry forecast, followed by
a company sales forecast
Based on what people say:
Survey of buyers intentions/needs
Composite of sales force opinions
Expert opinion
Put the product into a test market and measure buyer response
Analyze records of past buying behavior and use a statistical
method of projecting this behavior into the future

Business Objectives
Profit (Revenue Total Cost)
Market Share
Specify share of what market (global, national, regional, etc.)
Dollars vs. %

Revenues
Growth
Return on Investment (ROI)
= net income / total investment * 100%

Return on Equity (ROE)

= net income / owners equity * 100%

Return on Assets (ROA)

= net income / total assets * 100%

Thank You!