Chapter 11 Appendix

1
APPLIED MARKETING MANAGEMENT
APPENDIX
11
Assessing the Financial Impact of the Marketing
Plan
2
The Financial Assessment Process

• Budgetary considerations play a role in the
  identification, evaluation, and control of
  alternative marketing strategies.
• Top executives must be convinced that the
  marketing plan and strategy are a good value for
  the firm.
• The ratio of the plans costs compared to
  expected returns will be a deciding factor in
  determining which plans receive approval and
  funding.
• Performing a financial assessment of the
  marketing plan requires a working understanding
  of both finance and statistical analysis.

3
Financial Assessment Tools (1 of 3)

• Contribution Analysis
• Attempts to determine the amount of output
  (revenues) that can be expected from a given set
  of inputs.
• The formula for contribution analysis
• Breakeven Analysis
• Similar to contribution analysis, but focuses on
  the sales volume needed to cover costs. The
  formula for breakeven analysis is like that for
  contribution analysis without the addition of
  gross margin in the numerator.
• Response Analysis
• Addresses the question of incremental change. The
  goal is to estimate accurate response
  coefficients that can be used to predict the
  change in sales volume based on a change in one
  or more elements of the marketing mix, e.g.,
  Sales (Marketing mix elements).

4
Financial Assessment Tools (2 of 3)

• Systematic Planning Models
• Marketing managers often use a planning model to
  estimate the financial effects of marketing
  activities proposed in the marketing plan.
• The inclusion of a detailed planning model in the
  marketing plan can assist the marketing manager
  in convincing top executives that the
  implications of the proposed marketing plan have
  been considered carefully.
• Detailed models often include a Response Analysis
  as shown in Exhibit 11A.3.

5
Exhibit 11A.2
6
Exhibit 11A.3
7
Financial Assessment Tools (3 of 3)

• Answering the How Much Will We Make question
  (e.g., forecasting)
• The answer to this question is a function of
• The size of the market in units.
• The anticipated share of market.
• How much each unit will sell for.
• How much each unit will cost to produce.
• The required marketing budget.

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The Estimating Function Is

• Forecasted Size of Market (Units) x Desired Share
  (Percent) x Gross Margin Per Unit Average Unit
  Selling Price (Dollars) Average Unit Cost
  (Dollars)
• Equals
• Contribution Before Marketing (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

9
Forecasting Market Size The Anchoring and
Adjusting Method

• The anchor is last years sales (if anomalous,
  take a 3 year average).
• The adjustment is the expected difference between
  last year and the coming year (e.g., from the
  Current Situation Analysis of your Marketing
  Plan), expressed as a percent increase or
  decrease.
• Multiply the anchor by (1 adjustment) to get
  the projected size of the market next year.
• E.g., 10M units t x (1 .10) 11M units t1.

10
Forecasting Market Size in New, But Well Defined
Markets

• Draw a probability sample of adequate size from
  the target population.
• Get a valid assessment of intention to buy.
• Deflate the intention measure to get an estimate
  of the percent of the sample who will buy.
• Multiply this percentage by the number of
  potential customers in the target market. This is
  your expected unit sales volume.

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Forecasting Market Size in New, But Poorly
Defined Markets

• Find a relevant product-market of known size.
• Draw a large sample from this population.
• Collect classification data and an intention to
  buy (or switch) measure.
• Develop and apply a deflator to this measure, and
  identify the percent overlap in characteristics
  between this sample and the target market.
• Unit sales volume equals the product of
• size of the relevant product-market,
• percent intending to buy, and
• percent overlap between the two markets.

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Estimating Marketing Costs Existing Products

• Required Marketing Budgett1
• Marketing Dollars Spent / Share Achieved
• x 1 Markets' Expected Growth Rate)t1
• x (Share Desired).
• Adjust for anticipated changes (inflation,
  competitor actions).
• Adjust for efficiency (ratio of your spending per
  share point versus key competitors or overall
  industry).

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Estimating Marketing Costs New Products

• Required Marketing Budgett1
• Marketing Dollars Spent in Total Market / Total
  Industry Sales in Units t
• x Your Projected Unit Salest1
• Adjust for anticipated changes (inflation,
  competitor actions).
• Adjust for efficiency (ratio of your spending per
  share point versus key competitors or overall
  industry), especially if your desired share is
  relatively small.

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An Illustration New Product in an Existing
Market (Cell phone Gadget)

• Forecast Size of Market (Units) x 20 (expected
  share) x SP 25 Cost 15 (gross margin)
• Equals
• Contribution Before Marketing (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

15
An Illustration Forecasting Market Size for a
Cell Phone Gadget

• Find a relevant product-market of known size.
• 10M users of applicable Nokia Kyocera phones.
• Draw a large sample from this population.
• Sample 850 users.
• Collect intention to buy data.
• 50 definitely would buy and 150 would buy.
• Apply a deflator to this measure.
• 80 of the definites and 30 of the woulds
  actually will buy 50.8 150.3 85
• Forecasted market size is
• 85/850 10 10M 1 M potential buyers.

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An Illustration New Product in an Existing
Market (Cell Phone Gadget)

• 1 million potential units x 20 expected share x
  10 (gross margin per unit)
• Equals
• 2 M (CBM s)
• Less
• Marketing Expense (Dollars)
• Equals
• Contribution After Marketing (CAM s)

17
An Illustration Forecasting Marketing Expenses
for a Cell Phone Gadget

• Required Marketing Budgett1
• Marketing Dollars Spent in Total Cell phone
  Gadget Market (6M) / Total Gadget Sales in
  Units (2M units) t
• x Your Projected Unit Sales (1M.2)
  200,000t1
• Any Adjustments?
• If not Required Marketing Budgett1
  600,000.

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An Illustration New Product in an Existing
Market (Cell Phone Gadget)

• 1 million units x 20 x SP 25 Cost 15
• Equals
• 2 M (CBM s)
• Less
• 600,000 Marketing Expense
• Equals
• Contribution After Marketing, or 1,400,000 (to
  cover fixed costs and profits).

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A Final Thought on Forecasting

• IF ALL FORECASTS ARE WRONG, Why Bother?