Springfield Nor’easters
Jan 30, 2016
Springfield Nor’easters
Christopher Baughman, Luiz Eduardo Freitas, Diego Gonzalez, Sarah Gretzinger, Saryn Hoover, Laura Molnar
Michael Rhodes, Gaurang Mehra, Vivek Sharma, Kit Carson and Priyanka Obrai
Segments 38 Game 20 Game 5 Game 1 Game
Target Market Die-hard sports and baseball fans
Baseball fans and parents of little league players
Families with school age children and college students
Entertainment seekers and college students
Benefits Sought Quality (professional sport)
Joy of Baseball in the town
Intimate Setting to see up & coming players
Ability to see players with a passion for Baseball
Quality (professional sport)
Joy of Baseball in the town
Ability for young athletes to learn skills in an intimate setting
Motivation for future
Family Appropriate Entertainment
Cheap Outing Time spent with
kids Easy on campus
entertainment
Entertainment Cheap Outing Substitute for a
movie Easy on campus
entertainment
Characteristics Poorly served by competition
Poorly served by competition
Relatively well served by comp
Very well served by competitors
Price sensitivity Insensitive Insensitive Sensitive Most sensitiveCompetition Other sports Other Sports Entertainment Entertainment
Conditions for Alternative Pricing ObjectivesProduct Differentiation
SkimCost Leadership
PenetrationMarketing Differentiation
Neutral
COSTS
CUSTOMERS
COMPETITION
•Sufficient CM to finance advertising...
•Costs similar to competitors
•Little excess capacity•Incremental capacity is expensive
•Customers are sensitive to other elements of the marketing mix
•Large share brands w/ a lot to lose (Oligopolies)
•Sustainable mktg mix advantages
•Avoid threat of retaliation
•Changes in volume drive profitability
•High CMs•High volumes•Small BE Sales Changes•Excess capacity
•Little differentiation•High price sensitivity•Total Expend Effect•Large Part of End-Benefit
•Sustainable cost & resource advantage
•Financial strength•Competitors not willing to retaliate
•Aggressive small share brands
•Changes in Unit Price Drive Profit
•Low CMs•Low Volumes•Large BE Sales Changes•At or near capacity
•Difficult Comparison Effect
•Price Quality Effect•Low Price Sensitivity•Reference Price Effect
•Sustainable differentiation
•Limited threat of opportunism
•Limited opportunity for scale economies
•Low threat brands
6%
14%
37%
44%
100%
# of Tix
3.2
1.9
0.6
0.8
Total % Exposed*
During Past Year
Springfield Census Data
Total % exposed weighted by census data in each group
Educational Composition of Baseball Audience
College graduate 7% 17% 1.19% 18%Some college 12% 25% 3.00% 26%High school graduate 23% 34% 7.82% 23%Less than high school graduate 39% 24% 9.36% 33%
100% 21.37% 100%
% Population who said Would
Attend (from survey)
Adjusted % Population who
said Would Attend (45% adjustment)
Predicted (calculated) % population who would attend at recommended Price Points of
9/8/7/6Probably attend 1 game 21.00% 9.45% 9.29%Probably attend 5 games 11.00% 4.95% 4.52%Probably attend 20 games 5.00% 2.25% 1.78%Probably attend 38 games 2.00% 0.90% 0.49%
All Games together 39.00% 17.55% 16.09%
Saurabh Bagaria,, Abhijit Panda, Anshul Singh
1 Game 5 Games 20 Games 38 Games
Michael Rhodes, Gaurang Mehra, Vivek Sharma, Kit Carson and Priyanka Obrai
Barendse,Stevan;Edsell,Jake;Nureni-Yusuf,Babatunde,Sharma,Suruchi;Mishra,Barti;Wellman,Robert
Our confidence level High Low Low
Price points 11/10/8/7 11/10/8/7 11/10/8/7
Baseline Optimistic Conservative
Market Size 131,250 144,375 118,125 # of single games 1.4 1.8 1 Probability of adoption 0.65 0.7 0.5
Attendance 135,194 136,800 99,313 Exp. Profits $363,824 $318,668 -$7,609
% of Pop 15% 19% 12%
Springfield Key Takeaways• The value of marketing research in projecting demand and
determining introductory pricing for a new offering.• The importance of assumptions (e.g., market size and
purchase likelihoods) in driving your decisions and results.• The value of segmenting the market based on economic
value, purchase motivation, & likely usage rates.• The importance of clearly defining your offering, your
target customers, and your target competition in determining competitive advantage.
• The value of the PLC in determining the nature of demand, competition and competitive advantage.
CUSTOMERS High knowledge Repeat purchasersComparison shopping
COMPETITION Homogeneous dominant brands Market share defenseGains from competitors
High contribution marginsAsset utilization
Switching cost effectExpenditure effectEnd benefit effect HIGH SENSITIVITY
COSTS
PRICE SENSITIVITY
Market share defenseMarketing & production efficiencyProfitable market segmentation
MARKETING OBJECTIVES
Expansion of product line and price pointsSegmentation pricing
PRICING STRATEGIES
Market Dynamics over the PLCMATURITY
Pricing Strategy & Tactics – Chs. 9-10Four Steps for Financial Analysis for Pricing
1. Determine the Contribution Margin.
2. Calculate the Break-even Sales Change for a change (or difference) in price, variable costs, &/or fixed costs.• Virgin, Healthy Springs Homework & Final
3. Calculate the Profit Implications of sales changes greater or less than the Break-even Sales Change.• Virgin, Healthy Springs Homework & Final
4. Create a Breakeven Sales Curve and compare to an Estimated Demand Curve• Virgin, Healthy Springs Homework & Final
The Final will also focus on Competitive (Re)actions (next week)
Step 1: Determine The Contribution Margin
PER UNIT Price
- Incremental Variable Costs
= Contribution Margin ($, %)
PER UNIT Price
- Incremental Variable Costs
= Contribution Margin ($, %)
TOTAL Sales Revenue
- Total Variable Cost
= Total Contribution ($,
%)
TOTAL Sales Revenue
- Total Variable Cost
= Total Contribution ($,
%)
Why Focus on CM?
– Tool of Competitive Advantage• Relative advantage (Higher CM% = Greater Advantage)
– Tool for Segmentation Pricing• Set different prices for different segments• Can reach more segments
– Indicator of how to drive profitability• High margin: volume-based strategies (Springfield)• Low margin: price and bundling strategies (Atlantic)
Identify Incremental Variable Costs
• VARIABLE COSTS ARE ALWAYS INCREMENTAL • But be careful of averages. The incremental
variable cost for a change in sales is often not equal to the average variable cost
• Examples:• Overtime vs. average cost production• Costs from multiple sources using different technologies
(joint product vs. prime sourcing)• Average over different types of customers
Identify Incremental Fixed Costs
– Some fixed costs are also incremental for pricing • They are the fixed costs incurred to implement a change in
pricing (e.g., production capacity increase required for a price decrease leading to a volume increase).
– Most fixed costs are not incremental• Since they do not change with a change in price or sales, they
are not incremental. They have no impact on the relative profitability of alternative pricing strategies
– Examples:• Product Development Costs• Advertising
Full costs – which include non-incremental fixed costs – are neither the actual costs incurred when making additional sales at lower prices, nor the actual costs saved when making fewer sales at higher prices. They are, therefore, misleading as a guide to pricing
Full costs – which include non-incremental fixed costs – are neither the actual costs incurred when making additional sales at lower prices, nor the actual costs saved when making fewer sales at higher prices. They are, therefore, misleading as a guide to pricing
Costing Discussion Questions
• In the mid 1960s, McDonald's offered their franchisees breakfast items (e.g., Egg McMuffin) that they could offer in the mornings when demand for hamburgers and fries was not very large.
What costs should a franchisee have properly considered in deciding whether to offer a breakfast menu and in determining the most profitable prices to charge for breakfast items?
Step 2Break-even (B/E) Sales Change
Definition: The change that would sustain the same level of profit contribution at the new price as was achieved at the original price. A higher level of sales will produce higher profitability; a lower level of sales, lower profitability.
KEY QUESTIONS1. By how much must sales volume increase to profit from
a price cut?2. What loss in sales volume can be absorbed and still
enable us to profit from a price increase?
Incremental Percent Breakeven Sales Changes
Price increase: % decrease < the breakeven decrease leads to contribution increase.Price decrease: % increase > the breakeven increase leads to contribution increase.
Break-even (B/E) Sales Analysis FormulasBasic Formula (No change in costs):% B/E unit sales = — $P
$CM’ + $P
B/E Sales with Price Change & Incremental Fixed Costs (FC): B/E sales change = — $CM x Initial unit + $ in FC (units) New $CM sales New $CM
B/E sales change = — $CM + $ in FC (percent) New $CM New $CM x initial unit sales
B/E Sales Analysis for Reactive Pricing:% B/E unit sales change = %P for reactive price change %CM’ + %P
B/E Sales Incorporating a Change in Variable Costs (VC): % B/E unit sales = _ ($P - $VC)
$CM’ + ($P - $VC) — $CM New $CM=
— %P%CM’ + %P
or
Step 2Calculate Break-even (B/E) Sales Change
Basic Formula:% B/E unit sales change = - $P
$CM’ + $P==
-(-$.50) $4.50 - $.50
$.50 $4
12.5%=
Ex: $.50 decrease in price & $4.50 CM’ leads to a 12.5% increase in sales to B/E
Rule of Thumb: Set up equations where the units of analysis ($, %, Units) cancel out.
Basic Formula:% B/E unit sales change = - %P
%CM’ + %P
Also works for %:Ex: 5% ($.50) decrease in $10 price & 45% ($4.50) CM’ leads to a 12.5% increase in sales to B/E
= -(-5%)
45% - 5%
5% 40%
12.5%==
Note that breakeven occurs when price elasticity = 12.5%/-5% = -2.5.
Break-even (B/E) Sales Analysis FormulasBasic Formula:% B/E unit sales change = - $P
$CM’ + $PB/E Sales Incorporating a Change in Variable Costs (VC): % B/E unit sales = _ ($P - $VC)
$CM’ + ($P - $VC)_ $CM
New $CM=
- $1$3 + $1
-1 4
-25%= = =
Ex: 50¢ decrease in price & $4.50 CM’ with a 20¢ decrease in VC leads to a 7% increase in sales to B/E
_ (-50¢-(-20¢)) $4.50 + (-50¢-(-20¢))
_ $ -.30 $ 4.20
7%≈=
Ex: 5% (50¢) decrease in $10 price & 45% ($4.50) CM’ with a 2% (20¢/$10.00) decrease in VC leads to a 7% increase in sales to B/E
_ -5% - (-2%) 45% + (-5% - (-2%))
_ -3% 42%
7%≈=
Ex: $1 increase in price & $3 CM leads to a 25% decrease in sales to B/E
Breakeven occurs when elasticity ≈ 7%/-5% ≈ -1.4.
Break-even (B/E) Sales Analysis FormulasBasic Formula:% B/E unit sales = - $P
$CM’ + $P
B/E Sales with Price Change & Incremental Fixed Costs (FC): B/E sales change = _ %P x Initial unit + $ in FC (units) %CM’ + %P sales New $CM
- $1$3 + $1
-1 4
-25%= = =
Ex: $1 increase in price & $3 CM leads to a 25% decrease in sales to B/E
Ex: 5% decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an $800 increase in FC requires an increase of 70 unit sales (17.5%) to B/E
_ -5% 45% - 5%
4000 $800$4
x + = 12.5% x 4000 + 20 = 70 units
B/E Sales Incorporating a Change in Variable Costs (VC): % B/E unit sales = _ ($P - $VC)
$CM’ + ($P - $VC)_ $CM
New $CM=
70/4000= 17.5% increase
Breakeven occurs when elasticity = 17.5%/-5% = -3.5.
Break-even (B/E) Sales Analysis Formulas
B/E Sales with Price Change & Incremental Fixed Costs (FC): B/E sales change = _ %P x Initial unit + $ in FC (units) %CM’ + %P sales New $CM
B/E sales change = _ $CM + $ in FC (percent) New $CM New $CM x initial unit sales
Basic Formula:% B/E unit sales = - $P
$CM’ + $P - $1$3 + $1
-1 4
-25%= = =
Ex: $1 increase in price & $3 CM leads to a 25% decrease in sales to B/E
B/E Sales Incorporating a Change in Variable Costs (VC): % B/E unit sales = _ ($P - $VC)
$CM’ + ($P - $VC)_ $CM
New $CM=
50¢ decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an $800 increase in FC requires an increase 17.5% to B/E
_ $.50 $4.00
$800$4.00 x 4000
+ = 12.5% + 5% = 17.5%
Breakeven occurs when elasticity = 17.5%/-5% = -3.5.
Underlying Formula’ = P’×Q’ – VC’×Q’ – FC’
’ + = (P’×Q’ + P×Q’ + P’×Q + P×Q) – (VC’×Q’ + VC×Q’ + VC’×Q + VC×Q) -(FC’ + FC)
= (P×Q’ + P’×Q + P×Q) – (VC×Q’ + VC’×Q + VC×Q) -(FC)
= 0 = Q × (P’ + P – VC’ – VC) + Q’ × (P - VC) -(FC)
Q × (P’ + P – VC’ – VC) = -Q’ × (P - VC) + (FC)
Q Q’
FCQ’×(P’ + P – VC’ – VC)
- (P - VC)(P’ + P – VC’ – VC)
= +
B/E = _ $CM + $ in FC (percent) New $CM New $CM x initial unit sales
Break-even (B/E) Sales Analysis FormulasBasic Formula:% B/E unit sales = - $P
$CM’ + $PB/E Sales Incorporating a Change in Variable Costs (VC): % B/E unit sales = _ ($P - $VC)
$CM’ + ($P - $VC)
B/E Sales with Incremental Fixed Costs (FC): B/E sales change = _ %P x Initial unit + $ in FC (units) %CM’ + %P sales New $CM
B/E Sales Analysis for Reactive Pricing:
% B/E unit sales change %P for reactive price change %CM’ + %P
- $1$3 + $1
-1 4
-25%= = =
Ex: $1 increase in price & $3 CM leads to a 25% decrease in sales to B/E
=
B/E sales change = _ $CM + $ in FC (percent) New $CM New $CM x initial unit sales
Ex: Comp. A increases price by 10%. Should we follow?
10%55%
≈ 18%
Unless you expect > 18% increase in demand at lower price, follow the price increase.
_ $CM New $CM=
Breakeven occurs when elasticity ≈ 18%/-5% ≈ -3.6.
Step 3: Calculate the Profit Implications
Change in Profit = [Actual Unit Sales Change - Unit BE Sales Change] x New $CM per unit
or,
Change in Profit =[Actual % Sales Change - % BE Sales Change] X Baseline Unit Sales x New $CM per
unit
Change in Profit = [Actual Unit Sales Change - Unit BE Sales Change] x New $CM per unit
or,
Change in Profit =[Actual % Sales Change - % BE Sales Change] X Baseline Unit Sales x New $CM per
unit
Ex. 10-3: Profit Changes from Baseline with Simulated Sales Volume Changes
% Actual Sales
Unit Actual Sales
$ in Contribution
Incremental FC $ in Profit
0% 0 ($2,000) $800 ($2,800) 5% 200 ($1,200) $800 ($2,000 )
10% 400 ($400) $800 ($1,200)15% 600 $400 $800 ($400)20% 800 $1,200 $800 $40025% 1000 $2,000 $800 $1,20030% 1200 $2,800 $1,600 $1,20035% 1400 $3,600 $1,600 $2,00040% 1600 $4,400 $1,600 $2,800
Ex: 5% decrease in $10 price with an initial volume of 4,000, $4.50 CM’, and an $800 increase in FC leads to an increase of 70 unit sales (17.5%) to B/E_ -5%
45% - 5%4000 $800
$4x + = 12.5% x 4000 + 20 = 70 units
70/4000= 17.5% increase
4. Breakeven Sales Curve Calculation with Incremental Fixed Costs
BreakevenElasticity
-1.4
-1.5
-1.7
-1.8
-2
-3.5
-4.0
-4.7
-6.0
Breakeven Sales Curve
Breakeven Sales Curve Compared to Elastic Demand Curve
Breakeven Sales Curve Compared to Inelastic Demand Curve
Virgin Case: Customer Lifetime Value (CLV)Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime = CM/(i* + 1 – r) – ACwhereCM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factorr = retention rate for the customer (segment)AC = acquisition costs
How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
Virgin Mobile
Calculating Average Price Elasticity
E =% in Unit Sales
% in Price
ECell phone usage =(100-300)/Average(100,300)(.22-.12)/Average (.22,.12)
Next Week
• Complete the Healthy Springs exercise & email to me one hour before class.
Primary Demand Elasticity -1.0+ Selective Demand Elasticity -2.0= Total Demand Elasticity -3.0
• Rick Lester from TRG Arts (No Electronics)• Incorporating Competitor Analysis into Pricing
Decisions