Strategic Marketing MKT470 Part 1: Variable Cost 1) Variable Costs 2) Fixed Costs Part 2:Relevant Sunk Cost 1) Relevant Costs 2) Sunk Costs Part 3: Gross Margin 1) Trade Margin 2) Net Profit Margin (before Taxes) Part 4: Contribution Analysis 1) Break-Even Analysis 2) Sensitivity Analysis 3) Contribution Analysis and Market Size 4) Assessment of Cannibalization Part 5: Liquidity Part 6: Operating Leverage Part 7: Discounted Cash Flow Part 8: Customer Lifetime Value Part 9: Preparing A Pro Form Income Statement Financial Aspects of Marketing Management

Part 1: Variable and fixed Cost  Marketing managers are accountable for the impact of their actions on profit and cash flow.  Therefore, they need a working knowledge of basic accounting and finance concepts

Part 1: Variable and fixed Cost  Variable Cost: are expenses that are uniform per unit Of output within a relevant time period. As volume increases, total variable costs increases:  Variable costs are Divided into two categories: 1) Cost of goods sold applied directly to Production 2) Expenses that are not directly tied to production (sales commissions, discounts and delivery expenses

Fixed Cost are expenses that do not fluctuate with output within a relevant time period of time, but become smaller per unit as the output increases Two categories: 1) Programmed Costs (result from attempts to generate sales (marketing expenditure is considered programmed Costs) 2) Committed Costs: Required to maintain the organization (such Rent and administration cost) Total Fixed costs do not change during a budget year Selling expenses can be fixed or variable costs Part 1: Variable and fixed Cost

Relevant Costs are expenditure that: -Expected to occur in the future as a result of some marketing actions (such as adding a product to the marketing). -Sunk Costs are past expenditures (such as past research and test marketing) Part 2: Relevant and Sunk Costs

Margin refers to the difference between the selling price and the cost of a product or service. Margins are expressed on a total volume basis or on an individual unit basis. 1) Gross Margin or Gross Profit 2) Trade Margin 3) Net Profit Margin Part 3: Margins

Part 3: Margins (Kerin, page 35) Gross Margin is the difference between total sales revenue and total cost of goods sold or on per unit basis. Total Gross Margins $% Net Sales$ % Cost of goods sold-40 Gross Profit Margin 60

Part 3: Margins (Kerin, page 35) Trade Margin is the difference between unit sales price and unit cost at each level of marketing channels for example: Unit cost of goods sold Unit selling Gross Margin Manuf.$2.00$ % Wholesaler Retailer Consumer6.0 Factory WholesalerRetailer =88/2.00=30

Part 3: Margins (Kerin, page 36) Net Profit Margin (before taxes) Is the remainder after cost of goods sold, other variable costs and fixed costs have been subtracted from sales revenue ( Income Statement of an Organization ) Dollar AmountPercentage Net sales$ % Cost of goods sold Gross profit margin$ % Selling expenses Fixed expenses Net Profit Margin$ %

Part 4: Contribution Analysis (Kerin, page 37) Contribution analysis is the difference between total revenue sales and total variable costs Contribution analysis is useful in assessing relationships among costs, prices and volumes of products and services with respect to profit. 1) Break-Even analysis: identifies the unit or dollar sales volume at which the organization neither makes a profit nor incurs a loss. Total revenue= total variable costs + total fixed costs

Part 4: Contribution Analysis (Kerin, page 37) Break-Even analysis requires three pieces of information: 1) An estimate of the unit variable costs 2) An estimate of the total dollar fixed costs 3) The selling price for each product Unit break-even volume= Total dollar fixed costs Unit selling price – unit variable costs Plan to sell a product for $5.00. the unit variable costs are $2.00, Total Fixed costs are $ How many units must be sold to break even? Fixed costs=$ Contribution unit = $5.00-$2.00=$3 = $30.000/$3.00= units = 10,000 x $5=50,000 the dollar break-even volume

Part 4: Contribution Analysis (Kerin, page 37) Break-Even Analysis Dollar AmountPercentage Net sales$ % Cost of goods sold Gross profit margin$ % Selling expenses Fixed expenses Net Profit Margin$ %

Liquidity Liquidity refers to an organization’s ability to meet short-term (one year budget) financial obligations. Working Capital is the dollar value of an organization’s current assets (such as cash, accounts receivable, prepaid expenses, inventory)

Operating Leverage Operating leverage refers to the extent to which fixed costs and variable costs are used in the production and marketing of products and services. More fixed cost = high operating leverage. Examples: airlines and heavy equipments Less fixed cost compared to variable cost= low operating leverage The higher a firm’s operating leverage, the faster its total profit will increase.

Discounted Cash Flow A dollar received this year is not equivalent to a dollar received today because of risk, inflation, and opportunity cost. Discounted cash flow are future cash flows expressed in terms of their present value.

Customer lifetime value Customer lifetime value requires three pieces of information: 1) The per-period (month or year) cash margin by customer ($M)= sales revenue - variable cost and other traceable cash. 2) The retention rate (r) the per-period the customer will be retained 3) The interest rate (i). CLV= $M i-r

Preparing a Pro Forma Income statement  Display projected revenues, budgeted expenses, estimated net profit for a year. Sales1,000,000 Cost goods sold500,000 Gross Margin500,000 Marketing expenses170,000 Advertising expenses90,000 Delivery expenses40,000300,000 Admin Salaries120,000 Depreciation Building 20,000 Interest expenses5,000 Tax & Insurance5,000 Other admin expenses 5,000155,000 Net Profit before income tax 45,000 Pro Forma Income Statement for 12-Months Period Ended Dec. 31, 2006