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