UGBA 106 Marketing Section 103 (Tue 11a-12:30p) Section 105 (Tue 2-3:30p) Week 1 – January 19, 2010 © Ravi Shanmugam, 2010

UGBA 106UGBA 106MarketingMarketing

Section 103 (Tue 11a-Section 103 (Tue 11a-12:30p)12:30p)

Section 105 (Tue 2-3:30p)Section 105 (Tue 2-3:30p)

Week 1 – January 19, 2010Week 1 – January 19, 2010

© Ravi Shanmugam, 2010

Your Host: Your Host: Ravi ShanmugamRavi Shanmugam• The best way to reach me is by email:The best way to reach me is by email:

• Office hours: TBAOffice hours: TBA

How I’ll reach you: Weekly emails with How I’ll reach you: Weekly emails with announcementsannouncements

• Make sure your email address listed in Bearfacts is Make sure your email address listed in Bearfacts is legitlegit

• Bookmark the course website:Bookmark the course website:

UGBA 106 Section, Week 1UGBA 106 Section, Week 1

Welcome to UGBA 106 sectionWelcome to UGBA 106 section

[email protected]@haas.berkeley.edudu

http://faculty.haas.berkeley.edu/shanmuga/ugba1http://faculty.haas.berkeley.edu/shanmuga/ugba10606

Admin Admin overviewoverviewMarketing MathMarketing Math

Agenda:Agenda:


Tuesday “Case Discussion Class”Tuesday “Case Discussion Class”• This is not just an optional review of lecture, but a This is not just an optional review of lecture, but a

separate and integral part of the course.separate and integral part of the course.• Each week centers around discussion of a Each week centers around discussion of a casecase..

2 things to do to keep on top of cases:2 things to do to keep on top of cases:• Download the readerDownload the reader from from www.study.net – it – it

contains all cases used this semester. DON’T contains all cases used this semester. DON’T xerox/share cases.xerox/share cases.

• Keep an eye on the Keep an eye on the scheduleschedule at the end of the at the end of the syllabus.syllabus.

Case Discussion…not quite “section”Case Discussion…not quite “section”

Admin Admin overviewoverview

Agenda:Agenda:Marketing MathMarketing Math

http://www.study.net/


In section, it’s easier for the following things to happen:In section, it’s easier for the following things to happen:• You can actually raise your hand and say things.You can actually raise your hand and say things.• We can gauge your preparation and participation on a We can gauge your preparation and participation on a

weekly basis.weekly basis.

As a result, expectations are higher for section.As a result, expectations are higher for section.• Participation: Come to class prepared and make efforts Participation: Come to class prepared and make efforts

to participate. to participate. • Attendance: Up to 2 absences allowed – please inform Attendance: Up to 2 absences allowed – please inform

me in advance and submit a “makeup” writeup.me in advance and submit a “makeup” writeup.• Use your name cards.Use your name cards.• Please be on time.Please be on time.

Participation: yes, you willParticipation: yes, you will




Group presentations:Group presentations:• In section 2 weeks from now, you’ll need to form In section 2 weeks from now, you’ll need to form

groups of 3-4 students apiece. Start asking around groups of 3-4 students apiece. Start asking around ASAPASAP..

• Each group will be randomly assigned a case to Each group will be randomly assigned a case to present.present.

Other assignments:Other assignments:• Written brief (individual)Written brief (individual)• Marketing plan (group of 6)Marketing plan (group of 6)• ExamExam

Group presentation and other Group presentation and other assignmentsassignments




““Marketing math”...what is it?Marketing math”...what is it?

Admin overviewAdmin overviewMarketing MathMarketing Math

Agenda:Agenda:


One definition:One definition:

Marketing math doesn’t need to be complicated!Marketing math doesn’t need to be complicated!• Usually, it’s at a basic calculator/Excel level, but Usually, it’s at a basic calculator/Excel level, but

sometimes simple calculations can tell us quite a bit.sometimes simple calculations can tell us quite a bit.

““Marketing math”...what is it?Marketing math”...what is it?


Agenda:Agenda:

“Simple calculations that help inform strategic decisions made by marketing managers.”

A group of Cal students considers opening a hot dog stand in A group of Cal students considers opening a hot dog stand in NYC to compete with “Gray’s Papaya”.NYC to compete with “Gray’s Papaya”.


A Simple ExampleA Simple Example


Agenda:Agenda:

A group of Cal students considers opening a hot dog stand in A group of Cal students considers opening a hot dog stand in NYC to compete with “Gray’s Papaya”.NYC to compete with “Gray’s Papaya”.


A Simple ExampleA Simple Example


Agenda:Agenda:


Types of costsTypes of costs• Fixed costsFixed costs

• One-time (i.e. setup costs)One-time (i.e. setup costs)• Ongoing or per-period costsOngoing or per-period costs

• Variable costsVariable costs• Cost that’s incurred when you produce a unitCost that’s incurred when you produce a unit

What do you think are examples of each of these types of cost What do you think are examples of each of these types of cost for “Oski’s Papaya”? for “Oski’s Papaya”?

Basic concept: Sellers want to “cover their Basic concept: Sellers want to “cover their costs”.costs”.


Agenda:Agenda:


Types of costsTypes of costs• Fixed costsFixed costs

• One-time (i.e. setup costs)One-time (i.e. setup costs)• Ongoing or per-period costsOngoing or per-period costs

• Variable costsVariable costs• Cost that’s incurred when you produce a unitCost that’s incurred when you produce a unit• Note that these can change per unit depending on # Note that these can change per unit depending on #

units soldunits sold

To figure out whether it makes sense to go into the NYC hot To figure out whether it makes sense to go into the NYC hot dog business, we’ll compare revenue per unit (more on dog business, we’ll compare revenue per unit (more on this later) with these costs.this later) with these costs.

Basic concept: Sellers want to “cover their Basic concept: Sellers want to “cover their costs”.costs”.


Agenda:Agenda:

Contribution amount = revenue/unit – variable cost/unit.Contribution amount = revenue/unit – variable cost/unit.• Simple example: If we charge $1/dog and the costs Simple example: If we charge $1/dog and the costs

includeinclude• $8000$8000 kitchen equipment kitchen equipment• $2000/month$2000/month rent rent• $0.50/unit$0.50/unit ingredients ingredients

What’s the What’s the contributioncontribution amount per unit? amount per unit?


Contribution, margin, and markupContribution, margin, and markup


Agenda:Agenda:





Contribution can also be expressed as Contribution can also be expressed as marginmargin, as a % of selling , as a % of selling price.price.

• Above example: Margin = Above example: Margin = 50%50% ($0.50 is 50% of $1) ($0.50 is 50% of $1)

A similar statistic is A similar statistic is markupmarkup, expressed as a % of cost., expressed as a % of cost.• Above example: Markup = Above example: Markup = 100%100% ($0.50 is 100% of $0.50) ($0.50 is 100% of $0.50)



Agenda:Agenda:

$0.50/unit$0.50/unit





You can use this formula to calculate a desired selling price You can use this formula to calculate a desired selling price (i.e. revenue) given variable costs and desired margin:(i.e. revenue) given variable costs and desired margin:



Agenda:Agenda:

Selling price =Selling price =Variable costVariable cost

1 – [% margin/100]1 – [% margin/100]

$0.50/unit$0.50/unit


Example of a multi-level distribution channel:Example of a multi-level distribution channel:

What are the revenue and variable cost figures for each What are the revenue and variable cost figures for each company?company?

Additional considerations for Additional considerations for “revenue”“revenue”


Agenda:Agenda:

MANUFACTURERMANUFACTURER

RETAILERRETAILER

CONSUMERCONSUMER

Variable cost/unit = $4Variable cost/unit = $4Selling price to retailers = Selling price to retailers = $7.50$7.50

Purchase price from manufacturer = Purchase price from manufacturer = $7.50$7.50Selling price to consumers = $8.75Selling price to consumers = $8.75

Purchase price from retailers = Purchase price from retailers = $8.75$8.75


Question: What # of units must we sell to “break even”?Question: What # of units must we sell to “break even”?

Break-even volume: the key figureBreak-even volume: the key figure


Agenda:Agenda:


Question: What # of units must we sell to “break even”?Question: What # of units must we sell to “break even”?

Answer: We must sell enough units that our contribution Answer: We must sell enough units that our contribution margin for those units exceeds our per-period fixed costs.margin for those units exceeds our per-period fixed costs.

Returning to the original example:Returning to the original example:• Contribution = $0.50/unitContribution = $0.50/unit• Per-period fixed costs = $2000/month (rent)Per-period fixed costs = $2000/month (rent)• Thus, we need to sell Thus, we need to sell 4000 units/month4000 units/month to cover per- to cover per-

period fixed costs ($0.50 * 4000 = $2000)period fixed costs ($0.50 * 4000 = $2000)

One thing to think about: Are there other costs we ignored?One thing to think about: Are there other costs we ignored?

Break-even volume: the key figureBreak-even volume: the key figure


Agenda:Agenda:


Question: Let’s say because of increased competition from Question: Let’s say because of increased competition from Gray’s Papaya, we cut price from $1 to $0.75/dog. How Gray’s Papaya, we cut price from $1 to $0.75/dog. How does that change BEV?does that change BEV?

Answer: Here’s how each of the figures changes.Answer: Here’s how each of the figures changes.• New contribution = $0.75 revenue - $0.50 variable New contribution = $0.75 revenue - $0.50 variable

cost = cost = $0.25/unit$0.25/unit..• Per-period fixed costs = $2000/month (rent)Per-period fixed costs = $2000/month (rent)• Thus, we need to sell Thus, we need to sell 8000 units/month8000 units/month to cover per- to cover per-

period fixed costs ($0.25 * 8000 = $2000)period fixed costs ($0.25 * 8000 = $2000)

Note that a “small” price cut from $1 to $0.75 Note that a “small” price cut from $1 to $0.75 doubleddoubled our our break-even volume. Why did this happen?break-even volume. Why did this happen?

How can changing one number affect the entire How can changing one number affect the entire picture?picture?


Agenda:Agenda:


Can we Can we really really sell twice as many hot dogs if we cut price by 25 sell twice as many hot dogs if we cut price by 25 cents?cents?

A final questionA final question


Agenda:Agenda:



The answer: “it depends”...on quite a few factors, including:The answer: “it depends”...on quite a few factors, including:• The potential market for hot dogs in NYCThe potential market for hot dogs in NYC• How well similar hot dog stands have performed in the How well similar hot dog stands have performed in the

pastpast• How we can affect our sales through promotions, etc.How we can affect our sales through promotions, etc.• Other factors that require experience and intuition on Other factors that require experience and intuition on

the part of the marketing managerthe part of the marketing manager



Agenda:Agenda:



The answer: “it depends”...on quite a few factors, including:The answer: “it depends”...on quite a few factors, including:• The potential market for hot dogs in NYCThe potential market for hot dogs in NYC• How well similar hot dog stands have performed in the How well similar hot dog stands have performed in the

pastpast• How we can affect our sales through promotions, etc.How we can affect our sales through promotions, etc.• Other factors that require experience and intuition on Other factors that require experience and intuition on

the part of the marketing managerthe part of the marketing manager

Key lesson:Key lesson:



Agenda:Agenda:

Non-math considerations

Marketing math Decisions


• Turn in your bio sheets before leaving.Turn in your bio sheets before leaving.

• Start forming your presentation and marketing Start forming your presentation and marketing plan groups.plan groups.

• Read the British Airways case for next week (on Read the British Airways case for next week (on the website), and think about the questions in the website), and think about the questions in the case.the case.

Reminders for next week...Reminders for next week...


Agenda:Agenda:

Documents

UGBA 106 Marketing Section 103 (Tue 11a-12:30p) Section 105 (Tue 2-3:30p) Week 1 – January 19, 2010 © Ravi Shanmugam, 2010