Introduction to

Marketing Strategy
MKTG 5200
What is Marketing?
Words of Wisdom from Will Rogers

“Advertising is the art of

convincing people to spend
money they don’t have for
something they don’t need.”

Will Rogers
American humorist
What is Marketing?

DOGBERT, THE VP OF
MARKETING ALL THE
WELL, IT PARTS ARE
DESCRIBE YOUR TENDS TO KNOWN
PRODUCT IN TECHNICAL OVERHEAT HOTTEST CARCINOGENS
TERMS AND I’LL TURN PRODUCT
IT INTO MARKETING ON THE “MAKES YOU
LANGUAGE MARKET! APPRECIATE
LIFE!”
What is Marketing?

WE ALSO CAN’T THAT LEAVES FRAUD,

WE CAN’T COMPETE ON QUALITY, WHICH I’D LIKE YOU
COMPETE FEATURES OR SERVICE TO CALL MARKETING
ON PRICE
Marketing Defined

Marketing is the process of focusing the resources

and objectives of the organization on
environmental opportunities and needs.

– Warren Keegan, Author

Global Marketing Management
Marketing Defined
Good marketing is not the art of selling what you
make but knowing what to make in the first place...
It is the art of identifying and understanding
customer needs and creating solutions that deliver
satisfaction to customers, profits to producers and
benefits for stakeholders.

– Philip Kotler
Northwestern University
“The father of modern marketing”
What is Marketing?
FIRM ‘D’
SKILL SET
FIRM ‘B’
SKILL SET FIRM ‘E’
SKILL SET

People
“ THE MARKET
with needs
”
OUR
SKILL SET

FIRM ‘C’
SKILL SET FIRM ‘F’
SKILL SET
What is Marketing?

Marketing is a
set of processes
to help the firm identify THE OPPORTUNITY

and capitalize on this…

What is Marketing?

Or even this…
THE OPPORTUNITY
The Manager’s Challenge
• Need to understand customers
• Need to anticipate / manage competition
• Need to know / develop own strengths
but…
• Consumers change
• Competitors change
• The world changes (technology, etc...)
• Your company changes
What is Marketing Strategy?
• Marketing is the company’s primary lever for generating
customers, revenues and profits

• Marketing strategy is the content of every decision in a

company that influences…
– whether customers choose (or reject) your offering
– how much revenue you make on each unit sold
Marketing Strategy
• Analyzes market opportunities…
…to identify “gaps” of unmet needs, and find ways for the organization
to leverage its competencies to meet them

• Identifies well-defined target segments…

…that are internally similar, but differ from one another
…on meaningful dimensions
…and can be readily identified and targeted

• Creates unique product / service offerings…

…differentiated in ways that offer value to customers
Marketing Strategy
• Induces trial, choice, and customer loyalty…
…and encourages rejection of competitive offerings

• Creates high long-term profits

Tasks of the Marketing Manager
• Capture marketing insights
– Monitor the environment for opportunities
– Conduct market research to assess buyer needs and behaviour,
and actual / potential market size

• Connect with customers

– Determine how best to create value for the target
– Develop strong, profitable, long-term relationships with customers

• Shape market offerings

– Make decisions about product quality, design,
features, and packaging
Tasks of the Marketing Manager
• Deliver value
– Maximize the offering’s value to the target market by identifying and linking
with the right retailers, wholesalers, and distribution firms
• Communicate value
– Convey the value embodied by the offering to that target through effective
marketing communications
• Build strong brands
– Understand the brand’s strengths and weaknesses and what customers
associate with the brand
Tasks of the Marketing Manager
• Create long term growth
– Take into account changing global opportunities and challenges that are
transforming the world

• Develop marketing strategies and plans

Isn’t marketing just
common sense?
 If it were,
everyone would be
doing great marketing
Marketing Management Questions

Blackberry Apple iPhone

$139 $599

• Blackberry was the dominant smartphone brand as recently as 2010, with a

global share of 20%. Despite a technological lead and massive installed user
base, it has effectively disappeared from the market.
• At its 2007 U.S. launch, the iPhone sold for $599, could only be used on
AT&T’s network, and sold 1 million units in 74 days. It soon became the #1
selling phone in the world. What makes Apple so different?
Marketing Management Questions

• Zellers was founded in Ontario in 1931. Despite having a 60-year head start,
a Canadian pedigree, a well-known brand, and a strong portfolio of locations,
it struggled to compete with Walmart after the world’s largest retailer entered
Canada in 1994.

• In 2013, Target entered Canada, to great fanfare and excitement among

Canadian consumers. In just two years of operation, the company lost more
than $2 billion; all 133 locations were shuttered by April 2015.

• Why did Walmart succeed where similar

retail concepts failed?
Marketing Management Questions

• Tim Hortons is the largest quick-service restaurant chain in Canada,

and a national icon.

• Why do consumers flock to their stores, while rivals with essentially similar
offerings struggle?
Marketing Management Questions

Stokke Xplory Graco Verb

$1,499.99 $299.97

• The Stokke Xplory retails for $1,500 in Canada.

The Graco Verb, which includes an infant car seat, sells for $300.

• How can Stokke charge 5 times the price of the Graco?

• Who would pay that, and why? As a brand manager for Stokke,
how would you convince them to do it?
Marketing Management Questions
• The recreational footwear market is
mature, stagnant, and dominated by
deep-pocketed international players with
the ability to out-advertise any new
entrant and limit their access to retail
channels.

• So…how did Crocs sell so well?

Takeaways?
• Marketing has been the Achilles heel of many
formerly prosperous companies
• Good marketing is no accident but a result of
careful planning and execution
• Skillful marketing is a never-ending pursuit
• Great marketing is an art and a science

So how do you do great marketing?

 The Marketing
Planning Process
The Marketing Decision Framework: 3 Elements

Analysis

Decisions

Outcomes
The Marketing Decision Framework: Analysis
CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

Decisions

Outcomes
The Marketing Decision Framework: Strategic Decisions
CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

TARGET DIFFERENTIATION
MARKET
Benefits valued by customer
SELECTION
Added value from specific
combinations of benefits

POSITION

Decisions

Outcomes
The Marketing Decision Framework: Tactical Decisions
CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

DIFFERENTIATION IMPLICATIONS FOR

TARGET MARKETING STRATEGY
MARKET
Benefits valued by customer
SELECTION Product
Added value from specific
Price
combinations of benefits
Distribution channels
Promotion
- advertising
POSITION - sales force

Decisions

Outcomes
The Marketing Decision Framework: Outcomes
CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

DIFFERENTIATION IMPLICATIONS FOR

TARGET MARKETING STRATEGY
MARKET
Benefits valued by customer
SELECTION Product
Added value from specific
Price
combinations of benefits
Distribution channels
Promotion
- advertising
POSITION - sales force

Decisions
OUTCOMES
Financial
Other

Outcomes
The Marketing Decision Framework: The Complete Picture
CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

DIFFERENTIATION IMPLICATIONS FOR

TARGET MARKETING STRATEGY
MARKET
Benefits valued by customer
SELECTION Product
Added value from specific
Price
combinations of benefits
Distribution channels
Promotion
- advertising
POSITION - sales force

Decisions
OUTCOMES
Financial
Other

Outcomes
End of Lecture
The Marketing Mix
MKTG 5200
Introducing the Marketing Mix
• The Marketing Mix includes all the elements associated
with implementation of the marketing plan
• It encompasses all the decisions you make as a marketing
manager after you’ve decided which customers to target
and how you want to position your brand
Introducing the Marketing Mix
• Also commonly referred to as the “4 Ps”

Product The bundle of goods & services that creates the value
Price What the customer gives up in exchange for the product
Place Where the product is available for purchase
Promotion The messaging that communicates the value and
the incentives used to encourage the sale
How Many Ps?
• Today, some marketers advocate for 3 additional “Ps”
People The individuals who interact with the customer
Process Procedures and standards used to deliver the goods /
services efficiently and ensure a positive experience
Physical Everything the customer sees / touches (smells / hears)
Evidence when interacting with your business, including
packaging, signage, website, and the physical
environment of your store
How Many Ps?
• The 3 additional Ps were included to ensure that these
important elements are not overlooked
• Previously, they were included as part of “Product” or
in a separate discussion of operational considerations
arising from the marketing plan
 CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

DIFFERENTIATION IMPLICATIONS FOR

TARGET MARKETING STRATEGY
MARKET
Benefits valued by customer
SELECTION Product
Added value from specific
Price
combinations of benefits
Distribution channels
Promotion
- advertising
POSITION - sales force

Decisions
OUTCOMES
Financial
Other

Outcomes
Marketing Decision Framework
 Analysis

IMPLICATIONS FOR
MARKETING STRATEGY

Product
Price
Distribution channels
Promotion
- advertising
- sales force

Decisions

Marketing Decision Framework (Showing Area of Outcomes

Focus for this Lecture)
Why a “Mix”?
• Think of them as ingredients of a cake
• Although conceptually distinct, the various elements of the
marketing mix are interdependent and function in concert
to shape the offering that is experienced by the customer
– Product features and service levels influence price
– Deciding where to sell the product has important implications for
the media and messaging used to promote it, as well as price
– Distinct versions of the product may be sold via different channels
at different price points, using different
promotional tools
We will explore the marketing mix in detail
in the latter half of the course.

But here’s a sneak preview…

Product
• What you are selling, including all the features, advantages and
benefits that customers enjoy when they buy from you
• A ‘product’ may be a physical good or a service—and is
typically a combination of both
• Key considerations include:
– What features to offer
– How many product lines to sell
– How many variations of each product to offer
– What the packaging should look and feel like
– What added-value services to include
Price
• What the customer gives up in exchange for the product
• For companies the focus is on money—but customer decisions
also factor in time, effort, and inconvenience
• Key considerations include:
– How much to charge relative to competitors
– Price items separately or offer bundles
– Whether to charge different prices to different customers
– Whether to offer different products at different price points
– Whether to raise or lower prices over time
– Whether to offer promotional discounts
– How to respond to price cuts
Place
• How you deliver your product to customers
• It’s critical to sell your offerings via distribution channels that
customers find convenient and that are capable of providing the
kind of service that customers are seeking
• Key considerations include:
– Whether to use intermediaries
– What level of service is required at the point of sale
– Which intermediaries to use
– How many channels to use
– Whether to sell online and/or offline
Promotion
• How, when, and where you make customers aware of your
offering, how you explain the benefits, and how you incentivize
them to choose you rather than alternatives
• Digital and social media are transforming the media landscape
and offer the promise of new and better ways to target customers
• Key considerations include:
– What are you trying to achieve, exactly
– What should your message be
– What media to use
– How much to spend
End of Lecture
Financial Analysis Basics
for Marketing
MKTG 5200
 CUSTOMER ANALYSIS COMPETITOR ANALYSIS COMPANY ANALYSIS P.E.S.T. ANALYSIS
Statistics Direct / indirect competitors Objectives Political
Shopping / usage behavior Their current / previous strategies Strengths / weaknesses Economic
Buying process
Importance of this market to them Current / past performance Social
Likely actions and reactions Fit with other products Technological
SEGMENTATION
Possible segments
Size of segments
Growth potential
Analysis

DIFFERENTIATION IMPLICATIONS FOR

TARGET MARKETING STRATEGY
MARKET
Benefits valued by customer
SELECTION Product
Added value from specific
Price
combinations of benefits
Distribution channels
Promotion
- advertising
POSITION - sales force

Decisions
OUTCOMES
Financial
Other

Outcomes
Marketing Decision Framework
 Analysis

Decisions
OUTCOMES
Financial

Marketing Decision Framework (Showing Area of Outcomes

Focus for this Lecture)
Role of Financial Analysis in Marketing
• The ultimate objective of marketing is often (but not always)
financial in nature – e.g., maximize profits, revenues, etc.
• For marketing managers, financial calculations serve two
main functions:
1. To help choose among alternatives, and;
2. To evaluate the success of a specific course of action
once it has been taken
Comparing Alternatives
• When comparing the attractiveness of different options,
consider the profitability and risks associated with each:
– Create a basic financial forecast for all credible options
in order to assess their relative attractiveness
– Be sure to project over several years, so that you are factoring in
the longer-term consequences of your decision

• To do this, you’ll need to perform the following tasks…

1. Estimate Market Size
Determine how many units you are likely to sell in a year
• How many customers are in your target market?
• What percentage of them are likely to buy your product?
• How many units will each person buy?
Be careful! Market segments that contain large numbers of customers
may be less attractive when you also consider market penetration and
usage frequency.
2. Consider Market Growth
How quickly do you expect the market to grow?
• Markets that are small today may become more attractive over time
• Project forward 3-5 years to account for the effects of growth

Be careful! Forecasting growth entails uncertainty and therefore risk.

Consider the soundness of the forecasts on which your plan is based.
• Is your estimate merely someone’s ‘best guess’? How informed is that
individual? How reliable is the information their estimate is based on?
• Is your forecast a projection based on past growth? How certain are
you that current conditions will persist?
3. Consider Contribution Margins
How much money you will make on each unit sold?
• Be realistic when setting prices
• Remember that intermediaries (retailers, wholesalers) will retain
a portion of the selling price

Be careful! When building financial forecasts, it can be tempting to

set price high and hope for high sales volumes. Do your best to avoid
optimism bias and base your plan on prices that are realistic and
achievable.
4. Consider Fixed Marketing Expenses
How much will you need to invest in advertising, sales
force, point-of-sale materials, and promotion?
• The greater the up-front marketing investment, the more units you
need to sell to break even — creating greater risk.

Be careful! Some strategies require you to invest substantial money up

front, while others are less costly. Be sure to consider this risk, not just
expected profitability, when evaluating your plan.
Sensitivity Analysis
Sensitivity Analysis
• A commonly-used technique to understand the effects of key
variables on the profitability of a business
• In a sensitivity analysis, managers build several versions of
their financial forecasts, each using a different assumption
about the levels of these variables
• Consider:
– Which assumptions are you most uncertain about?

• Sensitivity analysis tells you which ones will have the

greatest impact if you are wrong
Sensitivity Analysis
• Profitability can be sensitive to a number of variables:
Market size How many units will be sold next year?

Market growth How quickly will the market expand?

Market share What fraction of the market will we capture?

How much will we make per unit sold?

Margins
How much of the final selling price will go to retailers and wholesalers?

Fixed marketing costs How much will we need to spend to advertise and promote this product?
Let’s look at a couple of examples…
Sensitivity to Market Share
Total Market Size at Retail (millions) $8,600 $8,600 $8,600 This sensitivity analysis
Expected Market Share 0.5% 1.0% 2.0%
Expected Dollar Sales at Retail (millions) $43 $86 $172 examines the impact of
Unit Sales (000s) 538 1,075 2,150 different assumptions
List Price $100 $100 $100
about market share
Less 20% Consumer Discount ($20) ($20) ($20)
Average Retail Price $80 $80 $80 The expected share is 1%
Less 28% Retailer Margin
Wholesale Price
($22)
$58
($22)
$58
($22)
$58
but we also consider ‘low’
Less 14% Wholesaler Margin ($8) ($8) ($8) (0.5%) and ‘high’ (2%)
Unit Price to Manufacturer $50 $50 $50
Less COGS ($30) ($30) ($30)
Contribution per unit $20 $20 $20
As you can see, the impact
on profit is substantial
Total Contribution (000s) $10,650 $21,300 $42,601
Fixed Costs (000s) $21,000 $21,000 $21,000

Net Profit (000s) ($10,350) $300 $21,601

Sensitivity to Selling Price
Total Market Size at Retail (millions) $8,600 $8,600 $8,600 This sensitivity analysis
Expected Market Share 1.0% 1.0% 1.0%
Expected Dollar Sales at Retail (millions) $86 $86 $86 examines the impact of
Unit Sales (000s) 1,075 1,075 1,075 different assumptions
List Price $60 $80 $100
about selling price
Less 20% Consumer Discount ($12) ($16) ($20)
Average Retail Price $48 $64 $80 The expected price is $80
Less 28% Retailer Margin
Wholesale Price
($13)
$35
($18)
$46
($22)
$58
but we also consider ‘low’
Less 14% Wholesaler Margin ($5) ($6) ($8) ($60) and ‘high’ ($100)
Unit Price to Manufacturer $30 $40 $50
Less COGS ($18) ($24) ($30)
Contribution per unit $12 $16 $20
The impact on profit is
significant, but less than
Total Contribution (000s) $12,780 $17,040 $21,300 market share
Fixed Costs (000s) $21,000 $21,000 $21,000

Net Profit (000s) ($8,220) ($3,960) $300

Sensitivity to Selling Price
Total Market Size at Retail (millions) $8,600 $8,600 $8,600
Expected Market Share 1.0% 1.0% 1.0%
Keep in mind…
Expected Dollar Sales at Retail (millions) $86 $86 $86
Unit Sales (000s) 1,075 1,075 1,075
The quality of the insights
List Price
Less 20% Consumer Discount
$60
($12)
$80
($16)
$100
($20)
from a sensitivity analysis
Average Retail Price $48 $64 $80 depends on the
Less 28% Retailer Margin ($13) ($18) ($22) reasonableness of your
Wholesale Price $35 $46 $58
Less 14% Wholesaler Margin ($5) ($6) ($8)
estimates for “low”,
Unit Price to Manufacturer $30 $40 $50 “medium”, and “high”
Less COGS ($18) ($24) ($30)
Contribution per unit $12 $16 $20

Total Contribution (000s) $12,780 $17,040 $21,300

Fixed Costs (000s) $21,000 $21,000 $21,000

Net Profit (000s) ($8,220) ($3,960) $300

End of Lecture
The Income Statement and
Marketing
MKTG 5200
What is an Income Statement?
• The income statement provides an indication of an organization’s
operating performance over a specific period of time (typically
one year), and includes the following information:
– Sales revenue
– Cost of goods sold
– Gross margin
– Marketing expenses
– General and administrative expenses
– Net profit before tax
How Are Income Statements Used?
• In financial reporting, the income statement provides a summary
of what happened in a previous period
• In marketing, forward-looking income statements are
commonly used to forecast the expected outcomes of a plan
that is under consideration or has yet to be implemented
• These rely on informed predictions about key variables whose
actual values are uncertain, such as:
– Overall market growth
– Market segment size / growth
– Market share
 Information in the
Income Statement
Sales Revenue

Sales revenue = unit selling price × unit volume

• Sales revenue refers to the total income generated from sales

before costs are taken into account
• Other things being equal, you can increase revenues by raising
the unit selling price, increasing unit volume, or both
Sales Revenue
• However, it is not always easy to determine the optimal price
for a product (i.e., the price that will generate maximum profit)
• Lower prices tend to produce higher sales volumes, but they
also result in smaller profit margins, so the key question is:

If we lower the unit selling price, how much additional sales volume
must be generated to maintain the same level of profit?
Sales Revenue
• Forecasting sales revenue is a key part of the marketing task
• Typically, future revenues are projected using sales volume
estimates that are based on one or more of the following methods:
1. What has happened in the past
2. What people (e.g., salespeople) expect will happen
3. What has happened in test markets
4. Estimates based on consumer analysis
Cost of Goods Sold (COGS)
• COGS refers to costs that are directly associated with producing
and handling the goods / services sold to the firm’s customers
• It includes:
– cost of acquiring raw materials
– production costs
– delivery costs
Cost of Goods Sold (COGS)
• COGS expenses are variable costs—i.e., they change with the
level of production—and are typically constant per unit within a
given volume range
– EXAMPLE:
It might cost a company $0.50 to manufacture and package a bottle of
hand sanitizer, although cheaper prices for raw materials could be
negotiated if production levels were doubled

• Marketing decisions can have a substantial impact on COGS:

– EXAMPLE:
Adding a new variant to a product line tends to add new costs,
especially in terms of inventory management
Gross Margin
• A margin is the difference between selling price and cost
• Gross margin (also known as “net contribution”) is what remains
after COGS has been subtracted from sales revenue
• It can be expressed in different ways:
– on a per unit basis (e.g., $0.21 per can)
– as a percentage of sales revenues, or
– as a total dollar figure
Marketing Expenses
• Marketing expenses may be either variable or fixed

Variable Marketing Costs Fixed Marketing Costs

Items such as sales commissions and Marketing costs that are incurred “up front”
brokerage payments, which are incurred on and do not vary directly with sales volumes,
a per-unit basis such as the cost of an advertising campaign
General and Administrative Expenses
• G&A expenses include “overhead” costs that are not directly
attributable to the cost of goods sold or the marketing activities
of the firm, such as management salaries, interest expenses,
rent, and utilities
• Many firms allocate G&A expenses to particular products or
product categories to arrive at a “full cost” for each item
• However, this allocation process is misleading, since allocation
methods are often arbitrary and the associated costs would be
incurred with or without the existence of the product line
Net Profit Before Tax
• The (almost) bottom line
• This is the amount that remains after all expenses except income
tax have been deducted from sales revenue
• When choosing among alternative courses of action, net profit is
always an important consideration—and often the most important
End of Lecture
Contribution Margins
MKTG 5200
What is ‘Contribution’?
• Contribution measures the profitability of individual products
by looking at how much of a product’s revenues the company
gets to keep after accounting for variable costs

Variable costs required to

Product’s
— make/acquire the product
selling price and get it to market

• It is an important concept because it allows managers to see

the impact of variations in costs, prices, and volumes on
product profitability
What is ‘Contribution’?
• One version is total contribution, the difference between total
sales revenue and total variable costs associated with the product
– “Our product generated a total contribution of $246,000 last year”

• Contribution can also be expressed as a per-unit dollar amount

– “Our product has a per-unit contribution of 50 cents”

• Most commonly, contribution is expressed as a percentage of

the product’s selling price—i.e., the contribution margin
– “At a selling price of $1.50, the contribution margin
for our product is 33%”
Which Margin?
• Keep in mind: Each member of the distribution chain has its
own margin, which is defined in terms of the price it charges its
customers and the cost at which it acquires the product
• For this reason, it’s important to specify which channel member
the margin applies to:
• Retail margin is expressed as a % of the retail price
• Wholesale margin is expressed as a % of the wholesale price
• Manufacturer margin is expressed as a % of the “ex-factory” price
(i.e., the price at which the product is sold by the factory)
Let’s look at a couple of examples
Example 1
Imagine you own a business that manufactures its own product and sells via
retailers. Your product is sold at a retail price of $200, retailers take a 30%
margin, and your cost of goods sold is $100. What’s your contribution margin?

$200 × 30% = $60 unit contribution (retailer)

This leaves $140 as the price you receive as the manufacturer.

Since we know that COGS is $100, your unit contribution is:

$140 - $100 = $40 unit contribution (manufacturer)

And your profit margin is ($40 ÷ $140) = 28.6%

Example 1
Retail price $200

RETAILER
30% UNIT
CONTRIBUTION
retail
margin $60 Ex-factory price $140

100% 28.6% MANUFACTURER

UNIT
RETAIL of retail
manufacturer CONTRIBUTION
PRICE price
margin $40

70% COST TO 100% of

EX-FACTORY
of retail RETAILER
PRICE ex-factory
price $140 price
COST TO
71.4% MANUFACTURER
of ex-factory $100
price
Example 2: With Wholesaler
Now imagine a world where wholesalers are part of the process. Your product is
sold at a retail price of $200, retailers keep a 25% margin, wholesale margins
are 10% and your cost of goods sold is $100. What’s your contribution margin?

$200 × 25% = $50 unit contribution (retailer)

…meaning that the retailer pays $150 to the wholesaler.

The wholesaler enjoys 10% margins:

$150 × 10% = $15 unit contribution (wholesaler)

…and uses the remaining $135 to buy the product from the manufacturer
Example 2: With Wholesaler
Since we know that COGS is $100, your unit contribution is:

$135 - $100 = $35 unit contribution (manufacturer)

And your contribution margin is ($35 ÷ $135) = 25.9%

 Example 2: With Wholesaler
Retail price $200

RETAILER
25% UNIT
CONTRIBUTION
retail
margin $50 Wholesale price $150
Ex-factory price $135
10% WHOLESALER
UNIT
wholesale CONTRIBUTION
100% margin
$15 25.9% MANUFACTURER
of retail UNIT
RETAIL manufacturer CONTRIBUTION
PRICE price
margin $35
75% COST TO 100% of
of retail WHOLESALE
RETAILER
PRICE wholesale EX-FACTORY 100% of
price COST TO price ex-factory
90% of WHOLESALER PRICE
$150 wholesale COST TO
price
price $135 74.1% MANUFACTURER
of ex-factory
$100
price
End of Lecture
Break-Even Analysis
MKTG 5200
Break-Even Analysis
• Break-even analysis is a tool used by managers to determine
how many units of a product must be sold to cover the costs
incurred in generating that sales volume
• Typically, a firm will incur fixed costs when conducting the
advertising / promotional / launch campaign for a product,
and then recover those costs (and subsequently make a profit)
via the revenues earned on each unit sold
Let’s look at an example…
Example
QUESTION
Suppose you’re offering a new product for sale at $100 per unit.
Production costs are $26 per unit, the proposed advertising budget
is $600,000, and $50,000 has been set aside for a launch event.

How many items must be sold to break even?

Example
• STEP 1: Calculate the unit contribution

Unit contribution = Selling price – Variable costs

= $100 – $26
= $74
Example
• STEP 2: Calculate total fixed costs

Fixed Costs = Advertising + Other marketing costs

= $600,000 + $50,000
= $650,000
Example
• STEP 3: Calculate break-even volume

Number of units to break even = Fixed costs .

Unit Contribution

= $650,000 .
$74
= 8,784 units
Example
• To determine the total sales revenue required to to break even,
simply multiply break-even volume by selling price per unit:
8,784 units × $100 = $878,400
Break-Even for Incremental Spending
• Break-even analysis can also be used to evaluate the merits of
incurring incremental marketing expenditures
• For example, you may be considering whether to spend
$600,000 or $700,000 million on advertising
• Break-even analysis tells you that the additional $100,000 spent
must generate additional sales of 1,352 units
• The key question: Is it reasonable to expect 1,352 units of
incremental sales as a result of the additional $100,000
advertising expenditure?
‘Target Profit’ Break-Even Analysis
• Of course, marketing managers are typically interested in profits,
rather than breaking even
• Break-even analysis can be extended to include profit by adding
the desired profit to the total fixed costs:

Number of units to achieve profit target = Fixed costs + Desired Profit

. Unit Contribution
End of Lecture