Download Project 1: Marketing

Project 1: Marketing
An Introduction
Goal
Your goal is three-fold:
To find the price of a particular product
that will maximize profits.
 Determine the number of units that will
be sold at the optimal price.
 Determine the maximum profit that is
expected from the sales of your
particular product.

Definitions
Market: A market is people or
organizations with purchasing power
and willingness and authority to buy
 Product: Good or service bought
and sold

Marketing/Marketing
Research

Product differentiation is very
important in marketing

“What makes this any different from
product X?”
Market can be segmented by age,
culture, and interest.
 http://www.ama.org

Marketing Mix -Components
3.
Product Planning
Distribution
Promotion – Advertisements
4.
Pricing
1.
2.

This is what we are interested in
Competition

Monopoly: Amount of product
depends on price set.
There are few perfect (pure)
monopolies – usually occur in
government regulated services such as
gas and electric
 Sometimes the above examples are
called natural monopolies

Competition

Perfect Competitor: Amount sold
does not affect the good’s price

Example (from text): Small farmer
planting wheat or soybeans. Shifting to
either affects neither price at all.
Where do we fit?
Our company has temporary
monopoly power for our product.
 This means that we have a new
product that does not have an exact
competitor

The functions

To achieve the goal of the project, we will
need to look at different mathematical
functions


Recall: What is the definition of a function?
We have 4 in particular that we will need
to study

Demand, Cost, Revenue, and Profit
• Note the units on each of the axes for all of the
functions

Note: We are assuming that we are
looking at a monopolistic situation
Demand Function, D(q)
Gives the unit price, D(q), at which
a company can charge in relation to
the total quantity (q) of the product
that it sells at that price
 Demand curve, which is the graph of
D(q), is generally downward sloping


Why?
Demand Curve
Recall: What does it mean for a
curve to be downward sloping?
 As quantity goes down, what
happens to price?
 As quantity goes up, what happens
to price?
 What should our curve look like?

Demand Curve

We can look at the curve and see at what unit
price we can sell a specified number of items



When the unit price is high, the total quantity we sell is
low
When the unit price is low, the total quantity we sell is
high
For our purposes we are going to assume that the
maximum quantity that can be sold is where the curve
intersects the q-axis.
Demand Curve, D(q)
Unit price, D(q)
(in $)
Total quantity (q)
Perfect Competitor vs.
Monopoly
For a perfect competitor, if you plot
price against quantity sold you get a
constant function. Why?
 What will the two curves look like
plotted against each other?

Demand Curve, D(q)
Monopolist
Unit price, D(q)
(in $)
Perfect Competitor
Quantity (q)
Revenue Function, R(q)

To determine the total revenue you will
receive from selling a product, you
multiply the total number of goods sold
by the unit price of the goods




R(q)=D(q)*q
Now, if you sell a small amount for a
high price, you will have a small revenue
If you sell a large amount for a low price,
you will have a small revenue
What does the curve look like?
Revenue Curve


We can look at the total revenue that is
produced when a specified number of
items is sold
Our graph, starts out low, gets high, and
then goes low again
Revenue Curve, R(q)
Total
Revenue
(in $)
Quantity (q)
Cost Function, C(q)
When you are making goods, you
will incur costs
 There are two types:

Fixed Costs: Incurred even if units are
not produced
 Variable Costs: Unit-based production

• Examples: labor, lighting, etc.

What does the curve look like?
Cost Curve

We can look at the total costs that
are incurred when a particular
number of goods are produced

The more goods that are produced, the
higher the total cost
Cost Curve, C(q)
Total cost
(in $)
Quantity (q)
Profit Function, P(q)

When does a company make a profit?


Thus, the profit function is total revenue
minus total cost or P(q) = R(q) – C(q).



When the revenue exceeds the costs
When the difference is positive, the company
has made a profit
When the difference is negative, the company
has lost money
What does the curve look like?
Profit Curve

When a small number of units are produced, the
total cost will be more than the total revenue


As the number of units produced is increased,
the total cost starts to reach the total revenue


Hence, you will have a negative difference
It eventually reaches it (break-even point) and then
exceeds it, reaching a maximum point
After the maximum point is reached it can only
decrease

This means that if you start making more and more
units, your costs exceed your revenue again – hence a
negative difference
Profit Curve

How does this translate to a graph?
Profit Curve, P(q)
Total profit
(in $)
Quantity (q)
Class Project: Save-it-All!

Save-it-All! developed and patented a
new type of computer drive, SXL


Features reliability, compact size, and the
ability to store 500 MB of information
Under the conditions of the patent, Saveit-All! has the exclusive right to produce
and market the new technology during
the next three years, giving them
temporary monopolistic power*.
*
This will be an assumption for our project
Questions to Answer
1.
2.
3.
How should they price SXL such
that it will produce a maximum
profit during the coming year?
How many drives can they expect
to sell?
How much profit might they realize
from sales?
Research

Save-it-All!’s marketing department did
research on potential buyers



Estimates that there are 120 million potential
customers in the national market during the
coming year
Studied 6 test markets to determine the
fraction of the potential buyers who would
actually buy SXL at various price levels
Assumption: From past experience, they
will assume that SXL will have a quadratic
demand function
Information


In Marketing Data.xls, you have the
results from the test markets
You also know the costs of production


Fixed overhead costs of $21,600,000 during
coming year
Variable costs:
• First 500,000 drives -- $115 per drive
• Next 600,000 drives -- $100 per drive
• Rest of the drives -- $90 per drive
Pricing & Production

Using the information that is given, Saveit-All! wants to analyze the pricing and
production of the product, SXL



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They want to know a price in order for them
to achieve maximum profit
They want to know how many they will sell at
the optimal price
They want to know the maximum profit
expected
They want to know how sensitive the profit is
to changes in optimal quantity
They want to know what the consumer
surplus will be if the profit is maximized
Advertising and Capital

Additionally, Save-it-All! wants to know
the following:




What profit can they expect if the unit price of
the drive is $154.49?
How much should they pay for advertising if
the campaign increases demand for the drives
by 10% at all price levels?
How would the 10% increase in demand effect
the optimal price?
Would it be smart if they put $4m into
training and streamlining if it reduces the
variable production costs by 7% for the
coming year?
Your project

Go on-line and get the team data (in an
Excel file)



It contains test market data and production
cost estimates
Also, it has 9 questions that will need to be
answered at the end of the project
Assume that your company has
temporary monopolistic power for the
next 3 years
Preliminary Report

We will follow the course syllabus




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Everyone will go on the same day – order of
presentation will be random
Casual dress (no shorts, wrinkled shirts, low cut
or short shirts/skirts, flip-flops)
Each team will present for about 5-10 minutes
Bring a hard copy of your slides for me (handout
– 4 slides per page)
Be prepared for computer mishaps – have
backup or hard copy of slides
Preliminary Report


Introduce your company and your job
descriptions (your choice – be creative)
Come up with a unique product that
makes sense with the prices given

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Know basic terms and assumptions


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Remember product differentiation
Do not give list of definitions but work into
presentation
Present the data
Give an initial guess for the max profit

How?
Initial guess of max profit

For each test market, you should
calculate the following:
Number of units
 (National Market Size)
Market Size


This calculation gives you the number of units
in the potential national market
Multiply that number by the price for that
test market

This gives you the total revenue for each
particular test market
Initial guess of max profit

Now, you will need to know the total cost for
each test market




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You already know the fixed cost
Determine the variable cost for each amount of units
(you have 8) by using the variable cost information
given
Total cost = Fixed Cost + Variable Cost
Once you have the total cost for each test
market, subtract it from the total revenue from
that test market.
The greatest number will be your initial guess