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9/15/15 Marke.ng Profit Introduc.on to the Defini.on of Marke.ng Profit Ted Mitchell In order to calculate the • Various aspects of marke.ng profit such as the amount of marke.ng profit, Z, that will be earned from a marke.ng investment, you will be given the values of two constants, ‘a’ and ‘b’ that have been es.mated by the firm’s market research With the values of ‘a’ and ‘b’ you will also calculate • 3) The Average Rate at which profit is being returned on a marketing investment, I Average Rate of Return, AROR = a – bI • 4) The Marginal Rate at which profit is being returned on a marketing investment, I Marginal Rate of Return, MROR = a – 2(bI) • Is the financial gain, Z, that is returned from a marketing investment, I, • The amount of financial gain, Z, that is generated from a marketing investment is determined by the size of the investment, I, and the rate at which profit is returned on that investment, MROI • Marketing Profit, Z = MROI x Investment, I With the values of the constants • ‘a’ and ‘b’ • You will be able to calculate • 1) the amount of profit, Z, that is being earned from a particular size of investment, I, as Marketing Profit, Z = aI – bI2 • 2) the optimal size of the marketing investment, I*, needed to maximize profits Optimal Investment, I* = a/2b There are many func.ons that describe • The nature of the relationship between the amount of financial gain, Z, to be expected from a marketing investment, I. • The traditional one is Marketing Profit Function, Z = (P-c)(kIa) – I • Where accountants provided estimates of the constants, ‘P’ and ‘c’ • Market research provided estimates of the values for ‘k’ and ‘a’ 1 9/15/15 The simplest func.on to describe • The nature of the relationship between the amount of financial gain, Z, to be expected from a marketing investment, I, is • The quadratic equation Marketing Profit, Z = aI – bI2 • Where market research provided estimates of the values for ‘a’ and ‘b’ The quadratic equation which describes the relationship between the financial gain, Z, and a marketing Investment, I Marketing Profit, Z Z = aI –bI2 0, 0 Example #1 • Market research has provided the estimates for the constants in the marketing profit function Marketing Profit, Z = aI – bI2 as ‘a’ = 0.61 and ‘b’ = 0.0002 • Your firm normally makes an investment in marketing of $800 each week. • How much profit do they normally get returned from the $800 investment? • Marketing Profit, Z = 0.61(I) – 0.0002(I2) • Marketing Profit, Z = 0.61(800) – 0.0002(8002) • Marketing Profit, Z = $488 – $128= $360 Example #3 • Market research has provided the estimates for the constants in the marketing profit function Marketing Profit, Z = aI – bI2 as ‘a’ = 0.61 and ‘b’ = 0.0002 • You have convince the senior management to increase the size of the weekly investment to $1,525 • How much profit should they expect to get from the investment? • Marketing Profit, Z = 0.61(I) – 0.0002(I2) • Marketing Profit, Z = 0.61(1,525) – 0.0002(1,5252) • Marketing Profit, Z = $930 – $465 = $465 • A gain of $105 in profit each week from the previous $360 Amount of Seller’s Investment, I Example #2 • Market research has provided the estimates for the constants in the marketing profit function Marketing Profit, Z = aI – bI2 as ‘a’ = 0.61 and ‘b’ = 0.0002 • You learned that the optimal level of marketing investment, I*, is calculated as Optimal Investment, I* = a /2b • What is the optimal level of marketing investment for the firm? Optimal Investment, I* = 0.61/2(0.0002) = $1,525 Over the coming weeks • You will learn to derive and es.mate the various func.ons associated with marke.ng profit, their applica.ons and the caveats in their use 2