PMBA BADM 7100

Case 5: Blue
Mountain Cofee
Steven Berniard, Robert Boyd, Ni!olas
Cla"!orn, #errell Clayton, S!annon Core!a$,
Cole %arner, Ryan Res&eber
Case 5: Blue Mountain Coffee
Question 1. State precisely what you think the objectives of Blue
Mountains 199 a!vertisin" plan shoul! have been. #ere these $an
%assles objectives& 'ucin!a (o"ues& ). *i"ures&
)n 199 Blue Mountains +!vertisin" shoul! have been to increase ,arket share
while spen!in" less on a!vertisin" than their increase! profits as a result of the
a!vertisin" ca,pai"n. %he e-pectation shoul!ve been to anticipate a lon".ter, increase
in ,arket share by the en! of the fiscal year that will recoup the fun!s spent initially.
+!!itionally/ the objectives for 199 shoul! be to use their a!vertisin" ca,pai"n
to increase the bran! na,e of blue ,ountain coffee an! establish an! co,,unicate a
feelin" a,on" consu,ers that blue ,ountain coffee is a superior coffee to other coffee
pro!ucts/ an! to alleviate so,e of the pressure place! on their pro,otional pro"ra,
which ,i"ht actually be !oin" !a,a"e to the thou"ht process that Blue Mountain coffee
is a pre,iu, pro!uct.
)n 199/ $an %assle sou"ht to reverse a lon".ter, !ownwar! tren! in ,arket share
for Blue Mountain Coffee. 0is objectives tar"ete! an increase in ,arket share an! hope!
for an increase that woul! justify the increase! spen!in" by the en! of the 1uarter.
'ucin!a (o"ues 199 objectives were to i,prove ,arket share an! profitability.
%he "oals attache! to the ,arket share increase lar"ely centere! on ,aintainin"
relationships with !istributors an! increasin" profits. #hile increasin" profitability/ as a
whole was i,portant/ (o"ue ha! a particular "oal of "eneratin" e-tra cash flow to ai! the
co,panys cash flow issues. +t the en! of the perio!/ (o"ue wante! to help "uarantee
future success for the co,pany an! !ivi!en!s for the sharehol!ers.
%he objectives of ). *i"ure/ the controller/ lar"ely centere! on recoupin" the fun!s
spent on a!vertisin" by Blue Mountain Coffee. +s evi!ence! by his ,e,o/ he e-pects
the return on invest,ent to be !efine! beforehan! an! to be ,et in the short ter,.
2 of 12
Case 5: Blue Mountain Coffee
Question 2. 3valuate the results obtaine! fro, the 199 4*56 a!vertisin"
fun!s. #hat !o you think the results woul! have been if the 27 percent
increase ha! been continue! for the entire year&
+ssu,in" Blue Mountain Coffee ,arket share is at stea!y state with 5.8 ,arket
share/ 92 M :1tr a!vertisin" bu!"et/ 1.7 Copy 3ffectiveness/ 1.7 Me!ia 3fficiency then
there are only 5 user input variables that can affect the outco,e. +ll of these inputs are
base! on the i,perfect infor,ation of the user an! so all are subject to inaccuracies.
+nother li,itation of the ,o!el we have to work with is that it is set up in perio!s
of 1 1uarter. ;ecisions were ,a!e ,i!.1uarter that affecte! the a!vertisin" bu!"et an!
,e!ia efficiency variables. +ssu,in" an avera"e a,ount for these variables ,ay or ,ay
not be accurate.
<sin" the values $an %assle input to the ,o!el as shown on pa"e =:1> in the case
!ocu,ent/ we see that what actually happene! !oes not ,atch up with the ,o!el. %he
,arket share per 1uarter for ?uarters 2/ @ an! are 5.5/ 5. an! 5. respectively. )n
reality/ the ,arket share was 5.> for ?uarter 2/ 5.> for ?uarter @ an! 5.5 for ?uarter .
%he actual ,arket share was hi"her than the ,o!el pre!icte! for each of the 1uarters.
So,ethin" !oesnt ,atch up. )t coul! be $an %assles interpretation of the
,arket/ in other wor!s/ the values he input for the ,arket shares at Saturation
+!vertisin"/ A278 +!vertisin" Bu!"et an! Bero +!vertisin". )t coul! also be that the
Copy 3ffectiveness or Me!ia 3fficiency nu,bers are off. )t see,s likely that any one of
the, coul! be off !ue to the nature of how they are !eter,ine!.
)f the ,o!el is broken out into perio!s of one ,onth/ which ,ay be ,ore accurate
!ue to so,e chan"es occurrin" ,i!.1uarter/ the ,o!el actually ,atches up rather well
usin" $an %assles inputs. %his coul! ,ean that a perio! of one 1uarter is not
representative enou"h of real worl! circu,stances.
)ts these !ecisions that the user of the ,o!el ,ust justify. <sin" a perio! of one
1uarter an! $an %assles ,arket share inputs an! esti,ates of Copy 3ffectiveness an!
Me!ia 3fficiency/ Blue Mountain Coffee woul! have a 5.=58 ,arket share if the 278
increase in a!vertisin" bu!"et were continue! throu"h the rest of the year. )ts likely
"iven that this ,o!el pre!icte! lower nu,bers than what reality showe! that ,arket
share woul! be hi"her than 5.=58.
@ of 12
Case 5: Blue Mountain Coffee
<sin" a perio! of one ,onth an! $an %assles ,arket share inputs an! esti,ates
of Copy 3ffectiveness an! Me!ia 3fficiency/ Blue Mountain Coffee woul! have a >.728
,arket share for the ,onth of Cune/ or an avera"e of 5.9>8 for ?uarter if the 278
increase in a!vertisin" bu!"et were continue! throu"h the rest of the year.
Dur "roup is hesitant to chan"e the values input by $an %assle since he shoul!
have a better un!erstan!in" of the ,arket than lay,en such as ourselves. Eiven that with
his inputs the ,onthly ,o!el ,atche! well with actual !ata fro, *5 199/ we are ,ore
incline! to believe the pre!iction of 5.9>8 avera"e for ?uarter by the ,onthly ,o!el.
of 12
Case 5: Blue Mountain Coffee
Question 3. #hat shoul! $an %assle propose as an a!vertisin" bu!"et for
1995& 0ow shoul! he justify this bu!"et to top ,ana"e,ent&
Base! on ). *i"ures nu,bers/ Blue Mountain lost 9277/777 in the 2
n!
1uarter of
199 by increasin" their a!vertisin" bu!"et by 278. 5et/ they ,aintaine! their increase
in ,arket share throu"h the ne-t 1uarter while cuttin" a!vertisin" spen!in" by 9@77/777.
%hus for the year/ the a!vertisin" ca,pai"n "enerate! 9177/777 net. <sin" this
infor,ation/ he ,ay be able to justify an increase in spen!in".
Base! on the perfor,ance !urin" 2
n!
1uarter 199/ an! the reaction of ). *i"ure/ it
,ay be safer to increase spen!in" in s,aller incre,ents. $an %assle shoul! also seek to
spen! ,ore in 1995 than in 199/ but re!uce the 1uarterly increase fro, 278 to 1=.58 in
or!er to avoi! the risks taken in 199. %he chart below uses the +;B<;E ,o!el
assu,in" constant Copy an! Me!ia 3ffectiveness of 1.7 4any assu,ptions "reater than 1
coul! lea! to very poor an! shows increasin" spen!in" by 9277/777 in each of the first
two 1uarters/ an! then ,aintains that level of spen!in". )n *5 1995/ Blue Mountain
woul! see a positive FD) by en! of 2
n!
1uarter.
Period
Increase
in Share
Change in
Revenue
Increase in
Spending
Profit
Q1 0.16% 0.16 M$ 0.20 M$ -0.04 M$
Q2 0.28% 0.28 M$ 0.20 M$ 0.08 M$
Q3 0.24% 0.24 M$ 0.00 M$ 0.24 M$
Q4 0.21% 0.21 M$ 0.00 M$ 0.21 M$
1995 0.89% 2.15 M 1.!0 M 0."5 M
5 of 12
Case 5: Blue Mountain Coffee
%hou"h increasin" spen!in" unevenly !oes not have the sa,e effect as a
consistent spen!in" level. 0ol!in" a consistent spen!in" level can ,ake for better
overall profit even thou"h the initial losses to cash flow ,ay be a proble,. %he less risky
,ove is to increase slowly or even to increase base! on returns. %he i,portant thin" to
note is that increases in a!vertisin" spen!in" !urin" the first 1uarter will lea! to a
ne"ative return in the 1
st
1uarter that will ,ost likely beco,e a positive return by the 2
n!

1uarter.
Period
Increase
in Share
Change in
Revenue
Increase in
Spending
Profit
Q1 0.27% 0.26 M$ 0.35 M$ -0.09 M$
Q2 0.23% 0.23 M$ 0.00 M$ 0.23 M$
Q3 0.20% 0.20 M$ 0.00 M$ 0.20 M$
Q4 0.18% 0.17 M$ 0.00 M$ 0.17 M$
1995 0.88% 2.#2 M 1.!0 M 0.92 M
Question 4. 0ow shoul! $an %assle !eal with the issues of seasonality
an! copy 1uality&
Copy effectiveness an! seasonality cant be pre!icte! in a ,o!el/ an! usin" the
+;B<;E ,o!el !oesnt even inclu!e the effects of seasonality.
*irstly/ a!!ressin" copy 1uality an! ,e!ia effectiveness with the +;B<;E
,o!el in!icates that the !ifference between a 1.77 an! .99 copy 1uality is 97/777 worth
of a!vertisin" bu!"et in the Blue Mountain case usin" $an %assles +;B<;E
calibration. )f the copy effectiveness is unanticipate! then its a 9177/777 !ecrease in
sales accor!in" to the +;B<;E ,o!el. %hat bein" sai!/ an increase of 97/777 in
bu!"et per percenta"e !ecrease in copy 1uality still loses 97/777/ so its very !ifficult to
,ake up for a lack of 1uality by just throwin" ,oney at the proble,. +s they have a
business relationship with +ar!vark +!vertisin"/ there ,ay be a possibility to tie copy
1uality into the contract. +s an a!vertisin" co,pany/ +ar!vark is responsible for the
1uality of their copy an! shoul! be able to offer cre!its to their clients to help the,
,aintain their relationships throu"h swin"s in 1uality.
+s $an %assle plans out the bu!"et/ seasonality is !efinitely a factor. Sales an!
sales "rowth ,ay not be static throu"hout a year an! the spen!in" !oesnt have to be
either. But then the 1uestion ,ust be aske!/ shoul! a!vertisin" tren! with the seasons/ or
re,ain at a constant rate throu"hout the entire year to keep Blue Mountain coffee in the
> of 12
Case 5: Blue Mountain Coffee
,in!s of consu,ers. +s $an %assle works with his tea, at Blue Mountain Coffee it ,ay
be i,portant for bu!"etary reasons to spen! seasonally. +!!itionally/ accor!in" to the
+;B<;E ,o!el/ ,arket share will be ne"atively affecte! by even a 1uarterly !ecrease
in spen!in" over the course of a year. $an %assle shoul! create a pay,ent plan with
+ar!vark to allow Blue Mountain Coffee to spen! seasonally/ but for +ar!vark to keep
constant a!vertisin" levels. %hat way/ Blue Mountain Coffee is constantly in front of
consu,ers/ an! the ). *i"ures an! 'ucin!a (o"ues watchin" the botto, line can
continue to see re"ular profit ,ar"ins.
Question 5. Co,,ent on the uses an! li,itations of the +;B<;E
,o!el as a !ecision ai! for this case an!/ ,ore "enerally/ as an
a!vertisin" bu!"etin" !ecision ai!.
%he +;B<;E ,o!el is only as "oo! as the infor,ation its "iven. %o reiterate
fro, our response to ?uestion 2/ all inputs to the ,o!el are base! on the i,perfect
infor,ation of the user an! so all are subject to inaccuracies. + co,pany ,ust rely on
outsi!e ven!ors for the Copy 3ffectiveness an! Me!ia 3fficiency values an! so cannot be
certain to their accuracy. %he user ,ust research or even "o off hunches to co,e up with
values for the ,arket share at the en! of the perio! "iven !ifferin" levels of a!vertisin".
3ach variable shapes the ,arket share response curve to a!vertisin" an! so a ,istake in
any coul! affect your !ecision.,akin" for the worse.
+nother li,itation of the ,o!el we have to work with is that it is set up in perio!s
of 1 1uarter. ;ecisions were ,a!e ,i!.1uarter that affecte! the a!vertisin" bu!"et an!
,e!ia efficiency variables. +ssu,in" an avera"e a,ount for these variables ,ay or ,ay
not be accurate. %he +;B<;E ,o!el also assu,es that the ,a-i,u, a,ount that
a!vertisin" can affect the ,arket share is the sa,e no ,atter what the current ,arket
share is. %his ,ay or ,ay not be accurate. +ll in all/ the results of the +;B<;E ,o!el
shoul! be taken with a "rain of salt. )t is better to look at the tren!s it establishes.
+;B<;E can be use! to better un!erstan! how ,arketin" a"ents view what they
can control in the ,arket. %o start/ there is a ,ini,u, ,arket share Blue Mountain
woul! have if they never a!vertise!. Since a!vertisin" is the tool ,arketin" a"ents use/
they take this nu,ber as a "iven since they cant affect it. %akin" a look at the shape of
the ,arket share response curve to a!vertisin" we know that ti,e plays an i,portant
= of 12
Case 5: Blue Mountain Coffee
factor in chan"in" ,arket share. %he slope of the response curve is steepest closest to the
)nitial ,arket Share. +n increase or !ecrease in the a!vertisin" bu!"et will have the
hi"hest i,pact in this re"ion. )n other wor!s/ a 278 increase for 5 ,onths will have a
lar"er i,pact than a 1778 increase for 1 ,onth. Copy 3ffectiveness an! Me!ia
3fficiency "reatly affect the response curve. Blue Mountain Coffee believe! spot
television was the best Me!ia 3fficiency for their pro!uct. )f Copy 3ffectiveness ha!
been closer to 1 instea! of closer to 7.95/ ,arket share ,ay have even re,aine! at 5.>8
for ,uch lon"er even after the re!uction in a!vertisin" bu!"et to 92M:1tr.
#hen it co,es to bu!"etin"/ in "eneral you "et the ,ost ban" for your buck by
increasin" the bu!"et by s,all a,ounts over ti,e. %he shape of the response curve
shows this. Eettin" the ,ost out of your !ollar ,ay not be the bi""est factor in
!eter,inin" how you want to procee!. )n Blue Mountain Coffees case/ increasin" their
,arket share 1uickly was a concern so as to not lose !istributors.
Blue Mountain Coffee also ha! a cash flow concern. +;B<;E allows you to
esti,ate ,arket share over ti,e. %his also allows you to esti,ate revenue over ti,e.
5ou will notice that the increase! ,oney spent on a!vertisin" ,ay not i,,e!iately
e1uate to an e1ual increase in revenue. 5ou will also notice that/ over ti,e/ ,aintainin"
that sa,e increase be"ins to brin" in ,ore revenue. %his occurs until you reach a point
of stea!y state in ,arket share/ where the a!vertisin" bu!"et now only offsets the loss of
,arket share !ue to ti,e.
Bein" able to pre!ict this is co,pletely base! on the accuracy of the ,o!el. +s
weve sai! before/ the results of the +;B<;E ,o!el shoul! be taken with a "rain of salt.
)t is better to look at the tren!s it establishes.
G of 12
Case 5: Blue Mountain Coffee
9 of 12
Case 5: Blue Mountain Coffee
+ppen!i- + H +;B<;E Monthly Calibration an! Eraphs
Forecasts

Period $dvertising
%uarter $dv.
&udget
Cop'
(ffectiveness
Media
(fficienc'
$verage Share
per %uarter
Share

Co))ents
Initial 5.40%
July 0.67 M$ 1.00 1.00
5.4%
5.40%
Aug 0.67 M$ 1.00 1.00 5.40%
Sep 0.67 M$ 2.00 M 1.00 1.00 5.40%
!t 0.80 M$ 0.95 1.00
5.6%
5.48% pe"ati#n $"ea%#ut $egin& ' (#py )**e!ti+ene&& ,#-n
.#+ 0.80 M$ 0.95 1.00 5.56%
,e! 0.80 M$ 2.!0 M 0.95 1.00 5.64%
Jan 0.80 M$ 0.95 1.00
5.6%
5.71%
/e0 0.70 M$ 0.95 0.95 5.66% A1+e"ti&ing $u1get (ut Mi1-/e0"ua"y ' Me1ia )**i!ien!y ,#-n
Ma" 0.60 M$ 2.10 M 0.95 0.95 5.52%
Ap" 0.67 M$ 1.00 1.00
5.5%
5.51% $u1get2 (#py )**e!ti+ene&& an1 Me1ia )**i!ien!y "etu"n t# &ta"ting +alue&
May 0.67 M$ 1.00 1.00 5.51%
June 0.67 M$ 2.00 M 1.00 1.00 5.50%
17 of 12
Case 5: Blue Mountain Coffee
AdBudg Calibration

Specif' the initia* share at the +eginning of the period, and the share at the end of the period for different *eve*s of advertising spending.
If 'ou change ca*i+ration va*ues, 'ou -i** need to reca*i+rate the curve .para)eters c and d/. P*ease refer to the tutoria*.



Share


5.68% Ma0i)u) Share at (nd











5.50% (nd Share -ith 120% $dvertising






Initia* Mar2et Share 5.40%

5.40% Initia* Mar2et Share




Ca*i+ration (rrors 2!


Para)eter c 4.74

5.13% Mini)u) Share at (nd
Para)eter d 0.16


Persistence 0.95


Initia* $dvertising &udget 0.67 M$

0.00% 3ong4Run Share .-ithout spending/
5i)e
3#ne pe"i#14
AdBudg Response Curve

11 of 12
5e"# a1+e"ti&ing
Maintenan!e a1+e"ti&ing
620%
a1+e"ti&ing
Satu"ati#n a1+e"ti&ing
Case 5: Blue Mountain Coffee
Sho-s share at the end of the period, for different *eve*s of advertising spending.


$dvertising
&udget
Share at
(nd of
Period

.# a1+e"ti&ing 5.1%

0.13 M$ 5.1%

0.27 M$ 5.1%

0.40 M$ 5.2%
0.53 M$ 5.3%
0.67 M$ 5.!%
0.80 M$ 5.5%
0.93 M$ 5.6%
1.07 M$ 5.6%
1.20 M$ 5.7%
1.33 M$ 5.7%
Satu"ati#n 5."%
12 of 12