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Fixed Costs, OtherThe fixed costs allocated to the new product (excluding the previouslyentered marketing mix variables: advertising, distribution, and sales promotion).
OUTPUT
Projected Long-run Market ShareCalculated based on the probabilities of trial, purchase,
and repurchase, this is the ultimately occurring market share that can be expected for the new
product. It is used to compute projected company sales and variable contribution margin from
the industry projection and per-unit contribution. The impact of what-if changes in the
marketing mix can be diagnosed against this variable.
Total Profit ContributionThis is the result of translating market share into dollars after
accounting for fixed costs.
ASSESSOR Exercise
Good Times Snack Company is a manufacturer of snack cakes. The company distributes only
over a three-state region in the Northeast but its cakes are extremely popular in that area,
regularly maintaining market shares almost as large as the big nationwide producers. Good
Times is planning to launch a new chocolate and cream snack cake, and is considering an
investment of about $1.8 million on advertising, distribution, and sales promotions (such as free
samples), allocated as follows: advertising, $800,000; distribution, $600,000; sales promotion,
$400,000. Your task is to determine whether an increase in any or all of these budgets would be
advisable in terms of increasing total company profit contribution.
Good Times management has provided you with estimates of certain parameters to be used in
running the ASSESSOR model. They believe the long-run trial probability of this product is
90%, and the probability that a customer who receives a free sample will actually purchase one is
80%. Based on studies of similar, previously-launched products, management believes the
probability a customer will switch to the new brand is 70% and the probability of a repeat
purchase is 60%. Key parameters used in developing the response function are as follow:
Advertising response: Reference budget $800,000; minimum share 5%; maximum share 90%;
exponent 1.3.
Distribution response: Reference budget $600,000; minimum share 0%; maximum share 90%;
exponent 0.8.
Sales promotion response: Reference budget $400,000; minimum share 0%; maximum share
80%; exponent 1.7.
Contribution per unit (selling price minus variable costs per unit) is $0.75. Industry sales
projection in the area is 25 million units per year. Direct fixed costs other than those for
advertising, distribution, and sales promotion total $2.5 million.
(a) What are the projected ultimate penetration (trial) and repeat rates? Interpret these figures.
What is the projected long-run market share? What are projected company sales and profit
contributions?
(b) Suppose contribution per unit were cut by a modest amount due to increases in ingredients
costs (you can try a few levels here). Would you say that total profit contribution is affected
a great deal by changes in unit contribution (that is, is total contribution very sensitive to
changes in unit contribution)?
(c) Return contribution per unit to the original level of $0.75. Vary the marketing expenditures,
one by one, to observe the effect on company sales and profit contribution. Can you
recommend a set of expenditures (advertising, distribution, and sales promotion) that yield a
$1,300,000 profit contribution and provide a long-run market share of at least 28%?