2.2 shows an example of price, margin, and volume sensitivity analysis.
Table 2.2 Price and Margin Sensitivity for Solar Power Device.
| Sale Price | ||||
|---|---|---|---|---|
| 10% of 16.9 million | Price Sensitivity | TTL Revenue | Margin | Margin % |
| 1,960,000 | $ 50.00 | $ 98,000,000.00 | $ 24,500,000.00 | 25% |
| 1,960,000 | $ 45.00 | $ 88,200,000.00 | $ 19,404,000.00 | 22% |
| 1,960,000 | $ 40.00 | $ 78,400,000.00 | $ 15,680,000.00 | 20% |
| 1,960,000 | $ 35.00 | $ 68,600,000.00 | $ 11,662,000.00 | 17% |
Table by David Tennant
Discussion Case 2.2 (Refer to Table 2.2)
Your marketing team has performed the following analysis. The new product is a portable external battery device that can power your laptop computer for up to one full day. The unit can be charged using regular home electric current or using the sun (solar power) in about one hour. This device is smaller than competing devices (a little larger than a flash drive) and more versatile. The target market is college students, nationwide. The new product has been designed to be trendy, easy to use, and reasonably priced. There are approximately 19.6 million college students in the USA.
We will assume that 10% of the total number of students will purchase the product and that the average cost will be $50. Note that the margin (profit) declines per unit as price declines. Discussion questions for Case 2.1:
1 What are the advantages and disadvantages of this kind of modeling?
2 Why do you think margins per unit decline as the price drops?
3 Looking at the sale prices compared to margins (%), is $50 the best price? How do you know students will pay this amount for your product?
4 If 10% of students purchase your product the best-case scenario shows $98 million in revenue and profits of $24.5 million. The worst case is a profit margin of $11.662 million. In your opinion, are these numbers realistic?
5 Do you think you will have competitors prior to reaching the maturity stage?
6 Is this type of analysis realistic?
7 What role would the engineering or R&D group play in this evaluation?
8 The chart above shows gross revenues and net profits. There is no mention of the cost of the product. What are some of the costs that would be involved? Can you determine from the chart above the total “costs” of the product?
The 2nd P – Promotion
The promotion of your new product is critical. And this is where marketing generally gets confused with sales. Promotion deals with how to get your product and its message out to the public, ideally in front of your competitors. Promotion is where marketing creates value to customers, or even the perception of value.
In promoting your new product, you must think about segmentation. For example, in the previous discussion topic, it was determined that the initial target market was college students. This is an example of segmentation, which is one of marketing’s primary concerns. To whom will we direct our promotional efforts? Do you think the above device is attractive to more than college students (high school students, working professionals)?
Segmentation can assist tremendously with the promotion of your product. Segmentation allows one to identify groups of potential users of your product. Here are several ways we can segment the market (and there are probably more):
Geographic: different areas of the country may have different tastes. Heavy winter clothing in February is fine in the Northeastern United States, but buyers in Florida will not have much use for it, even in February. If a firm does business overseas, then preferences will be different in color, texture, and marketing. For example, certain colors in North America symbolize happiness or purity; those same colors in other countries have the opposite meaning. Doing business overseas means one must be familiar with that country’s culture, history, ethnicity, and general preferences.
Demographic – Your target market may be grouped by gender, age, income, race, and other factors. For example, Ferrari considers high (very high)-income people their primary target. Tickets to professional sports venues can appeal to a variety of income groups. Box seats, or those closest to the home plate, will charge a premium. Lower cost seats will be in the upper reaches of a stadium, further away from the home plate. Everyone is going to the ball game, but where you wish to sit determines your cost.
Behavioral – Some groups of people will consider a product in a variety of perspectives. Some of these approaches will be similar. For example, everyone uses milk, but people have different perspectives. Those who are diet conscious may prefer to buy 2% (less fat); children might prefer chocolate milk, those who are vegan will prefer soy milk. Your target market can be divided into multiple subsets.
The 3rd P – Pricing
In most companies, it is the marketing group that determines pricing and margins using spreadsheets, pro forma models, market analyses, and other techniques. In many instances, new product development costs may involve significant capital spending. Capital spending usually involves depreciating the costs over time and detailed models projecting costs and revenues over time are common.
Several techniques that can assist in determining price can also include competitor analysis and focus groups. If you know what your competitor’s charge for a similar product, you have a starting point. Can you charge less and still be profitable? Will your product be so innovative as to pass your competitor allowing you to charge more?
Customer focus groups can provide insight as to what people are willing to pay for your product. Generally, a focus group will consist of a dozen potential customers, selected by your company, that will be introduced to advance notice of your new product. A few typical questions for your firm to ask includes:
What features would you want in this product?
Does this product fit your budget at $ ______.?
What are your initial impressions?
Do you like this more than the product you use now?
If adding more features, what would you be willing to pay?
While a focus group can uncover many customers’ likes and dislikes, pricing is clearly one of those attributes. Further, a series of focus groups, usually four or five, will help present a clear picture of market acceptance, pricing, general appeal, etc. Similar to market segmentation, focus groups can also be segmented with different groups according to income, age, etc.
In product development, there will always be costs to recover.