1. It is estimated that re-branding the professional range of Black & Decker power-tools as "DeWalt" would require a $3 million increase in advertising budget. Given that the average margin on power tools is 10%, what is the additional revenue required to break-even on this budget increase?
2.1. A Black & Decker board member is outraged about the brand name change. Instead, he proposes that the company should increase its competitiveness by posting a 5% price cut. Assuming an average initial margin of 10%, what would be the required sales volume increase (in percent) in order to break even on such a price cut?
2.2 Another member of the board is also outraged about the name change. Instead she thinks Black & Decker should sell at a premium and argues for a price increase of 5%. Assuming the same 10% margin, what decrease in sales volume (in percent) would result in a breakeven on the price change?
3. Continuing with Black & Decker and assuming the same 10% margin on retail sales of power tools, consider that (1) an average professional craftsman customer pays about $3,000 per year on new power-tools, and (2) Black & Decker has a customer churn rate of 20% per year. If we ignore time discounting, what is the maximum cost Black & Decker can spend in order to attract a new customer to its brand (so that the customer lifetime value is not negative)?
4. Now assume (1) a 10% margin for Black & Decker on retail sales, (2) $3,000 per year of average revenue per professional customer, (3) a churn rate of 25% per year, (4) 8% yearly interest rate used when discounting future amounts of money, (5) a gift of $100 for the purpose of customer acquisition.
4.1. What is the customer lifetime value of a typical Black & Decker professional customer?
4.2. What retention rate would we need to double this customer lifetime value, leaving everything else unchanged?
5. Crayola is planning to launch a new 12-color marker set that is safer, better for the environment, and with a touch of frankincense fragrance to elevate children's spirits.
The company wants to sell 3,000,000 sets in the first year. Based on the projected advertising and distribution efforts, the market research group is forecasting an awareness rate of 90% and that the distribution coverage (ACV%) will be 60% for the new markers set.
Of those customers who try the product (by purchasing one marker set), 50% will be repeat purchasers within the first year, buying an average of 2 more sets in 1 repeat occasion. There are 75 million children in the target market.
The fixed costs incurred by Crayola to invent and manufacture this new marker set was $2,000,000 (including exorbitant pay to spiritual scents experts which caused a great deal of controversy), and the variable cost is $2 per marker set.
5.1 What trial rate is required to achieve the company's goal?
5.2 Based on the market research results, what is the number of first time triers expected in the target market if the trial rate reaches 5%?
5.3. If Crayola is able to sell the markers sets at $4, what is the break-even volume?
5.4. Assuming a trial rate of 5% what is the total contribution margin earned from trial sales if the marker sets are sold for $4 each?
5.5. In order to achieve the original sales goal of 3,000,000 sets, what ACV% will be required if Crayola instead achieves a 30% repeat purchase rate and a trial rate of 3%?
6. Scrubbing Bubbles (a brand owned by S.C Johnson) has historically used regression analyses to forecast sales of new products in the US. They have found that sales volume ( in millions of dollars) is a function of product effectiveness (PE) on a scale of 0 - 100 as rated by a test panel, advertising expenditures (AD) in millions of dollars, number of stores (supermarkets and drug stores) in which the product is available nationally in thousands of stores (S). Their regression analyses conducted based on previous product launches has produced the following regression equation (R2 = .85, regression coefficients are unstandardized):
Sales ($mm) = 10 + .62*PE + 1.23*AD ($mm) + 1.34*S (000s)
If Scrubbing Bubbles launches a new tile cleaner that was rated a 94 on product effectiveness, gets the product into 12,000 stores and supports it with an $8M ad campaign, how much sales revenue will they expect?
What is the expected impact on sales of selling the product in one additional store?
CVS ends up deciding not to stock their new product in their stores which means that the product will only be sold in approximately 11,000 stores nationwide. How many advertising dollars would Scrubbing Bubbles need to spend to maintain the initial forecasted level of sales?
Imagine Scrubbing Bubbles was deciding between two new product concepts that are ready for commercialization. The first product has been rated an 87 by the consumer panel and can be stocked in 9,000 stores. The second was rated a 91 by the consumer panel but can only be stocked in approximately 7,500 stores. The advertising budget has not been finalized and approved yet but would be the same for either product launch. Which product concept would be forecasted as the bigger seller?
7. A new transportation system is introduced in the US in 2050 connecting all the major urban cities. For example, it would transport you from Washington DC to Los Angeles in 3 hours. It is believed that (in 2050) the 400 million population in US urban centers constitutes the total potential market for this invention.
7.1. By the end of the first year, there are 15 million first-time adopters. What is the coefficient of innovation (p), assuming that the process of diffusion follows the pattern of a Bass model?
7.2. In the second year, ridership in the new transportation system grew by 100% to a total of 30 million riders across both years (15M new adopters in year 2). What is the coefficient of imitation (q)?
7.3. Using the p and q coefficients calculated in 7.1 and 7.2, in which year will the cumulative number of adopters cross a quarter of the potential market (i.e. 100 million riders; feel free to use excel to solve this problem)? Attach a copy of your excel calculations.
7.4. Instead of the estimates found for p and q above (7.1 and 7.2 do not apply here), suppose we now assume that the diffusion pattern for this transportation system will be similar to that of the average durable goods innovation, with p=.003 and q=.360, what will be the number of new adopters in the first year?
7.5. What will be the number of new adopters in the second year (under the assumptions of question 7.4)?