Project 1: Marketing
An Introduction
Goal
Your goal is three-fold: To find the price of a particular product
that will maximize profits. Determine the number of units that will
be sold at the optimal price. Determine the maximum profit that is
expected from the sales of your particular product.
Definitions Market: A market is people or
organizations with purchasing power and willingness and authority to buy
Product: Good or service bought and sold
Marketing/Marketing Research
Product differentiation is very important in marketing “What makes this any different from
product X?” Market can be segmented by age,
culture, and interest. http://www.ama.org
Marketing Mix -- Components
1. Product Planning2. Distribution3. Promotion – Advertisements
4. Pricing This is what we are interested in
Competition Monopoly: Amount of product
depends on price set. There are few perfect (pure)
monopolies – usually occur in government regulated services such as gas and electric
Sometimes the above examples are called natural monopolies
Competition Perfect Competitor: Amount sold
does not affect the good’s price Example (from text): Small farmer
planting wheat or soybeans. Shifting to either affects neither price at all.
Where do we fit? Our company has temporary
monopoly power for our product. This means that we have a new
product that does not have an exact competitor
The functions To achieve the goal of the project, we will
need to look at different mathematical functions Recall: What is the definition of a function?
We have 4 in particular that we will need to study Demand, Cost, Revenue, and Profit
• Note the units on each of the axes for all of the functions
Note: We are assuming that we are looking at a monopolistic situation
Demand Function, D(q) Gives the unit price, D(q), at which a
company can charge in relation to the total quantity (q) of the product that it sells at that price
Demand curve, which is the graph of D(q), is generally downward sloping Why?
Demand Curve Recall: What does it mean for a
curve to be downward sloping? As quantity goes down, what
happens to price? As quantity goes up, what happens
to price? What should our curve look like?
Demand Curve We can look at the curve and see at what unit
price we can sell a specified number of items When the unit price is high, the total quantity we sell is
low When the unit price is low, the total quantity we sell is
high For our purposes we are going to assume that the
maximum quantity that can be sold is where the curve intersects the q-axis.
Unit price, D(q)
(in $)
Total quantity (q)
Demand Curve, D(q)
Perfect Competitor vs. Monopoly
For a perfect competitor, if you plot price against quantity sold you get a constant function. Why?
What will the two curves look like plotted against each other?
Unit price, D(q) (in $)
Perfect Competitor
Quantity (q)
MonopolistDemand Curve, D(q)
Revenue Function, R(q) To determine the total revenue you will
receive from selling a product, you multiply the total number of goods sold by the unit price of the goods R(q)=D(q)*q
Now, if you sell a small amount for a high price, you will have a small revenue
If you sell a large amount for a low price, you will have a small revenue
What does the curve look like?
Revenue Curve We can look at the total revenue that is
produced when a specified number of items is sold
Our graph, starts out low, gets high, and then goes low again
Quantity (q)
Total Revenue (in $)
Revenue Curve, R(q)
Cost Function, C(q) When you are making goods, you
will incur costs There are two types:
Fixed Costs: Incurred even if units are not produced
Variable Costs: Unit-based production• Examples: labor, lighting, etc.
What does the curve look like?
Cost Curve We can look at the total costs that
are incurred when a particular number of goods are produced The more goods that are produced, the
higher the total cost
Quantity (q)
Total cost (in $)
Cost Curve, C(q)
Profit Function, P(q) When does a company make a profit?
When the revenue exceeds the costs Thus, the profit function is total revenue
minus total cost or P(q) = R(q) – C(q). When the difference is positive, the company
has made a profit When the difference is negative, the company
has lost money What does the curve look like?
Profit Curve When a small number of units are produced, the
total cost will be more than the total revenue Hence, you will have a negative difference
As the number of units produced is increased, the total cost starts to reach the total revenue It eventually reaches it (break-even point) and then
exceeds it, reaching a maximum point After the maximum point is reached it can only
decrease This means that if you start making more and more
units, your costs exceed your revenue again – hence a negative difference
Profit Curve How does this translate to a graph?
Quantity (q)
Total profit (in $)
Profit Curve, P(q)
Class Project: Save-it-All! Save-it-All! developed and patented a new
type of computer drive, SXL Features reliability, compact size, and the ability
to store 500 MB of information Under the conditions of the patent, Save-it-
All! has the exclusive right to produce and market the new technology during the next three years, giving them temporary monopolistic power*.
* This will be an assumption for our project
Questions to Answer
1. How should they price SXL such that it will produce a maximum profit during the coming year?
2. How many drives can they expect to sell?
3. How much profit might they realize from sales?
Research Save-it-All!’s marketing department did
research on potential buyers Estimates that there are 120 million potential
customers in the national market during the coming year
Studied 6 test markets to determine the fraction of the potential buyers who would actually buy SXL at various price levels
Assumption: From past experience, they will assume that SXL will have a quadratic demand function
Information In Marketing Data.xls, you have the
results from the test markets You also know the costs of production
Fixed overhead costs of $21,600,000 during coming year
Variable costs:• First 500,000 drives -- $115 per drive• Next 600,000 drives -- $100 per drive• Rest of the drives -- $90 per drive
Pricing & Production Using the information that is given, Save-it-
All! wants to analyze the pricing and production of the product, SXL They want to know a price in order for them to
achieve maximum profit They want to know how many they will sell at the
optimal price They want to know the maximum profit expected They want to know how sensitive the profit is to
changes in optimal quantity They want to know what the consumer surplus will
be if the profit is maximized
Advertising and Capital Additionally, Save-it-All! wants to know the
following: What profit can they expect if the unit price of
the drive is $154.49? How much should they pay for advertising if the
campaign increases demand for the drives by 10% at all price levels?
How would the 10% increase in demand effect the optimal price?
Would it be smart if they put $4m into training and streamlining if it reduces the variable production costs by 7% for the coming year?
Your project Go on-line and get the team data (in an
Excel file) It contains test market data and production
cost estimates Also, it has 9 questions that will need to be
answered at the end of the project Assume that your company has
temporary monopolistic power for the next 3 years
Preliminary Report We will follow the course syllabus
Everyone will go on the same day – order of presentation will be random
Casual dress (no shorts, wrinkled shirts, low cut or short shirts/skirts, flip-flops)
Each team will present for about 5-10 minutes Bring a hard copy of your slides for me (handout
– 4 slides per page) Be prepared for computer mishaps – have
backup or hard copy of slides
Preliminary Report Introduce your company and your job
descriptions (your choice – be creative) Come up with a unique product that makes
sense with the prices given Remember product differentiation
Know basic terms and assumptions Do not give list of definitions but work into
presentation Present the data Give an initial guess for the max profit
How?
Initial guess of max profit For each test market, you should
calculate the following:
This calculation gives you the number of units in the potential national market
Multiply that number by the price for that test market This gives you the total revenue for each
particular test market
Number of units (National Market Size)
Market Size
Initial guess of max profit Now, you will need to know the total cost for
each test market You already know the fixed cost Determine the variable cost for each amount of units
(you have 8) by using the variable cost information given
Total cost = Fixed Cost + Variable Cost Once you have the total cost for each test
market, subtract it from the total revenue from that test market.
The greatest number will be your initial guess