MARKETNG 460 Lecture Notes - Lecture 3: Net Present Value, Cherry Picking, Gross Margin
2010
2011
Market Share
14.00%
16.00%
Total Sales
$660,000,000.00
$754,285,714.29
Cost of Goods Sold
$510,180,000.00
$583,062,857.15
Gross Margin
$149,820,000.00
$171,222,857.14
Expenses:
Payroll, taxes, benefits
$79,860,000.00
$91,268,571.43
Property rental
$7,920,000.00
$9,051,428.57
Utilities
$7,260,000.00
$8,297,142.86
Advertising
$9,240,000.00
$10,560,000.00
Supplies
$7,920,000.00
$9,051,428.57
Depreciation
$5,280,000.00
$6,034,285.71
Maintenance
$4,620,000.00
$5,280,000.00
All other
$13,860,000.00
$15,840,000.00
Total Expenses
$135,960,000.00
$155,382,857.10
Operating Profit
$13,860,000.00
$15,840,000.00
1. Dollar Special
Pro:
1. Proven to increase store traffic by 3%
2. Might attract the cherry-picking customers
3. Ongoing promotion (Sudden change in pricing/promotion can give confusion to the
customers)
Con:
1. Confuse the Customers (Brand image)
2. Not a profitable investment (ROI : -38%)
3. Difficult to increase regular / profitable customers
0.09
0.007
1st Month 2st Month 3rd Month 4th Month 5th Month 6th month
0 1 2 3 4 5
Discount 1 0.99284425 0.985739706 0.978685999 0.971682767 0.964729649
Investment $399,520 $399,520 $399,520 $399,520 $399,520 $399,520
NPV Investments $399,520.00 $396,661.13 $393,822.73 $391,004.63 $388,206.70 $385,428.79
Sum of NPV investments $2,354,643.98
Sales $249,700 $249,700 $249,700 $249,700 $249,700 $249,700
NPV Margin $249,700.00 $247,913.21 $246,139.20 $244,377.89 $242,629.19 $240,892.99
Present Discounted Value -$149,820.00 -$148,747.93 -$147,683.52 -$146,626.74 -$145,577.51 -$144,535.80
SUM of NPV Margins $1,471,652.49
NPV -$882,991.49
Multi Period ROI -38%
Reeds Supermarket Dollar Special ROI
Annual Discount rate
Monthly Discount rate
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Interpretation / Assumption:
1. 3% increased traffic results in 2% increased sales
2. Even if the assumption is as 3% increased sales, ROI results in negative figure
3. Investment (Cost of Dollar Special campaign) was calculated through the difference of
the gross profit if the dollar special items were sold in regular price
2. Lowering Price by lowering Gross Margin
Pro:
1. Might attract the customers in long-run
2. Resolves the price perception issue (Most important reason why customers avoid Reed)
3. Appeals to wider range of customers
Con:
1. Time needed for the changes in the perception
2. Possibly ruin the brand position
3. Unless a significant lowering of prices, hard for the customers to notice the reduction in
prices
0.09
0.007
1st Month 2st Month 3rd Month 4th Month 5th Month 6th month
0 1 2 3 4 5
Discount 1 0.99284425 0.985739706 0.978685999 0.971682767 0.964729649
Investment $1,100,000 $1,100,000 $1,100,000 $1,100,000 $1,100,000 $1,100,000
NPV Investments $1,100,000.00 $1,092,128.68 $1,084,313.68 $1,076,554.60 $1,068,851.04 $1,061,202.61
Sum of NPV investments $6,483,050.61
Sales $122,353 $247,153 $378,144 $519,318 $675,113 $850,643
NPV Margin $122,353.00 $245,384.49 $372,751.64 $508,249.37 $655,996.09 $820,640.52
Present Discounted Value -$977,647.00 -$846,744.18 -$711,562.03 -$568,305.23 -$412,854.95 -$240,562.09
SUM of NPV Margins $2,725,375.12
NPV -$3,757,675.48
Multi Period ROI -58%
Reeds Supermarket Lowering Price ROI
Annual Discount rate
Monthly Discount rate
Dollar Special item as
Regular item
Dollar Special item
Average Price per item
$2.70
$1.50
Monthly Sale
$3,960,000
$2,200,000
Gross Profit
$898,920
$499,400
Investment
$399,520
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Pro: proven to increase store traffic by 3, might attract the cherry-picking customers, ongoing promotion (sudden change in pricing/promotion can give confusion to the customers) Con: confuse the customers (brand image, not a profitable investment (roi : -38%, difficult to increase regular / profitable customers. Pro: might attract the customers in long-run, resolves the price perception issue (most important reason why customers avoid reed, appeals to wider range of customers. Con: time needed for the changes in the perception, possibly ruin the brand position, unless a significant lowering of prices, hard for the customers to notice the reduction in prices. 5% increase by adding private label product, 2% decrease by lowering price): increasing the gross margin by adding high-end private label products and lowering everyday price by 2% Pro: higher margin, increase range of production selection. Con: establishing a loyalty program, giving back for every purchase over.
