Marketing Analytics: Target Return-on-Investment Pricing

Aizan opened a small business a year ago manufacturing customized golf walking bags. The bags, which are used to hold golf clubs, are manufactured with durable high-end fabrics and choice of custom designs, targeted at the golfer who appreciates both style and function. Aizan invested $100,000 of his savings to start his business with a goal of earning a 15% return-on-investment. Unfortunately, after the first year of business, Aizan fell short of his goal, achieving only a 13% return-on-investment. To attract additional investors to and expand his business in the future Aizan knows he must be able to provide a 15% return-on-investment.

Over the past year, Aizan conducted a great deal of marketing research to collect data on consumer price sensitivity, demand, and response to marketing activities for his target market. Using his understanding of return-on-investment pricing and research findings, he constructed a simple spreadsheet to project operating statements for the upcoming year.

Aizan is evaluating four potential marketing mixes for next year, each with its own strength and weakness. Although manufacturing costs are expected to increase by 20% next year, Aizan negotiated a price break from his supplier that reduces this increase to 10% if his volume reaches 5500 units. Aizan discovered that he could charge the highest price for his product if he used magazine advertising to reposition his product as a luxury good, but that consumer demand increased more with direct mail, free 30-day trial offers, or social media campaigns. However, each of those strategies was only effective at a price point lower than $100.

The goal of this activity is to understand how target return-on-investment pricing can be calculated using an operating statement. Keep in mind that Return on investment = Net profit after taxes/Investment.

Use the formulas above and the spreadsheet below to help answer the questions that follow. The spreadsheet fields highlighted in yellow can be changed in order to determine possible outcomes. You can find the initial values in the corresponding blue cells in columns G to J. Start by entering the initial values into columns B to E. Then review the questions below and adjust the values in columns B to E to determine the correct answers.

Initial ValueInitial Value Initial Value Projection 3-Projection 4- Projection 1- Projection 2 Projection 3- Initial Value Projection 2- Free 30-Day Social Media Magazine Direct Mail with Free 30-Day Advertising $5 Coupon Social Medianitial Year Projection P Magazine Direct Mail 2 Price (P) 3 Increase in quantity 100 $ 10% 10% sold 4 Quantity sold (Q) 5,000 5,000 5,000 5,000 5,000 5,250 5,400 20% 66.0 5,500 5,500 Change in unit variable 20% 10% 10% cost (UVC) 6 Unit variable cost 7 Total fixed expenses S 8 Owner's salary 9 Marketing expense 10 Investment 11 State/federal tax rate 55.0$ 55$ 55,000 50,000$ S 50,000 50,00050,000S50,000$50,000$ 55.0$ 60.5 60.5 55,000 55,000 55,000$55,000 50,000 50,000$ 50,000$50,000 12,000 $100,000$ 100,000100,000100,000$100,000100,000100,000$100,000$ 100,000 50% 0 $400,000$525,000$ 513,000$ 495,000 $ 467,500 $ 275,000$ 275,000$ 275,000275,000 $275,000$346,500 $356,400 $ 332,750$332,750 S (275,000)(275,000) (275,000) (275,000) $125,000$ 178,500$56,600$ 162,250$ 134,750 S 105,000 105,000$ 105,000105,000 $100,000$153,000 135,000 129,000$117,000 16 Net profit before taxes S (380,000)$(380,000)$ (380,000) (380,000) 25,000 $25,500 $21,600$ 33,250$ 17,750 8,875 8,875 $ 100,000$ 100,000$100,000100,000 $100,000$100,000 100,000 $100,000$100,000 55.0 $ 55.0 $ 6601 55,000 $55,000 $ 55,000 $ 48,000 $ 30,000$ 24,000$ 50% 50% 50% 50% 50% 50% Net sales 13 Cost of goods sold 14 Gross margin 15 Total expenses Taxes S (190,000)(190,000$ (190,000) S (190,000)12,500$ 12,750 $ 10,800 $ 16,625$ 18 Net profit after taxes$ (190,000)(190,000)(190,000) 19 Investment 20 Return on investment (190,000)0012,750 10,80016,625$ (190)% (190)% (190)% 13% 11% 17%