Marketing Analytics: The Profit Equation

Kai Stephens recently opened a mobile dog grooming business named Waggin' Clean in the Dallas suburb of Frisco, TX. As a relatively new competitor in the market, Kai knows that he must find more customers quickly if his business is going to survive. There are many competitors in the Dallas market with service prices ranging between $40 and $100. To position his business competitively, Kai has decided to charge $60 for his dog grooming services. Kai's business has fixed monthly expenses of $2000 which covers his salary and the payment on his mobile grooming van. Additionally, Kai has variable expenses of $20 per service for his supplies, variable labor expenses, and gas.

Even with his competitive price, Kai's business is not reaching its potential. Kai has the ability to service 8 canine clients per day, 6 days a week, which results in approximately 192 potential dog services per month. Unfortunately, Kai is only booking 4 grooming appointments on average each day. Kai knows he needs to do some marketing to increase his client base. To increase his bookings, Kai is deciding between two different promotional marketing campaigns.

Kai is deciding between running an advertisement in a local Dallas magazine and creating a $10 off coupon direct mail campaign. The magazine ad Kai is considering has an advertising cost of $1000 while the advertising cost for the direct mailing is $500. Based on his research, Kai believes that the magazine advertisement would result in a 25 percent increase in customers (120 customers per month) while the direct mail coupon would result in a 55 percent increase in customers (150 customers per month).

The goal of this activity is to understand the profit equation and the relationship between sales, revenue, and costs. Keep in mind that: Profit = Total Revenue - Total Costs. Total Revenue (TR) = Price (P) x Quantity Sold (Q).

Refer to the formauls 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 intital vaules in the columns B to d. Then review the questions below and adjust the values in columns B to D determine the correct answer

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	No promotion	Magazine advertising	Coupon direct mail	Initial Value: No promotion	Initial Value: Magazine advertising	Initial Value: Coupon direct mail
Number of clients per month				96	120	150
List price for service		$60.00	$60.00	$60.00	$60.00	$60.00
Total Revenue (Clients X List Price)	$0.00	$0.00	$0.00	$5,760.00	$7,200.00	$9,000.00
Monthly operating costs (Fixed cost + Clients X Variable Cost)	$2,000.00	$2,000.00	$2,000.00	$3,920.00	$4,400.00	$5,000.00
Advertising cost					$1,000.00	$500.00
Cost per coupon						$10.00
Coupon expense (Clients X Cost per Coupon)			$0.00			$1,500.00
Profit (Total Revenue - Total Cost)	$(2,000.00)	$(2,000.00)	$(2,000.00)	$1,840.00	$1,800.00	$2,000.00

1. Based on the data provided in the marketing dashboard, what type of promotional marketing effort, if any, should Kai invest in to increase the number of canine customers and profit?

A) There is not sufficient data

B) Coupon direct mail

C)Magazine advertising

D) No marketing

E)Coupon and magazine are equal

2. Kai feels strongly that putting a coupon in the market will dilute the perceived value of his services, so he really wants to pursue the magazine advertising option. Kai can change the size of the ad which will affect the cost and the effectiveness of the ad. Which combination of advertising cost and responsiveness (number of new customers) maximizes his profit?

A) 160 clients per month, $2500 advertising cost

B) 130 clients per month, $1100 advertising cost

C) 120 clients per month, $750 advertising cost

D) 150 clients per month, $2000 advertising cost

E) 110 clients per month, $500 advertising cost

3. Another option that Kai could consider is changing the value of the coupon. Not surprisingly, the larger the coupon , the more customers Kai can expect. A $2 coupon gets him 120 clients per month, a $5 coupon gets him 135 clients per month, a $10 coupon gets him 150 clients per month, a $15 coupon gets him 175 clients per month, and a $20 coupon gets him 200 clients per month. Which customer/coupon combination maximizes Kai's profits?

A) 135 clients per month, $5 coupon

B) 150 clients per month, $10 coupon

C) 200 clients per month, $20 coupon

D) 175 clients per month, $15 coupon

E) 120 clients per month, $2 coupon

4. To maximize his profit, Kai should adopt which of the following strategies?

A) Focus all efforts on maximizing revenue, at any cost

B) Minimize promotional costs which decreases revenue

C) Maximize revenue while simultaneously minimizing costs

D) Focus all efforts on minimizing costs, regardless of the impact on revenue

E) Maximize selling efforts which increases costs

5. Instead of utilizing a promotional marketing tactic, Kai has decided to change the price of his product in an effort to increase his customer base and maximize his profit. The lower the price, the more customers Kai can expect to attract. Which customer/price combination will maximize Kai's profit?

A) $50 price, 140 clients per month

B) $70 price, 80 clients per month

C) $60 price, 96 clients per month

D) $45 price, 160 clients per month

E) $40 price, 180 clients per month