Marketing Calculus Study Guide PDF

Unit 4: Marketing Calculus Study Guide 10 Things You Should Know 1. Customer Lifetime Value is the measure of the average customer’s revenue generated over their entire relationship with a company. 2. Customer Segmentation – companies can use CLV to segment different customers and take the appropria...

Unit 4: Marketing Calculus Study Guide 10 Things You Should Know 1. Customer Lifetime Value is the measure of the average customer’s revenue generated over their entire relationship with a company. 2. Customer Segmentation – companies can use CLV to segment different customers and take the appropriate actions to retain very profitable customers and attempt to make other customers more profitable. A typical break down looks like this: 3. Customer Lifetime Value formula: 4. Customer Acquisition Cost – refers to how much it cost for a company to acquire a new, paying customer. 5. Customer Acquisition Cost Formula 6. A company is not sustainable then the CAC is higher than the CLV. In this situation, the company must do one of the following: • Lower the CAC • Increase the CLV • Abandon the project and try something different • Cease operations 7. Break Even Analysis - Financial calculation used to determine the number of products or services you must sell to at least cover production costs. The formula for: 8. Types of costs • Direct costs - a price that can be directly tied to the production of specific goods or services. Examples: Includes: cost of goods sold, shipping • Indirect costs are all the other costs of doing business. Examples: Rent, labor, utilities, insurance 9. The Break-Even Formula Indirect Costs ÷ (Price - Direct Costs) = Break-Even Point in Units In this formula, (Price – Direct Costs) = contribution to margin. Contribution to margin is the amount of revenue available per unit to cover indirect costs Example: Sales Price: $ 2.00 per pack of Oreos Direct Costs: $.40 per pack Indirect Costs: $16,000 What is the contribution to margin? $2.00 - .40 = $1.60 How many Oreo packs need to be sold to break even? $16,000 / $1.60 = 1,000 three packs 10. The Break-Even formula when there is a required profit is (Indirect Costs + Required Profit) ÷ (Price - Direct Costs) = Break-Even Point in Units Example • • • • • • • Sales Price: $ 8.00 for a three pack Direct Costs: $1.00 per pack Indirect Costs: $ 70,000 If Oreo required a profit of $140,000, how many three packs of Supreme Oreos need to be sold? Contribution to margin = $8.00 - $1.00 = $7.00 Indirect + Profit = $70,000 + 140,000 = $210,000 $210,000 / $7 = $30,000 units