MarketingManagement.pdf

of 65:35 evolving eventually to 50:50. Marketing research will be reduced to

$60,000 per year after the first year.

BUSINESS ANALYSIS

After management develops the product concept and marketing strategy, it can eval-

uate the proposal’s business attractiveness. Management needs to prepare sales, cost,

and profit projections to determine whether they satisfy company objectives. If they

do, the product concept can move to the product-development stage. As new infor-

mation comes in, the business analysis will undergo revision and expansion.

Estimating Total Sales

Management needs to estimate whether sales will be high enough to yield a satisfac-

tory profit. Total estimated sales are the sum of estimated first-time sales, replacement

sales, and repeat sales. Sales-estimation methods depend on whether the product is a

one-time purchase (such as an engagement ring or retirement home), an infrequently

purchased product, or a frequently purchased product. For one-time purchased prod-

ucts, sales rise at the beginning, peak, and later approach zero as the number of po-

tential buyers is exhausted (Figure 2-5). If new buyers keep entering the market, the

curve will not go down to zero.

Infrequently purchased products—such as automobiles, toasters, and industrial

equipment—exhibit replacement cycles dictated by physical wearing out or by obso-

lescence associated with changing styles, features, and performance. Sales forecasting

for this product category calls for estimating first-time sales and replacement sales sep-

arately (Figure 2-5).

Frequently purchased products, such as consumer and industrial nondurables, have

product life-cycle sales resembling Figure 2-5. The number of first-time buyers initially

increases and then decreases as fewer buyers are left (assuming a fixed population).

Repeat purchases occur soon, providing that the product satisfies some buyers. The

sales curve eventually falls to a plateau representing a level of steady repeat-purchase

volume; by this time, the product is no longer a new product.

In estimating a new product’s sales, the manager’s first task is to estimate first-time

purchases of the new product in each period. A variety of techniques is available. To es-

timate replacement sales, management has to research the product’ssurvival-age distri-

bution—that is, the number of units that fail in year one, two, three, and so on. The low

end of the distribution indicates when the first replacement sales will take place. The ac-

tual timing of replacement will be influenced by a variety of factors. Because replace-

ment sales are difficult to estimate before the product is in use, some manufacturers base

the decision to launch a new product solely on the estimate of first-time sales.

For a frequently purchased new product, the seller has to estimate repeat sales as

well as first-time sales. A high rate of repeat purchasing means that customers are sat-

isfied; sales are likely to stay high even after all first-time purchases take place. The

seller should note the percentage of repeat purchases that take place in each repeat-

purchase class:those who rebuy once, twice, three times, and so on. Some products

and brands are bought a few times and dropped.^18

Estimating Costs and Profits

After preparing the sales forecast, management should estimate expected costs and

profits. Costs are estimated by the R&D, manufacturing, marketing, and finance de-

partments. Table 2.3 illustrates a five-year projection of sales, costs, and profits for the

instant breakfast drink.

Row 1 shows the projected sales revenue over the five-year period. The company

expects to sell $11,889,000 (approximately 500,000 cases at $24 per case) in the first

year. Behind this sales projection is a set of assumptions about the rate of market

growth, the company’s market share, and the factory-realized price.

Row 2 shows the cost of goods sold, which hovers around 33 percent of sales rev-

enue. This cost is found by estimating the average cost of labor, ingredients, and pack-

aging per case.

Row 3 shows the expected gross margin, which is the difference between sales rev-

enue and cost of goods sold.

Developing

Marketing

(^342) Strategies
FIGURE 2-5
Product Life-Cycle Sales for Three
Types of Products
Sales
Time
(a) One-time purchased product
Time
Sales
(b) Infrequently purchased product
Replacement
sales
Sales
Time
(c) Frequently purchased product
Repeat purchase
sales