Marketing Economics

Abstract

The purpose of this note is to prepare the student for a series of exercises in making marketing economics calculations. These calculations are not replacements for spreadsheets or more detailed economic calculations such as net present value or return on investment. They are "back of the envelope" estimates that can easily be communicated to others to buttress arguments about what a company should or should not do in a decision situation.

Excerpt

UVA- UVA-M-0648

Rev. Aug. 26, 2010

MARKETING ECONOMICS

The purpose of this note is to prepare you for a series of exercises in marketing economics calculations. It will give you the basic information on the purpose and structure of various calculations, but the note, by itself, will not help you develop a facility for doing these calculations. The series of exercises in marketing economics will help you to become more proficient in performing what will eventually become simple calculations. These calculations are not replacements for spreadsheets or more detailed economic calculations such as net present value or return on investment. Rather, they are “back of the envelope” estimates that can easily be communicated to others to buttress your arguments about what a company should or should not do in a decision situation.

The note and the exercises will prepare you for the task of learning how to “see” which calculations are relevant to a particular case. That is a task that requires practice. The concepts of fixed and variable costs, for example, are simple in theory compared with practice. Deciding what should be treated (assumed) as variable or fixed says a lot about how you intend to manage the business. This note will not make a cost accountant out of you. The goal is to start you on a process of becoming fluent in the practice of marketing economic calculations.

These types of marketing calculations are used both for what we normally think of as marketing-related decisions and for decisions more generally associated with the finance and operations functions. Marketing-related decisions often made in conjunction with these calculations include (1) How many units of a product do I have to sell before I begin making a profit? (2) How much more do I need to sell to make a particular change in my marketing plan profitable?

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Keywords: break-even analysis, contribution analysis, cost analysis, economic analysis, marketing management, marketing strategy