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1 What are the advantages and disadvantages of this kind of modeling?It is acceptable to build models that can look at different scenarios. While the model above is somewhat simplistic, most companies use very sophisticated models to predict sales, margins, etc. The advantages include evaluating different market acceptance scenarios and its impact on revenues and margins.Disadvantages include the possibility that market acceptance may be way off target, impacting costs and revenues. Further, the true costs of the product should be as accurate as possible to obtain realistic outcomes.
2 Why do you think margins per unit decline as the price drops?There could be several reasons for this.Efficiencies of production ($/unit) tend to be beneficial at higher levels of product manufacturing. These efficiencies typically drop as the units produced decrease.Most likely, suppliers of raw materials provide volume discounts, so less raw material ordered will result in higher material costs.The fixed costs of production (salaries, overheads, etc.) are being absorbed by fewer units of production.
3 Looking at the sale prices compared to margins (%), is $50 the best price? How do you know students will pay this amount for your product?In this case, we do not know that $50 is the best price. It will provide the most profitability if we can sell almost two million units, but there is no guarantee for that level of market demand. Also, consider their target market, students, whom are very price sensitive. The best way to determine the selling price is to conduct focus groups with the target market.
4 If 10% of students purchase your product the best-case scenario shows $98 million in revenue and profits of $24.5 million. Worst case is profit margin of $11.662 million. In your opinion, are these numbers realistic?If those sales goals are obtained, the numbers are a good approximation. However, this cannot be considered absolute. What if we find some areas of the country will pay $50, but other areas only $30? This model will most likely need to be very dynamic with frequent updates on sales, costs, and revenues. And perhaps parsed to address different market acceptance across geographic areas or income levels.
5 Do you think you will have competitors prior to reaching the maturity stage?If the product “takes off” it will only be a matter of time before competitors appear. This may happen prior to the maturity stage but is hard to predict. It will depend, to some degree, on how technically difficult the product is to copy.
6 Is this type of analysis realistic?Model building to approximate sales and revenue is very common. However, the flaw in this model is the assumption that 10% of the total student population will buy the new product. Some considerations:If only 1% of the student population accepts the product, it could be a money loserIf 20% accept, we would perceive this as a good thing. However, at 20% acceptance, this means manufacturing would need to produce twice as many units to meet demand: 4 million units instead of 2 million. Can manufacturing meet this? Can we get the raw materials at the price and time needed? Can we distribute that much product in a timely and efficient manner? This type of analysis is very common, but fraught with potential errors. As mentioned previously, focus groups can provide valuable insights and help prevent the above dilemmas. First, focus groups will provide a more realistic answer to what students would actually be willing to pay for the proposed product. Further, this will also provide some insights as to whether students think this is a product they really need (or want) and can use. Students are very price sensitive, so any product competing for their dollars must offer value (or the perception of value).To make assumptions of market acceptance based on total student population and a blanket target rate is very risky and is probably unrealistic.
7 What role would the engineering or R&D groups play in this evaluation?The marketing department would be the most qualified to develop pricing, distribution, and margin scenarios (remember the 4 Ps). However, based on marketing research and studies, the results can have a direct impact on R&D and engineering. Some items to consider include:If students are only willing to pay $30 per unit, can a cheaper model be produced? R&D will look for alternative technologies or develop new ones. It may also include reducing some of the features of the unit in order to reduce costs/price.Engineering will work closely with marketing and R&D. Can less expensive materials be used, but still provide a quality product? Can we consider how the units are produced for more efficient methods? Can batch production be used rather than a continuous run? Can we find a supplier (or multiple suppliers) that can provide similar raw materials at lower cost?
8 The table above shows gross revenues and net profits. There is no mention of the cost of the product. What are some of the costs that would be involved? Can you determine from the chart above the total “costs” of the product?The chart does not provide any indication of product costs. Some of the costs to be included in the product’s price include:Cost of raw materialsR&D and engineering design costsManufacturing costs: fixed and variableOverheads: salaries of employees, benefits, legal department, sales group, etc.Costs of distribution (transport of product to stores)Marketing and PR (advertising)Intellectual property (royalty payments?).If these costs can be spread over a large number of units, the cost per unit will be low and the margin per unit will be higher. Spreading cost recovery over a longer time frame will also be beneficial (say three years instead of one).
Answers to Discussion Questions
1 The project leader has an important role. While all of the below are important, which is the most important and why:CommunicationsIntegrity and trustConflict resolution? While each answer is important, the correct answer is b. A project or product manager is a leadership role, and one of the principal hallmarks of leadership is trust. This will be of high importance in leading a product development team to success.
2 Some companies believe that a Product Development Manager must have strong technical skills. Is this true? Why or why not?The Product Manager will need leadership and managerial expertise more that technical expertise. The PM should expect to have technical subject matter experts (SME) assigned to the team. The required PMs skills include vision and focus on the objectives, strong communications and relationship building up and down the organization, managerial excellence, ability to track budgets and schedules, and the ability to resolve conflict. There are additional skills that could be listed, but these are the fundamentals.
3 What value does the Marketing Group bring to the product development effort?Marketing may assign a Product Manager to lead the development effortMarketing tracks industry trends and determines the 4 PsMarketing will develop pricing/margin scenario spreadsheetsMarketing will determine the break-even pointIt is likely that marketing will work with the finance group to determine NPV and other financial metrics
4 If the cost of each new product is $40, and our company expects margins of 25%, should we price our product at $50? Why or why not?At a cost of $40 and a selling price of $50, the required 25% margin will be realized. However, there is no guarantee that $50 will be accepted by the market. If the price, for example, must be dropped to $45 to sell, then the required margin will not be met. The company would then need to determine if a 20% margin is acceptable or find ways to cut costs so that the required profitability can be obtained.
5 One of the costs that may be in our product’s development is legal costs. What kind of legal activities would be in our budget?The legal department, depending on the product, may have a very key role to play in product development. Some of the activities may include:Developing and reviewing contracts with suppliersSubmitting patents for the new product(s)Determining intellectual property ownership and if royalties will be paidRegistering trademarks or copyrightsOutlining contracts or guidelines for product distribution rightsAdvising the product team and senior management of potential legal (product liability) or regulatory issues.
6 Why is it important to know the break-even point?Breakeven is related to profitability and
