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MSI, SDI, sales revenues, NPV and NMC

Question1. Couch-potato Cable TV competes in a regional market of 5,000,000 cable users in the Pennsylvania area. Their price is $30 per month. They have achieved the following results and have the following objectives for their marketing program.
Objective Actual
Awareness .85 .77
Like programming .90 .81
Price OK .90 .76
Distribution OK .85 .78
Service Ok .90 .82

a) What are their MSI and SDI?
b) What will be their sales revenue at a price of $30/month?
c) How much sales revenue did they lose because they did not achieve their price objective?
d) If they have 1,200,000 customers still with them at the end of the year what is their annual retention rate?

Question 2
Assume that if Couch Potato (as in Question 1) invests $10,000,000 in product and marketing improvements that they can increase their Customer Retention for this year by 5% over the CR in Question 1.

a) Is this investment worth it assuming?
- A variable cost of $20 per customer to provide the service
- A marketing cost of $30 to retain an old customer and $150 to recruit a new customer. Note this is a sunk cost that applies however long the customer is with the company.
- Customer who leave do so after 6 months on average
- New customers join Couch potato at the 6-month mark.

b) If the enhanced Customer Retention continues for 5 years what is the NPV of the increased marketing contribution (not net contribution after investment) assuming a discount rate of 6%.

Question 3
Couch Potato Products, a sister company to Couch Potato Cable produces signal converters. The total market demand is 7,000,000 units and Couch potato has 12% of this. Their per unit price is $220 and their variable cost per unit $140. Their marketing expenses are $32,000,000.

a) What is their NMC?

b) Assume that the total market demand doubles and Couch potato maintains their share. Also assume that a 15% experience curve effect applies to any product volume over their original volume. What is their new NMC?

Solution Preview

See the attached file for clarity.

Question 1. Couch-potato Cable TV competes in a regional market of 5,000,000 cable users in the Pennsylvania area. Their price is $30 per month. They have achieved the following results and have the following objectives for their marketing program.

Objective Actual
Awareness .85 .77
Like programming .90 .81
Price OK .90 .76
Distribution OK .85 .78
Service Ok .90 .82

a) What are their MSI and SDI?
MSI (Market Share Index) = Actual Product Awareness * Actual Like Programming * Actual Price Acceptable * Actual Distribution Acceptable * Actual Service Acceptable
= 0.77*0.81*0.76*0.78*0.82
= 0.3032 or 30.32%

To calculate SDI, first calculate the potential MSI.
Potential MSI (Market Share Index) = Objective Product Awareness * Objective Like Programming * Objective Price Acceptable * Objective Distribution Acceptable * Objective Service Acceptable
= Product Awareness * Like Programming * Price Acceptable * Distribution Acceptable * Service Acceptable
= 0.85*0.90*0.90*0.85*0.90
= 0.5267 or 52.67%

SDI (Share development Index) = Current MSI / Potential MSI = 0.3032/0.5267
=0.5756 or 57.56%

b) What will be their sales revenue at a price of $30/month?
Current market share = 30.32% of the total market size of 5,000,000
No of customers = 5000000*0.3032=1,516,000
Price = $30/month
Sales Revenue = No of customers * price / month *12 = 1516000*30*12
=$545.76 million per year

c) How ...

Solution Summary

This post has three questions. It shows how to calculate MSI, SDI, sales revenues, NPV and NMC and annual retention rate.

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