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Basic Quantitative Analysis for Marketing

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Harvard Business School

584-149
Rev. September 29, 1986

Basic Quantitative Analysis for Marketing
Simple calculations often help in making quality marketing decisions. To do good “numbers work,” one needs only a calculator, familiarity with a few key constructs, and some intuition about what numbers to look at. This note has as its primary purpose the introduction of key constructs. The development of intuition about what quantities to compute can begin with this note, but is best accomplished by repeated analyses of marketing situations and application of the concepts and techniques presented here. Case study analysis provides that opportunity.
The organization of the note is as follows. First we define key constructs such …show more content…

Figure B

Cost Increasing at Decreasing Rate
TC

Cost in dollars Output in units

Figure C

Cost Increasing at Increasing Rate
TC

Cost in dollars Output in units

While many real world examples of Figure B and C type of situations exist, we will typically be making the assumption that Figure A is a good enough approximation of actual cost behavior. The
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Basic Quantitative Analysis for Marketing

584-149

total cost line drawn in Figure A is special, because it represents the case of each unit costing the same. Thus, for Figure A, we can write
Total cost for output level V

Total variable cost for output level V

=

Fixed cost =

Fixed cost + [k × V]
OA

+

(1)

In Equation 1, k is the cost of producing one more unit of output. It is the slope of the total cost curve in Figure A and does not change over the range of output shown. In summary, one can divide the firm’s total cost into two parts: fixed cost and variable cost. Second, we will frequently assume that the cost of producing an additional unit of output does not change, so we can write the variable cost as k x V where V is total output.
Having defined total, variable, and fixed cost, we can now introduce the concept of contribution. If k is the constant unit variable cost and P the price received for the good or service, then we define
Unit contribution

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