We have learned that. Marke+ng Investment and Financial Hurdle Rates. Rates of Return Are Different 10/1/15

Transcription

1 We ave learned tat Markeng Investment and Financial Hurdle Rates Profit Funcons associated wit Financial Investments and Profit Funcons associated wit Markeng Investments are totally different in caracter Ted Mitcell Financial and Markeng Profit as Funcons of Investments Direct Relationsip Z = r(i) Slope of Direct relationsip as constant value r = k Financial Quadratic Relationsip Z = ai bi AROR at a Point (I. Z) MROR at a point Are Different Tere are Average and Marginal wit Financial Investments However, wit Financial Investment te AROR = MROR = a constant value, k AROR and MROR wit Markeng Investments are not equal and don t ave constant values from Financial Investments and Markeng Investments Are Very Different Te Financial of Rate of, r k Financial AROR and MROR are equal to te constant rate, k Area k(i) is te = r(i) Rate of as constant value, r =k Financial Area AROR(I) is te Profit, Z = (a bi)i of,, Wic is called te interest rate is onen given to markeng managers as a Hurdle rate A Hurdle rate,, is an interest rate wic te marginal rate of return on markeng, MROR, must be larger tan For a markeng Investment to be approved te MROR on te Markeng Investment must be greater tan te urdle rate,, MROR 1

2 MROR on Markeng Financial Hurdle Rate, Marginal Do NOT get caugt in te Conceptual Trap tat te MROR on Investments is equal to te AROR on Investments In MROR AROR of, Do not assume tat te Markeng MROR is te same value as te AROR!, Do not base decisions regarding te level of markeng investment on te False assumpon tat a financial urdle rate is an AROR, of, of, Using te AROR on markeng to determine wen you reac te urdle rate leads to very poor investment decisions Rate of, Quadratic Relationsip Z = ai bi MROR at a point Example of finding te Expenditure Level for te Markeng Investment tat will ave te MROR at tat level equal to te urdle rate,, provided by te firm of, AROR at a Point (I. Z) 2

3 Te quadratic equation wic describes te relationsip between te financial gain, Z, and a Te quadratic equation implies an optimal level of marketing investment, I, will maximize marketing profit, Z Z = ai bi 2 Z = 0.61I I 2 0, 0 Amount of Seller s Market researc provides te esmates for a and b 0, 0 Amount of Seller s I Were te MROR = 0 Wit a Quadratic Profit Function, Z = ai bi 2 Te Of at any point on te marketing profit function is written as MROR = a 2bI Remember values a and b ave been provided by market researc Wat is te level of marketing investment, I, tat makes te MROR equal to zero, 0? O I, AROR = I of, MROR = (0.0002)I Opmal level of markeng Investment Will maximize te profit being returned is were MROR = 0 In general MROR = a 2bI and set equal to zero a 2bI = 0 2bI = a I = a/2b For our specific example Were te MROR = a 2bI set = (0.0002)I = 0 (0.0004)I = 0.61 I = 0.61/ I = $1,525 as te optimal level of investment for maximum profit 3

4 Wat is te level of marketing investment, I, tat makes te MROR equal to urdle rate,? = 15% O I, AROR = I To find te level of markeng investment tat makes MROR on te marketing investment equal to te financial urdle rate,, is To set te MROR function equal financial urdle rate, MROR = a 2bI = 15% (0.0002)I = (0.0002)I = (0.0004)I = 0.46 I = 0.46/ = $1,150, te urdle rate investment of, MROR = (0.0002)I Example of Calculang AROR Te value of a = 0.61 and b = Wen te firm is spending te amount needed to ave MROR = urdle rate, 15% Wat is te average rate of return on tat $1,150 investment Answer AROR = a bi AROR = (1,150) AROR = AROR = 0.38 or 38% average rate of return Wen te MROR is only 15% $437 AROR = $437/$1,150 = 38% AROR = a bi = 38% $1,150 Were a = 0.61 and b = MROR = a 2bI = 15% Observed Point Profit function, Z = ai bi 2 Wen you ave a urdle rate, You will never reac te opmal level of markeng investment $437 AROR = $437/$1,150 = 38% AROR = a bi = 38% MROR = a 2bI = 15% Observed Point Profit function, Z = ai bi 2 $1,150 $1,500 4

5 Any quesons on Hurdle Rates Tat Finance may trow at us Marketers get frustrated wit financial urdle rates! We fail to acieve opmal markeng profits 5