Allegro Smart Sheet Case

1. Using the Simple Sheet, what happens when Allegro cuts advertising and selling effort to $0.00 and raises price to $500.00/unit? Comment.

To begin, in order to assess the effects on net profit as result of the aforementioned changes in price, advertising, and selling effort we must first analyze the initial situation at hand and subsequently compare it to the resultant scenario.  Namely, holding price, advertising, and selling effort constant, we see an increase in industry unit sales by 6.6% year over year. Consequently, with no projected growth in company market share, holding steady at 3%, forecasted unit sales, sales revenue, and gross contribution margin are anticipated to grow at 5.6% year over year – below the industry average. Moreover, we see an increase in overhead expenses of 11.4% year over year, and as a result, a decrease in net contribution margin, and more troubling, net profit of 1% and 2.9% respectively, year over year. In other words, before making the aforementioned changes, we see a forecasted increase in unit sales and sales revenue that is more offset, twice over, by an increase in overhead expenses, overall resulting in a year over year decrease in net profit.

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When we do indeed make the aforementioned changes, namely cutting advertising and selling efforts to $0.00 and raising prices to $500.00/unit we see considerably different results than those discussed above. That is, an 111% and 270% increase in sales revenue and gross contribution margin year over year – in comparison to a mere 5.6% increase in our initial predictions. Namely, after making the abovementioned changes we witness an exact doubling of sales revenue, and a 250% increase in gross contribution margin. Furthermore, we also observe considerable increases in net contribution margin as well as net profit of 561% and 1,753% respectively, year over year. The reason being, despite an increase in price and albeit eradicating advertising and selling efforts, we see no resultant change in either company market share nor unit sales volume. That is, when we generally witness an increase in price, or comparatively a decrease in marketing efforts, when referring to normal goods, we oftentimes expect to see an associated decrease in unit sales and thusly, market share. However, in the case at hand, we see no effect on either variables in question.

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1. Repeat exercise 1 using the Smart Sheet.

Repeating exercise 1 using the Smart Sheet revealed significantly different results than our previous analysis. Namely, after cutting advertising and selling efforts to $0.00 and raising prices to $500.00/unit we observe that whilst year over year projections for industry unit sales were held constant at an increase of 6.6%, company unit sales volumes and corresponding market share fell to zero. Thus, as a result of the aforementioned changes we witnessed a total loss in market of 100% and a decrease in net profit of 464% year over year. The reason being, unlike the abovementioned scenario, in which changes in price, advertising, and sales efforts had no impact on sales revenue and correspondingly sales volumes, in the situation at hand, changes in these variables do indeed have a direct impact on unit as well as dollar sales. In other words, we now take into account elasticity namely, price and advertising elasticity of demand. Price elasticity of demand indicates the responsiveness of demand to changes in price, that is, it measures the percentage change in total quantity demanded as a result of either a one percent increase or decrease in price. Advertising elasticity of demand on the other hand, is said to measure the market’s responsiveness to fluctuations in advertising saturation, or similarly, the percentage change in quantity demanded in response to a one percent change in advertising spend.

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1. Using the Smart Sheet, what is the profit maximizing level of advertising, selling effort and price? (Hint: Requires Solver) Would you recommend the firm implement this policy? Why or why not?

After conducting the following calculations, we identify that the profit maximizing level of advertising and sales efforts to be $1,589,271 and $1,033,026 respectively, and the profit maximizing price to be $275.00. If we judge our results solely on the basis of the resulting effects to net profits, then certainly implementing such a pricing and marketing spend policy would be recommended. The reason being, after maximizing profits we see a 20.4% increase year over year in net profit alongside a 30.5% increase year over year in net contribution margin. Comparing that to our initial situation where we’ve held price, advertising, and selling efforts constant we see a 24% increase year over year in net profits and a 32% increase year over year in net contribution margin from our earlier projections. However, where we would advise the company to err on the side of caution is the consequential effects to market share and unit sales volumes. Namely, as a result of maximizing profits we observe nearly a 10% decrease in company market share and a 3.7% decrease in unit volume sales year over year.