“Success does not consist in never making mistakes, but in never making the same one a second time.”
– George Bernard
Remember learning to ride a bike? Starting with training wheels you wobble around on your bike. The look in your teacher’s face is one of pure joy at your achievement. You might fall but you are quickly ushered to get back on your bike. You slowly learn to balance. Next, the training wheels come off. Riding a bike suddenly became frightening without your training wheels masquerading as a safety net. You lean to the left, lean to the right but still not getting it quite right; you tumble off. You are upset, but you get back up again and you learn to balance and ride a bike.Learning the simulation is just like learning how to ride a bike, you have to keep going in order to learn and if you fall, you just have to get back up again. The key to success is learning from your mistakes.
Over the years, we have noticed a few common mistakes that students make in the simulation that will be reflected in real-life if not learned from. As they say, prevention is better than cure and as such, we want you to learn from these mistakes and show you how to resolve them.
Three of the most common mistakes we see within MikesBikes-Advanced are:
- Misunderstanding the Importance of Reaching the Right Customers
- Failed Development Projects
- Excessive Stock on Hand
This will be a series of articles addressing the common mistakes we see within our simulations and we will help you correct these issues. This article focuses on MikesBikes-Advanced.
Mistake#1: Misunderstanding the Importance of Reaching the Right Customers
Not understanding this can be a costly mistake as it often leads to incorrectly assigning your marketing mix. This can have a negative impact on the demand for your products and can also lead to overspending. Meaning your firm’s profitability is at risk!
How do you know if you are spending your marketing budget inefficiently? Follow through this section, it will show you how to efficiently allocate your marketing budget.
There are three aspects to a marketing budget within MikesBikes-Advanced:
Each market segment is sensitive to different dimensions. View the Market Segment Scenario Information report.
Branding and Advertising work together to improve your firm’s Awareness rating (see Market Summary) whereas your PR index is only influenced by PR spend. Branding promotes your firm’s brands and will influence all of your product’s awareness whereas advertising is product specific.
How do I interpret this Product Dimension Sensitivities graph?
The best way to explain it is through an example. If we take the Racers segment we see it has a low sensitivity to Advertising and a high sensitivity to PR. This means that an increase to our Racers bikes’ PR index (see Market Summary report) is going to have a larger increase to our sales volume than a change to our Awareness rating.
I’ve now chosen which dimensions of marketing I want to focus on, what next?
Branding impacts the awareness of every product you have and is valuable if you have several products within the market. This is a straight forward decision; simply enter in the amount you want to invest into branding.
Whereas Advertising and PR decisions require you to choose media channels based upon the media types’ reach and the media viewing habits of each market segment. There are three media choices to develop your marketing mix on: Television, Internet and Magazines.
There are two substantial sources of information you can use to determine your optimal advertising mix for a given advertising spend.
Each media type can reach a given proportion of its audience for a given investment. This is shown within the Advertising and PR Reach by Media graph below (this can be found within the Market Segment Scenario Information report).
The best way to explain this would be to provide an example. A $2 million spent on TV or Magazine advertising (purple line) could reach around 40% of the potential TV or Magazine audience. Whereas $2 million spend on Internet advertising (green line) could reach 49% of potential Internet audience.
However, you also have to consider who uses each media channel. This is where we look at the Media Viewing Habits:
The table shows us that 10% of the Racers market watch TV, 40% engage within the use of the Internet regularly, and 60% read magazines. You use this information with the reach curves to calculate the percentage of the market segment you’re actually reaching.
Okay. I get that, but how do I tell if my MikesBikes-Advanced marketing budget is ineffective?
We have prepared for you two examples. One is a bad example of a marketing spend and the other is a good example. Through these examples this article will walk you through how to calculate an effective spend.
“I have a $2 million budget. I see most people read magazines in the Racers Market and they’re sensitive to PR so I’m going to spend this $2 million on magazines within the Racers market”
Sound logical, right? No. Far from it.
It is correct that the Racers segment is highly sensitive to PR. It is also correct that 60% of the Racers segment read magazines however it is ignoring the effective reach of each media type. Let’s look at the audience reached and calculate this ‘real reach’ for this bad marketing expenditure:
From the above curve we can see that a $2 million spend on magazines would reach approximately 38%. 60% of the Racers segment read magazines regularly. So our $2 million spend would reach 38% x 60% = 22.8%
So from that example, you might think that it’s best to allocate your budget completely on Magazines, but if we come up with a good Marketing Mix, we might be able to do better.
“I’ve got $2 million to spend on marketing this Racers product directly. I see the Racers market is sensitive to changes in PR so I’m going to fund my marketing budget into PR for this bike. I also see that 60% of this segment view magazines but 40% are on the internet regularly. Also, while racers segment mostly reads magazines; the internet has a higher reach so I will look into investing in both.”
Let’s look at how this logic plays out.
If we spend $1 million on Internet, we could reach approximately 44% of Internet viewers. 40% of the Racers segment is reachable via Internet advertising, meaning we could reach approximately 40% x 44% = 17.6% of the Racer segment.
Also spending $1 million on Magazines, we could reach approximately 23% of Magazine Viewers. So we could reach approximately 23% x 60% = 13.8% of the Racer segment.
Together, our $2 million budget (half spent on Internet and half on Magazine) would reach approximately 31.4% of the Racer segment. This is clearly a better use of our PR budget than bad example given which only reached 22.8% of the Racers segment.
As you can see, with the same budget, but a different allocation towards each media channel can make a huge difference in the amount of consumers you can reach.
This is only an example of good and bad marketing mixes. This is far from the best mix you can make. We suggest playing around on different Marketing Mix and see what works best for your strategy and budget.
Mistake#2: Failed Product Development Projects
You want to get product development projects right the first time as this can be a costly mistake. It can mean either your Unit Prime Cost is higher than you want and/or your specifications are not as you wanted resulting in a lower demand for your product if they are wrong.
There could be two reasons why your project failed:
1. The project/budget expenditure was too low and/or
2. The requested unit prime cost was unrealistically low
As in real life, you do not want to commit to a product development project without checking that it was appropriately funded and that it would be able to provide an acceptable return on investment.
In addition, you have to be careful that the specifications you enter for your new product actually fall close to the ideal point of the segment you are targeting. Look under Reports for Perceptual Map of Market Segments to check this. Products outside the radius of influence (i.e. outside the circles) will not sell at all.
How do we conduct successful development projects?
We will walk you through an example where we develop the design for a racers bike. While the specifics and calculations may change, the steps you follow will be the same:
1. View the Indicative Values for Market Segments within the Product Development Scenario Information report to view the ideal product attribute levels desired by each segment. (Note: These desired product attributes by each market segment change slightly from year to year so be sure to keep monitoring for the changes.)
2. Take the current Style/Tech Specs of your closest existing Design Project and calculate the required change in Style/Design and Technical Specs.
In our example, the closest existing Design Project is our Adventurer Bike. You can view the Product Development Project Results Report to view your closest existing design paying attention to the Style/Design and Technical Specs:
3. Calculate the difference in Style and Technical Specifications between the desired design and the closest existing design.
As you can see, in this example, our only and closest existing design project is our Adventurer product. This features specifications of 50 Style and 60 Technical. Our desired design project has targeted specifications of 20 Style and 86 Technical.
So the difference is 30 Style and 26 Technical.
We can see on the Product Development Scenario Information report that each unit of Style development costs $1000 and each unit of Technical development costs $20,000.
Our example calculation will be:
30 x $1,000 added to 26 x $20,000 = $550,000
Therefore, our design cost would be $550,000 on the new design to achieve 20 Style and 86 echnical.
4. Calculate your prime cost.
From the table above we can see that the prime cost will be calculated at roughly $0.1 to $0.15 per design and $4.50 to $5.00 per technical specification. We want a racers bike with 20 style/design and 86 technical specifications.
A conservative calculation would therefore be:
0.15 x 20 added to 5.00 x 86 = $433
If we enter any additional expenditure on to our design cost this will be used to further reduce the Prime Cost.
How do I correct a failed product design?
A failed product design is a design that shows anything less than 100% success rate within the Product Development Results Report. Unfortunately this means you will need to design the design again. However! The failed design is likely to be a lot closer to your desired specifications than the previous closest design, thus it means it is likely to be cheaper to invest in. Simply follow the process above again working off the new closest existing design (even if the closest existing design is a failure).
Mistake#3: Excessive Closing Inventory
Too much inventory can cause cost your firm in Finished Goods Holding Cost, this can be a needless cost if you are able to predict next year’s demand more accurately.
There are two ways on how you can resolve this:
1. Start by making Accurate Sales Forecast based on last year’s Actual Sales and adjust production based on this forecast and your current stock levels.
Your Sales Forecast is how many units you believe you will sell in the coming year. This is an estimate based on: Last year’s demand and adjustments based on anticipated changes in demand.
You can assess last year’s demand through the Products – Sales, Margin, Production report.
We can see we sold 3,760 units last year and we have a huge closing inventory of 15,840 units. This means we have more stock on hand than the total sales of all of last year!
Simply adjust your production decisions keeping in mind your anticipated sales for next year and the amount of bikes you have on hand. In this example we would reduce our production for that bike to 0.
2. Another step you can take to resolve this is to conduct Product Redevelopment projects to modify your existing bike. This will then get rid of any excess stock that you may have. The units will be sold at cost and removed from your inventory.
Every situation is unique within the simulation and these are only recommendations based on common mistakes we have found. As such there are no generalizations but this article will provide you with the tools to diagnose your unique situation and correct any problems you may be facing.
If you have any questions or would like to discuss anything further from what has been mentioned, please feel free to get in touch with us by clicking here.
By Camille Canuto