Allegro Case Analysis

Introduction (or Background):

The objective of this memo is to review limitations of using a simple sheet to estimate the Net Profits and benefits of using a smart sheet with a solver to accurately evaluate Net Profits for current (2016) and next year (2017).

Findings:

We recommend that the price for Allegro be set at $275 for 2017. Advertising Spend should be set at $1,589,271 and investments in the sales force and distribution should be at $1,033,025. Our expected profit at these target levels is $1,324,061. Our market share model suggests that we would end 2017 with a 2.7% market share level and sales units are predicted to be 63,571. We recommend these levels and suggest allocation of resources for 2017 as listed in Table 1.

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Table 1: Marketing Decision Mix

Discussion:

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To provide a simple comparison between simple and smart sheet, we decided to cut the advertising and sales efforts to $0 while increasing the unit price to $500 and evaluate the Net Profit. Table 2 shows the analysis.

The smart sheet considers managerial inputs such as price elasticity to consider its impact on market share. This improves the accuracy of the model and helps in better decision making.

The primary objective in our data analysis was to maximize profit. We used the market share model spreadsheet and assumed a price elasticity of -2.2%. We also assumed an increase in .2% in sales for a 1% increase in advertising and a .1% increase in sales with a 1% increase in sales force and distribution (S&D) investments. We utilized solver to maximize our net profit formula and added constraints on price, advertising and S&D spend. Using nonlinear optimization, Solver suggested the price of $275 and Advertising spend of $1.589M and sales spend of 1.033M which yields a Net profit of $1.324M.

Overall we agree with the results and feel it is a conservative estimate especially on the cost side. Our variable costs are assumed to be the same from 2016 and we don’t capture any efficiency gains for 2017. Our overhead is actually predicted to be higher by $400,000 from 2016 which we feel is an aggressive estimate. We believe our actual costs could be lower for 2017.

Advertising and S&D spend show increases from 2016 i.e. advertising rises ~76% while S&D rises a modest 3.4%. Any further increases to these levels does increase sales revenue however, costs increase more than the revenue increase leading to a lower profit level than the optimal level predicted above. Further, increases in Advertising and S&D spend results in diminishing growth rates in sales.

If the company’s strategy is to maximize the market share while maintaining current profits, the market share can be increased to 3.8% with reduction in price and increase in advertising and sales spending. Table 3 shows suggested $ amounts for maximizing market share.

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Table 3: Market Share Maximizing

This policy of maximizing the market share does not add anything to the bottom line. Without knowing historical trends, competitive prices it is hard to know if the market share will hold true if we get in a price war with the competition.