Prices, costs, margins and purchase quantity

 

Prices, costs, and average purchase volume

The core component of the ATAR model is designed to generate the estimation of the proportion of the target market to become ongoing loyal or occasional customers = the brand’s customer base.

Once we obtain this information, we need to combine it with price, cost and purchase levels in order to generate the sales and profitability forecasts.

Setting Price points

The easiest way to consider pricing in the ATAR forecasting model is to look at the product relative to the competition. If the product is relatively “equal” in quality and features, then you should look to price the product around the market average.

If you have a superior, quite differentiated product, then you should look to generate some form of price premium by pricing above the market. You can also price above the market if the new product is supported by strong brand equity.

If your product is a “me-too” offering with limited differentiation, then you are more likely to need to compete on price and set a lower price point than the market average.

Who are you selling to?

If you are preparing the ATAR for a manufacturer that sells its products via retailers or wholesalers, then you need to consider the price that they sell to their direct customers. In this case you would NOT use the retail price.

For example, manufacturer of pet food might sell a can of dog food to a retailer for $1. The retailer then sells the dog food to an end-consumer for $2. But please remember, if you are preparing this ATAR forecast for the manufacturer then you need to use $1 (their selling price) in the forecast model.

Unfortunately, it is not uncommon for marketing students to forget this point and end up with a dramatically overstated financial forecast as a result.

Unit costs

The other input needed at this stage to determine the average unit margin (profit margin per unit) is the cost of producing and distributing the product.

If you are internal to a firm, then you would know this information very precisely. If you are a marketing student, you will need to estimate it from industry averages (looking for gross margin percentages) or from published financials within annual reports.

The combination of price less costs will give us the average unit margin – the profit margin per individual product sold. Obviously this profit margin is then multiplied by the overall sales volume to generate the sales forecasts. If we over or under state the margin by a significant amount, then we risk an unrealistic financial forecast.

Average purchase volume

This is another significant factor in the underlying sales and profitability forecasts in the ATAR model. This is the average number of the product – across all brands – that consumers buy in a period (in this case, on an annual basis).

Sometimes these figures are published in media reports about the consumption of certain products. Sometimes the information is available from industry bodies or government statistical areas. And of course, if we are internal to the organization, then we can determine this average consumption level quite precisely.

Again, as with the unit margin estimation, if we are significantly incorrect with our estimation of average purchase consumption/volume, then our overall financial forecasts with the ATAR approach will be largely inaccurate.

Related topics

How the ATAR formula works