CALCULATION OF ACCOUNTING

QUESTION
Marketing Decision Analysis

Note: This case is due on April 16
th
Case 2 Notes
(Monday) due to Easter break. This being second case,
you are expected to be familiar with the case guidelines (in MUSO) and all guidelines will be
strictly followed.

1) Analysis section should contain all your calculations.
2) You have to stick to the space provided for each section in the case write-up. Only the
visible portion of your text will be graded.
3) Model assessment should discuss why your method is appropriate for solving the
problem.
4) Your case task also includes sensitivity analysis as a question. You can answer this
question under the sensitivity analysis section of the case write-up.
Mel Guards is a Melbourne based company providing security services to mid-sized
organizations. Its primary clients are corporate offices, colleges and shopping malls. As of
2012, the Mel Guards had 70 clients across the three sectors and it charges a uniform service
fee of $200,000 per client. The company had been earning less than 10% returns for several
years and is now embarking on a profitability expansion path with a stated objective of $2
million in profits. It has identified two main strategies to increase its profits – acquiring new
customers and/or increasing the profitability of its existing customers. Mel Guards has hired
you as its marketing consultant to analyse the profit potential of different strategies and
advise them on which one to pursue.
Mel Guards has provided following information about its clients to enable your analysis.

Sector
No. of.
clients
Avg. Annual
expenses per client
Service fee
per client
Offices  20  $170,000  $200,000  $500,000
Colleges  40  $150,000  $200,000  $500,000
Malls  10  $190,000  $200,000  $500,000
Fixed
costs
The company applies a discount rate of 10% and has a retention rate of 100%. Mel Guard has
to invest $100,000 for prospecting a new client and it has an acquisition rate of 15%. In
addition, its marketing department has provided with you with its demand equations for each
sector, based on its past pricing experience. These demand equations are locally linear
approximations and are valid only around the current service fee level of $200,000.
Offices:   No. of. Clients (demand) = 100-[(Service fee*4)/10,000]
Colleges: No. of. Clients = 100-[(Service fee*3)/10,000]
Shopping Malls: No. of clients = 100-[(Service fee*4.5)/10,000]
Your specific tasks are outlined as follows.
1) Identify whether Mel Guard can increase its profitability by acquiring new clients. If
so, identify the sector or sectors that Mel Guard should focus its attention on.
(Hint: Calculate the CLV and PLV separately for each sector and identify whether it
is worth prospecting)

2) Analyse whether Mel Guard can extract more profits from its current clients by i)
increasing its service fee uniformly across the sectors or ii) by charging different
service fee for different sectors.

a. Calculate the net profit from Mel Guards existing clients taking both its fixed
and variable costs in to account.

b. Calculate the maximum profit that Mel Guard can achieve by charging same
service fee to all sectors.
(Hint: Using demand equation, calculate the demand of each sector and the
total profits at current service fee. Use solver to find the service fee at which
the total profit is maximized. When using Solver, set the current price to
$200,000 in the formula and then  find the optimal price)

c. Calculate the maximum profit that Mel Guard can achieve by charging
different service fees to different sectors.
(Hint: Use solver to find the profit maximizing service fee for each sector
separately and find the overall profit).

d. How sensitive are your results to the demand assumptions? How will your
results change if the demand (No. of clients) increases or decreases by 20%.
(Hint: Your new demand will be 1.2 times or 0.8 times the current demand).

[Note: No. of. Clients or demand should be in whole numbers and not fractions. You
can round off the fraction to nearest whole number using TRUNC (number,0) option
in Excel].

SOLUTION

JI67

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