Question

You might be familiar with Crazy Eddy, an owner of the “Crazy Eddy’s” home electronics stores that used to exist when you were younger (though maybe too young to remember). Some of the larger superstores like Best Buy and Circuit City moved in and began squeezing Eddy. As it turned out his tagline, “where the prices are insane,” was quite true, and he was forced out of business. Unbeknownst to many, Eddy was an avid skier, and his desire to continue running a business led him to buy a small mountain in NH, which he renamed “Crazy Eight’s” (in part because of the 8 lifts he planned to use at the mountain). Eddy thought that his major competition would not be the large ski areas who catered to resort type vacations, impeccable ski lodges, fully apportioned accommodations and a booming nightlife, but rather the smaller ski areas that catered to a more “hard-core” crowd which was more interested in just skiing without a lot of extra commotion at the bottom of the mountain. It would be a smaller ski area intended to fill a small niche in the New England Ski community. Eddy had gotten support from both the local communities and the local governments because of the jobs he would create. The state’s department of environmental services also agreed that the plans did not impact the surrounding environment enough to warrant stopping the project. All three groups warned however, that the plan must be followed as approved. Any significant changes, especially those that would cut down any more of the forest or keep skiers there after the hour of 7 PM on a regular basis, would be cause for further review and potential revocation of the building permit and environmental license (due to the impact both things had on the reproductive cycles of the endangered bobcats and fisher cats that lived in the area). Joe Ohno, one of my college buddies, signed on as a marketing consultant to the project in exchange for an “insane” salary and a stake in the ownership of the business. With some diligent work, he was able to find out the following information about the New England Ski and Snowboard Market. (Note: Henceforth any reference to ski, skiing or skier days, etc. is intended to cover both skiers and snowboarders. This may upset some hardcore snowboarders, but it is done to simplify the case. Sorry if you are offended.) The Market: Income from Ski Tickets, Lodging and Dining: There are approximately 10 Million skier days (a skier day being a person buying a lift ticket and using it for at least half a day) each year in New England. Ticket sales at the 10 largest destination resorts like Killington and Sunday River etc. take in about 30% of these skier days (on a Unit Basis) and approximately 48% (on dollar basis), leaving the remainder in both measures to be split among the remaining smaller mountains in a highly fragmented market. This does not account for the extra funds that are garnered by the overpriced dining and lodging, much of which is owned by the destination resorts. The revenue from this is usually estimated to be roughly 2.5 times (on average) the revenues from ticket sales. The average prices of a skier day are $51.00 and $24.00 dollars for the resorts and smaller ski areas, respectively. This number varied largely for the smaller mountains from $14.00 up to $55.00, depending upon the characteristics of the mountain. Customer Groups: Ohno found that there were two major customer groups in the industry (perfectly segmented to his amazement). The first was the resort traveler who generally traveled with a family or large group. This group tended to have large amounts of disposable income and was somewhat price insensitive. People in this group tended to travel to ski area for multiple days at once and ski only that area. Many came from the more southern New England states of Massachusetts, Rhode Island and Connecticut. This group skied entirely at resort areas. The second main group was the “true skiers,” these people may have families or come in groups, but were just as likely to come alone or in pairs. They tended to have less disposable income and were more price sensitive. Another important aspect of this group was that they tended to come for day trips only and were largely uninterested in anything except the conditions of the ski trails and ski lifts. They were a short drive from home and had little use for accommodations or nightlife facilities. This group was largely from northern New England states and skied exclusively at smaller ski areas. The Mountain: Crazy Eddy had some plans for the design of the mountain and found some discounted ski lifts from closing mountains in the area. Still, to start up the mountain, build a base lodge, and cut the trails he was looking at a sizeable investment. He managed through his fast talking to convince a bank to give him a sweet deal on a loan that would allow him to build all of this for a fixed cost of $7,000,000 yearly. Crazy Eddy was also able to sweet-talk his way into a deal with the owner of local high-end ski shop. The owner, who also owned the only Inn in the area and was looking to increase the occupancy rate at his older, but quaint establishment, agreed to provide the ski equipment rental services at the mountain for just the profits he could make with the rentals (a good deal as most companies had wanted to charge Eddy to do this) and the right to put up flyers for his 35 room inn. Strangely, he also would only sign at longest a yearly contract. Joe and Eddy both agreed that his service would help provide a better experience for their customers. Joe figured that variable cost for each skier day would be about $19. Crazy Eddy was fairly happy with the information that Joe compiled and asked him to turn in a break even market share analysis for his new mountain before leaving based on the share of the total number of skier days in New England (10MM) and a ticket price of $42/skier day (Eddy thought the quality of his mountain put him in the higher end of the price range for the smaller mountains). Joe argued that Eddy was using the wrong number of skier days on which to base a conservative estimate for break even market share, but agreed to do it only if Crazy Eddy allowed him to also do a few calculations on “true” market as Joe saw it. Eddy agreed but said that he wanted the calculations in both units and dollar share of market.

a.) (4 points) On what number of skier days did Joe feel they should base the breakeven market share calculations? (Just a number of skier days.)

b.) (6 points) Why did Joe think Eddy was using the wrong number of skier days for their specific ski area’s break even and who do you think was right, Eddy or Joe? Justify your answers.

The next morning Joe was called into Crazy Eddy’s office, and Eddy, true to his namesake, was flipping out. Crazy Eddy said “Joe these percentages don’t make any sense at all! First, you gave me four different market share measures that don’t match exactly and then you tell me we should use the larger market share numbers of each type (units and dollars) to base our breakeven on. You’d better start making some sense or you’re fired!”

c.) (20 points) What were the four break-even market shares (Two Unit Share calculations, Two Dollar Share calculations. One of each for Joe’s market Size and Eddy’s Market size) that Eddy had received from Joe? Please show your work.

d.) (3 points) Should Joe be concerned that the two market shares percentages (unit and dollar shares) do not exactly match for either his market or Eddy’s market? Why? Disaster was avoided for Joe. He finally made Eddy see things his way (for right of for wrong). Then however Eddy came up with a “great” idea. He figured that with all the business that they were bound to have a need for some slope side accommodations (at the mountain). “We might need to skimp a bit on making the trails as nice as they can be with our manpower, but I think this hotel is it.” He figured the fixed cost of the 150 room hotel (Maximum capacity of 750 people in any one night) would cost another $1,950,000 of fixed cost plus $10 of variable cost per ROOM per night. Rooms would be $100/night regardless of the number of people. Eddy figured he could fill 140 rooms a night for the ski season from about December 11th to April 30th (assume this season length is reasonable and 150 days long) each year. Eddy also wanted to spend another $50,000 (in addition to the $1,950,000) to advertise the hotel, figuring that would give him an advantage over some of the other resorts. Joe replied “Forget the financial issues which I can’t calculate in my head, this plan has a major issue with each of Dolan’s 5Cs! I don’t think that is a good idea at all.”

e.) (15 points) For EACH of the 5C’s explain at least one thing with which Joe had an issue. Eddy replied, “I only take financial arguments seriously. If my assumptions about occupancy rates and costs are correct, we should make a ton of money on this, right?” Joe was reluctant to bother with this in light of his reservations to the strategy of the problem, but he agreed.

f.) (7 points) Did Joe find support for the financial side (that is would there be an overall profit for the hotel assuming it had no affect on the ski ticket sales or the cost structure of the ski area operations) of this hotel idea in the absence of his strategic reservations with Eddy’s estimated number of rooms filled per night? Please justify your answer with a calculation.

Bonus Questions :

1. (2 points) We talked about financial motivations for distributors in some of the cases discussed in class. Besides price and percent mark-up or margin, what two other factors directly influence the financial motivation (i.e. total profit) of a channel partner (wholesalers, retailers, etc.) who carries a new product?

2. (3 Points) Eddy decides to sell packs of chewing gum at the ski lodge. He buys the gum in bulk from Yummie’s candy (a wholesaler) for $.50 per pack. If Eddy sells each pack with a 75% margin for himself what is the retail price (to a consumer)?

3. (3 Points) If Yummie’s sold the gum to Eddy at $.50 a pack, and which included a 50% Mark-up above the manufacturer’s selling price to them, what is the manufacturer’s selling price?

This question can be broken up into 10 Posted answered questions if need be.

Answer 1

(a) On what number of skier days did Joe feel they should base the breakeven market share calculations?

7 MM Skier Days - the amount of the smaller portion of the market held by smaller mountains.

(b) Why did Joe think Eddy was using the wrong number of skier days for their specific ski area’s break even and who do you think was right, Eddy or Joe? Justify your answers.

Joe did not think they should use the full 10 million (what Eddy wanted to use) as 30 percent of the market would only ski at destination resorts and the market would be perfectly segmented. Joe felt that the 7 Million Skier days would be a better number to base calculations on, because it represents the total number of skiers who would consider skiing on a smaller mountain (of which they are one). Joe was more right, as they had little hope of attracting the other 30 percent who only skied in the other "resort" mountains

The next morning Joe was called into Crazy Eddy’s office, and Eddy, true to his namesake, was flipping out. Crazy Eddy said “Joe these percentages don’t make any sense at all! First, you gave me four different market share measures that don’t match exactly and then you tell me we should use the larger market share numbers of each type (units and dollars) to base our breakeven on. You’d better start making some sense or you’re fired!”

(c) What were the four break-even market shares (Two Unit Share calculations, Two Dollar Share calculations. One of each for Joe’s market Size and Eddy’s Market size) that Eddy had received from Joe? Please show your work.

Unit Contribution (UC) = SP – VC = $42 - $19 = $23               

Total Fixed Cost = $7MM                                                                       

Breakeven Units = Fixed Cost / UC = 304,348 Units (Skier Day Tickets)

Or Breakeven Sales of : B/E Units * SP = 304,348*$42 = $12,782,609

Eddy:

So For 10MM Skier Days:

B/E Units Market Share

304,348 / 10MM = 3.04%  

B/E Sales Share:

Total Market = 3MM *$51 + 7MM*24 = $321MM

B/E Share = $12,782,609/$321MM = 3.98%

Joe:

For 7MM Skier Days Market:

B/E Units Market Share

304,348 / 7 MM = 4.3%

B/E Sales Share:

Total Market = 7MM*24 = $168 MM

B/E Share = $12,782,609/$168 MM = 7.6%

There is another acceptable way to calculate this that can get credit:

$51/day (for the big areas) X 3MM Skier Days = $153MM

The case says this is 48% of the market dollars: 153MM/.48 = $318.75MM

Or

$24/day (for small areas) X 7 Million skier days = 168 MM

With 52% of the $ value = $323.08 MM

Either of those is acceptable for full credit.

(d) Should Joe be concerned that the two market shares percentages (unit and dollar shares) do not exactly match for either his market or Eddy’s market? Why?

No. Dollar share and unit share do not necessarily have to match. They both tell you slightly different things and won’t be exactly the same unless every competitor has the same price (or very close). The pricing was widely varied, so this would suggest different market share results.

Disaster was avoided for Joe. He finally made Eddy see things his way (for right of for wrong). Then however Eddy came up with a “great” idea. He figured that with all the business that they were bound to have a need for some slope side accommodations (at the mountain). “We might need to skimp a bit on making the trails as nice as they can be with our manpower, but I think this hotel is it.” He figured the fixed cost of the 150 room hotel (Maximum capacity of 750 people in any one night) would cost another $1,950,000 of fixed cost plus $10 of variable cost per ROOM per night. Rooms would be $100/night regardless of the number of people. Eddy figured he could fill 140 rooms a night for the ski season from about December 11th to April 30th (assume this season length is reasonable and 150 days long) each year. Eddy also wanted to spend another $50,000 (in addition to the $1,950,000) to advertise the hotel, figuring that would give him an advantage over some of the other resorts.

Joe replied “Forget the financial issues which I can’t calculate in my head, this plan has a major issue with each of Dolan’s 5Cs! I don’t think that is a good idea at all.”

(e) For EACH of the 5C’s explain at least one thing with which Joe had an issue.

Company: It is unclear that your company has any expertise at all. It has done little research on the hotel accommodations in the area and probably will not have a great management plan. It should be more focused on the things that matter (like ski slope conditions than the hotel, especially with the limited manpower.

Customers: Your customers don’t care at all about accommodations there is no point to the investment. If you are not making the trail conditions as good as they can be, you are not serving them as well as you can.

Collaborators: You will be taking business away from your ski rental supplier this will likely upset him greatly and could cause relationships to sour. This could lead him to leave at the end of the season.

Context: The regulatory agencies and town govt. will be extremely upset and potentially pull all the permits.

Competitors: You’re competitors have been doing this for years and probably have far better facilities and will be able to promote far better ski and stay packages etc. They will likely have better advertising and larger marketing budgets.

Eddy replied, “I only take financial questions seriously. If my assumptions about occupancy rates and costs are correct, we should make a ton of money on this, right?”   Joe was reluctant to bother with this in light of his reservations to the strategy of the problem, but he agreed.

(f) Did Joe find support for the financial side (that is would there be an overall profit for the hotel assuming it had no affect on the ski ticket sales or the cost structure of the ski area operations) of this hotel idea in the absence of his strategic reservations with Eddy’s estimated number of rooms filled per night? Please justify your answer with a calculation.

Unit contribution = $100 - $10 = $90

No at 140 Rooms * $90/room/night (Unit Contribution) *150 nights = $1.89 Million

Which is less than the expenditure of the hotel and the advertising by $110K, thus you can’t make a profit at that rate, which has an extremely high occupancy rate (over 93%). You would have to have an occupancy rate of over 98% to turn a profit (which is likely unrealistic and still not a good idea for the strategic reasons mentioned before.)

Alternatively: they could focus on the B/E Units:

$2MM / $90 = Fixed Cost/ UC = 22,223 Rooms required

Total number of rooms = 140rooms/day * 150days = 21,000 Units.

Bonus Questions:

1. Volume and Cannibalization.

2. RC = $.50

Margin = (Price – Cost)/Price = > Price = Cost/(1-Margin) = .5/.25 = $2.

3. WSP = $.50

Cost = Price / (1+Markup) = .5/1.5 = $.33 = WC = MSP

****Please please please LIKE THIS ANSWER, so that I can get a small benefit, Please****