Question

5. After six months, Sally's band finds that the Moderate Sales forecast is the most accurate for the quantity and types of t-shirts they are selling. The band develops two potential marketing tactics to increase the profit they earn from t-shirts. Tactic A: Work with a lower-cost supplier for the Basic Tees. The band can buy the Basic Tees for $10.50 per shirt (variable cost). The shirts are of lesser quality, so the band expects 20% of the Basic Tee customers to switch to purchasing the Premium Tee. Tactic B: Do not change the supplier for the Basic Tees. Launch an advertising campaign, which includes hiring models, shooting photos and videos, an influencer campaign, and spending more orn Instagram ads. They estimate the total campaign will cost $6600, and will double sales of each t-shirt type. Which tactic should the band implement, and why? (Must give numbers to support your answer).

Answer 1

In my opinion, the company should opt for Tactic B i.e to launch an advertising campaign.

Tactic A

The various costs involved in manufacturing of the t shirt (assumption = 1000 pc)

1. Buy from seller - $10.50

2. Fixed costs (Rent, electricity etc) = $1500/1000 = $1.5/t shirt

Total = $12 (when buying from a low cost seller)

Wholesale price = 2*$12= $24

Approximate profit = 50%

Tactic A is definitely a way to increase profits but in short term. Working with a lower-cost supplier will reduce the overall production costs and thus the price of the basic tee for the firm. However, it will also mean compromising on the quality of the product offered to the customer. There is an assumption made by the company that 20% of the customers of the basic tee will shift their preferences to the Premium Tee. Since the clothing industry is very competitive and filled with substitutes, chances are the consumers might shift to a different brand all together. Thus, an attempt to increase profits might end up reducing the sales and tarnishing the market image of the company in the long run. It may also lead to erosion of the brand value of the company.

On the other hand, investing money in marketing tactic B will no doubt attract huge one time expenses of $6000, but this advertising cost will reap the benefits for longer period of time. With the right advertisement targeted to the right audience through the right channel the company is sure to increase its brand presence. More consumers will know about the brand, and since the company has no plans to compromise on the quality of the product it will lead to better customer satisfaction. Business is not just about making people buy your product but is also about turning them into loyal towards the company.

The various costs involved in manufacturing of the t shirt (assumption = 1000 pc)

1. Buy from seller - $13

2. Fixed costs (Rent, electricity etc) = $1500/1000 = $1.5/t shirt

3. Advertisement cost = $6000 (spread over 2 years) = 6000/2 = $300/year for 1000 pc => $0.30 for 1 piece

Total = $14.8 or $15 approximately (when buying from a low cost seller)

Wholesale price = 2*$15= $30

Approximate profit = 50%

This marketing tactic is also expected to increase the sales by 50% therefore the profits will increase accordingly.