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Blue Mountain Coffee case

In this case we use the adbudg model. The adbudg model is a sales response model which suggests the optimal level of advertising and when to advertise e.g. how to allocate the advertising budget, do we use it all in the first quarter, how much should we spend etc. In this case we will determine the optimal budget for Blue Mountain Coffee. Their current advertising budget is 8m a year. However, by using the adbudg model we will see if this is the appropriate amount to spend on a yearly basis or if there should be an increased budget. Scenario 1 The model analyses quarter by quarter. As off now the budget and expected revenue is as follows:

As we can see the budget is allocated equally in each quarter, with a budget of $8m annually. With this budget Blue Mountain Coffee is expected to make $43.8m in profits.

Scenario 2 When running solver to get the optimal budget we get the following:

The first thing to notice is that the budget has been increased by $2m. Also, the way the budget is allocated in the four quarters has changed. In the previous budget it was allocated equally in each quarter. Now we see that in the first quarter it is higher at $2.59m then decreases to $2.39m. This makes perfectly logical sense as we would want to create a lot of noise in the beginning to increase awareness, which has been the problem for Blue Mountain Coffee. Then the rest of that year they can slowly decrease the advertising, but only by a little, as we see from the above results. The profit made by using the new optimal budget is $57.2m, an increase of $13.4m. So by increasing the budget, as the advertising manager predicted, Blue Mountain Coffee can expect a better result. By using the adbudg model, he has a stronger argument when asking for an increased budget. The market share goes from 5.40% to 7.66%, an increase of 2.26%. In both above scenarios the weights of both long and short term profit and share are equally weighted. Scenario 3 If we assume that this is a real life example the advertising manager might have to produce results based on short term instead of the long term. Many managers are pressed with getting results in a few quarters. With the adbudg model we can adjust for this by changing the weight of the short term profit and/or short term market share. If we change short term profit weight to 2, like the following:

And hereafter run solver, we get the following results:

If we analyze the numbers now we see that there are small changes, by the end of the first year, in Q4 we get $15.2m instead of $15.1, a subtle change but still a faster result. The market share is 6.46% in Q3 instead of 6.40%. This way we can get results faster. However, I would not recommend the advertising manager to do this as it gives a poorer end result. By the end of the third year we get a result of $57.1m in profit where we made $57.2m if we weight short term the same as long term. Also the final market share is 7.65% instead of 7.66%, a small change albeit, but still no reason to choose scenario 3 over scenario 2. In summary: My decision in this case is that I would choose scenario 2 and discard scenario 1 and 3.