Question

Sally, a brand manager is considering several options for her company. Her company has recently developed and test marketed a new brand in a regional market. Based on the market test data, it appears that her customers like the new brand. However, during the market test, her competitors were not running any heavy promotions for their own brands. Sally feels there is a 60% chance that her competitors will run heavy promotions with their own brands if she launches her new brand in the national market. Her estimate is that she will lose about $2.5 million if she launches the new brand nationally and her competitors run heavy promotion. She estimates she will make $5 million if she launches nationally and competitors do not run heavy promotion. Can you help her figure what will happen if she launches nationally and explain to her why?

Answer 1

In this case, Sally's company will make an estimate $5 million if she launches the new brand nationally (provided the customers do not run heavy promotion) which means there is a potential in the brand to earn good( As the new brand earns when there are no promotions from the competitors)

Now, the company loses estimated $2.5 million in case the competitors run heavy promotions which is 60% probable

Now if we find the expected profit due to the launch of brand nationally, we get = $5 million * (1 - 0.60) - $2.5 million * 0.60 = $0.5 million

Apart from the positive expected profit of $0.5 million,

the competitors would not be able to run heavy promotions for long(in case they run heavy promotions in the first place) as that will lead to decreased or even negative margins. Thus when the promotions by the competitors are reduced or removed, the new brand will lead to profit.

Thus, there will be a long run profit when Sally launches the new brand nationally.