Blue Mountain Coffee ADBUDG

1. State precisely what you think the objectives of Blue Mountains 1994 advertising plan should have been. Were these Van Tassles
objectives? Lucinda Pogues? I. Figures?
The objectives of Blue Mountains 1994 advertising plan should have been to:
Drive American consumption of coffee, generally, back up.
Differentiate the Blue Mountain product line from its competitors by highlighting Blue Mountains focus on quality. Per the article, Blue
Mountain coffee is noticeably richer and more aromatic than many competing coffees.
Increase consumer awareness and impact consumer attitudes regarding Blue Mountain coffee.
Balance Blue Mountains short term and long term goals, with extra emphasis placed on long term market share.
Expand not only Blue Mountains share of its existing market, but also its market footprint.

In contrast, the objectives of the key players at Blue Mountain are summarized below:
Reginald Van Tassle, Advertising Manager, seeks to reverse the long-term downward trend in Blue Mountains market position. He
intends to increase advertising as long as resulting increased market share can cover the increased advertising costs. Therefore, his
focus is on market share without consideration for profitability.
Lucinda Pogues, President and major stockholder of Blue Mountain Company, seeks to improve market share and profitability of Blue
Mountain. To do this, she felt they needed to increase consumer awareness of the Blue Mountain brand and develop more favorable
consumer attitudes. Ms. Pogues focus is both short term and long term.
I.Figure, Controller, strives to maximize profitability in order to relieve current cash flow bind and maintain quarterly dividend. Ms.
Figures focus is primarily short term.

2. Evaluate the results obtained from the 1994 (FY) advertising funds. What do you think the results would have been if the 20 percent
increase had been continued for the entire year?
The increased advertising spend in Q2 FY94 ($2.4M compared to $2M in previous quarters) resulted in increased market share of .1%. Using I.
Figures data (total market of about 22 million cases per quarter and a realized share change from 0.054 to 0.056 (a 0.002 increase)), Blue
Mountain recognized increased sales of:
a. $198,000 in Q2 ($4.50 x 22 million x 0.002)
b. $198,000 in Q3 ($4.50 x 22 million x 0.002)


c. $33,000 in April ($4.50 x (22 million/3) x 0.001)
Total realized gain of $429,000, compared to total increase in advertising expenditures of $500,000 ($400,000 in Q2 and $100,000 in Q3).

Using the data in Van Tassles table on page 7 of the case, we used the tool to project market share, thus sales, using the ADBUDG tool. The
results are summarized in the table below. If we review the results in Q2, Q3 and April in isolation, in order to be consistent with the analysis of
actual results above, we see that the tool projected the following:
a. $198,000 increase in sales in Q2 based on a 5.6% market share (a 0.002 increase) ($4.50 x 22 million x 0.002)
b. $227,700 increase in sales in Q3 based on a 5.63% market share (a 0.0023 increase) ($4.50 x 22 million x 0.0023)
c. $99,000 increase in sales in April based on a 5.6% market share in Q4 (a 0.002 increase) ($4.50 x (22 million/3) x 0.002)
This analysis using the ADBUDG tool suggests that we should have had a gain of $524,700, which is $95,700 more than was actually realized.
Therefore, it should be noted that the tool may overestimate the sales increases resulting from increased marketing spend.




Units Dollars Units Dollars Before Adv. After Adv. Cumulative
Initial 5.40%
Q1 2.00 M$ 1.00 1.00 5.40% 1.18800 20.4 M$ 22 378.4 M$ 5.3 M$ 3.3 M$ 3.3 M$
Q2 2.40 M$ 1.00 1.00 5.60% 1.24432 21.4 M$ 22 382.2 M$ 5.6 M$ 3.2 M$ 6.5 M$
Q3 2.10 M$ 1.00 1.00 5.63% 1.26291 21.7 M$ 22 386.0 M$ 5.7 M$ 3.6 M$ 10.1 M$
Q4 2.00 M$ 8.50 M$ 1.00 1.00 5.60% 1.26886 21.8 M$ 23 389.9 M$ 5.7 M$ 3.7 M$ 13.8 M$
Q1 2.00 M$ 1.00 1.00 5.57% 1.27568 21.9 M$ 23 393.8 M$ 5.7 M$ 3.7 M$ 17.6 M$
Q2 2.00 M$ 1.00 1.00 5.55% 1.28327 22.1 M$ 23 397.7 M$ 5.8 M$ 3.8 M$ 21.4 M$
Q3 2.00 M$ 1.00 1.00 5.53% 1.29157 22.2 M$ 23 401.7 M$ 5.8 M$ 3.8 M$ 25.2 M$
Q4 2.00 M$ 8.00 M$ 1.00 1.00 5.51% 1.30049 22.4 M$ 24 405.7 M$ 5.9 M$ 3.9 M$ 29.0 M$
Q1 2.00 M$ 1.00 1.00 5.50% 1.30999 22.5 M$ 24 409.8 M$ 5.9 M$ 3.9 M$ 32.9 M$
Q2 2.00 M$ 1.00 1.00 5.49% 1.32001 22.7 M$ 24 413.9 M$ 5.9 M$ 3.9 M$ 36.9 M$
Q3 2.00 M$ 1.00 1.00 5.47% 1.33050 22.9 M$ 24 418.0 M$ 6.0 M$ 4.0 M$ 40.8 M$
Q4 2.00 M$ 8.00 M$ 1.00 1.00 5.47% 1.34142 23.1 M$ 25 422.2 M$ 6.0 M$ 4.0 M$ 44.9 M$
Brand Sales Product Class Sales Contribution
Period Advertising
Annual Adv.
Budget
Copy
Effectiveness
Media
Efficiency
Share



Nevertheless, the tool provides very good information and is a valuable tool for managers as they make budgeting decisions. Therefore, weve
used the tool to evaluate expected impact to total brand sales had Van Tassle been permitted to spend $2.4M quarterly for the remainder of the
year.

The tool indicates that if wed maintained an increased level of advertising spend ($2.4 M quarterly compared to $2M quarterly), market share
would have peaked at 5.93 in Q4 but increased market share (greater than original share of 5.4) would have sustained throughout the next
couple of years.

Forecasts
Units Dollars Units Dollars Before Adv. After Adv. Cumulative
Initial 5.40%
Q1 2.00 M$ 1.00 1.00 5.40% 1.18800 20.4 M$ 22 378.4 M$ 5.3 M$ 3.3 M$ 3.3 M$
Q2 2.40 M$ 1.00 1.00 5.60% 1.24432 21.4 M$ 22 382.2 M$ 5.6 M$ 3.2 M$ 6.5 M$
Q3 2.40 M$ 1.00 1.00 5.77% 1.29583 22.3 M$ 22 386.0 M$ 5.8 M$ 3.4 M$ 10.0 M$
Q4 2.40 M$ 9.20 M$ 1.00 1.00 5.93% 1.34313 23.1 M$ 23 389.9 M$ 6.0 M$ 3.6 M$ 13.6 M$
Q1 2.00 M$ 1.00 1.00 5.86% 1.34096 23.1 M$ 23 393.8 M$ 6.0 M$ 4.0 M$ 17.7 M$
Q2 2.00 M$ 1.00 1.00 5.80% 1.34066 23.1 M$ 23 397.7 M$ 6.0 M$ 4.0 M$ 21.7 M$
Q3 2.00 M$ 1.00 1.00 5.75% 1.34202 23.1 M$ 23 401.7 M$ 6.0 M$ 4.0 M$ 25.7 M$
Q4 2.00 M$ 8.00 M$ 1.00 1.00 5.70% 1.34484 23.1 M$ 24 405.7 M$ 6.1 M$ 4.1 M$ 29.8 M$
Q1 2.00 M$ 1.00 1.00 5.66% 1.34898 23.2 M$ 24 409.8 M$ 6.1 M$ 4.1 M$ 33.8 M$
Q2 2.00 M$ 1.00 1.00 5.63% 1.35428 23.3 M$ 24 413.9 M$ 6.1 M$ 4.1 M$ 37.9 M$
Q3 2.00 M$ 1.00 1.00 5.60% 1.36062 23.4 M$ 24 418.0 M$ 6.1 M$ 4.1 M$ 42.1 M$
Q4 2.00 M$ 8.00 M$ 1.00 1.00 5.57% 1.36790 23.5 M$ 25 422.2 M$ 6.2 M$ 4.2 M$ 46.2 M$
Brand Sales Product Class Sales Contribution
Period Advertising
Annual Adv.
Budget
Copy
Effectiveness
Media
Efficiency
Share



3. What should Van Tassle propose as an advertising budget for 1995? How should he justify this budget to top management?
The table below shows analysis of varying levels of marketing spend and its impact on total sales. Given that increased marketing spend in 1995
will impact market share, thus total sales, Blue Mountain should consider returns in future periods. Therefore, we used the ADBUDG excel tool
to evaluate Blue Mountains marketing strategy and its impact on brand sales for fiscal year 1994 (because we have actual data), 1995 (because
we seek to establish best marketing strategy for period), and 1996 (because marketing spend in 1995 will impact sales in 1996). The table below
summarizes the impact to brand sales for these three years at varying levels of marketing spend. Based on this analysis, we suggest that Van
Tassle propose that marketing spend be increased by 10%, or $200,000, for each quarter of FY95. Though sales continue to grow as marketing
spend is increased, the last column of the table, total sales as a % of marketing spend, suggests that the impact made by increased marketing
spend is greatest at 10%.

At the 10% increase throughout 1995, the market share will increase to 6.0% within the first 2 quarters and to 6.5% by the end of the year. This
will allow management to see immediate sales increases due to the added expenditures in marketing. The overall contribution due to
advertising throughout 1995 will be 16.9M$. Should Blue Mountain decide to remain at the initial spend of $2M in 1996, their market share
would gradually decrease to 6% by the end of the year. The total contribution resulting from a quarterly advertising expenditure of 2.2M$
throughout 1995 and 2.0M$ throughout 1996 would equate to 49.2 M$.
$ %
No change - $2M/quarter 265.2 M$ 0.0 M$ - - 0.01326%
5% increase - $2.1M/quarter 269.1 M$ 3.9 M$ 3.5 M$ 1.32% 0.01281%
10% increase - $2.2M/quarter 272.9 M$ 7.7 M$ 6.9 M$ 2.60% 0.01240%
15% increase - $2.3M/quarter 276.6 M$ 11.4 M$ 10.2 M$ 3.85% 0.01203%
20% increase - $2.4M/quarter 280.0 M$ 14.8 M$ 13.2 M$ 4.98% 0.01167%
25% increase - $2.5M/quarter 283.3 M$ 18.1 M$ 16.5 M$ 6.22% 0.01133%
Sales growth resulting
from marketing
Total Brand Sales in $
(FY94 - FY96)
FY1995 Marketing Budget
Strategy
Total Sales
as % of mkt
spend
Sales growth less
marketing spend




5.4% 5.4%
5.5% 5.5% 5.5%
5.8%
6.0%
6.3%
6.5%
6.3%
6.2%
6.1%
6.0%
0.0 M$
0.5 M$
1.0 M$
1.5 M$
2.0 M$
2.5 M$
3.0 M$
0%
1%
2%
3%
4%
5%
6%
7%
Initial Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
A
d
v
e
r
t
i
s
i
n
g

S
h
a
r
e

Period
Advertising and Share per Period
13.58338466
49.24293529
0 M$
10 M$
20 M$
30 M$
40 M$
50 M$
60 M$
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
C
o
n
t
r
i
b
u
t
i
o
n

Period
Contribution Before and After Advertising
Before
Advertising
After
Advertising
Cumulated
Contribution


4. How should Van Tassle deal with the issues of seasonality and copy quality?
The table below summarizes the results of analyzing copy quality using the ADBUDG model. It is clear that copy quality has a significant impact
on the sales growth resulting from marketing.


Therefore, Van Tassle should take the copy quality issues seriously and not accept less than expected from his vendor. In response to the issues
with regard to copy quality, Van Tassle should consider the following options:
a. Seeking an alternate marketing company with a history of and reputation for quality.
b. Amending the contract with Aardvark Associates to hold them accountable for the quality of the marketing materials they produce for
Blue Mountain. For example, should the copy quality ratings be less than 1.0, Blue Mountain could require Aardvark Associates to
refund a pre-defined percentage of marketing fees paid.
Most markets experience what is known as seasonality. As the coffee market is no different, Blue Mountain should be mindful of this when
making decisions regarding the advertising budget. It is evident in the market that consumption of coffee decreases in the summer months due
to the warm weather. Arguments can be made that advertising dollars should be decreased at this time. However, if the campaigns during this
time were centered on iced coffees, it could also be argued that additional funds should be spent during this down season.


Copy Quality
(assuming $2M
marketing spend)
Total Brand
Sales in $
(FY94 - FY96)
Sales growth resulting
from copy quality
(compared to 1)
0.9 248.3 M$ -8.3 M$
0.95 252.5 M$ -4.1 M$
1 256.6 M$ 0.0 M$
1.05 260.5 M$ 3.9 M$
1.1 264.3 M$ 7.7 M$
1.15 268.0 M$ 11.4 M$
1.2 271.4 M$ 14.8 M$


5. Comment on the uses and limitations of the ADBUDG model as a decision aid for this case and, more generally, as an advertising
budgeting decision aid.
Though the ADBUDG model is very helpful, its uses are limited. Managers should keep in mind that there are other factors, not included in the
model, that could (and should) impact marketing decisions. In many cases, managers will have more data than that considered in the model,
and should consider this data appropriately.
Additionally, the value derived from the results of this model is limited by organizational constraints. For example, the model may suggest that
Blue Mountain can see the greatest return if they spend substantially more on marketing; however, Blue Mountain may not have the cash flow
required to make such a significant investment in marketing.
The results from the ADBUDG model are limited by the accuracy and appropriateness of the parameters and assumptions built into the model
and specified by the manager. Therefore, the model is dependent, in large part, on the judgmental input from the managers.
Another limitation of the model is that the solutions considered are limited and do not represent all possible solutions within the range
considered. Though possible, it is not feasible or cost effective to consider all possible decisions within the range of possibility.