Blue Mountain Coffee Case
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,