mattkid - sorry, but please stop and think about this again.1)...

mattkid - sorry, but please stop and think about this again.

1) You have a number of model scenarios running in this thread - with some variation between the scenarios in terms of price erosion. For example, the scenarios shown close to the top of the thread various have 20% & 30% price erosion.

2) In all of the scenarios you assume that DRR's operating costs will be 42% of revenue - at least for the early years. This appears to be one of the drivers of your model, rather than an output.

It is point 2 that I take issue with. DRR's operating costs will be driven by the number of units of product sold rather than by the price at which they are sold.

To take to ridiculous extremes - your approach assumes that if it costs you $42 to manufacture and sell Fonda when the unit selling price is $100, that you will somehow be able to cut your manufacture and selling expenses to just 42 cents if you choose to drop the price to $1.

Your modelling should instead assume a FIXED Production and marketing cost to DRR PER UNIT OF SALES expressed in dollars. It is reasonable to derive this FIXED figure from the 20% price erosion scenario, as this is the sort of scenario that Pete SMith has used when providing guidance previously. However, once you have calculated this figure, it should then be held constant in other scenarios that you might choose to look at.

As shown in my other post this morning under the price erosion thread, it is a big big problem for ACL if the price cut is 50% rather than 20%. This difference would cut by around 2/3 the amount of revenue to ACL generated by each unit of sales.

However, this is not what we would see from your model - as shown in your post #7285408 - where you state that:

- 35% market share @20% discount gives $30 million annual revenue to ACL
- 55% market share @40% discount gives $36 million annual revenue to ACL

I have not perfectly recreated your model, but my back of the envelope calcs show that if we assume the DRR cost structure necessary to achieve the first $30 million for a 35% market share at a 20% discount. . . . then the revenue to ACL that would flow from 55% market share at a 40% discount is around $27.5 million.

This is a very important issue.