Marketing Performance and Marketing Profitability

• Fixed Costs -- Necessary organizational costs regardless of production or sales. Must be considered over a period of time. Fixed costs can be broken up into Marketing expenses and Operating expenses.
  • Examples: Rent, utilities, management salaries

• Variable Cost -- is cost of producing one additional unit. It is the cost that depends on the level of output produced.
  • Examples: Materials, labor

• Unit Contribution (aka Gross Margin): Defined as the price minus the unit variable cost (=p-uv)

• Break Even Point
  • How does the break even point relate to risk?
    • The break even point is the point at which the cost of production (fixed cost + variable cost) is equal to the revenue produced by the sales. A higher break even point means that the company must sell more units to reach this $0 net profit/net loss level. The more units a company must sell to break even, the more risky a venture will be.
    • It measures the cost of units produced and sold over time that result in Total Revenue = Total Cost. Ideally the business must at least cover its fixed cost to stay in business and longer time period of reaching break-even point puts the business at risk of failing to meet its fixed cost commitment.
    • With lower initial cost/fixed cost and higher contribution margin in a relatively large market the risks associated with the business is mitigated better.
    • Unit Break Even = FC / unit contribution

Marketing Performance and Marketing Profitability

• Performance Metrics: are important because they provide measures of marketing performance and they are correlated with profitability.
  • Classified into four categories: Market metrics, customer metrics, copetiveness metrics, and marketing profitability metrics.
  • Financial performance indicators can be considered lagging indicators as they look only at past events
  • Evaluated by:
    • Sales Revenue
    • Return on Sales
    • Gross and Net Profit
    • Return on Investment
    • Assets
    • Return on Assets
  • Over time market based performance indicators are powerful tools for demonstrating the value of market orientation
  • Evaluated by:
    • Market and Sales Growth
    • Market Share Size
    • Customer Retention and Acquisition
    • Customer Satisfaction
    • Relative Product/Service Quality

A market based business engages in three distinguishing practices :

1. It tracks market based measures of marketing performance .
2. It measures marketing profits by product , market , or both .
3. It organizes aound market rather than products .

• Net Marketing Contribution (NMC) = [market demand x market share x (price/unit – variable cost/unit)] – marketing expenses
• In order to clearly measure marketing contribution marketing expenses must be separated from operating expenses.

• How to improve Net Market Contribution and identify potential risks:
  • Ways to improve Net Market Contribution
    • Strategies to grow market
    • Strategies to grow market share
    • Strategies to increase average selling price
    • Strategies to lower channel costs
    • Strategies to increase profit margin
    • Strategies to improve marketing efficiency

• Marketing Profitability
  • Profit impact of Marketing Performance Metrics
    • Marketing profitability and profits: the marketing profitability metric needs to be strategic, that a marketing tactic is determined as same as a profitable result of financial profitability metric is reported.
    • Marketing profitability and product lines: net marketing contribution is a part of measure of profitability, however, marketing expenses separate from other expenses.
      • Net Marketing Contribution = Sales Revenue x Percent Margin - Marketing Expense
      • Net Marketing Contribution = Market Demand x Market Share x Average Selling Price x Channel Discount x Percent Margin - Marketing Expenses
    • Marketing profitability and customer satisfaction: customers and the market segments are important piece which can grow the firm's profit.
  • Marketing ROS and ROI are ratios that compare the results of different sales levels.
    • Marketing ROS (Return on sales), finds the NMC as a percent of SALES.
    • Marketing ROS = NMC/SalesX100%, or Gross Profit - Marketing Expenses, expressed as a % of sales.
    • Marketing ROI (Return on Investment), finds the NMC as a percent of EXPENSES.
    • Marketing ROI = NMC/Marketing Expenses X 100%, or Marketing ROS/Marketing Expenses, expressed as a % of sales

• Profit impact of Marketing Strategies
• Benchmarking Marketing Profitability
  • Company must compare their marketing profitability metrics to a benchmark in order to determine if their numbers are desirable.
    • Compare to others (industry average, like company)
    • Compare internally to previous marketing metric numbers to see if the metrics are improving
• Always consider untapped market potential: (customers for whom the product is...) -not affordable-lacks benefits
  -unable to use-not available
  -not aware

Relevant orphan pages:
Broad Market Definition
Link to TED video