Margins and Profits Flashcards
Why look at margins/ profits?
- Market share metrics are based on revenues – but the firm needs to make money, not just gather revenues.
- Basic understanding of profitability (the “value of sales)
Margin Definition
- Difference between selling price and cost.
- Can be calculated per unit or considering multiple products with different revenues and costs.
- used for many marketing decisions e.g. pricing, return on marketing spending, budgeting and forecasting, customer profitability etc.
Markup
In some instances, especially at smaller retailers, the term markup will be used instead of margin. The important difference to remember between markup and margin is that markup % is applied against the cost, whereas margin % is applied against the selling price.
Problems with margins and markups
- What is “selling price”? Before or after rebates, customer discounts, brokers’ fees, and commissions – and do you subtract these “extras” from list price or do you add them to costs? Internal and external reporting may vary along these lines
- What is “cost”? Variable costs (costs of goods sold) or fixed costs as well (overhead included)? (Needs to be mentioned for a number of years) How do you allocate fixed costs?
Channel prices and margins purpose.
To assess how value is shared within the distribution channel. In most cases, products are not sold directly to consumers, but through a chain of distributors, wholesalers, retailers – each adding a margin to the manufacturer/supplier selling price.
Channel prices and margins problems
- Same as with basic margins (what is cost/price)
- No separation between “gross” (deducting only direct costs/costs of goods sold variable costs directly linked to the manufacture/resale of the product) and “net” margins (deducting all costs including overhead, cost of capital)
- Easy to get confused with the layers – always map it out
Hybrid channel margins
Use of multiple distribution systems (store, web, telemarketing etc) to reach the same market
- Different costs and margins for each channel
- Focus on recognising profitable channels
- Performed weighted average channel margins
Variable and fixed costs purpose
To understand how costs change with volume. Forecasting the earnings generated by changes in unit sales.
Why is a per unit basis calculation used for total costs?
to show how economies of scale work in the given case – as quantity produced increases total cost per unit decreases, in a non-linear fashion
Examples of Fixed costs in marketing
- Sales force compensation (salaried portion and support)
- Upfront stocking allowance (distribution channel)
- Advertising production (e.g., TV commercials)Sales promotion production (POP props, coupon design)
- Coop advertising allowances – based on last year’s sales
- Marketing staff salaries
- NPD costs
Examples of variable costs in marketing
- Sales force compensation (commissions, bonuses)
- Early payment terms (distribution channel)
- Coupon redemption costs (payments, rebates, processing)
- Coop advertising allowance – based on current period sales
Break even analysis purpose
- To provide a rough indicator of the earnings impact of marketing activity
- “Break-even” point is the sales level where neither a profit, nor a loss is made
Contribution
A portion of sales revenue that is not consumed by variable costs and so “contributes” to the coverage of fixed costs – at break-even contribution fully covers fixed costs
Contribution Margin (%)
the fraction of the sales price that contributes toward covering fixed costs
Break even analysis problems
- Assumes that you are able to group costs into variable and fixed costs – in the long run all costs are variable
- It’s a rough guide to detect if more detailed analysis is needed, not the final answer (techniques that take into consideration the time-value of money)
- Always needs demand forecasting as a complement to check viability
