Lecture Marketing metrics: Chapter 5 - Trần Nhật Minh

Lecture Marketing metrics - Chapter 5: Financial metrics presentation of content: Cost, key metrics, price, revenue and profit; key financial indexes.

Chapter 5:

Financial metrics

Contents

• Cost, price, revenue and profit

• Key financial indexes

Costs

Key metrics

• Cost

◦Variable and Fixed cost

• Margin & Contribution

◦Unit margin

◦Margin (%)

◦Contribution per unit

◦Contribution margin

• Marketing spending

Variable & Fixed Costs

• Purpose: To understand how costs change with

volume

Variable & Fixed Costs

• 𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕 $ = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ ∗

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 # + 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 $ =

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 $ + 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡($)

Variable & Fixed Costs

• Cautions:

◦Linear cost model does not fit every situation

◦The classification of costs as fixed or variable depends on

context

◦Total cost per unit vs Variable cost per unit

Margins &

Contributions

Margins

• Purpose: To determine the value of incremental

sales, and to guide pricing and promotion

decisions.

• 𝑼𝒏𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 $ = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ −

𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $

• 𝑴𝒂𝒓𝒈𝒊𝒏 % = 𝑈𝑛𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛($)

𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡($)=

𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 $ −𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡($)

𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒($)

Margins

• Cautions:

◦Unit margin vs percentage margin

◦What is a unit

◦Unit cost and selling price: rebates, customer discount,

commissions can be considered as cost or as deduction

from the selling price

◦Margin as a percentage of costs, not as selling price:

applied in certain industries

◦Margin vs Markup

◦Various costs may or may not be included

Contributions

• Purpose: to provide a rough indicator of the

earning impact of a marketing activity.

• 𝑪𝒐𝒏𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 $ =

𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ −

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $

• 𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 $ = 𝑈𝑛𝑖𝑡 𝑠𝑜𝑙𝑑 # ∗

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ =

𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 $ − 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡𝑠($)

Marketing

spending

Marketing spending

•Purpose: to forecast marketing spending and assess

budgeting risk

•Marketing spending: total expenditure on marketing

activities This typically includes advertising and

non-price promotion It sometimes includes sales force

spending and may also include price promotion.

Marketing spending

• 𝑻𝒐𝒕𝒂𝒍 𝒎𝒂𝒓𝒌𝒆𝒕𝒊𝒏𝒈 𝒄𝒐𝒔𝒕𝒔 $ =

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 $ +

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 $

• 𝑻𝒐𝒕𝒂𝒍 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒎𝒂𝒓𝒌𝒕𝒊𝒏𝒈 𝒄𝒐𝒔𝒕𝒔 $ =

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 $ ∗ 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠(%)

Marketing spending

• Fixed marketing cost:

◦Sales force salaries and support

◦Major advertising campaign, including production costs

◦Marketing staff

◦Sales promotion material

◦Cooperative advertising allowances based on prior-period

sales

Marketing spending

• Variable marketing cost:

◦Sales commissions paid to sales force, brokers, or

manufacturer representatives

◦Sales bonuses contingent on reaching sales goals

Marketing &

Finance

Key financial metrics

Key financial indexes

• Profit

◦Net profit

◦Return On Sales (ROS)

• ROI

• NPV

• ROMI

Net profit & Return on sales

• Purpose: to measure levels and rates of

profitability

• 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 $ = 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 $ −

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 $

Return on Investment (ROI)

•Purpose: to measure per period rates of return on

dollars invested in an economic entity

•𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 % =𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡($)𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡($)

•Investment:

◦Return on Assets (ROA)

◦Return on Net Assets (RONA)

◦Return on Capital (ROC)

◦Return on Invested Capital (ROIC)

◦Return on Capital Employed (ROCE)

Evaluating multi-period

investments

•Purpose: to evaluate investments with financial consequences

spanning multiple periods.

• 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 # = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑡𝑜 𝑝𝑎𝑦 𝑏𝑎𝑐𝑘

𝑜𝑟 𝑟𝑒𝑡𝑢𝑟𝑛 𝑡ℎ𝑒 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

• 𝑵𝒆𝒕 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 𝑵𝑷𝑽 $ =

𝑇ℎ𝑒 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑢𝑡𝑢𝑟𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

• 𝑰𝒏𝒕𝒆𝒓𝒏𝒂𝒍 𝑹𝒂𝒕𝒆 𝒐𝒇 𝑹𝒆𝒕𝒖𝒓𝒏 𝑰𝑹𝑹 % =

𝑇ℎ𝑒𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 𝑡ℎ𝑎𝑡 𝑟𝑒𝑠𝑢𝑙𝑡𝑠 𝑖𝑛 𝑎𝑛 𝑁𝑃𝑉 𝑜𝑓 𝑧𝑒𝑟𝑜

Return on Marketing

Investment (ROMI)

• Purpose: to measure the rate at which spending

on marketing contributes to profits.