Lecture Marketing metrics - Chapter 5: Financial metrics presentation of content: Cost, key metrics, price, revenue and profit; key financial indexes.
9/18/2015 Chapter 5: Financial metrics Contents • Cost, price, revenue and profit • Key financial indexes Costs 9/18/2015 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($) • 𝑻𝒐𝒕𝒂𝒍 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕𝒔 $ = 𝑈𝑛𝑖𝑡 𝑣𝑜𝑙𝑢𝑚𝑒 # ∗ 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ 9/18/2015 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 9/18/2015 Margins • 𝑼𝒏𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 $ = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ − 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 $ 𝑈𝑛𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛($) • 𝑴𝒂𝒓𝒈𝒊𝒏 % = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡($) = 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 9/18/2015 Contributions • 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 nonprice promotion It sometimes includes sales force spending and may also include price promotion • Total, fixed, variable marketing cost 9/18/2015 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 ◦ Early payment terms ◦ Coupon face-value payments and rebates, including processing fees ◦ Bill-backs for local campaigns, which are conducted by retailers but reimbursed by national brand and cooperative advertising allowances, based on current period sales 9/18/2015 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 𝑺𝒂𝒍𝒆𝒔 % = 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡($) 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒($) 9/18/2015 Return on Investment (ROI) • Purpose: to measure per period rates of return on dollars invested in an economic entity • 𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 % = 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡($) 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡($) • 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 • 𝑅𝑂𝑀𝐼 % = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 $ ∗ 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 % −𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡($) 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡($) ...