Posted by Chris Quinn
Dr. Roger Best is a leader in the marketing field with a particular focus on establishing marketing profitability measures that have an established relationship with profitability.
In a series of guest posts, he will outline some basic concepts illustrated by examples that will be provided for your consideration.
This medical devices business unit produces about 10 percent of the company's sales but 11.7 percent of the company's marketing profits (net marketing contribution) of $3.18 billion on sales of $10 billion.
Business Unit NMC = Sales x % Margin - Marketing & Sales Expenses
= $1 billion x 62.5% - $250 million
= $375 million
The company's Marketing Return on Sales (ROS) was 31.8 percent and Marketing Return on Investment (ROI) was 146 percent. The business unit has a higher Marketing ROS (35 percent) and a slightly higher Marketing ROI (150%) as shown below.
Business Unit Marketing ROS = (NMC / Sales) x 100%
= ($350 million / $1 billion) x 100%
= 35%
Business Unit Marketing ROI = (NMC / Marketing & Sales Expenses) x 100%
= ($375 million / $250 million) x 100%
= 150%
However, to better understand business unit performance and how it can be managed for improved performance, the marketing profitability portfolio map can be created. As shown above, Product Line 1 is performing well below both the business unit and company averages. It needs more attention with respect to how net marketing contributions are produced in relation to the money invested. Product Lines 2, 3, 4 and 5 are close to the business unit average in both Marketing ROS and Marketing ROI.
Product Lines 6, 7, 8 and 9 are above average with respect to these two marketing profitability metrics and play an important role in shaping the overall business unit average. Clearly, Product Line 10 is above average in Marketing ROS and well above average in Marketing ROI.
Managing Productivity and Resource Allocation
The first goal of each product line manager should be to develop a marketing plan that increases marketing profits (net marketing contribution). For Product Line 1, the goal should be to improve marketing profits but also improve marketing spending efficiency. Currently, they produce roughly $0.50 in marketing profits per $1.00 of investment in marketing and sales expenses. By contrast, Product Line 9 produces $2.50 of marketing profit per $1.00 of investment in marketing and sales expenses. If a company has only one extra $1.00 to spend on marketing and sales expenses, it should go to Product Line 10 where it can obtain $5.00 in marketing profits per $1.00 of investment.
Dr. Best is a well known author and consultant to many top corporations. His book Market-Based Management is used on top MBA programs and many Fortune 500 companies. To support this book and the Marketing Metrics Handbook, Dr. Best has begun to write a series of Blogs on Marketing Metrics.
He is an alliance partner of Imprint Learning Solutions in the introduction of the Managing Profitable Growth 'team based applied learning' workshop series that link marketing decisions to the profitability of the organization.
http://www.imprintlearn.com/instructor-led-marketing-skills-workshops/
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(*) Note: This example is for educational purposes only.
Posted by Chris Quinn
Dr. Roger Best is a leader in the marketing field with a particular focus on establishing marketing profitability measures that have an established relationship with profitability. In a series of guest posts, he will outline some basic concepts illustrated by examples that will be provided for your consideration.
Apple, Inc. produced $10 billion in marketing profits in 2009. All general administration expenses, other expenses, interest and taxes must be deducted from the NMC to yield a net profit of $5.7 billion as shown below.
Apple , Inc. - 2009
Net Marketing Contribution (NMC) = $36.5 billion x 36% - $3.2 billion
= $10 billion
Each market served by Apple contributed to both overall company sales and net marketing contribution. For the computer market, Apple produced an estimated $2.43 billion in net marketing contribution.
Apple Mac Computer Market - 2009
NMC = $13.87 billion x 25% - $1.04 billion
= $2.43 billion
While this clearly shows how Mac sales contributed to overall marketing profits, this level of measurement needs to be extended to make it more strategic with respect to marketing performance and strategies. As shown below, Apple's computer market net marketing contribution can be broken down into the market variables such as market demand, market share, average selling, channel discounts, unit cost and marketing and sales expenses. In this example we examined the profit impact of a 5 percent market share. Since gains in market share are not free, the marketing and sales expenses were increased using the same percentage of sales. This would result in an increase in net marketing contribution from $2.43 billion (current) to $2.89 billion (analysis), a $460 million increase in marketing profits, as shown above.
Apple Mac Share Strategy - Product Level Marketing Profits with 5% Market Share
NMC (Current) = Market x Market x (Average x Channel - Unit ) - M&SE
Demand Share Selling Price Discounts Cost
= 247.6 million x 5% x ( $1482 x ( 1- 10%) - $1000) - $1.24billion
= $2.89 billion
This product level measure of marketing profitability allows management to assess future marketing profits based on strategies that take into consideration growth in market demand, market share, channel strategies, profit margins and investments in marketing and sales expenses.
Dr. Best is a well known author and consultant to many top corporations. His book Market-Based Management is used on top MBA programs and many Fortune 500 companies. To support this book and the Marketing Metrics Handbook, Dr. Best has begun to write a series of Blogs on Marketing Metrics.
He is an alliance partner of Imprint Learning Solutions in the introduction of the Managing Profitable Growth 'team based applied learning' workshop series that link marketing decisions to the profitability of the organization.
http://www.imprintlearn.com/instructor-led-marketing-skills-workshops/
(*) Note: This example is for educational purposes only. Many of the numbers had to be estimated, as Apple does not publish them.
Posted by Chris Quinn
Dr. Roger Best is a leader in the marketing field with a particular focus on establishing marketing profitability measures that have an established relationship with profitability.
In a series of guest posts, he will outline some basic concepts illustrated by examples that will be provided for your consideration.
Apple, Inc. produced $10 billion in marketing profits in 2009. All general administration expenses, other expenses, interest and taxes must be deducted from the NMC to yield a net profit of $5.7 billion as shown below.
Apple , Inc. (2009)
NMC = $36.5 billion x 36% - $3.2 billion
= $10 billion
Each market served by Apple contributed to both overall company sales and net marketing contribution. For the computer market, Apple produced an estimated $2.42 billion in net marketing contribution.
Apple (2009) Computer Market
NMC = $13.8 billion x 25% - $1.03 billion
= $2.42 billion
While this clearly shows how Mac sales contributed to overall marketing profits, this level of measurement needs to be extended to make it much more strategic with respect to marketing performance and strategies. Apple's computer market net marketing contribution can be broken down into the market variables such as market demand, market share and channel discounts, as shown above.
Apple (2009) Computer Market - Market Level Marketing Profits
NMC = Market x Market x Channel x Percent - Marketing &
Demand Share Discounts Margin Sales Expenses
= $365 billion x 4.2% x (1 - 10%) x 25% - $1.03 billion
= $2.42 billion
This market-level measure of marketing profitability allows management to assess future marketing profits based on strategies that take into consideration growth in market demand, market share, channel strategies, profit margins and investments in marketing and sales expenses.
Dr. Best is a well known author and consultant to many top corporations. His book Market-Based Management is used on top MBA programs and many Fortune 500 companies. To support this book and the Marketing Metrics Handbook, Dr. Best has begun to write a series of Blogs on Marketing Metrics.
He is an alliance partner of Imprint Learning Solutions in the introduction of the Managing Profitable Growth 'team based applied learning' workshop series that link marketing decisions to the profitability of the organization.
Virtual Team Based Workshops Uncover Millions in New Profit Opportuniies- Learn More by Clicking.
Posted by Chris Quinn
Dr. Roger Best is a leader in the marketing field with a particular focus on establishing marketing profitability measures that have an established relationship with profitability. In a series of guest posts, he will outline some basic concepts illustrated by examples that will be provided for your consideration.
Apple, Inc produced a marketing profit (Net Marketing Contribution) of $10 billion in 2009. This was achieved through a $3.1 billion investment in marketing and sales. As shown above, the marketing profit (output) divided by the investment in marketing and sales (input) times 100 percent resulted in a Marketing ROI of 323 percent. What constitutes an outstanding Marketing ROI?
The graphic above represents a broad sample of well-known Fortune 500 companies. The average Marketing ROI for this sample is roughly 200 percent. Clearly, Apple's Marketing ROI of 323 percent is considerably higher than the average. More importantly, the higher a company's Marketing ROI, the higher the Pre-Tax Return on Assets (ROA). As shown, Apple's Pre-Tax Return on Assets was 14.2 percent in 2009.
Apple Pre-Tax Return on Assets - 2009
Pre-Tax ROA = Operating Income / Total Assets x 100%
= $7.7 billion / $53.9 billion x 100%
= 14.2%
While the correlation is far from perfect, there is reason to believe that companies with higher Marketing ROI's are more profitable. This measure of Marketing ROI is simple to compute and can be used for a business unit, region, market, product line or product. We can compare different areas of a business, utilizing this measure of Marketing ROI. The Marketing ROIs for Mac, iPod, iPhone, iTunes, and all other Apple products and services combined to produce the Marketing ROI of 323% in 2009.
Dr. Best is a well known author and consultant to many top corporations. His book Market-Based Management is used on top MBA programs and many Fortune 500 companies. To support this book and the Marketing Metrics Handbook, Dr. Best has begun to write a series of Blogs on Marketing Metrics.
He is an alliance partner of Imprint Learning Solutions in the introduction of the Managing Profitable Growth 'team based applied learning' workshop series that link marketing decisions to the profitability of the organization.
Click Here to learn how teams are uncovering millons in new marketing profit opportunities!
Posted by Chris Quinn
Marketing professionals struggle with establishing the link between the decisions they make and the impact on their organization's profits.
Dr. Roger Best is a leader in the marketing field with a particular focus on establishing marketing profitability measures that have an established relationship with profitability. In a series of guest posts, he will outline some basic concepts illustrated by examples that will be provided for your consideration.
Businesses struggle to understand how their investment in marketing and sales contributes to the profits of their company. The logic and math are simple and use financial data, which adds to the credibility of this metric.
As shown above marketing profits are a net marketing contribution. They are the sales times the percent margin minus what was spent on marketing and sales to produce that level of sales and margin. Because Apple does not report marketing and sales expenses separately, it was estimated as 75 percent of their sales, general & administrative expense. This is an industry average used to estimate marketing and sales expenses when not available.
In 2009, Apple produced $36.5 billion in sales for all products and services sold worldwide. As a company, their marketing and selling strategies produced a gross profit of 36 percent, or $6.9 billion. However, this gross profit did not just appear at Apple's doorstep. It was earned through their investment of $3.1 billion in marketing and sales. The remaining $10 billion is their net marketing contribution.
These are the only profits produced by the enterprise. As shown below, Apple's net profit of $5.7 billion is their net marketing contribution minus general administration expenses, other expenses (including R&D), and interest and taxes.
Apple Net Profit - 2009
Net Profit = NMC - SG&A - Other Expenses - Taxes & Interest
= $10 B - $1 B - $1.3 B - $2 B
= $5.7 billion
When net profit is divided by stockholder shares it results in $6.29 earnings per share. If Apple invests in marketing and sales and can increase their net marketing contribution to $11 billion, it should extend its net profits in the graph above.
To appreciate the relationship between marketing profits (Net Marketing Contribution) and net profits, note the relationship for Apple, Inc. from 1999 to 2009. This is a pretty compelling relationship which, in the case of Apple, has a correlation well above .90.
Dr. Best is a well known author and consultant to many top corporations. His book Market-Based Management is used on top MBA programs and many Fortune 500 companies. To support this book and the Marketing Metrics Handbook, Dr. Best has begun to write a series of Blogs on Marketing Metrics.
He is an alliance partner of Imprint Learning Solutions in the introduction of the Managing Profitable Growth 'team based applied learning' workshop series that link marketing decisions to the profitability of the organization.
Team Based Applied Learning Workshops uncover millions in new profit opportunities per team- learn more.
Posted by Chris Quinn
In our experience with designing and delivering team based marketing courses, we have identified some simple but important questions which serve to set the stage for a positive outcome if they are addressed upfront.
At the initiation of any learning and development investment, these (4) basic questions should become a key part of the dialog as you ‘inspect' the alignment with your business priorities:
- What are you going to learn? (objectives)
- How are you going to learn it? (resources/strategies)
- How are you going to know that you learned it? (evidence)
- How are you going to prove you learned? (verification)
If the answer to these questions is unclear or cannot be addressed- you should be slow to provide funding until they can be. If you undertake an action learning approach it is much easier, even a necessity to answer these key questions.
Training professionals aren't particularly satisfied with their organizations' approaches to and success with training measurement, but there is little disagreement about the value of measurement. When done properly, measurement can demonstrate the trainings' impact on the company's top and bottom lines.
2010 Survey of 800 senior learning executives by Chief Learning Officers magazine
In the arena of marketing effectiveness, our work with teams to uncover and measure marketing profitability measures that link to the client companies financial profits have made answering these questions less taxing.
Posted by Chris Quinn
In my earlier blog posting I highlighted the fact that marketing lacks credibility at the 'C' level in organization's due to their inability to link the profit impact of their activities to the organizations financial performance.
I think one issue that fosters this credibility gap is the lack of leadership from the senior level manager's within marketing. I have seen that behavior's and outcomes will begin to change when marketing leadership begins to ask different questions and expect different answer's.
The following are a five simple questions to assess the status of your organization's ability to connect marketing choices with financial results:
1. How do you model the profit potential of different marketing program options?
2. Which marketing metrics utilized by your organization have a 'known' relationship with financial profitability?
3. When was the last time you reviewed a marketing plan that clearly articulated the likely profit impact of the recommended investments?
4. When a recommendation is made by marketing to reduce the price on a given product or service offering, do you know the break even market share required to offset the profit reduction?
5. How do you estimate the price elasticities of your target markets when using the historical data available no longer reflects the current market realities?
Marketing leadership needs to 'step up' and address the perceptions that marketing lacks credibility within the majority of 'C' suites by providing robust market based evidence that connects marketing spending with organizational financial profits.
Learn more about how team's are uncovering new profit opportunities-Click Here!
Posted by Chris Quinn
Marketing is the one functional area that struggles for credibility within the 'C' suite amongst all the other functions. This lack of credibility stems from real concerns about the ability of marketing personal to confidently link their spending with the organization's profitability. The quote below resulted from a survey of 'CEO's' which found that more than 50% agreed with the statement:
"The reason for marketing's low level of credibility is largely because marketing lacks disciplined financial-return measures to assess the value of their contribution to the enterprise." - Booz-Allen Consulting
The implications of this are clear- marketing will struggle to make the case for investment spending when competing for finite organizational resources due to the lack of marketing profitability measures.
There are new marketing profitability software tools available to both support the education of marketing personnel and the use of these marketing metrics on an on-going basis. The Marketing Metrics Handbook is being deployed by organizations to accomplish these dual objectives of both educating and providing a job-aide/tool to embed the new marketing profitability practices.
If marketing professionals cannot improve their ability to articulate the profit impact of their spending recommendations in terms that address the organization's profitability while incorporating the external market's realities, the results of the CEO survey will not change and credibility will likely worsen.
With so many MBA's in the workforce- why does this problem persist?
Posted by Chris Quinn
Why do most training initiatives fail to generate compelling and sustainable business results?
We think it is because most training initiatives in the marketing arena that we have observed fail to incorporate these six (6) elements:
1. The training program does not address real work. Instead of focusing on applying the newly learned concepts or practices to an existing business challenge, case studies are utilized to tell stories and illustrate how other companies have addressed the concept in question.
2. The individuals participating in the training are from the same functional area- for example product marketing. This ensures that the real challenge associated with working across functions to formulate and implement the marketing plan is not addressed or reconciled. Change must include diverse perspectives!
3. The learning objectives for the training program are not integrated with or explicitly linked to important business outcomes. Assessment of the degree to which the learning objectives have been met is determined by a knowledge assessment test or in some cases- role playing feedback.
4. There are no explicit feedback loops or opportunity for reflective learning because the 20 pounds of learning content delivered is packed into a 10 pound bag! This minimizes the time/space needed for participants to gain and share perspective! There is a focus on imparting broad knowledge in a short time frame instead of focusing on applied learning in a longer time frame. To go fast- initially you must start slow!
5. The training is led by an 'instructor/trainer' and not a seasoned practitioner who can coach and mentor participants and address application related questions based on their relevant work experience and quickly move beyond a discussion of theory. The lack of meaningful or related work experience can diminish the credibility of the 'instructor' in the eye's of the learner's.
6. The training is paid from a budget approved by senior leadership but there is not a senior executive sponsor who is engaged in both reinforcing and institutionalizing the new approaches, tools and practices required to impact business performance.
Each of the six (6) missing elements noted above are keys to a successful team based accelerated learning approach.
The ability to leverage the learning opportunity of the organizations marketing team in collaboration with their cross functional peers while also doing 'real-work' is now an imperative and no longer merely an aspiration in corporate environments.