Managing Product-level Marketing Profitability
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.