Marketing Profitability Portfolio
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.