Unit 3
MARGINS & PROFITS
Which one is important??
Customer or Margin!!!
What is margin??
Margins are simply the difference between a
product’s price and its cost.
Is it so simple????
What happens when multiple variations of a
product are sold at multiple prices, through
multiple channels, incurring different costs along
the way?
• Variable And Fixed Costs,
• Margins,
• Mark-ups,
• Average Price Per Unit,
• Contribution Per Unit,
• Contribution Margin,
• Breakeven Sales Level,
• Target Profit,
• Rate Of Return On Sales And
• Breakeven On Incremental Investment.
Margins
• Margin (on sales) is the difference between
selling price and cost. This difference is
typically expressed either as a percentage of
selling price or on a per-unit basis.
Margins Represent-
• Pricing,
• Return On Marketing Spending (Budgets and
Forecasts),
• Earnings Forecasts
• Analyses Of Customer Profitability
What is a unit?
• Percentage margins can also be calculated
using total sales revenue and total costs
• Marketers can perform a simple check by
verifying that the individual parts sum to the
total
When considering multiple products with
different revenues and costs, we can calculate
overall margin (%) on either of two bases:
• total revenue and total costs for all products,
or
• the money-weighted average of the
percentage margins of the different products.
Mark-up or margin?
• “mark-up”- practice of adding a percentage to
costs in order to calculate selling prices
Example: A 50% mark-up on a variable cost of
£10 would be £5, yielding a retail price of £15
• “margin”-
Example: Margin of a product having retail price
of £15 and that carries a variable cost of £10
would be £5/£15, or 33.3%
Markup= Profit/Cost
Margin= Profit/Retail Price
Relation between Mark up and Margin
Sale!!!! or No Sale!!!!
• Retail is that prices are “marked up” as a
percentage of a store’s purchase price (its
variable cost for an item)
• “marked down” during sales events as a
percentage of retail price.
Most customers understand that a 50% “sale”
means that retail prices have been marked
down by 50%.
• Percentage margin varies between the internal
and external reports.
• Example: An apparel manufacturer sells the X
Brand for rs 500. X Brand actually costs rs100 to
the manufacturer. A cash back of rs35 is included.
Calculate the internal and external report margins
for the provider.
• The inclusion or exclusion of costs generally
depends on the intended purpose of the relevant
margin calculations
Price and Channel Margin
• When there are several levels in a
distribution chain – including a manufacturer,
distributor and retailer,
• Should you simply add all channel margins as
reported in order to calculate “total” channel
margin????
Simple Distribution Channel
• Marketers should be able to work forward
from their own selling price to the
consumer’s purchase price and should
understand channel margins at each step
• Below represents two equations to use in
working backward, one for economic margins
and the other for percentage margins:
• forward-looking construction-solve for the
customer selling price, that is, the price
charged to the next level of the chain, moving
toward the end consumer
Hybrid (mixed) channel margins
• The use of multiple distribution systems to
reach the same market.
• A company might approach consumers
through stores, the Web and telemarketing,
for example.
• Margins often differ among such channels.
Hybrid channels may also be known as mixed
channels
Note:
• When selling through multiple channels with
different margins, it is important to perform
analyses on the basis of weighted average
channel margins, as opposed to a simple
average.
• Using a simple average can lead to confusion
and poor decision-making
Question
• A company sells 10 units of its product
through six channels. It sells 5 units through
one channel at a 20% margin, and 1 unit
through each of the other five channels at a
50% margin. Calculating its average margin on
a weighted basis.
Average Selling Price
Average Supplier Selling Price
• Stock-keeping unit (SKU): A term used by
retailers to identify individual items that are
carried or “stocked” within an assortment.
• This is the most detailed level at which the
inventory and sales of individual products are
recorded.
Average Price per Unit
Average Price per Unit =
Total sales revenue/Total units sold
• The average price per unit depends on both
unit prices and unit sales of individual SKUs
• Statistical Unit- volumetric or weight
measures
• Example:
Milk Manufacturer
Variable costs and Fixed costs
• Variable costs can be aggregated into a “total”
or expressed on a “per-unit” basis.
Variable costs increase linearly with volume
• Fixed costs, do not change with the number of
units sold or produced.
Fixed costs do not change with volume.
how costs changes with volume????
• Y = mX + b Standard Linear Equation
• explains the relationship between total costs
and unit volume
Y = mX + b fixed cost
company’s total
cost variable
cost per
quantity of
unit
products sold (or
produced)
Break-even analysis and Contribution
analysis
• The break-even level represents the sales
amount – in either unit or revenue terms –
that is required to cover total costs (both
fixed and variable).
• Profit at break-even is zero
Contribution
• The difference between price per unit and
variable cost per unit is defined as
contribution per unit
Breakeven Analysis
• Swiss Army knife of marketing economics
• Evaluate the likely profitability of marketing
actions
• Break-even occurs when the total contribution
equals the fixed costs. Profits and losses at
this point equal zero.
At break-even,
total costs = total revenues
Contribution
• Contribution represents the portion of sales
revenue that is not consumed by variable
costs and so contributes to the coverage of
fixed costs
=
Break-even on incremental investment
• The additional investment needed to pursue a
marketing plan.
• Also calculates the additional sales required to
cover that expenditure
Profit-based sales targets
• Target volume- is the unit sales quantity
required to meet an earnings goal.
The volume of sales necessary to generate the
profits specified in a company’s plans.
Very similar to Break Even Analysis -> add the
required profit target to the fixed costs
• Target revenue- is the corresponding figure for
money sales.
Target Profit
For a given period ,
Target Profit = Total contribution margin – Total
amount of expected Fixed Cost
• Note: the break-even volume equation can be
viewed as a special case of the general target
volume calculation – one in which the profit
target is zero, and a company seeks only to
cover its fixed costs
• In target volume calculations, the company
broadens this objective to solve for a desired
profit
