Profitability analysis in Marketing
1. Introduction
Profitability is nothing but "the result of the production process." Salvat Encyclopedic Dictionary. (1970). If this result is positive, the company earns money (profit) and has met its objective. If this result is negative, the product in question is giving loss so it is necessary to review the strategies and in case no corrective can be implemented, the product should be discontinued.
A General Motors executive said, "We are in the business of making money, not cars," he was wrong. A company makes money and therefore is profitable, meeting the needs of its consumers better than the competition. The experience of quality-oriented companies is that a superior quality product with integrity in business, profits, market share and growth will come in addition.
This is an investigation of certain basic topics to determine profitability in the marketing area of companies.
2. Analysis of profitability in Marketing
How is the profitability of a product calculated or estimated?
Generally, those who buy expensive products compare the performance characteristics of different brands and pay more for better performance, as long as the price increase does not exceed the highest perceived value, in short, the customer will always be looking for the best price-value ratio. At first, almost all products are at one of four performance levels: Low, Average High, and Superior. The question is: does higher performance make it more profitable?
The Institute for Strategic Planning studies the impact of higher relative product quality, which is equivalent to performance and other factors that increase value, and discovered (Kotler, "Marketing Management", 1996 p. 298) a positive and important relationship between the relative quality of the product and the return on investment. For example, in a sample of 525 medium-sized businesses, those with low-quality products earned 17%; those of medium quality 20%, and those of high quality 27%. Thus, high-quality businesses earned 60% more than lower-quality businesses, since the best quality allowed them to charge a higher price, or to achieve greater renewal of purchases, as well as the perseverance and recommendation of the clients themselves.,so the cost of this quality improvement was not much higher than that of companies that produced lower quality. At the same time, this does not mean that the company should aim to achieve the highest possible quality, but it should choose the most appropriate level of performance for the market and the positioning of the competition, that is, the best balance between quality and profitability. you want to get.
Likewise, companies must continuously improve the product, which usually generates a higher recovery and market share. An example of the aforementioned is the case of Procter & Gamble, a company that stands out for the practice of improving its products, which together with their high initial performance, helps explain why it is at the forefront in many markets.. Another important aspect of product performance is preserving product quality.
Many companies do not change the initial quality unless they find highly visible defects or exceptional opportunities arise, and others deliberately reduce it to increase their profits, although in the long run this usually affects profitability.
The company must use at least one (or all) of the following strategies to determine its quality policy that will determine its profitability:
- Compliance with specifications. The degree to which the design and characteristics of the operation are close to the desired standard. Many control formulas have been developed on this point: Norven quality seal, ISO 9,000, ISO 14,000, etc. Durability. It is the measure of the operational life of the product. For example, the Volvo company guarantees that the vehicles they manufacture have the highest average lifespan and therefore their high price. Safety of Use. The manufacturer's guarantee that the product will work without fail for a specified time. Chrysler in Venezuela gives the widest guarantee to its vehicles: 2 years or 50,000 kilometers, demonstrating its confidence in the quality of manufacturing.
There are 9 main factors that influence profitability and which we will analyze throughout the work:
- Investment intensity Productivity Market Share Market growth rate Product / service quality New product development or differentiation from competitors Vertical integration Operating costs Effort on these factors
The profitability of a company is so important that in some commercial areas such as banking and insurance, the central government has constant control: if a bank or an insurance company does not give profitability, it is immediately intervened in order to preserve possible damage to your clients as well as corruption. In the case of insurance, when a new product is launched, it must first be submitted through an actuary to the division of the Ministry of Finance in charge, the Superintendency of Insurance, in order for them to determine whether the rate (price) applied represents the profitability that the product must have. This avoids a price war that goes against both the profitability of companies and the market. There is always a margin of competence, but this must be approved by this body,if the product is not profitable, its rate must be increased or it must be discontinued.
Finally, we must say that, in the marketing area, managers and companies must be flexible enough to modify and improve their products when the market requires it.
How is the profitability of a market calculated?
The first question for a company to ask is whether a potential market segment has the right size and growth characteristics. Large companies prefer high-volume segments and often underestimate or avoid small segments. Small companies, in turn, avoid large segments, as these require too many resources. Segment growth is generally a desirable feature as companies want their sales and profits to increase; But at the same time, competition will quickly enter the growing segments and, as a consequence, their profitability will decrease.
A segment could be of desirable size and growth and not be attractive from the point of view of its potential profitability. There are five forces that are identified to determine the long-term intrinsic appeal of an entire market or segment of it. Companies have to assess the long-term impact on profitability of five groups or risks, which are as follows:
Industrial Competition: A segment is not attractive if it already contains numerous, strong or aggressive competitors. The picture is even worse if the segment is stable or in decline (within the product life cycle), if capacity increases are made with large increases, if fixed costs are high, if exit barriers are high or if the competitors are very firm in the segment. These conditions will lead to frequent price wars, advertising battles and new product introductions, and it will cost the company more to compete.
Potential Participants: A segment is not attractive if it can attract new competitors who will come with new capacity, substantial resources, and momentum for increased participation. The attractiveness of a market segment varies depending on the difficulty of the barriers against entry or exit. The most attractive segment is the one whose barriers against entry are high and barriers against exit are low. When both entry and exit barriers are high, the potential for profit is high, but generally leads to more risk because poorly performing companies stay inside and struggle to get out. When both barriers are minimal, companies can easily enter or exit the industry and returns are stable and low.An interesting case is represented by the Venezuelan fixed telephony market. It is attractive and profitable despite the restrictions that the government has placed and despite the fact that there is a competitor who has the entire current market (CANTV) but with the limitation that obsolete technology represents.
Substitutes: A segment is not attractive if there are actual or potential substitutes for the product. Substitutes limit the prices and potential profits that can be obtained in a segment. The company has to closely monitor price trends in substitutes. If technology advances or competition increases in these substitute industries, prices and profits are likely to decrease in the market.
Buyers and Suppliers: A segment is not attractive if buyers have strong or increasing bargaining power. Buyers will try to drive prices down, demand better quality or services, and will put competitors against each other; all this at the expense of the seller's profitability. Even if the market shows positive size and growth and is structurally attractive, the company must take into account its own objectives and resources in relation to said market or selected segment. Some are attractive and could be scrapped because they do not match the company's objectives. The company must consider whether it has the skills and resources required to succeed in that market.
How is profitability calculated based on sales areas and distribution channels?
Profitability measures in the sales territory take several forms. Managers can compare territories to identify any variability in margins and assignable fixed cost of sales as a percentage of sales. In addition, margins and fixed costs of sale may be related to sales and distribution objectives. And it is possible to manage certain assets in the sales territory. Consequently, the profitability of the territory is also calculated based on the return produced by those assets.
If you seek to improve the allocation procedures in terms of assets and direct expenses, or if you want to modify the budgets of the territories, you can compare the coefficients of return on the assets managed in the different territories. Accounts receivable, inventories and deposit assets are generally used to estimate these managed assets. To the extent that the sales territory determines the credit policy and has its own warehouse to maintain inventory, the managed assets may be sufficient to guarantee the use of this measure.
Sales and cost analysis identify the results achieved and the costs of obtaining these results. However, it is also important to consider the assets necessary to achieve these results. By comparing profitability results and levels of achievement of program objectives in different territories, managers can obtain several clues about the performance of the territory. And the combined use of performance and profitability with the achievement of the program's objectives will make it easier to assess sales territories and diagnose the problems and opportunities of each territory.
In the case of our country, generally and for the majority of mass consumption products, the west of the same represents a better and more profitable market than the west, since the standard of living is higher, however, the east is important for certain industries such as those related to oil and fishing. Therefore, it is important to determine the profitability of an area according to the product or segment that you want to work on.
The same principles can be applied to distribution channels to determine whether one is more profitable or effective. For example, in the case of American International, the sales channel represented by Dipromulca receives and a profit margin of 43%, which represents almost double that of a regular channel, however, this channel assumes all operating costs, discharging their company (and that they are much more than the additional 20% that this receives for its operation).
How is it determined if the marketing activities are profitable or not?
The purpose of the marketing concept is to help organizations achieve their goals. In the case of private companies, the main goal is profits; in the case of public and non-profit organizations, it is surviving and raising enough funds to perform their functions well. Now, the key is not to make profits as a first goal, but to make them as a consequence of having done a good job. As we said earlier: "A company makes money by meeting the needs of its customers better than the competition."
Marketers must participate in the analysis of generating potential profits in different marketing ways, it is for this reason that it is said that not only the marketing director puts on the marketing hat, but also the financial hat, since it is in the market. business of generating profitable clients. But how many companies have actually practiced the marketing concept? The answer is that very few: In reality, only a handful of companies stand firm as practicing leaders in the concept of marketing, such as Procter & Gamble, Apple, McDonalds, etc. Clearly, these companies are customer focused and organized to respond effectively to changes in customer needs.
Marketing is the art of attracting and keeping profitable customers. Even so, companies usually discover that between 20 and 40% of their consumers will be unprofitable and that in 20% of their best customers is 80% of their profit. In addition, many companies report that their most profitable consumers are not the largest, but medium-sized. The largest customers demand a considerable amount of service and receive the greatest discounts, reducing, consequently, the level of profits of the company. Smaller customers pay the full price and receive minimal service, but the cost of transacting with small consumers reduces their profitability. Medium-sized consumers receive good service, pay almost full price, and are the most profitable.This helps explain why many large companies that originally targeted only large customers are now invading the market at the mid-level. In the Venezuelan insurance market, large companies are heading towards the Small and Medium Industry, since it is a market that is not only profitable but much more stable than yesterday's large clients.
What makes a consumer profitable?
A profitable customer is defined in the following terms: A profitable customer is one that generates a flow of income over time, exceeding by an acceptable amount the cost flow that the company incurs in attracting, serving and selling to that consumer. Almost all companies omit the profitability of a consumer individually, since they affirm that a consumer can use various services such as banks or different products in the case of a company that manages a variety of products. An important aspect that companies must take in terms of profitability is firstly to increase the price of their least profitable products, or to eliminate them, or to cross-sell their products that generate profits to these unprofitable consumers, in order to try to achieve the desired profitability of the market.
In recent times the theory of One-to-One Marketing has been booming. This theory is based on the profitability of clients based on their lifetime value, which is nothing other than the quantity of products that this client will be able to acquire from our company throughout its useful life. In this sense, participation "By Client" is more important than market participation. In other words, how many of the products in the area of my company are acquiring a certain consumer from it and how many from the competition. In this sense, companies are seeking to sell the greatest amount of their products to each client and through the added value that the service represents, their loyalty.
A company oriented in this way, maximizing its Marketing operations, may have a profitable operation in this regard.
When are the costs valid and when are they not?
The costs of a company are presented in two ways are presented in two ways: fixed and variable. Fixed costs do not vary with production or sales profits, and within fixed costs we have direct costs: which are generated in direct relation to production (raw material, machinery, etc.) and indirect costs that are rather general (administration, accounting, human resources, etc.). Fixed costs prevail regardless of the level of production level of production. Fixed costs vary directly with the level of production. For example, a company that makes pocket calculators includes the cost of plastic, processing chips, packaging, etc. These costs tend to be constant per unit produced.In this case the cost can be variable because it can vary according to the quantity produced. In this example it can be seen that the costs are valid because they are so immersed in the entire production process of any product which will later influence the pricing of the product. We can also observe costs that consist of the sum of the fixed and variable costs for any level of production. That is only when a management wants to charge a price that covers at least the total production costs at a given production level.We can also observe costs that consist of the sum of the fixed and variable costs for any level of production. That is only when a management wants to charge a price that covers at least the total production costs at a given production level.We can also observe costs that consist of the sum of the fixed and variable costs for any level of production. That is only when a management wants to charge a price that covers at least the total production costs at a given production level.
To set prices intelligently, organizations need to know how their costs vary at different levels of production. However, the price setting presents important risks when it is aggressive, it could give a cheap image of the product. But when you have strategies that lead the company to build more plants to meet demand, while a competitor could innovate a technology at a lower cost (the case of Digitel and CANTV) and obtain lower costs than the market leader.
Most of the pricing has focused on the behavior of manufacturing costs. But, all costs, including marketing costs, are subject to learning improvements. For example, if three companies invest a large amount of money testing telemarketing, the company that has used it the longest would put telemarketing costs lower, then this company may charge slightly less for their product and still get the same return., with the rest of the costs at the same level. Organizations also need to mark their costs against those of their competitors to see if they are operating at a cost with advantages or disadvantages. And at the same time, you should ask buyers how they perceive the price and quality of each competitor's offer.In a simple way this is done to place the price of the product inch by inch with that of the competitors. The costs will always be valid since they are one of the many important aspects that the life cycle of a product has, for an organization to measure through them its profits, prices and how it will market its product.
In the case of American International, which works in the form of Strategic Business Units, or Profit Centers, indirect costs are distributed equally between the different units, however, it has been determined that this is not correct, since there are much more units. Big ones like Personal Lines (automobile) that generate much more work volume, but also with higher losses. In this case, Personal Accidents, which is a highly profitable line, is giving loss due to excessive indirect costs. These costs are not valid and therefore it is necessary to redo the distribution in order to determine much more clearly the profitability of each Unit.
On the contrary, a company may determine that it is not profitable to maintain a segmented operation and work based on an economy of international scale. Fiat, for example, closed its regional operations in Venezuela to reinforce its scale production in Brazil to cover the Venezuelan market, to be competitive and more profitable.
What activities can be established to reduce costs?
There are many strategies and activities that can be implemented to reduce costs, but we will only analyze some of them.
Efficient Customer Response. Efficient response to the consumer is a strategy that emerged in the United States giving excellent results. Its main idea is to eliminate non-productive costs and share savings with the consumer. This strategy leads to logistical and commercial improvements, which employ in the logistics of replenishment practices and in commercial logistics introduce Category Management.
Regarding the practice of replenishment, it optimizes information and product flows to minimize inventories and guarantee continuous supply to the final consumer. This practice also changes the relationship of the supply chain from a relationship of competitors where everyone is only concerned with maximizing their profits. As in other strategies, technology offers a series of important information and data, however, the article details that technology is not essential to start working on it.
With the introduction of Category Management, the commercial aspects of the efficient consumer strategy are summarized, which encompasses aspects such as assortment, promotion and introduction of new products, these aspects involve optimizing the available space on the shelves for the products that more are sold, eliminate practices that lead to buying a fixed quantity of products that have no relation to sales and replace them with promotions tailored to each store. The introduction of new products requires information to assess public acceptance, a factor that stands out from this strategy is that the result is greater profitability since purchasing decisions are derived from a detailed analysis of demand.
The results of the Efficient Consumer Response Strategy in the world have been expressed in increases in sales, increases in investment, reduction in inventories, reduction in prices, reduction in operating costs which vary by categories and distribution channels, but significant is that for each case an important reduction opportunity was obtained in different aspects.
We can cite in Venezuela the case of the Apolo system, implemented by the liquor companies and led by Seagram, in which a computerized inventory control is carried out and it is possible to automatically place an order, according to the pre-established parameters regarding delivery time. and minimum limit quantity in stock. In addition, an incentive system is created according to which the brands that sell the most are earning "heads" (the front spaces in which the product will be seen) on the shelf and rising to more visible positions. This allows a clear inventory control as well as a reduction in costs for this concept and an efficient production management. It also tells Seagram managers, when they need to do a promotion,or exactly in which distribution channel or point of sale they have decreased, in order to detect problems and correct them in time.
In the case of Venezuela, the application of this strategy was through the company Procter & Gamble, which promoted meetings with other companies in the sector, best practices and ideas emerged, Procter Gamble carried out with Cada and Farmatodo have carried out team tests that have allowed them Knowing where there is an exaggerated line extension, managing to reduce the number of presentations of a product, and significantly increase the volume of sales, this indicates that the strategy can be shared with other organizations that require important changes that improve the marketing of their products. and allow them to have an efficient response to the needs of their consumer.
In conclusion, the application of these cost reduction strategies allow companies to be more agile in making decisions regarding market problems, significantly reduce their costs, provide better customer service, among others. All supported by new computerized technologies and information management.
Outsourcing. This strategy consists of delegating to external companies those activities that do not have to do with the main business of the company in order to reduce operating costs.
Benchmarking. It consists of copying and adapting those processes that other companies (including the competition) perform best, in order to make our performance and utility more efficient and productive.
Marketing one to one. It consists of developing a direct relationship with each of our most important clients in order to adapt our products and services more exactly to their needs, offering added value and therefore, retaining clients and increasing their potential value throughout their shelf life as a consumer.
There are many strategies to reduce costs, there are just a few and in a simple way. We only delved substantially into the first for its novelty and currency.
How and when should a company evaluate the possibility of modifying its business strategies?
Strategies must be evaluated at all times. The success of a company today does not guarantee the success of tomorrow. The markets change and the circumstances also, what turned out to be extremely positive once according to certain characteristics of the market can change in a short time and therefore the requirements of the consumers, this is part of the process of evaluation and constant feedback of each company.
According to Tracy Emerick, a marketing expert, while the use or implementation of a marketing strategy produces positive results for the company, it should not be changed or modified.
How do the decisions made in the short, medium and long term affect the profits of companies?
Malcolm Forbes wrote: "Anyone who says that businessmen deal with facts, not fiction, has never retrospectively read five-year projections."
Especially in an economy like Venezuela, long-term plans do not work. I think at most, you can talk about plans for a year. Although the company can make projections for longer, these should be reviewed frequently, with respect to what the competition does and other factors: economic, political, social, cultural, etc. that may affect the business.
In this sense, Jack Trout (1999) outlined in his last book: «The power of simplicity» the following:
"The sensible thing to do in planning is to incorporate some good sense into the process (…)
- Informing employees that predicting the future is an exercise in illusion, and that overly detailed 'strategic scenario' analysis is more of a waste of time. Informing everyone that the real value of strategic planning is at stake. set the consistent direction of the business and structure the means to beat the competition. Set up planning staff with operations executives, in each line of business, and discuss references to that consistent direction under different economic assumptions. What is being sought is a "flight plan" to guide the company that is simpler and less esoteric than old-style plans. "
Although Mr. Trout is somewhat "acidic" in his approach, we agree that the plans should be proposed in short terms and although there are projections for longer terms, they should be reviewed frequently. Otherwise, the budgets of the companies and their profits will result in red numbers, even leading to possibly losing market as in the case of General Motors.
How can the value of the business be increased?
There are many ways how to increase business value, among which we can mention: the search for competitive advantages beyond its own value chain: in value chains, three strategies or reasons must be implemented that allow obtaining competitive advantages: first Instead of cost leadership, which implies that a company intends to be the lowest cost producer in its industrial sector, this allows economies of scale, use of its own technology, preferential access to raw materials and other factors. Secondly, differentiation with such a strategy seeks to be unique in the industrial sector,along with some dimensions that are highly valued by buyers (exclusivity is rewarded with higher price levels) and thirdly The approach strategy that involves choosing a narrow competition landscape within an industrial sector that relates to a group or segment of the industrial sector and adjusts the strategy to be seen with the exclusion of others. Today many companies turn to partnering with other members of the supply chain to improve the performance of the value delivery system to the customer. As companies strive to be more competitive, they resort, ironically enough, to cooperate more.
Initially, companies viewed suppliers and distributors as centers of cost generation, and sometimes even adversaries. However, today, they carefully select their partners and try to collaborate to discern profitable strategies for both parties. Now there is talk of integration: forward, by the company with distributors and retailers; backwards with suppliers; and even Horizontal integration, with the competition (the case of Nestlé and Savoy).
Marketing can no longer be viewed as a simple sales department, but rather as the responsibility for designing and managing a superior value delivery system to reach the target consumer. Thought should also be given to how to stimulate the development of improved company products, actively collaborating with other departments to manage the company's central processes and build stronger external partnerships. Another important aspect is to analyze the costs and performances in each of the activities that generate value and find ways to improve them. And estimate the costs and performance of your competitors as milestones. To the extent that any company is able to perform some activities better than its competitors, it can obtain a competitive advantage.
The success of a company in increasing its business will depend not only on how well each department performs its work, but also on how well the different departmental activities are coordinated.
Companies are required to carefully watch the number of customers who lose and take immediate action to lessen the loss. For this, it has to define and quantify the number of clients it maintains, distinguish the different reasons why it generates displeasure among clients and identify those that can be better managed. Estimate how many profits you stop receiving when you lose a customer. All the marketing activities that are applied based on the aforementioned will give the expected result or increase the value of the business in terms of the products that are marketed and the service that is provided to the client.
Apart from the above, there are additional strategies to increase the value of the business, such as the development of new markets or the breadth of existing markets through the development of new products, economies of scale, globalization strategies and Benchmarking, etc..
In addition, today companies are looking to give added value to differentiate their products or services and to retain customers.
What is the product experience curve?
The product life cycle describes how the product elements of an industry move through the stages of Introduction, Growth, Maturity and Declination. The life cycle concept is used to ensure that the introduction, alteration and termination of a product are timely and properly executed.
The sales or experience curve is at zero in the introduction stage, increases at an increasing rate during the growth stage, reaches its peak level in the maturity stage, and then falls. Profits reach their peak level towards the end of the growth stage of the product life cycle. The life expectancy of a product is based on the wishes of the buyers, the availability of competitive products and other environmental conditions. Most companies have a combination of life cycle patterns for various products. It is important to manage existing products and develop new ones to keep total sales performance at a desired level.
As a company gains experience as a producer, it reduces its costs. You can increase your production based on greater efficiency and quality, which in turn will allow you to have greater utility, have more ability to compete higher, and have a greater capacity to reduce your prices and remove unprofitable competitors from the market to absorb your participation. In short, the experience of a company, or the experience curve of a product, gives it the ability to be more competitive in the market and more resistant to the attacks of the competition. The company that has more experience in a certain area could, based on that experience, lower its costs at that point and therefore be more profitable despite maintaining its other stable costs.In a way, that is what companies working with an economy of scale do: maximize their experience at scale to be more competitive.
Importance of the sales forecast and its utility
Forecasting is projecting past experiences into the future. How William Shakespeare said very eloquently: "The past is the prologue." Projecting is: organizing the best guesses about the future. Forecasting or projecting does not mean knowing what will happen in the future, but estimating what will happen if things go this way or that.
A company's demand describes its estimated sales at alternative levels of its marketing effort. The administration is responsible for selecting one of the levels. The level selected with respect to the effort in marketing will generate an expected level of sales, which is called the company's sales forecast. This sales forecast is the expected level of the company, based on a selected marketing plan and a supposed marketing environment. In other words, we can say that the sales forecast has to do with how many sales I must make to sustain my operation and obtain profitability and what strategies I must follow to achieve said sales. According to expert marketing advisor Peter Drucker, companies can survive for a long time without profit,but you can't survive a day without cash (cash flow). The importance of sales then is to generate that constant cash flow to keep the company alive.
The sequential relationship between the company's forecast and its marketing plan is often confusing. It is often heard that the company must develop its marketing plan based on its forecast or sales projection. The predicted sequence for planning is valid where market demand is susceptible to expansion. However, the sequence is invalid if the forecast means an estimate of national economic activity, or if the company's demand is not susceptible to expansion, or where the forecast refers to an estimate of the company's sales.
The company's sales forecast does not lay the groundwork for deciding how much to spend on marketing. Rather, the sales forecast is the result of a pre-determined marketing spending plan. Another term worth mentioning in relation to the company's forecast is the sales quota which the administration establishes based on the general forecast of the company and the psychological stimulus to achieve it. Generally, sales quotas are set a little higher than the estimated sales, in order to force the sales force to make a greater effort.
An important task is to estimate demand, for estimation the company can use several important methods to prepare sales forecasts such as studies of the buyer's intentions, combination of the opinion of the sales force, expert opinion, market tests, etc. The proper use of these methods varies according to the purpose of the forecast, the type of product, and the availability and reliability of the information.
As a final point, we must mention that part of the usefulness of the sales forecast, especially in manufacturing companies, is that they serve to determine the production that must be planned in advance, purchase of raw materials, employees and production shifts, etc.
3. Questions to measure performance
What is a sales analysis?
Sales analysis is about quantifying and evaluating actual sales against sales targets. There are two specific tools in this analysis which are the sales variance analysis and the micro sales analysis. In the case of sales variance analysis, it measures the relative contribution of different factors to a gap in sales performance. For example, if a company in its annual plan stipulated that it had to sell 40,000 units in the first quarter to 100 Bolívares, that is to say 4 MM of Bolívares and at the end of the quarter it only sold 30,000 units to 80 bolívares each, that is 2.4 MM. The variance of sales performance is 1.6 MM or 40% of the expected sales. Almost two thirds of the sales variance is due to not having achieved the objective of achieving your expected sales volume.In this example, what happened is that the company did not achieve the expected sales since there was a decrease in volume.
As for the micro-sales analysis, it can provide the answer, as it reviews specific products, territories and other elements that could not generate the expected sales volume. This corresponds to a detailed analysis of what is happening in each of the sales areas in order to microeconomically determine what is happening. In this way you can know that in an area there is a socioeconomic problem, a recession, problems with the sales team, a competitor with a strong personal sales strategy, or any other factor.
Why is it an effective control tool for productivity and profitability?
It is an effective control tool, because it compares or measures the current performance of sales with the planned sales of the company, and the costs incurred to generate the current volume of sales, such analysis is performed on total sales, by product, distribution channel, geographic area or group of clients, which allows any company to observe the relationship of production factors used and the result obtained (productivity), and know their income and costs (profitability).
Describe the cost analysis methods
Marketing cost analysis breaks down and ranks costs to determine which costs are associated with certain marketing activities. By comparing the costs of previous marketing activities with the results obtained, the marketer may in the future better allocate the company's marketing resources. Cost analysis allows a company to assess the effectiveness of a current or recent marketing strategy by comparing sales made and costs incurred. By accurately identifying where the business experiences high costs, this form of analysis can be useful for targeting profitable or unprofitable customer segments, products, or geographic areas. The task of determining marketing costs is difficult and complex,The simple fact of determining the costs associated with marketing a product is rarely adequate. In general, marketers must determine the marketing costs incurred to serve certain geographic areas, market segments, or even certain customers.
The first step in establishing a cost analysis is to examine the accounting records in which we find natural accounts that are nothing other than the cost category that is based on how the money was actually spent. Analysis of Marketing costs generally requires that some of the costs that appear in natural accounts be reclassified into accounts of the Marketing function which indicate the costs or disbursement in terms of storage, order processing, advertising, sales, market research, promotions and customer credit.
In this analysis, three more categories are also used, which are direct costs which are attributable to the performance of Marketing functions. For example, sales force salaries could be assigned to the cost of selling a certain product or selling to a particular customer. The allocable common costs are those that are indirectly attributed to the functions that they support, for example, if the company annually spends a certain amount to rent a production, storage and sale space, the rental costs for storage could be determined based on cost. per square foot used for storage. And non-assignable common costs cannot be attributed in accordance with a logical criterion and, therefore, they are only arbitrarily assignable, for example interest,taxes and senior management salaries are common non-assignable costs.
What performance indices would you take for a financial analysis in marketing?
For a financial analysis in marketing, analytical performance coefficients must be taken which will allow a manager to compare the results for the current year with the data from previous years and statistics from the organization. However, the comparisons between the statement of losses and current earnings and statistics from other years are not very important because factors such as inflation are not explained, but if we use operating coefficients these are based on the net sales figures of the statement of losses and profit and this allows an excellent financial analysis of sales in marketing. However, marketers must understand the basic components of selected financial analysis if they are to explain and defend their decisions.They must first become familiar with certain financial analyzes if they want to be in good shape. Three areas are examined in this analysis: cost-benefit aspects of the profit and loss statement, selected performance coefficients, and price calculations. To monitor and evaluate marketing activities, marketers must understand the profit and loss statement and what it says about their organization's operations. They also need to know the performance ratios, which compare current operational results with past results and with those of the industry in general. This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.Three areas are examined in this analysis: cost-benefit aspects of the profit and loss statement, selected performance coefficients, and price calculations. To monitor and evaluate marketing activities, marketers must understand the profit and loss statement and what it says about their organization's operations. They also need to know the performance ratios, which compare current operational results with past results and with those of the industry in general. This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.Three areas are examined in this analysis: cost-benefit aspects of the profit and loss statement, selected performance coefficients, and price calculations. To monitor and evaluate marketing activities, marketers must understand the profit and loss statement and what it says about their organization's operations. They also need to know the performance ratios, which compare current operational results with past results and with those of the industry in general. This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.To monitor and evaluate marketing activities, marketers must understand the profit and loss statement and what it says about their organization's operations. They also need to know the performance ratios, which compare current operational results with past results and with those of the industry in general. This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.To monitor and evaluate marketing activities, marketers must understand the profit and loss status and what it says about the operations of their organization. They also need to know the performance ratios, which compare current operational results with past results and with those of the industry in general. This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.This analysis is very important since it allows you to support decisions and make the necessary adjustments in your operations at various times.
How would you calculate or what pricing method would you use and why?
The pricing method is a mechanical procedure to set prices on a regular basis. The pricing method structures the calculation of the actual price. The nature of a product, its sales volume, or the amount of product the organization has will determine how prices are calculated. The pricing decision can be complex due to the number of factors that need to be considered. There is often considerable uncertainty about price reactions from buyers, competitors, and others. The most important pricing objective is the survival of the organization.The price should be easily adjusted to increase sales volume or to combat competition so that the organization achieves profit maximization.
Another factor that must also be taken into account in pricing is that decisions are made that are consistent with the organization's goals and mission. And also point out the costs and expenses that the organization has to incur for the marketing of a product.
It is also worth mentioning that some companies set their prices based on their positioning. For example, Mercedes Benz will never produce a popular vehicle as that would be contrary to its own principles.
In the insurance market, the price is determined by a rate: which is the percentage of the insured value that the company will charge in order to guarantee security for the specific property or person.
This is done through an Actuary and is called an actuarial study. This insurance specialist and duly certified by the state regulatory body, the Insurance Superintendency of the Ministry of Finance, performs a statistical study of the probability of occurrence of a claim under the circumstances covered by the policy, this percentage corresponds to claims and which in the case of insurance, is, taking it to the terminology of the marketing, the cost of the raw material of the insurance. Then a percentage corresponding to operating costs, distribution channel costs and a percentage to play with are taken into account, which corresponds to profits, discounts and marketing costs.
In the case of the Personal Accidents line, the accident rate corresponds to an average of 45%. In the case of a policy whose premium had a cost of 100,000 Bolívares, 45,000 Bs. They correspond to the reserve to cover the loss ratio. Then we have that the commissions to intermediaries: brokers, producers and brokerage companies, is 25% in the case of individual policies, since they require more work from the intermediary for their placement and 20% in the case of groups (groups) as they require more operational work by the company. Therefore, it would be 25,000 Bs. And 20,000 Bs. Respectively. So, there would be between 30 and 35% of the premium (30,000 and 35,000 Bs.) To cover any discount, direct and indirect operating costs, marketing and advertising costs and any additional.
Because these percentages are already established, what the actuary must determine are the technical possibilities, in the case of AIG Salud, that a person has a critical illness, for example, and based on that determine the percentage to be collected (the cousin).
What makes prices vary from one insurance company to another, has to do with its operating costs, its global responsibilities, etc. In the case of American International, it is above the average in terms of prices, which represents a skimming strategy, aimed at a high target of the population.
Why are they priced and how is the performance of buyers measured with this strategy?
A price drop also known as an invoice drop or list price drop, is a direct discount from the list price on every purchase made during a given period. The offer encourages distributors to buy a quantity or to handle a new product that they would not normally buy. Distributors can use the purchase discount for immediate profit, advertising, or price reductions. For the company this means greater cash flow, an increase in market share, an increase in sales. Producers supply discounts or reductions to intermediaries from list prices. Although there are many types of discounts, they often fit into one of the following five categories: commercial, quantity, cash payment,seasonal and bonuses.
- Commercial discounts are a reduction outside the list price given by a producer to an intermediary for the performance of certain functions such as sale, transportation, storage, etc. Quantity discount are the deductions from the list price that reflect the economies of buying in large quantities., which are used to pass on to the buyer the cost savings obtained through economies of scale. Cash discount is the reduction in the price that is given to a buyer for prompt payment or cash payment. Seasonal discounts is a reduction in the price to buyers who acquire goods and services out of season is a seasonal discount. These discounts allow the seller to maintain a more constant production throughout the year.Bonus discount is a price concession to achieve a desired goal.
Most organizations go through difficulties such as short-term losses and internal chaos if they are necessary for survival. As the price is a flexible variable, some companies sometimes manage a lot of the aforementioned discounts in order to adjust and improve the sales volume and equalize them with the organizational expenses and this in turn allows to maximize profits. Also in the case of transnational companies, to achieve their objectives of units sold even at the cost of profit or in the case of small companies and in view of the current economic recession, to increase cash flow. And most importantly, keep or increase my buyers relative to competitors' sales.
4. Conclusions
Determining the profitability of a product represents on a small scale knowing whether the company is meeting the objectives for which it was created: generating profit for shareholders.
Furthermore, it represents whether the strategies, plans and actions that the marketing management is following are correct or not and consequently make the necessary adjustments to correct the problem.
In today's competitive and globalized world, companies must be profitable, but flexible at the same time. Let's take a case for reflection. American International Group is the largest insurance company in the world and also one of the most profitable. However, its lack of flexibility, because profitability is prioritized, has made it lose market to bolder competitors. The result is that AIG is reorienting itself to become more competitive in order to strike a balance between its profitability and efficiency. Many great and strong global giants have lost their strength due to not being aware of the true meaning of profitability and productivity.
5. Bibliography
- COOK, Victor. "Readings in Marketing Strategy". 2nd edition. The Scientific Press.DA COSTA, Joao. "Dictionary of Marketing and Advertising". Panapo Publishing House. Caracas Venezuela. 1992. 274 pp. DAVID, Fred. "The Strategic Management". ESCORCHE, Víctor. "Productivity and Quality". 1st edition. Editorial New Times. 1990. 192 p. Gomez, Luis. "Continuous improvement of quality and productivity". 2nd edition. 1992. 96 pp. KOTLER, Philip. "Marketing Department". 8th edition. Prentice Hall. 1996. 800 pp. KOTLER, Philip. "Marketing". 6th edition. Prentice Hall. 1996. 826 pp. LEVITT, Theodore. "Creative Marketing". Continental Publishing Company. Mexico. 1986. 191 p. LEVITT, Theodore. Innovation in Marketing. McGraw Hill. 203 p. MARTIN, ET «Marketing». Core Business Program. 1983. 127 pp. PRIDE, William. "Marketing:Concept and strategies ». 9th edition. McGraw Hill. 1997. 877 p. TAYLOR «Marketing Planning». Interactive Book. Prentice Hall.WILSON, Bud. "Planning and Commercial Development of the Product". Herrero Hermanos, Mexico. 217
