marketing finance- evaluating products

Chapter TwoChapter Two Evaluating ProductsEvaluating Products 11

Learning ObjectivesLearning Objectives

UnderstandUnderstand

The Basic Concept of ProductThe Basic Concept of Product

What are different types of products.What are different types of products.

Appreciation of terms Appreciation of terms ““ RevenueRevenue””, , ““Net Net

RealizationRealization””, , ““Mark ups and marginsMark ups and margins””, , ““ Net Net

profitabilityprofitability””, , ““ InvestmentsInvestments””, and , and ““Profit Profit

Center.Center.””


StructureStructure

2.1 Introduction2.1 Introduction

2.2 Product2.2 Product

2.3 Setting up an Evaluation Format2.3 Setting up an Evaluation Format

2.4 Summary2.4 Summary


2.1 Introduction2.1 Introduction

A product can be A product can be ‘‘anythinganything’’ that can be offered to a market that can be offered to a market forfor

attentionattentionacquisitionacquisitionuseuseconsumptionconsumption

that might satisfy a need or a want.that might satisfy a need or a want.

Products can be physical objects, services, events, persons, Products can be physical objects, services, events, persons, places, organizations, ideas or a mix of any of these entities.places, organizations, ideas or a mix of any of these entities.Service is an activity that is intangible, and does not result iService is an activity that is intangible, and does not result in n ownership of anything. ownership of anything.



ProductProduct

CoreCore {benefit} Functional{benefit} Functional Augmented Augmented

What the consumer / What the consumer / product per seproduct per se service otherservice otherbuyer Is really buyingbuyer Is really buying back upsback ups

{cosmetics {cosmetics –– may actually { the cake of soap} {may actually { the cake of soap} {LuxLux soap ofsoap ofSell Sell ‘‘beauty hopebeauty hope’’.}.} good fresh good fresh ‘‘sitaaronkasitaaronka saboonsaboon’’ quality in thequality in the

market}market}



Consumer ProductsConsumer Products

ConvenienceConvenience ShoppingShopping Specialty UnsoughtSpecialty Unsought

bought without bought without bought after bought after bought boughtbought boughtcomparison .comparison . some researchsome research after a lot once inafter a lot once inwhen needed. when needed. & comparison& comparison research,research, a whilea while

evaluation.evaluation.

{Bread, milk{Bread, milk {clothing{clothing {costly{costly {insurance} {insurance} Cereals} Cereals} small appliances}small appliances}

appliances}appliances}



Industrial products Industrial products are purchased for further processing are purchased for further processing or for use in conducting business.or for use in conducting business.

Product AttributesProduct Attributes

1.1. Product quality: ability of product to perform its Product quality: ability of product to perform its functions. Includes product durability, reliability, functions. Includes product durability, reliability, precision, ease of operation and other valued attributes.precision, ease of operation and other valued attributes.

2.2. Product features: a product can come with varying Product features: a product can come with varying features features –– you can buy unassembled and assemble later.you can buy unassembled and assemble later.

3.3. Product style / design: design can go deeper.Product style / design: design can go deeper.4.4. Branding Branding –– a name sign, logo, style or a combination of a name sign, logo, style or a combination of

these that gives a product / service a separate identity. these that gives a product / service a separate identity.



DistributionDistribution

Reaching the customers.Reaching the customers.

Optimization of expenses for serving the supply chain.Optimization of expenses for serving the supply chain.

Improvement in customer service levels.Improvement in customer service levels.

So far we broadly covered several aspects connected with So far we broadly covered several aspects connected with marketing.marketing.

Now we shall develop a framework to evaluate marketing Now we shall develop a framework to evaluate marketing activities from their overall effectiveness and cost activities from their overall effectiveness and cost

benefits. benefits.



DefinitionsDefinitions

[1] Revenue [1] Revenue –– Amount earned through the business activities. Amount earned through the business activities. starting point of any profitability analysis.starting point of any profitability analysis.Revenue = volume x net realization.Revenue = volume x net realization.

[2] Net Realization [2] Net Realization -- Actual income per piece. May not be the Actual income per piece. May not be the MRP.MRP.

[3] Margins & Markups [3] Margins & Markups –– Differential between the net Differential between the net realization and the cost of goods sold. When it is realization and the cost of goods sold. When it is

described as a % of sales it is termed described as a % of sales it is termed MarginMargin and if as a and if as a % cost of goods sold then % cost of goods sold then MarkupMarkup..



DefinitionsDefinitions

[4] Net Contribution [4] Net Contribution –– Revenue minus cost of goods sold Revenue minus cost of goods sold provides provides Gross Contribution. Gross Contribution. Gross Contribution minus Gross Contribution minus total of Marketing, Selling, Administrative and Distribution total of Marketing, Selling, Administrative and Distribution expenses provides expenses provides Net Contribution.Net Contribution.

[5] Measure of Profitability [5] Measure of Profitability -- The most common measure is The most common measure is margin as % of sales. The product that yields higher margin as % of sales. The product that yields higher margin is profitable. Product A next.margin is profitable. Product A next.

But to decide preferable profit center, we have to consider But to decide preferable profit center, we have to consider investments required to earn the margin. Profit center investments required to earn the margin. Profit center preference is decided by return on investment i.e. Total preference is decided by return on investment i.e. Total margin earned per year divided by total investment. margin earned per year divided by total investment. Higher %, more profitable the center. Product B next.Higher %, more profitable the center. Product B next.



[5] Measure of Profitability [5] Measure of Profitability -- an examplean example

Product AProduct A Product BProduct BUnit selling priceUnit selling price Rs. 1000Rs. 1000 Rs. 1000Rs. 1000Cost of goods soldCost of goods sold Rs. 800Rs. 800 Rs. 900Rs. 900Margin Margin 220% Rs. 2000% Rs. 200 Rs. 100 10%Rs. 100 10%Sale per yearSale per year 120#120# 120#120#Margin per yearMargin per year Rs 24000 Rs 12000Rs 24000 Rs 12000Stocks Stocks –– average daysaverage days 40# 40# 10#10#Debtors Debtors –– average daysaverage days 15 15 77Value Value –– stocksstocks Rs. 32000Rs. 32000 Rs. 9000Rs. 9000

-- debtorsdebtors Rs. 5000 Rs. 2500Rs. 5000 Rs. 2500Total Total Rs. 37000 Rs. 37000 Rs 11500Rs 11500Return on InvestmentReturn on Investment 65% 65% 104%104%



InvestmentsInvestmentsTo keep business operational & ongoing , investments are To keep business operational & ongoing , investments are

required. They can be capital assets like plant, required. They can be capital assets like plant, machinery, equipment, vehicles etc.machinery, equipment, vehicles etc.

Investment can be in working capital like stocks, receivables Investment can be in working capital like stocks, receivables etc.etc.

The recurring costs of investments have also to be absorbed The recurring costs of investments have also to be absorbed by the business on an ongoing basis.by the business on an ongoing basis.

Cost of InvestmentsCost of Investmentsrecurring costs on investment such as depreciation, or recurring costs on investment such as depreciation, or

diminution in value of assets as well as inventory which diminution in value of assets as well as inventory which are are non cash, non cash, and and finance or interest charges payable finance or interest charges payable for such investments which are paid in for such investments which are paid in cash.cash.



Profit CenterProfit Center

Profit center has to deliver profits after accounting for Profit center has to deliver profits after accounting for opportunity costs of for the funds employed in the opportunity costs of for the funds employed in the centercenter’’s activity.s activity.

For running the business there would be requirements of For running the business there would be requirements of funds. funds.

Funds are used for investments that can be for long term Funds are used for investments that can be for long term assets and short term assets.assets and short term assets.

Funds so invested are blocked and thus cannot be used Funds so invested are blocked and thus cannot be used for other opportunities in any other business.for other opportunities in any other business.



Profit CenterProfit Center

We evaluate the use of these blocked investments from We evaluate the use of these blocked investments from opportunities in other business oropportunities in other business or

We load cost of the funds on the business activity.We load cost of the funds on the business activity.

Cost of the funds is calculated either by what the Cost of the funds is calculated either by what the business pays for procuring such funds or at weighted business pays for procuring such funds or at weighted average cost of all funds used by the organizationaverage cost of all funds used by the organization



Marketing / Sales Function EvaluationMarketing / Sales Function Evaluation

It has to cover It has to cover

Evaluation of performance Evaluation of performance EffectivenessEffectivenessEfficiencyEfficiencyCost controlCost control

At At

Product level &Product level &Territory level.Territory level.


2.4 Summary 2.4 Summary

Functional product Functional product –– is the product per se for example the is the product per se for example the cake of soap.cake of soap.

Augmented product Augmented product –– service / other back ups, examples, service / other back ups, examples, LuxLux soap of good fresh quality available in the market.soap of good fresh quality available in the market.

Consumer products Consumer products –– productsproducts that are purchased for that are purchased for personal consumption and not for business use.personal consumption and not for business use.

Different types of Consumer ProductsDifferent types of Consumer ProductsConvenience itemsConvenience itemsShopping itemsShopping itemsSpecialty itemsSpecialty itemsUnsought itemsUnsought items


That is the end of our session # 02That is the end of our session # 02Next we move to session # 03Next we move to session # 03

Covering chapter 03Covering chapter 03

““ Profit Center Evaluation.Profit Center Evaluation.””

Good Luck !Good Luck !

marketing finance- evaluating products

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