Appendix TOOLS FOR MARKETING CONTROL ln this appendix, we provide detailed guidelines and insights about how to best conduct several market- ing control procedures. ANNUAL PLAN CONTROL Four sets of analyses can be useful for annual plan control SALES ANALYSIS Sales analysis measures and evaluates actual sales in relat! specific tools make it work Sales-variance analysis measures the relative contribution of different factors to a gap in sales per- formanice. Suppose the annual plan called for selfing 4,000 widgets in the first quatter at $1 per widget, revenue of $4,000, At quarter's end. only 3,000 widgets were sold at $,80 per widget, for total revenue of $2,400, How much of the sales performance gap is due to the price decline, and how’ muuch to ‘he volume decline? This calculation answers the question: nship to goals. Two Variance due to price decline: ($1.00 ~ $.80) (3,000) =$ 600 37.5% Variance due to volume decline: ($1,004,000 ~ 3,000) = $1,000 62.5% = $1,600 100.0% Almost two-thirds of the variance is due to faiture to achieve the volun look closely at why it failed to achieve expected sales volume. Microsales analysis looks at specific products, territories, and so forth, that failed to produce expected sales, Suppose the company sells in three territories, and expected sales were 1,500 units, 500 units, and 2,000 units, respectively. Actual volumes were 4,400 units, 525 units, and 1,075 units, respectively. Thus, territory I showed a 7 percent shortfall in terms of expected sales; territory 2, a 5 pervem improvement over expectations: and terntory 3, a 46 percent shortfall! Territory 3 is causing most of the trouble. Maybe the sales rep in territory 3 is underperforming, a major competitor has entered this territory, or busitess is, in a recession there. target. The company should MARKET SHARE ANALYSIS Company sales don't reveal how well the company is perforuting relative to competitors. For this, management needs to track its market share in one of three Ways, Overall market share expresses the company’s sales as 2 percentage of total market sales. Served market share is sales as a percentage of the total sales to the market. The served mark is ll the buyers able and willing to buy the product, and served market share is always larger than overall inarket share. A company could capture 100 percent of its served market and yet have a relatively smull share of the total market, Relative market share is market share in relationship to the largest competitor. A relative mark share of exactly 100 percent means the Company is tied for the lead: more ttn LOO percent indicates a ‘market leader, A rise in relative market share means a company is gaining on its leading competitor. Conclusions from market share analysis, however, are subject to qualifications: + The assumption that outside forces affect all companies in the same way is often not true, The U.S, Surgeon General’s report on the harmful consequences of smoking depressed total cigarette sales, but not equally for all companies. + The assumption that @ company’s performance should be judged against the average perfar- ‘mance of all companies is not always valid. A company’s performance is best judged against that of its closest competitors. + Uanew firm enters the industry, every existing firm's market share might fall. 4 decline in mat- ket share might not mean the company is performing any worse than other companies. Share loss depends on the degree to which the new firm its the company’s specific markets,782 PARTS | CONDUCTING MARKETING RESPONSIBLY FOR LONG-TERM SUCCESS + Sometimes a market share decline is deliberately engineered to improve profits. For example, management might drop unprofitable customers or products. + Morket share can fluctuate for many minor reasons, For example, it con be affected by whether a large sale occurs on the last day of the month or atthe beginning of the next month, Not all shifts in market share have marketing significance.” A useful way to analyze market share movements is in terms of four components: Overall Customer Customer Customer Price ee = penetration —* loyalty selectivity selectivity where: Customer penetration — Percentage of all customers who buy from the company Customer loyalty Purchases from the company by its customers as a percentage of their total purchases from all suppliers of the same products Customer selectivity Size of the average customer purchase from the company as a percentage Of the size of the average customer purchase from an average company Price selectivity Average price charged by the company as a percentage of the average price charged by all companies Now suppose the company’s dollar market share fails during the period, The overall market share equation provides four possible explanations: The company lost some customers (lower customer pen- tration); existing customers are buying less from the company (lower customer loyalty); the company's remaining customers are smaller in size (lower customer selectivity): of the company’s price has slipped relative to competition (lower price selectivity). MARKETING EXPENSE-TO-SALES ANALYSIS Annual-plan contro} requires making sure the company isn’t overspending to achieve sales goals, The key ratio to watch is marketing expense-to-sales In one company, this ratio was 30 percent and consisted of five component expense-to-sales ratios: sales force-to-sales (15 percent), advertising-to-sales (5 percent), sales promotion-to-sales (6 percent), mar~ keting research-to-sales (1 pervent), and sales administration-to-sales (3 percent) Fluctuations outside the normal range are cause for concern, Management needs to monitor period- to-period fluctuations in each ratio on a control chart (see Figure 23.6). This chart shows the advertising expense-t0-sales ratio normally fluctuates between 8 percent and 12 percent, say 99 of 100 times. In the I5th period, however, the ratio exceeded the upper control limit, Either (1) the company stil has good ‘expense control and this situation represents a rate chance event, or (2) the company has lost control over this expense and should find the cause. If there is no investigation, the risk is that some real change might have occurred, and the company will fall behind. | Fig. 23.6 | The Control- Chart Mode! Upper iit 10 { : Desires ievel Loner list Tas@se7Ts sna Time PeriodMANAGING A HOLISTIC MARKETING ORGANIZATION FOR THE LONG RUN Managers should make successive observations even within the upper and lower control limits. Note in Figure 23.6 that the level of the expense-te-sales ratio rose steadily from the Sth period onward. The probability of encountering six successive increases in what should be independent events is only 1 in 64."7 This unusual pattern should have led to an investigation sometime before the [Sth observation, FINANCIAL ANALYSIS: Marketers should analyze the expense-to-sales ratios in an overall financial framework to determine how and where the company is making its money. They can, and are i ingly, using financial analysis to find profitable strategies beyond building sales. Management uses financial analysis to identify fatoes that affect dhe company’s rate af return on net worth,"* The main factors are shown in Figure 23.7, along with illustrative numbers for a large chain-store retailer. The retailer is eaming a 12.5 percent return on net worth. The return on net worth is the product oF two ratios, the company’s return on assets and its financial leverage. To improve its return on net worth, the company must increase its ratio of net profits to assets or increase the ratio of assets to net worth. The company should analyze the composition of its assets (cash, accounts receivable, inventory, and plant and. equipment) to see whether it can improve its asset management. ‘The return on assets is the product of two ratios, the profit margin and the asser turnover. The profit ‘margin in Figure 23.7 seems low, whereas the asset turnover is more normal for retailing. The marketing executive can seek to improve performance in two Ways: (1) increase the profit margin by increasing sales ‘or cutting costs, and (2) increase the asset turnover by increasing sales or reducing assets (inventory, receiv= ables) held against a given level of sales. seas- PROFITABILITY CONTROL MARKETING PROFITABILITY ANALYSIS We will illustrate the steps in marketing profitability analysis with the following example: The marketing vice president of a lawn mower company wants to determine the profitability of selling through three types of retail channels: Hardware stores, garden supply shops, and department stores, The company’s profit-and-loss statement is shown in Table 23.10, Step I: Identifying Functional Expenses Assume the expenses listed in Table 23.10 are incurred to sell the product, advertise it, pack and deliver it, and bill and collect for it. The first task is to measure how much of each expense was incurred in each activity. Suppose most of the salary expense went to sales representatives and the rest to an advertising man- ager, packing and delivery help, and an office accountant. Let the breakdown of the $9,300 be $5,100, $1,200, $1,400, and $1,600, respectively. Table 23.1] shows the allocation of the salary expense to these four activities. Table 23.11 also shows the rent account of $3,000 allocated to the four activities, Because the sales reps work away from the office, none of the building’s rent expense is assigned to selling. Most of the CHAPTER 23 Prot Marla | Fig. 23.7) Financial Model feel ftet ty f ‘etum on Assets tautier OF Return ee grafts Worth Wet soe ‘Asset Tunover lt profits et wort on Net 753784 PARTS | GCQNOUCTING MARKETING RESPONSIBLY FOR LONG-TERM SUCCESS: TABLE 23.10 Sales Cost of goods sold 39,000 | Gross margin $21,000 | Bipenses — : "Salers Rent 15,900 | Net profit $6,200 expenses for floor space and rented equipment are for packing and delivery. The supplies account covers promotional miaterials, packing materials, fuel porchases for delivery, and home office stationery. The {$3,500 in this account is reassigned to functional uses of the supplies. Step 2: Assigning Functional Expenses to Marketing Entities The next task is to measure hhow much fuactional expense was associated with selling through each type of channel. Consider the selling effort, indicated by the number of sles in each channel, This number is in the selling column of Table 23.12, Altogether, 275 sales calls were made during the period. Because the total selling expense amounted to $5,500 (see Table 23.12), the selling expense averaged $20 per eal. ‘We can allocate advertising expense according to the number of ads addressed to different channel Because there were 100 ads altogether, the average ad cost $31 ‘The packing and delivery expense is allocated according to the nuntber of orders placed by each type of channel. This same basis was used for allocating billing and collection expense Step 3: Preparing a Profit-and-Loss Statement for Each Marketing Entity We can now prepare a profit-and-loss statement for each type of channel (see Table 23.13). Because hardware stores accounted for half of total sales ($30,000 out of $60,000), charge this channel with half the cost of goods sold ($19,500 out of $39,000). This leaves a gross margin from hardware stores of $10,500, From this ‘we deduct the proportions of functional expenses hardware stores consumed. According to Table 23.12, hardware stores received 200 of 275 cotal sales calls. At an imputed value of $20 a call, hardware stores must bear a $4,000 selling expense. Table 23.12 also shows hard= ware stores were the target of 50 ads. At S31 an ad, the hardware stores are changed with $1.550 of advertising. The same reasoning applies in computing the share of the other functions! expenses. The result is that hardware stores gave rise {0 $10,050 of the total expenses. Subtracting this from gross margin, we find the protic of selling through hardware stores is only $450. TABLE 23.1! Natural Packing Billing Total Selling Advertising and Delivery and Collecting "$9,300 ‘$5,100 $1200 $1,400 $1600 god 400 20000 4800 a ao ~—-$15/800 $6,500 $3,100 $4,800 “|MANAGING A HOLISTIC MARKETING ORGANIZATION FOR THE LONG RUN CHAPIER 23 Packing and ivory 50 275 “$5,500 "275 $ 2 |e Repeat this analysis forthe other channels, The company is losing money in selling through garden supply shops and makes virtually all its profits through department stores. Notice tat gross sales is not a reliable indicator of the net profits for each channel. DETERMINING CORRECTIVE ACTION It would be naive to conclude the company should drop garden supply shops and hardware stores to concentrate op department stores. We need t0 answer the folfowing questions first: ‘To what extent do buyers buy om the basis of type of retail outlet versus brand? + What trends affect the relative importance of these three channels? + How gond are the company’s marketing strategies for the three channels? Using the answers, marketing management can evaluate five alternatives: 1. _ Establish a special charge for handling smaller orders. 2. Give more promotional aid to garden supply shops and hardware stores, 3. Reduce sales calls and advertising to garden supply shops and hardware stores. 4. Ignore the weakest cetait units in each channel. S. Do nothing, — = | TABLE 23.13 Hardware Garden Supply Whole i _ Stores Shops __—Dept, Stores Company | Sales $30,000 «$10,000 «$20,000 $60,000 - 19500 6.500 - | | Biess marin $10,500 $3,500 = + Expenses |__Seling ($20 perca) $4000 $1,300 8 20 Advertising ($31 per advertisement) 1,550 620 930 Packing and delvery ($60 per order 3,000 1,260 540 | ling {$30 per order) 1,500 630 270 { Total expenses $10,050 $ 3810 _ $1,940 $18,800 | Net prof o ass $40 $10) $5080 $ 6,200 756