Financial Aspects of Marketing
Management
Part 1: Variable Cost
1)
Variable Costs
2) Fixed Costs
Part 2:Relevant Sunk Cost
1) Relevant Costs
2) Sunk Costs
Part 3: Gross Margin
1)
Trade Margin
2) Net Profit Margin (before Taxes)
Part 4: Contribution Analysis
1)
Break-Even Analysis
2) Sensitivity Analysis
3)
Contribution Analysis and Market Size
4) Assessment of Cannibalization
Part 5: Liquidity
Part 6: Operating Leverage
Part 7: Discounted Cash Flow
Part 8: Customer Lifetime Value
Part 9: Preparing A Pro Form Income Statement
Strategic Marketing
MKT470
Part 1: Variable and fixed Cost
 Marketing managers are accountable for the
impact of their actions on profit and cash
flow.
 Therefore, they need a working knowledge of
basic accounting and finance concepts
Part 1: Variable and fixed Cost
 Variable Cost: are expenses that are uniform per
unit Of output within a relevant time period. As
volume increases, total variable costs increases:
 Variable costs are Divided into two categories:
1) Cost of goods sold applied directly to
Production
2) Expenses that are not directly tied to production
(sales commissions, discounts and delivery
expenses
Part 1: Variable and fixed Cost
Fixed Cost are expenses that do not fluctuate with output
within a relevant time period of time, but become smaller
per unit as the output increases
Two categories:
1)
2)
Programmed Costs (result from attempts to generate sales
(marketing expenditure is considered programmed Costs)
Committed Costs: Required to maintain the organization
(such Rent and administration cost)
Total Fixed costs do not change during a budget year
Selling expenses can be fixed or variable costs
Part 2: Relevant and Sunk Costs
Relevant Costs are expenditure that:
-Expected to occur in the future as a result of some
marketing actions (such as adding a product to the
marketing).
-Sunk Costs are past expenditures (such as past
research and test marketing)
Part 3: Margins
Margin refers to the difference between the selling
price and the cost of a product or service.
Margins are expressed on a total volume basis or on
an individual unit basis.
1) Gross Margin or Gross Profit
2) Trade Margin
3) Net Profit Margin
Part 3: Margins (Kerin, page 35)
Gross Margin is the
difference between total
sales revenue and total
cost of goods sold or on
per unit basis.
Total Gross
Margins
$
%
Net Sales
$10
0
100
%
Cost of goods sold
-40
-40
Gross Profit
Margin
60
60
Part 3: Margins (Kerin, page 35)
Trade Margin is the
difference between unit
sales price and unit cost
at each level of
marketing channels for
example:
Factory
Wholesaler
2.88-2.0=88/2.00=30
Unit cost of
goods sold
Unit
selling
Gross
Margin
Manuf.
$2.00
$2.88
30.6%
Wholesaler
2.88
3.60
20
Retailer
3.60
6.00
40
Consumer
6.0
Retailer
Part 3: Margins (Kerin, page 36)
Net Profit Margin (before
taxes)
Is the remainder after cost of
goods sold, other variable
costs and fixed costs have
been subtracted from
sales revenue (Income
Statement of an Organization)
Dollar Amount
Percentage
Net sales
$100.000
100%
Cost of goods sold
-30.000
-30
Gross profit margin
$70.000
70%
Selling expenses
-20.000
-20
Fixed expenses
-40.000
-40
Net Profit Margin
$10.000
10%
Part 4: Contribution Analysis (Kerin, page 37)
Contribution analysis is the difference between total
revenue sales and total variable costs
Contribution analysis is useful in assessing
relationships among costs, prices and volumes of
products and services with respect to profit.
1) Break-Even analysis: identifies the unit or dollar sales
volume at which the organization neither makes a profit
nor incurs a loss.
Total revenue= total variable costs + total fixed costs
Part 4: Contribution Analysis (Kerin, page 37)
Break-Even analysis requires three pieces of
information:
1) An estimate of the unit variable costs
2) An estimate of the total dollar fixed costs
3) The selling price for each product
Total dollar fixed costs
Unit break-even volume=
Unit selling price – unit variable costs
Plan to sell a product for $5.00.
the unit variable costs are $2.00,
Total Fixed costs are $30.000.
How many units must be sold to break even?
Fixed costs=$30.000
Contribution unit = $5.00-$2.00=$3
= $30.000/$3.00=10.000 units
Part 4: Contribution Analysis (Kerin, page 37)
Break-Even Analysis
Dollar Amount
Percentage
Net sales
$100.000
100%
Cost of goods sold
-30.000
-30
Gross profit margin
$70.000
70%
Selling expenses
-20.000
-20
Fixed expenses
-40.000
-40
Net Profit Margin
$10.000
10%
Liquidity
Liquidity refers to an organization’s ability to
meet short-term (one year budget) financial
obligations.
Working Capital is the dollar value of an
organization’s current assets (such as cash,
accounts receivable, prepaid expenses,
inventory)
Operating Leverage
Operating leverage refers to the extent to which
fixed costs and variable costs are used in the
production and marketing of products and
services.
More fixed cost = high operating leverage.
Examples: airlines and heavy equipments
Less fixed cost compared to variable cost= low
operating leverage
The higher a firm’s operating leverage, the faster
its total profit will increase.
Discounted Cash Flow
A dollar received this year is not equivalent to a
dollar received today because of risk,
inflation, and opportunity cost.
Discounted cash flow are future cash flows
expressed in terms of their present value.
Customer lifetime value
Customer lifetime value requires three pieces of
information:
1) The per-period (month or year) cash margin
by customer ($M)= sales revenue - variable
cost and other traceable cash.
2) The retention rate (r) the per-period the
customer will be retained
3) The interest rate (i).
CLV= $M 1 1+ i-r
Preparing a Pro Forma Income
statement
Pro Forma Income Statement for 12-Months Period Ended Dec. 31, 2006
 Display projected
revenues, budgeted
expenses, estimated
net profit for a year.
Sales
1,000,000
Cost goods sold
500,000
Gross Margin
500,000
Marketing expenses
170,000
Advertising expenses
90,000
Delivery expenses
40,000
Admin Salaries
120,000
Depreciation
Building
20,000
Interest expenses
5,000
Tax & Insurance
5,000
Other admin
expenses
5,000
Net Profit before
income tax
300,000
155,000
45,000