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Ted Mitchell

Marketing Return as an Identity Decomposing MROS into ROME, EOR , and Markup or How to allocate additional budget?. Ted Mitchell. What is the difference in the Definition and Calculation of Marketing Profit and Net Profit?.

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Ted Mitchell

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  1. Marketing Return as an IdentityDecomposing MROS into ROME, EOR, and Markupor How to allocate additional budget? Ted Mitchell

  2. What is the difference in the Definition and Calculation of Marketing Profit and Net Profit? • Marketing Profit is Gross Profit minus all the marketing expenses that directly impact sales in the periodadvertising, promotion, sales force • Net Profit is the Gross Profit minus all the direct expenses and indirect marketing expenses and overheads, market research, product development, rent

  3. Why is Net Profit Less Useful to the Manager than Marketing Profit? • Net Profit calculation involves many costs that have nothing to do with creating sales revenue in the current period. • Don’t need fixed period costs such as Rent, • Depreciation • Market research • Marketing executive salary

  4. Why is Marketing Profit More Useful to the Manager than Net Profit? • Marketing Profit, M, is more useful because it is the direct contribution that marketing makes to the firm’s Net Profit • It allows us to calculate1) The Rate of Marketing Profit Being Returned on Sales Revenue, MROS • 2) The Rate of Marketing Profit Being Returned on the Marketing Expenditures, ROME

  5. What is the difference between ROS and MROS? • ROS = the Net Profit, Z, divided by sales revenue, RROS = Z/Rthe rate of Net Profit generated by Revenue • MROS = the marketing profit, M. divided by the sales revenue, RMROS = M/Rthe rate of marketing profit being generated by the sales revenue

  6. What is the difference between GROS and MROS? • GROS = the Gross Profit, G, divided by sales revenue, RGROS = G/Rthe rate of Gross Profit generated by Revenue • MROS = the marketing profit, M. divided by the sales revenue, RMROS = M/Rthe rate of marketing profit being generated by the sales revenue

  7. What is the difference between the ROS as a rate and its functional form? • The Rate of Net Profit being returned by the sales revenue is the ratio ROS =Z/RIt is used as a measure of efficiency • The functional form of the ROS isNet profit = ROS x RIt can be used for predicting of the Net Profit that will be raised if the efficiency improves or the sales revenue increases

  8. What is the difference between the MROS as a rate and its functional form? • The Rate of marketing profit being returned by the sales revenue is the ratio MROS =M/RIt is used as a measure of marketing efficiency • The functional form of the MROS isMarketing profit = MROS x RIt can be used for predicting of the marketing profit that will be raised if the marketing efficiency improves or the sales revenue increases

  9. What are some Common Rates of Return found on the Marketer’s Operating Statement?

  10. The Operating Statement For the Good Shoe Marketing Manager

  11. Marketing Return on Sales is Often held as the most important • MROS = M/RThe rate of return is often seen as a measure of marketing efficiency • The functional form is needed to ensure that changes in revenues are not distorting the Rate of Return on Sales • Marketing Profit = MROS x Sales Revenue • M = MROS x R

  12. The Operating Statement For the Good Shoe Marketing Manager

  13. Using the MROS to get more budget? • You are responsible for allocating the firm’s total promotion budget between your two brand managers. • The Good Shoes Brand has a MROS of 48.85% • The Competitor Brand has a MROS of 48.75% • The Good Shoes Brand has a higher MROS and appears to be more efficient at converting sales into profits • Should Good Shoes Get More Budget?

  14. You are a Graduate of UNR’s Marketing program • You know that a single performance metric should not be used as the sole determinant in the decision on which brand should get more promotion budget. • You know that other performance metrics should be reviewed for more insight

  15. What are the Key Performance Indicators on the Marketer’s Operating Statement? • 1) The Rate of Marketing Profit being Returned on Sales Revenue, MROS • 2) The Rate of Gross Profit being Returned on Sales Revenue, GROS or Markup on Price, Mp • 3) The rate of Promotional Expenditures on the Gross Profit, EOG • 4) The Rate of Profit Being Returned on Promotional Expenditures, ROME

  16. The Operating Statement For the Good Shoe Marketing Manager

  17. You gather the key performance ratios from the Competitor Brand

  18. Key Performance Indicators of the Competitor Brand • 1) The Rate of Marketing Profit being Returned on Sales Revenue, MROS = 48.75% • 2) The Rate of Gross Profit being Returned on Sales Revenue, GROS =71.81% • 3) The Rate of Promotion Expenditures on the Gross Profit, EOG = 32.11% • 4) The Rate of Profit Being Returned on Promotional Expenditures, ROME = 211%

  19. Analysis

  20. Why does Good Shoes have the higher rate of return on sales, MROS? • You know from this class • The Brands Rate of Return on Sales, MROS, is explained by three other performance metrics • 1) Gross Return on Sales, GROS, or Markup, Mp • 2) The rate of spending on marketing expenditures, over the Gross Profit, EOG • 3) Profit Returned on Marketing Effort, ROME

  21. Analysis

  22. You know that • MROS = Markup x Spending Rate x ROME • Good Shoes • MROS = 72.42% x 32.54% x 207% = 48.85%

  23. Analysis of Promotional Usage • MROS = Markup x Spending Rate x ROMEGood ShoesMROS = 72.42% x 32.54% x 207% = 48.85% • Would you give more promotion budget to Good Shoes if the higher rate of return, MROS, was only due to a higher markup? • Your answer is Certainly NOT!

  24. Analysis of Promotional Usage • MROS = Markup x Spending Rate x ROMEGood ShoesMROS = 72.42% x 32.54% x 207% = 48.85% • Would you give more promotion budget to Good Shoes if the higher rate of return, MROS, was only due to a higher rate of spending? • Your answer is Certainly NOT!

  25. Analysis of Promotional Usage • MROS = Markup x Spending Rate x ROMEGood ShoesMROS = 72.42% x 32.54% x 207% = 48.85% • Would you give more promotion budget to Good Shoes if the higher rate of return, MROS, was only due to a higher rate of return on marketing expenditures, ROME? • Your answer is Yes, Yes , Yes!

  26. You know that • MROS = Markup x Spending Rate x ROMEGood ShoesMROS = 72.42% x 32.54% x 207% = 48.85% • Competitor ShoesMROS = 71.81% x 32.11% x 211%= 48.75% • Good Shoes has higher Markup, a bigger spending rate • Competitor has bigger ROME! • You will give additional promotion budget to the Competitor Brand

  27. The Marketing Identity isMROS = ROME x Spending Rate x Markup • The Marketing Identity for MROS helps us identify the reasons for a brand’s rate of profitability on sales!

  28. Marketing Identity • The Marketing Identity isMROS = ROME x Spending Rate x Markup • MROS = ROME x EOG x GROS • M/R = (M/E) x (E/G) x (G/R) • “Please Use Numbers to Prove it!”

  29. The Operating Statement For the Good Shoe Marketing Manager

  30. The Marketing Identity isMROS = ROME x Spending Rate x Markup • MROS = ROME x EOG x GROS • M/R = (M/E) x (E/G) x (G/R) • “Please Use Numbers to prove it!” • 6,177,739/12.645,900 =(6,177,739/2,980,000) x (2,980,000/9,157,739) x (9,157,739/12,645,900)

  31. Prove it! Why does the Marketing Identity Work? • MROS = ROME x Spending Rate x Markup • Prove the Above! • Marketing Profit = MROS x Sales Revenue • M = MROS x R • M = MROS x 1 x R • M = MROS x 1 x 1 x R • Substitute 1 = G/G, 1 = E/E, and MROS = M/R • M = M/R x G/G x E/Ex R • M = (MxGxE)/(RxGxE) x R • M = (M/E) x (E/G) x (G/R) x R • M = ROME x EOG x GROS x R • M/R = ROME x Spending Rate x Markup • MROS = ROME x Spending Rate x Markup • Q.E.D.

  32. For the same reason the DuPont Identity has worked for almost 100 years! • Return of Owner’s Equity = Return on Sales x Asset Turnover x Leverage • ROE = ROS x Turnover x Leverage • Z/E = Z/R x R/A x A/E • It’s a mathematical identity! • Any change in ROE is explained by • ∆ROE = ∆ROS x ∆Turnover x ∆Leverage

  33. Question #1 You want to choose between giving more budget to the manager of brand A or to giving more to the manager of brand B. The criteria of the choice is profitability. You know that the dollar profit from brand A is higher than from brand B. Why should you be fired for picking brand A as the more profitable brand to invest in? Because you have ignored the rate of profitability!

  34. Question #2 You want to choose between giving more budget to the manager of brand A or to giving more to the manager of brand B. The criteria of the choice is profitability. You know that brand A has a higher rate of return (ROS) than does brand B. Why should you be fired for picking brand A as the more profitable brand to invest in? Because you have ignored the fact that the rate of profitability is determined by both the efficiency of the operation and the size of the sales revenue!Profit = ROS x Revenue

  35. Question #3 You want to choose between giving more budget to the manager of brand A or to giving more to the manager of brand B. The criteria of the choice is profitability. You know that brand A has a higher rate of return (ROS) than does brand B and that higher rate of return is not due to a larger sales revenue Why should you be fired for picking brand A as the more profitable brand to invest in? Because you have ignored the fact that the rate of profitability, ROS, can be explained by more performance metrics!MROS can be decomposed into ROME x Promotional Spending Rate x the Markup

  36. Question #4 • What the Key performance ratios the you have to know and work with in this course • GROS and Markup (gross profit returned on sales) • MROS (marking profit returned on sales) • ROS (net profit returned on sale) • ROME (profit returned on marketing expense)

  37. Question #5 • All performance rates can be decomposedMROS = ROME x Spending Rate x Markup • the rate at which we deplete the money in the some pools of funds or account • What are some definitions of the spending rate? • 1) Advertising to Sales Rateor Total promotion expense to sales rate • 2) Promotion Expense from Gross Profit Pool

  38. The Operating Statement For the Good Shoe Marketing Manager

  39. The Operating Statement For the Good Shoe Marketing Manager

  40. Any Questions on why rates of performance are useful and important?

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