Marketing Metrics Handbook Blog

This medical devices business unit produces about 10 percent of the company’s sales but 11.7 percent of the company’s marketing profits (net marketing contribution) of $3.18 billion on sales of $10 billion.

The company’s Marketing Return on Sales (ROS) was 31.8 percent and Marketing Return on Investment (ROI) was 146 percent. The business unit has a higher Marketing ROS (35 percent) and a slightly higher Marketing ROI (150%) as shown below.

However, to better understand business unit performance and how it can be managed for improved performance, the marketing profitability portfolio map can be created. As shown above, Product Line 1 is performing well below both the business unit and company averages. It needs more attention with respect to how net marketing contributions are produced in relation to the money invested. Product Lines 2, 3, 4 and 5 are close to the business unit average in both Marketing ROS and Marketing ROI.

Product Lines 6, 7, 8 and 9 are above average with respect to these two marketing profitability metrics and play an important role in shaping the overall business unit average. Clearly, Product Line 10 is above average in Marketing ROS and well above average in Marketing ROI.

Managing Productivity and Resource Allocation

The first goal of each product line manager should be to develop a marketing plan that increases marketing profits (net marketing contribution). For Product Line 1, the goal should be to improve marketing profits but also improve marketing spending efficiency.  Currently, they produce roughly $0.50 in marketing profits per $1.00 of investment in marketing and sales expenses. By contrast, Product Line 9 produces $2.50 of marketing profit per $1.00 of investment in marketing and sales expenses. If a company has only one extra $1.00  to spend on marketing and sales expenses, it should go to Product Line 10 where it can obtain $5.00 in marketing profits per $1.00 of investment.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.

(*) Note: This example is for educational purposes only.

Apple, Inc. produced $10 billion in marketing profits in 2009. All general administration expenses, other expenses, interest and taxes must be deducted from the NMC to yield a net profit of $5.7 billion as shown below.

Apple , Inc. (2009)

Each market served by Apple contributed to both overall company sales and net marketing contribution. For the computer market, Apple produced an estimated $2.42 billion in net marketing contribution.

Apple (2009) Computer Market

While this clearly shows how Mac sales contributed to overall marketing profits, this level of measurement needs to be extended to make it much more strategic with respect to marketing performance and strategies. Apple’s computer market net marketing contribution can be broken down into the market variables such as market demand, market share and channel discounts, as shown above.

Apple (2009) Computer Market – Market Level Marketing Profits

This market-level measure of marketing profitability allows management to assess future marketing profits based on strategies that take into consideration growth in market demand, market share, channel strategies, profit margins and investments in marketing and sales expenses.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.

(*) Note: This example is for educational purposes only. Many of the numbers had to be estimated, as Apple does not publish them separately.

Businesses struggle to understand how their investment in marketing and sales contributes to the profits of their company. The logic and math are simple and use financial data which adds to the credibility of this metric.

As shown above marketing profits are a net marketing contribution. They are the sales times the percent margin minus what was spent on marketing and sales to produce that level of sales and margin. Because Apple does not report marketing and sales expenses separately, it was estimated as 75 percent of their sales, general & administrative expense. This is an industry average used to estimate marketing and sales expenses when not available.

In 2009, Apple produced $36.5 billion in sales for all products and services sold worldwide. As a company, their marketing and selling strategies produced a gross profit of 36 percent, or $6.9 billion. However, this gross profit did not just appear at Apple’s doorstep. It was earned through their investment of $3.1 billion in marketing and sales. The remaining $10 billion is their net marketing contribution.

These are the only profits produced by the enterprise. As shown below, Apple’s net profit of $5.7 billion is their net marketing contribution minus general administration expenses, other expenses (including R&D), and interest and taxes.

Apple Net Profit – 2009

When net profit is divided by stockholder shares it results in $6.29 earnings per share. If Apple invests in marketing and sales and can increase their net marketing contribution to $11 billion, it should extend its net profits in the graph above.

To appreciate the relationship between marketing profits (Net Marketing Contribution) and net profits, note the relationship for Apple, Inc. from 1999 to 2009. This is a pretty compelling relationship which, in the case of Apple, has a correlation well above .90.

To learn more, visit www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.