TUTORIAL 3 (WEEK 3)

CHAPTER 2: MARKETING METRICS AND MARKETING PROFITABILITY

LEARNING OUTCOMES

At the end of this session, students will be able to:

 Present the importance of marketing performance metrics and make clear the
characteristics and roles of external and internal metrics and of forward-looking and
backward-looking performance metrics.
 Illustrate how a market-based business continues to reengineer itself around markets
as customer needs and competition change and new market opportunities emerge.
 Demonstrate the importance of market-level measures of profitability and how the
mechanics of the net marketing contribution can be applied to a variety of marketing
strategies.

CLASS ACTIVITIES

Weekly Discussion Questions: Chapter 2

1. How could marketing metrics help Automobile companies turn around their decline in
sales and profits?

- Automobile companies have many internal performance metrics with regard to

production, employee productivity, and financial performance. Metrics for these
categories are standard for most manufacturing companies.
- The importance of marketing metrics rests on their external measurements of
performance. Ratings of customer satisfaction, intentions to repurchase, brand
preference, loyalty, and customer complaints provide an external scorecard for
assessing current performance.
- Many of these marketing metrics are forward-looking metrics that help forecast
future performance. For example, declining customer satisfaction and decreasing
intentions to purchase vehicles in the future would signal a serious problem
ahead.
- Likewise, improvements in these marketing metrics would signal the potential for
a bright future.

2. If a company dominates a market the way Apple, Google, and P&G dominate their
markets, why should that company bother to track marketing metrics?

- All market leaders stumble at some point. Xerox, GM, and IBM all seemed
invincible at one time.
- Without external marketing metrics, a company is vulnerable to listening to itself
and not the voice of the customer.
- Customer complaints, shifting customer preferences, customer satisfaction, and
intentions to repurchase are valuable external barometers that can warn a
company before declines in sales and profits occur.
- A company could have many captive customers, unhappy but with no place to
go. When presented with an opportunity to buy elsewhere, however, these
dissatisfied captive customers will exit the market to try better products.

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 3. How would marketing metrics help a company like McDonald’s better manage its
profitability?
- By measuring the net marketing contribution (NMC), marketing ROI, and
marketing ROS of each of its restaurants, McDonald’s could better understand
average performance as well as above- and below average performance of the
overall company average and all stores in different regions, and the average
performance for different regions.
- Other marketing metrics like complaint behavior (from retention rate) and
customer satisfaction scores could be tied to these marketing profitability metrics
to further illuminate and help improve the company’s performance.

4. How would Toyota use forward-looking marketing metrics to better understand future
sales and profits in the Malaysian market?

- Changes in customer satisfaction, and particularly changes in the percentage of

“very satisfied” customers, along with measurements of intentions to repurchase,
provide external metrics of company performance that shape future sales and
profit performance.
- These forward-looking marketing metrics provide early warning signs of problems,
but they can also be encouraging signs when the metrics are improving.

5. Netflix had a marketing ROI of 178 percent. What does this mean in terms of the
company’s investment in marketing and sales?

- A marketing ROI of 178 percent means that for each dollar Netflix invested in
marketing and sales to grow the company, it produced $1.78 in net marketing
contribution (after paying the $1 investment back).
- From the net marketing contribution, Netflix deducts its general and
administrative expenses and other overhead to figure its operating income.
- If the company improved its marketing ROI to 200 percent, this would mean it is
making $2 in net marketing contribution for every $1 it invested in marketing and
sales expenses.
- The higher the ROI, the more productive the marketing department is, the higher
the profitable the marketing activities and investment made.

MARKETING PERFORMANCE TOOL AND APPLICATION EXERCISES

2.1. Company-Level Net Marketing Contribution (NMC):

A. Evaluate the profit impact of eliminating the casual shorts and knitted sweaters
product lines. Refer to Table 2.1 below.

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TABLE 2.1 (present marketing data and marketing income statement)

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ANSWER 2.1A

TABLE 2.1A (after elimination – new marketing data and marketing income statement)

Answer 2.1A:

By eliminating the casual shorts and knitted sweaters product lines,

- Sales drop by $25 million ($125-100)
- Net marketing contribution (NMC) drops by $3 million ($30-27).
- Net profit (before taxes) falls by 30 percent, from $10 million to $7 million.
- As long as the market profit is positive, it is contributing to other fixed costs and
profits.
- The $20 million in operating expenses is not product-related but represents overhead
expenses that will still occur without these two product lines.
- Then the operating expenses would have to be covered by the remaining product
lines. So, to eliminate or not, the marketing manager can decide which decision leads
to higher net profit.

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 B. What would be the profit impact of increasing market share from 2 to 3 percent for
the casual short’s product line if marketing and sales expenses were doubled ($1.5
million to $3 million)?

TABLE 2.1B (present marketing data and marketing income statement)

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ANSWER 2.1B

TABLE 2.1B (After increased Market Share and increased MSE double)

ANSWER

While this strategy would produce $5.1 ($130.1 – 125.1) million more in sales, the net
marketing contribution (NMC) would drop by $200000 ($1-0.8).

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The gains in market share and sales are not enough at current margins to offset a $1.5
million increase in marketing and sales expenses. As shown, this loss drops to the bottom
line where net profit (before taxes) also drops by $200000.

MSE is doubled ($1.5 to 3.0), which reflects a huge sum of money has been spent on the
marketing activities, but the marketing profit has not increased considerably. This could
mean that marketing staff and personnels are not productive, marketing strategies are not
effective and marketing managers are not performing well.

ROS is 5.0% and ROI is 25% and not able to breakeven (100%). So, the marketing manager
may decide to stop the production of casual short product line or eliminate it and focus on
other profitable product lines.

2.2. Market-Level NMC, Marketing ROS, and Marketing ROI:

A. Evaluate the profit impact of exiting the fashion segment.

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TABLE 2.2 (present marketing data and marketing income statement)

ANSWER

Exiting the fashion segment means the company or business no longer has a market to
serve (group of customers). This would be a disastrous decision. Despite a low pretax net
profit of $300000, the fashion segment generates $6.8 million in marketing profits (Refer to
Table 2.2).
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This amount covers the $6.5 million in allocated operating expenses, which the business
would have to pay regardless of whether it exits this segment or not. While the strategy
lowers the marketing budget by $6.5 million, the business’s overall net profit would be
reduced by $6.8 million, the exact amount of the current net marketing contribution for the
fashion segment.

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Now refer to Table 2.2A, by exiting the market;
 Sales revenue reduces to $87.9 from $125 million (loss of $37)
 Net profit reduces by $6.8 million ($10 – 3.2).
 NMC reduces from $30 to $23.2 ($6.8)
 ROS increases to 26.3% from 24% (2.3% higher)
 ROI increases to 193% from 162% (higher by 31%)

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TABLE 2.2A (after exiting)

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2.3. Company Net Marketing Contribution and Marketing ROI:

A. Show the calculations and interpretations of NMC, ROS and ROI from Figure 2.3
below.

FIGURE 2.3

ANSWER

NMC: (Sales Revenue x Percent margin) = Gross Profit – MSE = NMC

RM125 million x 38.8% = $48.5

(-) 125 million x 14.8% = $18.5

= $30.00 (marketing profit)

ROS: NMC/SR X 100 = $30/125 = 0.24 @ 24%

(ROS tells us what portion of sales represents the marketing profits. In this case, ROS is
24% which means 24% of sales represent the marketing profit. The higher the ROS, the
better for the marketing profitability).

ROI: NMC/MSE X 100 = $30/18.5 = 162%

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 (ROI implies for every $1 invested in Marketing & Sales Expenses (MSE), the company
produces $1.62 in marketing profits. If the company produces $1 in marketing profit,
it means breakeven. As long as the value exceeds $1, the company will make a
profit. The higher the returns, the better for the company).

B. Evaluate the profit impact of a strategy in which the percentage margin is increased
by 5 points and marketing and sales expenses are increased by 2 percentage points.

ANSWER

- As shown in Figure 2.3B, this strategy produces an increase of $3.375 million for
NMC (33.7% -30%) – Marketing profit increased. Better results since the profit
impact is stronger.
- ROS increased 3% (27% -24%) – better result (i.e. 20% or higher ROS is
considered a good return)
- ROI reduced 1% (162 – 161) – no impact on the overall investment since the
difference is insignificant.

FIGURE 2.3 B

ASK STUDENTS TO SHOW THE CALCULATION OF NMC, ROS & ROI IN A

MARKETING INCOME STATEMENT.

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ANSWER:

MARKETING INCOME STATEMENT (MILLIONS)

Sales revenues $125.00

Percent margin (43.8%) 54.75
Minus MSE 21.00
NMC 33.75
Minus Other exp 20.00
Net Profit 13.75
ROS (NMC/Sales) x 100 27%
ROI (NMC/MSE) x 100 1.60 @1.61

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