Marketing Return as an Identity Decomposing MROS into ROME, EOR, and Markup or How to allocate additional budget? Ted Mitchell

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

The following lecture assumes That the definition and calculation of the following are known: 1) Net Profit, Z, and the rate of Net Profit Returned on Sales Revenue, ROS 2) Gross Profit, G, and the rate of Gross Profit Returned on Sales Revenue, GROS 3) Marketing Profit, M, and the rate of Marketing Profit Returned on Sales Revenue, MROS

The Operating Statement For the Good Shoe Marketing Manager Quantity Sold, Q210,000 Classic Rates of Return on Sales Revenue, R = P x Q, P = $60$12,600,000 Cost of Goods Sold, COGS = V X Q, V = $20 $4,200,000 Gross Profit, G$8,400,000 GROS = 66.67% Total Promotion Expenditures, E AD+CP+SF+DP = E $3,000,000 Promotion to Sales, Spending Rate, 23.8% Marketing Profit, R-COGS-E =M $5,400,000MROS = 42.86% Overheads and Salaries, Rent, Depreciation, Market research, Executive salaries, Product Development $2,300,000 Net Profit$3,100,000ROS = 18.25%

Marketing Return on Sales is Often held as the most important MROS = (Marketing Profit)/Revenue The rate of return is often seen as a measure of marketing efficiency The Two-Factor Model is needed to ensure that changes in Revenues are not distorting the Rate of Return on Sales Marketing Profit = MROS x Sales Revenue M = (M/R) x R

The Operating Statement For the Good Shoe Marketing Manager Quantity Sold, Q210,000 Classic Rates of Return on Sales Revenue, R = P x Q, P = $60$12,600,000 Cost of Goods Sold, COGS = V X Q, V = $20 $4,200,000 Gross Profit, G$8,400,000 GROS = 66.67% Total Promotion Expenditures, E AD+CP+SF+DP = E $3,000,000 Promotion to Sales, Spending Rate, 23.8% Marketing Profit, R-COGS-E =M $5,400,000MROS = 42.86% Overheads and Salaries, Rent, Depreciation, Market research, Executive salaries, Product Development $2,300,000 Net Profit$3,100,000ROS = 18.25%

Decomposing Two Factor Models Marketing Return on Sales, MROS Ted Mitchell

Two Factor Model of Revenue (input) in a Performance Statement If your sales revenues increase, R, then you expect your marketing profit to Increase Output = Conversion Rate x Input Marketing Profit, M = MROS x Revenue, R M = MROS x R

Three other Two-Factor models related to measuring marketing profit Higher Gross Profits should imply higher marketing profits 1) If your sales revenues increase, R, then you expect your Gross Profit, G, to Increase Output = Conversion Rate x Input Gross Profit, G = GROS x Revenue, R G = GROS x R G = (G/R) x R

Three other Two-Factor models related to measuring marketing profit Higher spending on marketing Effort should result in higher marketing profits 2) If your Marketing Expenses increase, E, then you expect your Marketing Profit, M, to Increase Output = Conversion Rate x Input Marketing Profit, M = ROME x Expenses, E M = ROME x E M = (M/E) x E

Three other Two-Factor models related to measuring marketing profit Marketing Expense Budgets or Spending Levels, E, are traditionally driven by Sales Revenue, R, or the amount of Gross Profit 3) If your Revenues increase, then you expect your Marketing Budget for promotion, E, to Increase Output = Conversion Rate x Input Marketing Expense Budget, E = Promotion to Sales Rate x Revenue, R Or by Marketing Expense Budget, E = Spending on Promotion to Gross Profit Rate x Gross profit, G E = (E/G) x G

Revenues are an important determinant in the creation of marketing profit Marketing Profit, M = MROS x Revenue, R M = MROS x R M = (M/R) R Sample Problem The marketing profit, M was higher this week than the week before. Can we identify and explain how much of the change in marketing profit was due to a change in the sales revenue, R, or due to a change in the efficiency, MROS

How can we make the explanation of the changes more detailed M = MROS x R M = (M/R) x R But we would like to have other important variables to be included in the explanation of changes in marketing profit, ∆M A variable such as Gross Profit, G A variable such as the size of the promotion budget and marketing expenses, E

To include Gross Profit, G and amount of the Marketing Expense, E We use a process called expand, aggregate and decompose. Sometimes just called the Decomposition Process To Decompose the Two-Factor Model into a richer Four-Factor Model that includes Gross Profit, R, and the mount of Marketing Expense, E.

To include Gross Profit, G, and Marketing Expense, E M = (M/R) x R The expansion of M = (M/R) x 1 x 1 x R Changes nothing the fact that 1 = G/G and 1 = E/E M = (M/R) x (G/G) x (E/E) x R Changes nothing Combine The conversion ratios into an Aggregated Conversion Factor M = ((M x G x E) / (G x E x R)) x R Decompose the Aggregated Conversion Factor M = (M/E) x (E/G) x (G/R) x R Interpret the three new conversion factors Marketing Profit = Return on Marketing Expense x Spending Rate x Gross Return on Sales x Revenue Marketing Profit = ROME x Spending Rate x GROS x Revenue

Now explain the change in Gross profit Marketing Profit = ROME x Spending Rate x GROS x Revenue Any change in the Gross Profit = any change in the gross return on sales x any change in the spending rate x any change the Rate of Marketing profit Returned on Marketing Expense x any change in the incoming sales revenue

Decomposition process allows The decomposition of simple 2-factor marketing models into richer explanations with more factors being made explicit Marketing Expense Budgets, E, and Gross Profit, G, are always at work in the conversion of Revenue into Marketing Profits But the Expansion, Aggregation and Decomposition made them explicit!

Decomposition process allows A move From Marketing Profit = MROS x Sales Revenue To a 4-Factor Explanation Gross profit = GROS x Spending Rate x ROME x Revenue

In Future Lectures Show how to measure how much of the change in Marketing Profit, ∆M, was due to 1) the changes in gross return on sales, I∆GROS 2) the changes in the Spending Rate, I∆(E/G) 3) the changes in the Return on Marketing Expense, I∆ROME 4) the change in the amount of Sales Revenue I∆R ∆M = I∆GROS + I∆(E/R) + I∆MROS + I∆R

Any Questions