Profitability Control

Successful companies also measure the profitability of their products, territories, customer groups, segments, trade channels, and order sizes. This information helps management determine whether any products or marketing activities should be expanded, reduced, or eliminated. The first step in marketing-profitability analysis is to identify the functional expenses (such as advertising and delivery) incurred for each activity. Next, the firm measures how much functional expense was associated with selling through each type of channel. Third, the company prepares a profit-and-loss statement for each type of channel.

In general, marketing-profitability analysis indicates the relative profitability of different channels, products, territories, or other marketing entities. However, it does not prove that the best course of action is to drop the unprofitable marketing entities,

Figure 1-10 Financial Model of Return on Net Worth

Profit margin

1.5%

Return on assets

Financial leverage

Rate of return on net worth

Net profits Net sales

4.8%

x

2.6

=

12.5%%

Asset turnover

Net profits

Total assets

Net profits

3.2

Total assets

Net worth

Net worth

Net sales Total assets

nor does it capture the likely profit improvement if these marginal marketing entities are dropped. Therefore, the company must examine its alternatives closely before taking corrective action.

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