Marketing_Management_14th_Edition-min

656 PART 8 CREATING SUCCESSFUL LONG-TERM GROWTH
TABLE 22.15
Profit-and-Loss Statements for Channels
Hardware
Garden
Supply
Dept.
Stores
Whole
Company
Sales $30,000 $10,000 $20,000 $60,000
Cost of goods sold 19,500 6,500 13,000 39,000
Gross margin $10,500 $ 3,500 $ 7,000 $21,000
Expenses
Selling ($20 per call) $ 4,000 $ 1,300 $ 200 $ 5,500
Advertising ($31 per advertisement) 1,550 620 930 3,100
Packing and delivery ($60 per order) 3,000 1,260 540 4,800
Billing ($30 per order) 1,500 630 270 2,400
Total expenses $10,050 $ 3,810 $ 1,940 $15,800
Net profit or loss $ 450 $ (310) $ 5,060 $ 5,200
with half the cost of goods sold ($19,500 out of $39,000). This leaves a gross margin from hardware
stores of $10,500. From this we deduct the proportions of functional expenses hardware
stores consumed.
According to Table 22.14, hardware stores received 200 of 275 total sales calls. At an imputed
value of $20 a call, hardware stores must bear a $4,000 selling expense. Table 22.14 also shows hardware
stores were the target of 50 ads. At $31 an ad, the hardware stores are charged with $1,550 of
advertising. The same reasoning applies in computing the share of the other functional expenses.
The result is that hardware stores gave rise to $10,050 of the total expenses. Subtracting this from
gross margin, we find the profit of selling through hardware stores is only $450.
Repeat this analysis for the other channels. The company is losing money in selling through garden
supply shops and makes virtually all its profits through department stores. Notice that gross
sales is not a reliable indicator of the net profits for each channel.
Determining Corrective Action It would be naive to conclude the company should drop garden
supply and hardware stores to concentrate on department stores. We need to answer the following
questions first:
• To what extent do buyers buy on the basis of type of retail outlet versus brand?
• What trends affect the relative importance of these three channels?
• How good are the company’s marketing strategies for the three channels?
Using the answers, marketing management can evaluate five alternatives:
1. Establish a special charge for handling smaller orders.
2. Give more promotional aid to garden supply shops and hardware stores.
3. Reduce sales calls and advertising to garden supply shops and hardware stores.
4. Ignore the weakest retail units in each channel.
5. Do nothing.
Marketing profitability analysis indicates the relative profitability of different channels, products,
territories, or other marketing entities. It does not prove the best course of action is to drop unprofitable
marketing entities or capture the likely profit improvement of doing so.
Direct versus Full Costing Like all information tools, marketing profitability analysis can lead or
mislead, depending on how well marketers understand its methods and limitations. The lawn
mower company chose bases somewhat arbitrarily for allocating the functional expenses to its marketing
entities. It used “number of sales calls” to allocate selling expenses, generating less record