This document provides an analysis of the profitability of a pharmaceutical company, Darham Pharmaceuticals, at the territory and product level. It summarizes sales, costs, expenses, and profitability metrics for different products and territories. The key findings are: 1) The East territory provided the highest return on investment of 88% and ranked first in net margins and ROI. 2) The South territory ranked first in gross margins but fourth in net margins, indicating it was less effective at managing expenses. 3) Evaluating performance using different metrics like gross margins, net margins, and ROI provides a more comprehensive view of profitability than any single metric.

1. Learning Objectives
Understand
How to evaluate performance of sales
revenue, expenses and working capital controls at
territory levels as well as product levels.
What are the different types of costs & how are
they controlled, allocated?
Methods to evaluate productivity.
Chapter Four Territory & Product Level Profitability 1

2. Structure
4.1 Introduction
4.2 Costs
4.3 Summary
Chapter Four Territory & Product Level Profitability 2

3. 4.1 Introduction
Earlier we studied how profitability can be increased by :
increasing sales revenue
reducing cost of sales
reducing selling, distribution,
marketing and administrative expenses.
Now we shall evaluate performance [ and thus profitability ] at
territory & product levels to find out more means to increase
it.
Chapter Four Territory & Product Level Profitability 3

4. 4.1 Introduction
Profitability at territory level can be measured from an
elementary salesman level to
sales supervisory levels
area sales manager levels
branch manager levels or
ultimately zonal and / or national levels.
This evaluation dashboard would show the progress of
marketing, help assess productive areas and help in decision
making.
Chapter Four Territory & Product Level Profitability 4

5. 4.1 Introduction
The aim of marketing is to
ensure product that is developed,
marketed, sold and distributed
satisfies customer requirements.
and it is sold effectively.
That means in addition to satisfying the customer it also
earns profits for the organization.
Chapter Four Territory & Product Level Profitability 5

6. 4.1 Introduction
Let us now try to evaluate profitability for Darham
Pharmaceuticals which has all India sales of Rs 174
crores per annum.
It markets OTC [over the counter] product called
Darcold in tablets and syrup forms.
Plus it markets ethical products Darmet & Darclox,
anti-diarrhea & antibiotic formulations respectively .
Darmet again is sold in tablet & syrup forms while
Darclox is sold in 250mg and 500mg sizes.
Chapter Four Territory & Product Level Profitability 6

7. 4.1 Introduction
Monthly Sales Rs. lacs
Products North East West South
Darcold Tab 10 7.5 12.5 8.75
Syrup 15 15 30 22
Darmet Tab 80 100 120 60
Syrup 125 150 175 100
Darclox 250mg 37.5 45 60 30
500mg 55 110 55 27.5
Total 322.5 427.5 452.5 248.3
Chapter Four Territory & Product Level Profitability 7

8. 4.1 Introduction
The rate of Gross Profit Margins per Product :
Darcold Tablets 45% & Syrup 50%
Darmet Tablets 35% & Syrup 42%
Darclox 250mg 22% & 500mg 23%
Now we shall look at their Organization &
Salaries.
Chapter Four Territory & Product Level Profitability 8

9. 4.1 Introduction
Vice President [Rs 45 lacs]
General Manager General Manager
Marketing [Rs 36 lacs] Sales [Rs 32 lacs]
Darham Organization – DO 01
CTC – cost to company per year.
Chapter Four Territory & Product Level Profitability 9

10. 4.1 Introduction
Vice President [Rs 45 lacs]
Regional Sales Managers [ Rs 20 lacs each]
West North South East
Darham Organization – DO 02
Chapter Four Territory & Product Level Profitability 10

11. 4.1 Introduction
General Manager Marketing
Product Manager Manager Market Research
[ Rs 18 lacs] [ Rs 16 lacs]
Darham Organization – DO 03
Chapter Four Territory & Product Level Profitability 11

12. 4.1 Introduction
Regional Sales Manager North
2 # Branch Managers [ Rs 10 lacs]
4# Sales Supervisors [Rs 7.5 lacs] for each Branch Mgr
5 # Salesmen [ Rs 5 lacs] for each Supervisor
Darham Organization – DO 04
Chapter Four Territory & Product Level Profitability 12

13. 4.1 Introduction
Regional Sales Manager East
2 # Branch Managers [ Rs 10 lacs]
4 # & 3 # Sales Supervisors [Rs 7.5 lacs] for two Branch Mgrs
respectively.
4 # Salesmen [ Rs 5 lacs] for each Supervisor
Darham Organization – DO 05
Chapter Four Territory & Product Level Profitability 13

14. 4.1 Introduction
Regional Sales Manager West
3 # Branch Managers [ Rs 10 lacs]
4 # , 4 # & 3 # Sales Supervisors [Rs 7.5 lacs] for three Branch Mgrs
respectively.
5 # Salesmen [ Rs 5 lacs] for each Supervisor
Darham Organization – DO 06
Chapter Four Territory & Product Level Profitability 14

15. 4.1 Introduction
Regional Sales Manager South
2 # Branch Managers [ Rs 10 lacs]
5 # Sales Supervisors [Rs 7.5 lacs] for each Branch Manager
4 # & 5 # Salesmen [ Rs 5 lacs] for each Supervisor of two
branches respectively.
Darham Organization – DO 07
Chapter Four Territory & Product Level Profitability 15

16. 4.1 Introduction
Other Expenses
Commission to Salesmen - 3% on OTC product
2% on ethical products.
Travelling expenses p.a. - Vice President Rs. 20 lacs.
GM Sales Rs. 30 lacs.
GM Marketing Rs. 16 lacs.
Product Manager Rs. 12 lacs.
Mgr M Research Rs. 8 lacs
Sales Supervisor
North Zone Rs. 4 lacs ea.
South Zone Rs. 3.5 lacs ea.
East Zone Rs. 3.75 lacs ea.
West Zone Rs. 4.5 lacs ea
Chapter Four Territory & Product Level Profitability 16

17. 4.1 Introduction
Other Expenses contd
Travelling expenses - Salesmen per Journey Cycle
North Rs 20 K
East Rs. 18 K
West Rs. 22 K
South Rs. 16 K
Other Expenses - OTC Advertising Rs. 2.5 crore.
Medical Sampling Rs. 3 crore.
Gifts Rs. 1 crore.
Chapter Four Territory & Product Level Profitability 17

18. 4.1 Introduction
North East West South
Stock Levels
Days 75 80 90 55
Credit Extended
Days 17 18 26 16
With the above data let us now evaluate Darham’s
performance territory & brand wise.
Chapter Four Territory & Product Level Profitability 18

19. 4.2 Costs
Before starting evaluation process let us start first with
understanding ‘costs’.
Fixed Costs: Are those costs that tend to remain fixed over
periods of times irrespective of volumes involved.
Variable Costs : Are those costs which vary consistently with
volumes produced.
Semi Variable Costs : Are those costs which do not vary in
proportion to volumes produced, but vary all the same at
some rate, with increases in volume produced.
Chapter Four Territory & Product Level Profitability 19

20. 4.2 Costs
Let us illustrate with a case of T Shirt Manufacturer
Each T shirt needs a] cloth costing Rs. 35/- ; b] thread Rs. 6/-
, c] stitching charge to tailor Rs. 12/-. Factory pays monthly d]
rent of Rs. 15,000/- and e] salary of Rs. 8,000/- to the
manager.
Electricity charges are incurred for one shift of eight hours,
but when orders increase, factory works for more hours thus
increasing electricity expenses.
Thus you will see that costs at a, b, and c are variable in
nature while those at d and e are fixed in nature.
Electricity charges are neither fixed nor variable with changes
in production. These are termed semi variable costs.
Chapter Four Territory & Product Level Profitability 20

21. 4.2 Costs
Let us illustrate with a case of T Shirt Manufacturer
Unit Costs:
You will also observe that unit variable cost of Rs. 53/-
[ 35+6+12] is constant for all levels of production. Volumes
may increase or decrease but unit variable cost is only Rs.
53/-.
But when fixed costs are fully allocated to volumes produced ,
unit fixed costs vary with volumes. Higher the volumes lesser
unit fixed cost.
Chapter Four Territory & Product Level Profitability 21

22. 4.2 Costs
You can look at costs from the angle of whether same are
controllable or uncontrollable at the hands of center head. If
the branch manager can determine the rates & loads of
products to be moved from the central depot to distribution
points, transport costs are controllable costs for the Branch
Manager.
If these are determined by the Head Quarters, then for the
Branch Manager they are uncontrollable costs. However if the
HQ fixes only the rates and loads are decided by the Branch
Manager , the transport costs are manageable costs in his
hands.
Chapter Four Territory & Product Level Profitability 22

23. 4.2 Costs
Opportunity costs open up appropriate yard sticks to choose
between two alternatives. If you buy a color TV you lose
interest you would have earned if the money was left in the
bank. This interest lost is the opportunity cost of the TV!
Incremental Costs are the extra cost that is incurred in the
extra activity/task/output. It differs from Marginal Cost in as
much as marginal cost is incremental cost incurred in
producing one extra unit. In short run it equals unit variable
cost.
This overview of costs is useful when we evaluate marketing /
sales performance by territory and/or product brand.
Chapter Four Territory & Product Level Profitability 23

24. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
North Zone Gross Margin earned during the year.
Products Sales Margin % Margin Earned
Darcold Tabs 120 45% 54
Syrup 180 50% 90
Darmet Tabs 960 35% 336
Syrup 1500 42% 630
Darclox 250 450 22% 99
500 660 23% 151.8
Total 3870 1360.8
Chapter Four Territory & Product Level Profitability 24

25. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
East Zone Gross Margin earned during the year.
Products Sales Margin % Margin Earned
Darcold Tabs 90 45% 40.5
Syrup 180 50% 90
Darmet Tabs 1200 35% 420
Syrup 1800 42% 756
Darclox 250 540 22% 118.8
500 1320 23% 303.6
Total 5130 1728.9
Chapter Four Territory & Product Level Profitability 25

26. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
West Zone Gross Margin earned during the year.
Products Sales Margin % Margin Earned
Darcold Tabs 150 45% 67.5
Syrup 360 50% 180
Darmet Tabs 1440 35% 504
Syrup 2100 42% 882
Darclox 250 720 22% 158.4
500 660 23% 151.8
Total 5430 1943.7
Chapter Four Territory & Product Level Profitability 26

27. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
South Zone Gross Margin earned during the year.
Products Sales Margin % Margin Earned
Darcold Tabs 105 45% 47.25
Syrup 270 50% 135
Darmet Tabs 720 35% 252
Syrup 1200 42% 504
Darclox 250 360 22% 79.2
500 330 23% 75.9
Total 2985 1093.35
Chapter Four Territory & Product Level Profitability 27

28. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
Gross margins as % of sales.
Zones Sales Margin Margin as Rank
Earned % of Sales
NORTH 3870 1360.8 0.35 3rd
EAST 5130 1728.9 0.34 4th
WEST 5430 1943.7 0.36 2nd
SOUTH 2985 1093.35 0.37 1st
Total India 17415 6126.75 0.35
Chapter Four Territory & Product Level Profitability 28

29. 4.2 Costs
Profitability analysis { all figures in Rs. lacs}
Net margins as % of sales.
Zones Sales Gross Selling & Net Net Margin Rank
Margin Distri Exps Margin % of Sales
NORTH 3870 1360.8 895.7 465.1 0.12 3rd
EAST 5130 1728.9 854.2 847.7 0.17 1st
WEST 5430 1943.7 1219.5 724.2 0.13 2nd
SOUTH 2985 1093.35 812.1 281.3 0.09 4th
Total India 17415 6126.75 3781.5 2345.25 0.13
Chapter Four Territory & Product Level Profitability 29

30. 4.2 Costs
Profitability analysis { all amounts in Rs. lacs}
Return on Investment
Zones Stock Receivables Investments ROI Rank
Days Amt Days Amount Amount %
NORTH 75 516 17 180 696 0.67 3rd
EAST 80 745 18 253 998 0.88 1st
WEST 90 860 26 387 1247 0.58 4th
SOUTH 55 285 16 131 416 0.68 2nd
Total India 2406 951 3357 0.70
Chapter Four Territory & Product Level Profitability 30

31. 4.2 Costs
Profitability analysis
Ranking using different evaluation parameters
Zones Gross Margin Net Margin ROI
NORTH 3rd 3rd 3rd
EAST 4th 1st 1st
WEST 2nd 2nd 4th
SOUTH 1st 4th 2nd
Chapter Four Territory & Product Level Profitability 31

32. 4.2 Costs
Profitability analysis
Results of ranking using different evaluation parameters
tabulated earlier indicates that :-
1] In terms of Gross Margins as % of sales , South leads with
West coming second.
2] In case of net margins as % of sales, East is number one
followed by West.
It means that South was good in managing the product mix
(explained later), it slipped in managing expenses.
Chapter Four Territory & Product Level Profitability 32

33. 4.2 Costs
Profitability analysis
Results of ranking using different evaluation parameters
tabulated earlier indicates that :-
3] When we finally look at ROI, a different picture emerges.
Here East has provided the best ROI of 88%, followed by
South.
This analysis proves that territory wise performance has to be
evaluated on several parameters to really decide which zone
is performing well.
Chapter Four Territory & Product Level Profitability 33

34. 4.2 Costs
Sales Force Productivity analysis
Zones Sales Rs lacs Sales Force Sales/person
NORTH 3870 51 75.88
EAST 5130 38 135.00
WEST 5430 70 77.57
SOUTH 2985 58 51.47
ALL India 17415 217 80.25
Chapter Four Territory & Product Level Profitability 34

35. 4.2 Costs
Profitability analysis
The analysis shows different regions are best performers on
different parameters of profitability.
Heads of zones can control some costs like salaries,
travelling expenses or commissions of staff reporting to them.
But they have no control on these costs incurred by HO staff
like Vice President, GM Sales or Market Research etc.
Whether expenses are controllable or not, it must be noted
that, Center Head can manage expenses to derive maximum
mileage from them.
Chapter Four Territory & Product Level Profitability 35

36. 4.2 Costs
Profitability analysis
Costs incurred by HO staff like Vice
President, GM Sales or Market
Research etc. though not controllable by Center Heads, they
have to be allocated to the centres to arrive at total costs of
the center and their net margins.
This allocation over centers can be based on proportion of
their sales
gross margin
number of staff
number of branches/offices
or equally among all centers.
Let us see how these different methods affect the center’s net
margins.
Chapter Four Territory & Product Level Profitability 36

37. 4.2 Costs
Profitability analysis
Apportionment on the basis of sales / gross margin
North East West South India
Zone Zone Zone Zone
Sales in lacs 3870 5130 5430 2985 17415
Zone Sales 22 30 31 17 100
As % of Total
Gross Margin 1360.8 1728.9 1943.7 1093.4 6127
Zone GM
As % of Total 22 28 32 18 100
Chapter Four Territory & Product Level Profitability 37

38. 4.2 Costs
Profitability analysis
Apportionment on the basis of number of staff and branches
North East West South India
Zone Zone Zone Zone
RSM 1 1 1 1 4
BM 2 2 3 2 9
Sales Supervisor 8 7 11 10 36
Salesmen 40 28 55 45 168
Total 51 38 70 58 217
% of total 23% 18% 32% 27% 100%
Zone Office 1 1 1 1 4
Branch Office 2 2 3 2 9
Total / % of Total 3 23% 3 23% 4 31% 3 23% 13 100%
Chapter Four Territory & Product Level Profitability 38

39. 4.2 Costs
Profitability analysis
We have established %s for distribution of common costs
to four Zones.
Assuming the Vice President spends half the time on sales
and marketing common costs to be allocated are
Officer Salary Travelling Total
VP 22.5 10 32.5
GM 32 30 62
Total 54.5 40 94.5
Chapter Four Territory & Product Level Profitability 39

40. 4.2 Costs
Profitability analysis
Method # 1- Net Margin after distributing costs on equal basis
to four Zones. (amounts in Rs. lacs).
North East West South
Gross Margin 1360.8 1728.9 1943.7 1093.4
-Apportioned costs 23.6 23.6 23.6 23.6
Net margin Amount 1337.2 1705.3 1920.1 1069.8
as % of sales 34.6 33.2 35.4 35.8
Chapter Four Territory & Product Level Profitability 40

41. 4.2 Costs
Profitability analysis
Method # 2- Net Margin after distributing costs on sales basis
to four Zones. (amounts in Rs. lacs).
North East West South
Gross Margin 1360.8 1728.9 1943.7 1093.4
-Apportioned costs 21 27.8 29.5 16.2
Net margin Amount 1339.8 1701.1 1914.2 1077.2
as % of sales 34.6 33.2 35.3 36
Chapter Four Territory & Product Level Profitability 41

42. 4.2 Costs
Profitability analysis
Method # 3- Net Margin after distributing costs on gross
margin basis to four Zones. (amounts in Rs. lacs).
North East West South
Gross Margin 1360.8 1728.9 1943.7 1093.4
-Apportioned costs 21 26.7 30 16.9
Net margin Amount 1339.8 1702.2 1913.7 1076.5
as % of sales 34.6 33.2 35.2 36
Chapter Four Territory & Product Level Profitability 42

43. 4.2 Costs
Profitability analysis
Method # 4- Net Margin after distributing costs on number of
staff basis to four Zones. (amounts in Rs. lacs).
North East West South
Gross Margin 1360.8 1728.9 1943.7 1093.4
-Apportioned costs 22.2 16.6 30.5 25.3
Net margin Amount 1338.6 1712.4 1913.2 1068.1
as % of sales 34.6 33.4 35.2 35.8
Chapter Four Territory & Product Level Profitability 43

44. 4.2 Costs
Profitability analysis
Method # 5- Net Margin after distributing costs on number of
establishments basis to four Zones. (amounts in Rs. lacs).
North East West South
Gross Margin 1360.8 1728.9 1943.7 1093.4
-Apportioned costs 21.8 21.8 29.1 21.8
Net margin Amount 1339 1707 1914.6 1071.5
as % of sales 34.6 33.3 35.3 35.9
Chapter Four Territory & Product Level Profitability 44

45. 4.2 Costs
Profitability analysis
Summary of Net Margin after distributing costs by five methods
North East West South
1. Equally 34.6 33.2 35.4 35.8
2. Sales 34.6 33.2 35.3 36
3. Gross margins 34.6 33.18 35.2 36
4. Staff 34.6 33.4 35.2 35.8
5. Establishments 34.6 33.3 35.3 35.9
GM as % Sales 35.2 33.7 35.8 36.6
Chapter Four Territory & Product Level Profitability 45

46. 4.2 Costs
Profitability analysis
You would have observed that the different basis of allocation
has resulted in the net margins at the four zones
undergoing changes. Since the amount apportioned is
not high, the changes may seem insignificant but with
larger expenses they become material.
Of these several methods of apportionment , the one based
in proportion to sales is the most appropriate as well as
equitable.
Further, even though gross margin rates are same for four
zones, South has higher gross margin rate for the zone
than others. This happens because of a better product
mix. Let us see how.
Chapter Four Territory & Product Level Profitability 46

47. 4.2 Costs
Profitability analysis – effects of product mix
Products A,B,C & D have gross margin rates of 15%, 40%,
10% and 50% resp. Sales by Ram & Shyam for the
month of January are as under :-
Product Ram Shyam
Sales Gross Margin Sales Gross Margin
A 2000 300 3000 450
B 3000 1200 2000 800
C 1000 100 4000 400
D 4000 2000 2000 1000
Total 10,000 3600 11,000 2650
Shyam has higher sales but earned lesser gross margins as
he sold more of A & C which had lower margin rates.
Chapter Four Territory & Product Level Profitability 47

48. 4.2 Costs
Profitability analysis – effects of product mix
Conclusion:
Sales teams should not only sell more, but also
concentrate on selling more of products that
have a higher gross margin.
Chapter Four Territory & Product Level Profitability 48

49. 4.2 Costs
Profitability analysis – effects of product mix
By apportioning common expenses over Products, it is
necessary to determine net margins earned by each
product category.
From gross margins of the product category, apportioned
common expenses are deducted and net margins
arrived.
We have thus learnt that evaluation of marketing efforts both
at a territory level and a product level is required and we
have seen how this evaluation is carried for Dirham.
Chapter Four Territory & Product Level Profitability 49

50. 4.2 Costs
Profitability analysis
It is possible to evaluate centers on other yardsticks like
Productivity of sales personnel: sales or gross margins per
head.
Expense control: travelling expenses as % of sales.
Working capital control: number of days stocks and
receivables. Advances received from customers,
expenses incurred but still to be paid etc.
Chapter Four Territory & Product Level Profitability 50

51. 4.3 Summary
Controllable costs are those which are controllable in the
hands of the cost center head.
Opportunity costs open up appropriate yard sticks to choose
between two alternatives. Opportunity cost for working
for self that is earning by self employment vis a vis
working for another as an employee.
Incremental costs are the extra cost that is incurred in the
extra activity /task /input.
Chapter Four Territory & Product Level Profitability 51

52. That is the end of our session # 04
Next we move to session # 04
Covering chapter 05
“ Pricing.”
Good Luck !
Chapter Four Territory & Product Level Profitability 52

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