1. Margins &
Profitability.
Financial Return
23rd January

2. Chapter 3
Chapter 10

3. Lecture Objectives
• To explain financial reporting principles
• To explain “margins”
• To define the main financial metrics
important for marketing

4. • Managers are requesting more
accountability from marketers
• Accounting v. marketing – marketing has
fewer standardised techniques for
measuring performance
Measuring Marketing Performance

5. Chapter 3 at a glance
Margins and Profits
• Margins
• Average price per unit
• Variable and Fixed Costs
• Breakeven analysis and Contribution analysis

6. Chapter 10 at a glance
Marketing and finance
• Net profit and return on sales (ROS)
• Return on investment (ROI)
• Project metrics: Payback, Net Present Value(NPV).
• Return on marketing investment (ROMI)

7. • Annual Plan control looks at the
objectives of the annual marketing plan.
Evaluates these against results
achieved & takes action
• Financial or Expense control considers
the financial parameters and objectives
in the annual marketing plan.
• Strategic control ensures the
organization maximises opportunities
3 types of control

8. Key Metrics (in red & bold)
Margins and Profits
• Margins : Unit Margin. Percentage (%) Margin
• Average price per unit
• Variable and Fixed Costs
• Breakeven analysis and contribution analysis:
Contribution per unit. Contribution Margin.
Breakeven revenue. Breakeven quantity.

9. LW2MM01 UNIT MARGIN
Definition
“Unit Prices LESS Unit Cost”
Construction
UNIT MARGIN= SELLING PRICE PER UNIT - COST PER UNIT (in relevant currency)
EXAMPLE 135 pence per litre (95 Octane petrol) - 130 pence per litre= 5 pence per litre

10. LW2MM02 % MARGIN
Definition
“Unit Margin as a % of Unit Price”

11. LW2MM02 % MARGIN
Definition
“Unit Margin as a % of Unit Price”
Construction
% MARGIN = UNIT MARGIN (currency)
SELLING PRICE per UNIT
EXAMPLE
Unit Margin per litre £0.05 % Margin = 3.7%
Selling Price per litre £1.35

12. LW2MM03 AVERAGE SELLING PRICE
Definition
“The average selling price of each unit
sold in a period”
Construction
AVERAGE PRICE PER UNIT= TOTAL REVENUE/TOTAL UNIT SALES
EXAMPLE
SALES VALUE IN A PERIOD £156M AVERAGE PRICE £15,600
UNIT SALES IN SAME PERIOD 10,000

13. LW2MM04 FIXED AND VARIABLE
COSTS
Definition
“Fixed costs are those which do not vary
with volume (output)”
“ Variable costs are those which (do)
vary with volume (output) ”

14. LW2MM05 CONTRIBUTION PER UNIT
Definition
“Unit Price LESS unit Variable Cost
Construction

15. LW2MM06 CONTRIBUTION MARGIN
Definition
“Contribution per unit divided by unit price”
Construction
Contribution Margin (%)= Contribution per unit (eg £)
Selling Price per unit (eg £)

16. LW2MM07 BREAKEVEN SALES LEVEL
Definitions
“Breakeven is that level of sales where sales
value equals total cost of sales”
BREAKEVEN QUANTITY
“ Breakeven (unit sales) equals Fixed Cost
divided by Contribution per unit”
BREAKEVEN REVENUE
“Breakeven revenue is Fixed Cost divided
by the percentage Contribution Margin ”

17. Fixed costs
Units Sold
Money(£)
Determining the break even point
Total variable costs

18. Fixed costs
Total revenue
Units Sold
Money(£)
Determining the break even point
Total cost
Total variable costs

19. Fixed costs
Break even point
Total revenue
Units Sold
Money(£)
Determining the break even point
Losses
Total cost
Total variable costs
Profits

20. Chapter 10
Marketing and finance
• Net profit and return on sales (ROS)
• Return on investment (ROI)
• Project metrics: Payback, Net Present Value(NPV).
• Return on marketing investment (ROMI)

21. LW2MM07 NET PROFIT
Definition
“Sales Revenue Less Total Costs”
Construction
Net Profit = Sales Revenue less Total Costs
(Total costs will include a share of Corporate
Overheads)

22. LW2MM08 RETURN ON SALES (ROS)
Definition
“Net Profit as a % of sales revenue”
Construction
Net Profit = Sales Revenue – Total Cost
Return on Sales (%) = Net Profit
Sales Revenue

23. LW2MM09 RETURN ON INVESTMENT
(ROI)
Definition
“The financial benefit accruing from
prior financial investments, expressed
as a percentage of the investment”
Construction
Net Profit = Sales Revenue – Total Cost
Return on Investment (%) = Net Profit
Investment

24. Return on Investment (ROI)
• Also known as Accounting Rate of
Return (ARR)
• Average annual profit after depreciation
but before interest to capital invested.

25. ROI example
Initial outlay for a computing system is £110,000.
Annual cash flows over five years will be £24,400 p.a.
The scrap value estimated at end will be £10,000.
Depreciation on straight line basis. What is the ARR?
Investment £110,000
Scrap value £10,000
Life (years) 5
Annual cash flows £24,400
Annual Depreciation £20,000
Average Annual Profit £4,400
ARR is (£4400/£110000) 4.00%
Average Investment (initial + scrap/2) £60,000
Or ARR using average investment is 7.33%

26. Payback Period Method
• Estimates the time taken by a project’s
net cash flow to recover the initial
investment.
• Favours projects which can recoup
their cost quickly.
Year
Cash
Flow
Cum.
Cash
Flow
Cash
Flow
Cum.
Cash
Flow
Cash
Flow
Cum.
Cash
Flow
£ £ £ £ £ £
0 Initial investment -21000 -21000 -21000
1 Net cash inflow 3000 3000 5000 5000 8000 8000
2 Net cash inflow 14000 17000 15000 20000 6000 14000
3 Net cash inflow 4000 21000 1000 21000 7000 21000
4 Net cash inflow 500 6000 10000
Payback reached at end of year 3 3 3
Project J Project L Project R

27. Time Value of Money
• To make sensible investment decisions
appraisal method should also make a logical
allowance for the projected timing of the
costs and benefits.
• Interest earned on interest already paid is
called compounding.
• Concept involves going from today’s value,
or present value (PV) to future value (FV).

28. Net Present Value (NPV)
• The value of a stream of future cash
flows after accounting for the time value
for money
• Why? To summarise the value of cash
flows over multiple periods

29. LW2MM10 RETURN ON MARKETING
INVESTMENT (ROMI)
Definition
“The contribution attributable to
marketing investments, expressed as
a percentage of the marketing monies
invested or put at risk”
Construction
ROMI (%) = Incremental Revenue*Contribution Margin (%) LESS Marketing
Exp.
Marketing Expenditure

30. Marketing Profitability Analysis
• Step 1: Identify functional expenses
• Step 2: Assign functional expenses to
marketing entities
• Step 3: Prepare a profit-and-loss
statement for each marketing entity

31. Profit-and-Loss Statements for Channels