January 15, 2016
Anyone who does not include “profit” in their definition of brand likely has never run a brand before. To me, a product is the basic commodity you sell but a brand creates a BOND, POWER and PROFIT, beyond what the product alone could achieve. The only reason you would ever add more investment to create a brand is because you believe you can get more back from that investment. We believe that the more LOVED a brand is by consumers, the more POWERFUL and PROFITABLE that brand will be.
If you wish to succeed in Brand Management, you have to understand Accounting and Finance. If you just like the activity of Marketing, then you won’t get promoted past Brand Manager.
Dissecting the Financial Statement
- The first thing you should do is look at Gross Margins % by dividing the overall gross margin by the overall sales. Doing that, we can see on this P&L the gross margin % is down from 43% to 37%. We’d want to gig deeper to figure out if it’s either overall pricing has been cut or the costs are up. On the pricing, investigate whether it is an increase in trade spend, decrease in the prices across the board or a shift in the sales mix to lower priced items. On the cost of goods, there could be decisions around raw material costs, supplier charges, foreign exchange or production costs.
- Next, look at Contribution Margins % by dividing overall contribution income (bottom line income) by overall sales. We can see in our example above that the Contribution Margin % has fallen from 26% to 17%. Not only is there is there a problem at the top line margin, but gross margin is not covering off the increase in spend.
- With that change in Contribution Margin %, the next thing I would want to see is a comparison between the sales growth rate and the spend growth rate.We can see here that sales are growing at a healthy 12%, however total spend is outpacing sales growth with 22% spend increase. We are now seeing two issues with profits: Above the falling gross margin plus the high increases in below the line spend. Always remember that Marketers have limited resources……to apply against unlimited choices. The more you focus that spend, the better you will see your strong return on investment.
The 8 ways brand leaders can drive brand profit
Jack Welch, the former CEO of General Electric was notorious for asking his employees “how do you add value?” I would take that one step further by asking “which of the 8 ways to add profit are you currently working on”. That would be a sign of a very focused Brand Leader. Here are eight ways the Brand Leader can drive profits:
- Trading the consumer up or down
- Product Costs
- Marketing Costs
- Stealing other users
- Getting current users to use more
- Enter new categories
- Create new Uses for your brand
While many marketers think of price as a defensive reaction, most times to counter inflation or something happening in the trade channels, marketers should refocus and start using price as a weapon to drive Brand Value. Beloved Brands seem more capable at driving profits through pricing, but they also are careful to ensure the premium does not become excessive to create backlash.
- Price Increase: You can do a price increase if the market or brand allows you. It likely has to be based on passing along cost increases. Factors that help are whether you are a healthy brand or it’s a healthy market as well as the power of your brand vs. competition and channel.
- Price Decrease: Used when fighting off competitor, if you need to react to a sluggish economy or channel pressure. Another reason to decrease price is if you have a competitive advantage around cost, whether that’s manufacturing, materials or distribution.
There are watch outs for price changes. It’s difficult to execute especially if it has to go through retailers. You need to understand power relationships–how powerful are the retailers. Many times, price changes are scrutinized so badly by retailers that you must have proof of why you are doing it. It’s likely your Competitors will over-react. So your assumptions you used to go with the price increase will change right after. And finally, it’s not easy to change back.
2. Trading the consumer up or down
Aside from price increases, another strategy would to create a range of products that allows you to reach up or down to a new set of consumers. You need to ensure that you are doing this for the right reason or it could backfire on you.
- Trading Up: If you have a range of products, sometimes it can be beneficial to get consumers to trade up. Can you carve out a meaningful difference to create a second tier that goes beyond your current brand? Do your brand image/ratings allow it?
- Trading Down: Risky, but you see un-served market, with minimal damage to image/reputation of the brand. In a tough economy, it might be better to create a value set of products rather than lower the price on your main products.
There are a few watch outs around trying to trade up or down: Premium skus can feel orphaned at retail world—on the shelf or missing ads or displays. Managing multiple price levels can be difficult—what to support, price differences etc. For all the effort you go to, make sure your margins stay consistently strong through the trading up or down. Be careful that you don’t lose focus on your core business. You can’t be all things to everyone. The final concern is what it does your Brand’s image, especially risky when trading downward.
3. Product costs
Managing cost as a weapon to enhance the Brand’s Value. It can be either your cost of goods or the marketing costs. As marketers, we sometimes think cost is someone else’s job. But it’s an effective weapon that marketers should be utilizing.
- Cost of Goods Decreases: You are able to use the power of your brand to drive power over your suppliers; you find cheaper potential raw materials, process improvement or find off-shore manufacturing.
- Cost of Goods Increases: Make sure that you manage the COGs as they increase. Watch out for suppliers trying to pass along costs. But realize that with new technology, investing in brand’s improved image, going after premium markets, offering new benefit or a format change, that cost of good increases could be a reality.
The watch outs with managing costs: with cuts, make sure the product change is not significantly noticeable. You should understand any potential impact in the eyes of your consumer on your brand’s performance and image. Can the P&L cover these costs, either increased sales or efficiency elsewhere? Managing your margin % is crucial to the long-term success of your brand.
4. Marketing costs
As marketers sometimes we get protective of the amount, hoping to have as much money as we can to carry out the activities on our priority lists. But we should be looking at marketing costs from the view-point of the CEO, with a focus on making sure every program drives profit.
- Marketing Cost Decrease: To counter changes in the P&L (price, volume or cost), it’s very tempting to look to short-term P&L management or look at changes in go-to-market model. Where a brand stands on the product life cycle or how loved the brand is can really impact the selling costs. Even though we think that Beloved Brands have endless spending, they actually likely have a lower investment to sales ratio.
- Marketing Cost Increase: When you’re in Investment mode, defensive position trying to hold share against an aggressive competitor or when you see a proven payback in higher sales–with corresponding margins.
Always be in an ROI mindset: Manage your marketing costs as though every DOLLAR has to efficiently drive sales. Realize that short-term cuts can carry longer term impact. Competitive reaction can influence the impact of investment stance–like a price change, your competitor might over-react to your increases in spending.
5. Stealing other users
Externally, the Share and Volume game are traditional tools for brand. Either stealing other users or getting current users to use more.
- Offensive Share Gains: Use it when you have a significant Competitive Advantage or you see untapped needs in the market. Or opportunistic, use first mover advantage on new technology.
- Defensive Share Stance: Hold the fort until you can catch up on technology, maintain profitability, loyal base of followers needs protecting.
Be careful when trying to gain share. A Beloved Brand has a drawing power where it does gain share without having to use attack modes. Attacking competitors can be difficult. It could just become a spend escalation with both brands just going at it. After a share war that’s not based on a substantive reasoning (eg. technology change), there might end up with no winners, just losers. Many times, the channel will try to play one competitor against another for their own gain. Watch out what consumers you target in a competitive battle: some may just come in because of the lower price and go back to their usual brand.
6. Getting users to use more
Going after frequency is a different strategy.
- Share of Requirements: In many categories, even loyal consumers will work within a competitive set of favourite brands. A good strategy is to provide a reason (claim, experience, emotion) for loyal consumers to stay with your brand.
- Get Current Users to Use More: When there is an opportunity to turn loyal users into creating a potential routine. Changing behaviours is more difficult than enticing trial. It’s a good strategy to use, when your there’s real benefit to your consumer using more. It’s hard to just get them to use more without a real reason.
There has to be a real benefit connected to using more or it might look hollow/shallow. Driving routines is a challenge. Even with “lifesaving” medicines, the biggest issue is compliance. Find something in their current life to help either ground it or latch onto. When I worked on Listerine, people only used mouthwash 20-30 times a year compared to 700+ brushing occasions. So we focused on connecting rinsing with Listerine to the twice daily brushing routine.
7. Enter new categories
When there is an untapped or under-served need. There could be a significant changing demographic that impacts your base. Or you are able to translate/transfer your reputation to a new user group. There should be something within your product/brand that helps fuel the brand post trial. Trial without repeat, means you’ll get the spike but then bust. Substantial investment required. Don’t let it distract from protecting the base loyal users.
8. Create new uses
Format Line Extensions that take your experience or name elsewhere. Able to leverage same benefit in convenient “on the go” offering. Make sure current brand is in order before you divert attention, funding and focus on expansion area. Investment needed, could divert from spend on base business. Be careful because the legendary stories (Arm and Hammer) don’t come along as much as we hope.
Here are lessons learned for driving more profits for your brand.
- Higher volume helps you exert pressure on costs. That could be supply costs, operations costs, and distribution over even media costs.
- Get more for less from the trade. You can begin exerting power over the sales channels to your advantage–trimming variable trade costs with retailers while demanding more display, prime real estate, coop advertising and more control over pricing. ROI on trade programs.
- Smarter more efficient management: manage your inventories, meet customer expectations, control pricing and drive cheaper costs. Make better choices.
- Growth means you start outgrowing any fixed costs. This includes start-up costs, sales force, product plants or R&D costs.
- Lower Cost of Capital: More certainty means lower risk and you can re-invest, knowing the ROI will be quicker and stronger.
Love = Power + Profit
To get better at Brand Finance, here is our Workshop we run to help Brand Leaders understand Accounting.
We make Brands stronger.
We make Brand Leaders smarter.™
We offer brand coaching, where we promise to make your brand better by listening to the issues, providing advice that challenges you, and coaching you along a strategic pathway to reaching your brand’s full potential. For our brand leader training, we promise to make your team of brand leaders better, by teaching sound marketing fundamentals and challenging to push for greatness so that they can unleash their full potential. Feel free to add me on Linked In, or follow me on Twitter at @belovedbrands If you need to contact me, email me at firstname.lastname@example.org or phone me at 416 885 3911