January 19, 2015
Great Brand Leaders, not only drive demand, they drive profitable demand.
A lot of marketers enter in marketing as a career because they weren’t into the numbers part of business. However, the reality is that to run a brand you have to be good at running the P&L. The only reason that brands exist is that you can create a bond, power and profit, beyond what the product itself could achieve. At Beloved Brands, we believe that passion matters because the more loved a brand is by consumers the more powerful and profitable that brand can be. So in everything you do as a brand leader, even as you are launching new products, creating new advertising or writing a great brand plan, you have to have profit front and center in everything you do. Yet, there are far too many Brand Leaders who can’t run the P&L. These Brand Leaders hit the mid-point of their career and then we realize that they aren’t very good with numbers and all of a sudden, a fast track career for the super star Brand Manager completely stalls. As you’re looking up to the director level jobs, challenge yourself to get better with finance.
Looking at the P&L
Here’s my Finance 101 that can help simplify your role with the P&L. This is meant for the Brand Manager level who is aspiring to continuing to move up. But regardless of level, if you secretly are weak in the P&L area, this might help you.
While it’s important to learn every line of the P&L, where Brand Leaders can have the biggest impact is on the Net Sales, the Gross Margin and the Contribution Margin. The Net Sales line is simply Gross Sales minus the Trade Spend. Some income statements have brought the trade spend up to the sales line, while others have left it down in the cost line. Check with your company’s or country’s way of doing it. In many industries, the trade terms are dictated by the channels. While I would want to say the more Beloved Brands have a power over the channels, many times they still aren’t able to turn that power into lowering the trade spend. If the trade spend is out of your control, you should be working with sales to ensure you are maximizing the value in programs that you are getting for the trade spend.
Net Sales is the Unit Sales times Net Price. For unit sales, you’ll have to either drive the market share or enter new markets. That’s where the marketing programs you leverage drive faster growth relative to the spend. And for price, you can increase price or get consumers to trade up to a premium price within your portfolio. The overall brand image you drive will usually be one of the biggest impacts on price. The more love you create for the brand, the more inelastic the price.
Gross Margin is Net Sales minus Cost of Goods. Just like above this can be impacted by how high of a price premium you can drive for the brand, or whether you can lower your Cost of Goods without impacting the quality of the product. As a Brand Manager, this becomes your primary focus for “profit” as you feel the below the line costs are out of you control, so you don’t pay much attention to them. However, as you get up to the Director or VP level, you get involved in discussions about marketing spend, R&D and the goals for the bottom line contribution margin levels. This is where your strength or weakness in running the P&L begins to really show up.
The ways brand leaders can Drive the P&L
Looking at the above P&L lines, in a slightly different way you really have 8 different areas that you can impact the Profit:
- With Price, you can increase/decrease the price or you can get consumers to trade up to a premium line or down to a value line.
- When looking at Costs, you’re either driving the product costs or the marketing costs. You’re trying to minimize the costs without impacting the brand or the impact on the brand.
- Driving the Market Share is a focus on either stealing other users or getting your current users to use more.
- The Market Size is all about entering new categories or finding new uses for your current brand.
Using Price as a weapon to drive brand value. It can be a price change, up or down, or it could be trying to get consumers to trade up or down.
- 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 price changes 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. Also, it’s quite 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.
- Trading Up: If you have In 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? Does your brand image/ratings allow it?
- Trading Down: Risky, but you see unserved 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.
When looking at Price Increases, here’s a formula to help get you started on your analysis for gaining approval.
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. 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. Can’t be all things to everyone. The final concern is what does it do your Brand’s image, especially risky when trading downward.
Managing cost as a weapon to enhance the Brand’s Value. It can be either your cost of goods or the potential selling costs.
- 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.
- Selling 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.
- Selling 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.
Externally, the Share and volume game are traditional tools for brand. Either stealing other users or get 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.
- 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 “life saving” 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.
Increase the Size of the Market by Finding New Users or Creating New Uses.
- Find New Users: 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.
- 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.
As you look to either grow by share or new categories the two crucial calculations for you are Compound Annual Growth Rate (CAGR) and Return on Investment (ROI)
For CAGR, here is a calculation tool:
And for Return on Investment (ROI):
Show Your Work: Just like in grade school where you get extra points for showing your work, the same thing goes when taking senior leaders through your assumptions.
There is only one reason we have brands: to make more money than if we just had products.
To view a copy of How to drive Profits into your Brand, click below:
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