A brand leader needs to be able to quickly look at P&L statement to assess your brand’s profit situation. You need to be able to quickly assess your brand’s sales growth, margins, and marketing spend levels.
Anyone who does not include profit in their definition of a brand has never run a branded business before. To me, a product is a basic commodity you sell. A brand creates a bond that leads to a power and profit beyond what the product alone can achieve.
If you want to succeed in brand management, you have to understand brand finance. After all, you are running a business. If you just like the activity of marketing, then you should become a subject matter expert, because if you cannot work the finances of your brand, you will not get promoted past brand manager.
A quick dissection of the financial statement
So if finance is not a natural skill, when your finance manager hands you the brand’s profit and loss (P&L) statement, it can be rather intimidating. To assess the performance of your brand, and begin knowing where to dig deeper, I recommend you break it down by looking at four key numbers.
1. Growth Rate
As a leader of the brand, I start by trying to understand the growth rate. Most brand leaders have brand growth as their number one objective. You can do a quick calculation to figure out the average growth rate but, as you dig in, you should try to find out what happened each year to give you a better feel of the brand performance. There are two calculations you can use, either average growth rate or compound annual growth rate (CAGR).
- In this example, the average growth rate is 7% and CAGR % is 9.1%, but very high compared to the overall economic growth of 2-3%. My first instinct would be to look at the category growth to see if the brand is gaining or losing market share.
- Next, the year-by-year growth shows the growth rate has shot up to 12% over the past two years. I would make a mental note to expect to see this as an investment brand and determine whether the profit is paying off yet.
2. Gross Margin Percentage
My eye is drawn immediately to figuring out the gross margin percentage, as the first signal of the health of the brand or to try to understand the strategy behind the brand. Divide the absolute gross margin by the sales. You can assess the brand’s health by comparing the margin percent over time to see the trend line, with other brands in your portfolio to assess the opportunity cost, or with other competitive brands in the category.
- In this example, the gross margin percentage has fallen from 43% in 2018 down to 37% in 2020, which should prompt you to go a layer deeper to look at price and cost of goods.
- Regarding price, dig around to see if there has been an average price decrease, then look to see if it is due to an increase in trade spend, a shift in the sales mix to lower-priced items, or even a shift to lower margin items.
3. Contribution Margins
Next, look at your brand’s cost of goods and impact on overall profit. Some cost factors are outside the brand’s control, such as foreign exchange, raw material cost increases, duties, and transportation costs. However, you also need to look out for factors within the brand’s control. Was there a strategic decision to change to a higher cost raw material? Was there increased quality control at the manufacturing site? Did you switch to a more expensive supplier or change the location of your production?
- Look at contribution margin percentage, dividing the bottom line contribution income by the overall sales.
- In the example, an alarm bell goes off when I see the contribution margin percentage has fallen from 26% to 17% in three years. My first observation is the sales are up dramatically, yet both the gross margin percentages and contribution margin percentages are down.
- While the gross margin percentage is down, the gross margin dollars increased. However, in this case, the contribution margin dollars have gone down from $5,763 to $4,772. After two years of investment, the brand is not responding fast enough to cover that spend level.
4. Marketing spend growth rate
Finally, look at the comparison between the sales growth rate and the marketing spend growth rate.
- While sales are growing at 12% over the past two years, spending is up 22%. The brand is not covering the spending increase. Dig in to understand if the payback was expected to be slower. If not, I would dig in to explain why it is not paying back: not the right message, competitive activity, or market dynamics.
Here is a training workshop we call Brand Finance 101, the ideal training for any brand manager.
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Founder and CMO, Beloved Brands Inc.