Here are 4 simple steps to quickly uncover your brand’s profit situation

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.brand profit

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.

 

To learn more about this type of thinking, you should explore my new book, Beloved Brands.

With Beloved Brands, you will learn everything you need to know so you can build a brand that your consumers will love.

You will learn how to think strategically, define your brand with a positioning statement and a brand idea, write a brand plan everyone can follow, inspire smart and creative marketing execution and analyze the performance of your brand through a deep-dive business review.

Beloved Brands book

To order the e-book version or the paperback version from Amazon, click on this link: https://lnkd.in/eF-mYPe

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Beloved Brands: Who are we?

At Beloved Brands, our purpose is to help brands find a new pathway to growth. We believe that the more love your brand can generate with your most cherished consumers, the more power, growth, and profitability you will realize in the future.

We think the best solutions are likely inside you already, but struggle to come out. Our unique playbook tools are the backbone of our workshops. We bring our challenging voice to help you make decisions and refine every potential idea.

We start by defining a brand positioning statement, outlining the desired target, consumer benefits and support points the brand will stand behind. And then, we build a brand idea that is simple and unique enough to stand out in the clutter of the market, motivating enough to get consumers to engage, buy and build a loyal following with your brand.

We will help you write a strategic brand plan for the future, to get everyone in your organization to follow. It starts with an inspiring vision that pushes your team to imagine a brighter future. We use our strategic thinking tools to help you make strategic choices on where to allocate your brand’s limited resources.

Our brand playbook methodology will challenge you to unlock future growth for your brand

  1. Our deep-dive assessment process will give you the knowledge of the issues facing your brand, so you can build a smart plan to unleash future growth.
  2. Find a winning brand positioning statement that motivates consumers to buy, and gives you a competitive advantage to drive future growth.
  3. Create a brand idea to capture the minds and hearts of consumers, while inspiring and focusing your team to deliver greatness on the brand’s behalf.
  4. Build a brand plan to help you make smart focused decisions, so you can organize, steer, and inspire your team towards higher growth.
  5. Advise on advertising, to find creative that drives branded breakthrough and use a motivating messaging to set up long-term brand growth.
  6. Our brand training program will make your brand leaders smarter, so you have added confidence in their performance to drive brand growth.

To learn more about our coaching, click on this link: Beloved Brands Strategic Coaching

To learn more about our training programs, click on this link: Beloved Brands Training

If you need our help, email me at graham@beloved-brands.com or call me at 416 885 3911

You have my personal promise to help you solve your brand building challenges. I will give you new thinking, so you can unlock future growth for your brand.

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Graham Robertson

Founder and CMO, Beloved Brands Inc.