What should you do when someone hands you a financial statement. If you want to succeed in brand management, you have to understand marketing finance. After all, you are running a business. Consequently, if you only 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 beyond brand manager.
Anyone who does not include “profit” in their definition of a brand has never run a brand before. To me, a product is a basic commodity you sell. Most importantly, a brand creates a bond that leads to a power and profit beyond what the product alone can achieve.
To start, we use our marketing finance 101 to do a quick dissection of your profit statements.
For many of us, we became marketers because we were attracted to the strategic, creative, and psychology aspects of business. And, 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 start, look at the sales growth, gross margins and draw out comparisons.
First, you need to understand the sales growth rate, relative to the economy or the category growth. Then, look at the gross margin percentage. Next, dig into the contribution margin percentage. Finally, do a quick comparison between spending growth rate and the sales growth rate.
Once you have understand these four elements of the financial statement, you can begin digging deeper.
Step 1: 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. Marketing finance starts with 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. Then, I would make a mental note to expect to see this as an investment brand and determine whether the profit is paying off yet.
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Step 2: My eye is drawn immediately to the gross margin percentage, as a first signal of brand health 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.
Step 3: Next, look at contribution margin percentage, dividing the bottom line contribution income by the overall sales, using 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. And, 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?
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.
Step 4: Finally, look at the comparison between the sales growth rate and the spending 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.
Eight ways to drive brand profit
- Premium pricing
- Trade loyal consumers up to a higher price
- Lower cost of goods
- Lower marketing and selling costs
- Steal competitive users
- Get loyal users to use more
- Enter into new markets
- Find new uses for the brand
- Premium pricing
Now you are set to dig in deeper with marketing finance
To read more on brand profitability, here’s a deeper look at the 8 ways to drive profit within our marketing finance 101:
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