Two Perspectives on Revenue, Price and Quantity: The Accounting Machine and The Marketing Machine Ted Mitchell

Goal of Lecture Understanding the differences between 1) an accountant’s perspective of controlling costs to ensure profit 2) a marketer’s perspective of choosing optimal levels of marketing costs to maximize sales and profits

There are many perspectives On the nature of the price that sellers charge and buyers pay for things in the market place The economist’s perspective The accountant’s perspective Consumer behaviorist’s perspective The marketing manager’s

Two Views on Nature of Business Marketing View Spend money to make profit Revenues and profits are the consequences of running a business Accounting View To make profit, control costs Costs and profits are the consequences of running a business

Two Views of the Business Machine Marketing View Inputs: Price Tags and the cost of the 3 P’s are Inputs to the machine Advertising, Sales force, building Product quality are costs inputted into the machine Outputs of the Machine are Demand (Quantity sold), Revenue, and Profit Accounting View Inputs: Revenue and Price are Inputs to the machine Advertising, Sales force, building Product quality are costs inputted into the machine Outputs of the Machine are Costs and Profits Advertising, Sales force, product quality are costs resulting from the machine’s operation

Two Views of the Business Machine Marketing View The machine is a conversion machine Output (Revenue) is converted from the cost of the Inputs Measure of Efficiency Profit returned on costs, ROME (aka ROMI) Accounting View The machine is a reduction machine Input (Revenue) is reduced to Costs and payments Measure of Efficiency Profit returned on sales revenue, ROS

Two Views of Revenue Marketing View Revenue is an Output Basic Two-Factor Machine has a Direct Relationship between Revenue and Cost Revenue/Cost = r Output = r x Input Revenue = r x Cost Accounting View Revenue is an Input Basic Two-Factor Machine Has a Direct Relationship between Cost and Revenue Cost/Revenue = k Output = k x Input Cost = k x Revenue

Two Views of Unit Price and Cost Marketing View Selling Price is the Price Tag and the revenue generated by the sale of a single unit Direct Relationship r = Price/Cost per unit r = P/V Sounds like unit revenue returned on unit cost Accounting View Selling Price is the average revenue per unit sold Direct Relationship k = Cost per unit/Price k = V/P Sounds like cost to revenue ratio

Two Views of Returns and Efficiency Marketing View Unit Revenue Returned on Cost is P/V P/V = Sales Return Rate Profitability rate Markup on Cost of Goods Sold Mv = (P-V)/V Accounting View Average Unit Cost to Price rate = V/P V/P = Efficiency rate Profitability rate Markup on Price Mp = 1-(V/P) Mp = (P-V)/P

Accounting Machine Produces Expenses Accounting Cost Producing Machine Marketing Revenue Producing Machine RevenueRR Cost of Goods SoldCOGSCOGS/RR/COGS sales return on inventory Gross marginR – COGS = GG/R, gross return on sales G/E, gross return on marketing expense Marketing ExpenseEE/R, advertising to sales ratio R/E, sales to advertising Marketing ProfitZZ/R marketing return on sales Z/E, ROMI or Rome Overheads ExpenseHH/R Shareholder Expense (Net Profit) NN/R, return on sales

Marketing Machine Produces Revenues Accounting: Cost Producing Machine Marketing: Revenue Producing Machine RevenueRR Cost of Goods SoldCOGSCOGS/RR/COGS or P/V sales return on inventory Gross marginR – COGS = GG/R, gross return on sales G/E, gross return on marketing expense Marketing ExpenseEE/R, advertising to sales ratio R/E, sales to advertising Marketing ProfitR-E = ZZ/R marketing return on sales Z/E, ROMI or ROME Overheads ExpenseHH/R Shareholder Expense (Net Profit) NN/R, return on sales

Two Views of Unit Price and Revenue Marketing View Direct Relationship between Revenue, R, and Price Tag, P q = Revenue /Price Tag q = dollars of sales returned on a $ of price tag q = R/P Revenue, R = q x P Sounds like Quantity x Price = Revenue, (But Not) Accounting View Direct Relationship between Revenue, R, and Quantity sold, Q Price, p = Revenue/Quantity p = R/Q P = dollars of sales returned on a unit sold Revenue, R = p x Q Sounds like Price x Quantity = Revenue, (But Not)

Two Views of Unit Price and Quantity Popular Marketing ViewAccounting View Price Tag, P Price, P Quantity, Q X X

Two Views Price, Quantity and Revenue Popular Marketing ViewAccounting View Price Tag, P Price, P Quantity, Q Area is the Revenue Revenue, R = (Q) x P Area is the Revenue Revenue, R = (Q) x P Area is the Revenue Revenue, R = (P) x Q Area is the Revenue Revenue, R = (P) x Q X X

Two Correct Views of Marketing and Accounting Marketing ViewAccounting View Price Tag, P Not Price, p = R/Q It is a conversion rate Quantity, Q Not Quantity, q = R/P It is a conversion rate Area is the Revenue Revenue, R = (R/P) x P Area is the Revenue Revenue, R = (R/P) x P Area is the Revenue Revenue, R = (R/Q) x Q Area is the Revenue Revenue, R = (R/Q) x Q

Do Accounting and Marketing Have any perspectives in common? Yes! When managers are in Diagnostic Mode Comparing Two Different Performances as if they were different machines Using ∆Price and ∆Quantity explain ∆Revenue

Diagnostic Mode Comparing Two Machines There is NO assumed relationship between the machines Performance from machine 1 Performance from machine 2 DifferenceCan NOT say Price, PP1P1 P2P2 ∆P = P 2 -P 1 Quantity, QQ1Q1 Q2Q2 ∆Q = Q 2 -Q 1 Revenue, R =P x Q R1R1 R2R2 ∆R = R 2 -R 1 ∆P x ∆Q = ∆R There is NO indication of a direct or an inverse relationship between price, P, and quantity sold, Q There is NO obvious conversion rate

Diagnostic Mode Explain the Difference in the Revenues of the Two Machines Performance from machine 1 Performance from machine 2 DifferenceImpact of Changes Price, PP1P1 P2P2 ∆P = P 2 -P 1 I∆P = Impact of ∆P Quantity, QQ1Q1 Q2Q2 ∆Q = Q 2 -Q 1 I∆Q = Impact of ∆Q Revenue, R =P x Q R1R1 R2R2 ∆R = R 2 -R 1 I∆P + I∆Q = ∆R

Diagnostic Mode Comparing Relative Performances Relative to average competitive Position Performance from machine 1 Performance from machine 2 Differences in Relative Performances Relative Price, Pr = P/Pa Pr 1 Pr 2 ∆Pr = Pr 2 -Pr 1 Relative Volume, Qr = Q/Qa Qr 1 Qr 2 ∆Qr = Qr 2 -Qr 1 Relative Revenue, Rr = R/Ra Rr 1 Rr 2 ∆Rr = Rr 2 -Rr 1 Difference in the revenues, ∆R, has to be explained by the differences in the prices and quantities, I∆P and I∆Q

One Common View of the Variance (Impact) Analysis Marketing View Relationship between difference in relative price, quantity and revenue Q(∆Pr) + P(∆Qr) = ∆Rr Accounting View Relationship between actual and budgeted price, quantity and revenue Q(∆P) + P(∆Q) = ∆R

Goal of Lecture was to Ensure you understood the differences between 1) an accountant’s perspective of controlling costs to ensure profit 2) a marketer’s perspective of choosing optimal levels of marketing costs to maximize sales and profits 3) A common view on explaining differences between performances