Professor Chip Besio Cox School of Business Southern Methodist University

 Companies are managed using common measurements These include: Sales Sales Market Share Market Share Profit/Contribution Margin Profit/Contribution Margin

Dollar Sales Dollar Sales - Revenues generated Gross Dollar Sales - Dollar sales at checkout (before returns) Net Dollar Sales - Dollar sales after returns Unit Sales Unit Sales - Measure of sales volume Examples include individual units, ounces, grams, gallons and liters

Market share measures a company’s sales in a market relative to its competitors. Calculation - Company’s unit sales in the market Sum of unit sales in the market of all competitors, including the company Why is market share important? Boston Consulting Group (BCG) study which linked high market share to corporate profitability

The basic profitability measure Calculation - (Selling Price per unit - Cost per Unit) Selling Price per Unit  Determining profitability per unit provides the company key information to improve its marketing program Determining sales is fairly straightforward, but what about costs?

Costs should be divided into two types for marketing analysis: Variable Variable - Those costs that increase with each unit produced/sold Fixed Fixed - Those costs incurred independent of the level of production/sales

Variable Cost of goods Sales Commissions (as a percent of sales) Transportation Discounts Warranty costs Fixed Utilities Real estate payments Selling, general and administrative expenses (SG&A)?

Which costs are fixed and which are variable also depends on the time frame. The longer the time frame, the more costs are variable and the fewer are fixed For example: Over the next week, labor costs (without overtime) are fixed Over the next five years, however, the labor force can be increased or reduced to accommodate needs; i.e., variable

Sunk costs Sunk costs, money which has already been spent, are frequently misunderstood They are sometimes viewed as an investment on which some level of return must be realized “Sunk costs are sunk” — they cannot be avoided or recovered  Sunk costs are irrelevant for marketing decisions

opportunity cost One important cost that is often overlooked is opportunity cost That is, what is the value of opportunities the company cannot take advantage of because it chooses to devote resources to a different alternative? Note that opportunity costs may be either variable or fixed

Facilities and equipment Investing $1,000,000 in new facilities is not without cost — the opportunity cost is the return that could have been generated by investing the money otherwise At 8% return, the annual opportunity cost of $1,000,000 is $80,000

 For marketing decisions, it is important to distinguish between: Costs that : 1) can be avoided by reducing production/sales 2) are incurred by increasing production and Costs which are not affected by production or sales  For marketing decisions, it is important to distinguish between: Costs that : 1) can be avoided by reducing production/sales 2) are incurred by increasing production and Costs which are not affected by production or sales