MarketingManagement.pdf

$31 an ad, the hardware stores are charged with $1,550 of advertising. The same rea-
soning applies in computing the share of the other functional expenses to charge to
hardware stores. The result is that hardware stores gave rise to $10,050 of the total
expenses. Subtracting this from the gross margin, the profit of selling through hard-
ware stores is only $450.
This analysis is repeated for the other channels. The company is losing money in
selling through garden supply shops and makes virtually all of its profits through de-
partment stores. Notice that gross sales is not a reliable indicator of the net profits for
each channel.

Determining Corrective Action
It would be naive to conclude that the company should drop garden supply shops
and possibly hardware stores so that it can concentrate on department stores. The fol-
lowing questions need to be answered first:

■ To what extent do buyers buy on the basis of type of retail outlet versus brand?

■ What are the trends with respect to the importance of these three channels?

■ How good are the company marketing strategies directed at the three channels?

On the basis of the answers, marketing management can evaluate five alternatives:

■ Establish a special charge for handling smaller orders.

■ Give more promotional aid to garden supply shops and hardware stores.

■ Reduce the number of sales calls and the amount of advertising going to garden
supply shops and hardware stores.

■ Do not abandon any channel as a whole but only the weakest retail units in
each channel.

■ Do nothing.

In general, marketing-profitability analysis indicates the relative profitability of
different channels, products, territories, or other marketing entities. It does not prove
that the best course of action is to drop the unprofitable marketing entities, nor does
it capture the likely profit improvement if these marginal marketing entities are
dropped.

Direct versus Full Costing
Like all information tools, marketing-profitability analysis can lead or mislead mar-
keting executives, depending on the degree of their understanding of its methods and
limitations. The lawnmower company showed some arbitrariness in its choice of bases
for allocating the functional expenses to its marketing entities. “Number of sales calls”
was used to allocate selling expenses, when in principle “number of sales working-

chapter 22

Managing the

Total Marketing

Effort^703

Profit-and-Loss Statements for

Channels

TABLE 6.10

Garden Dept. Whole

Hardware Supply Stores Company