The Marketing Book 5th Edition

£

Gross Sales by Product x

Less Product-Specific Discounts & Rebates x

Net Sales by Product x

Less Direct Costs of Product x

Gross Product Contribution x

Less Product-Based Marketing Expenses x

Product-Specific Direct Sales Support Costs x x

• x
  Less Product-Specific Direct Transaction Costs
  Sourcing Costs x
  Operations Support x
  Fixed Assets Financing x
  Warehousing & Distribution x
  Inventory Financing x
  Order, Invoice & Collection Processing x x


• 
  

  x
  Less Product Attributable Overheads x
  Direct Profit Profitability x

  
  


• 
  

526 The Marketing Book

analysis for such strategies is a soundly based,
decision-focused, long-term direct product
profitability (DPP) analysis. As with the cus-
tomer profitability analysis, the objective of
DPP is to indicate the relative profit contribu-
tions from the different product groups. There-
fore, apportioning indirect costs in an attempt
to arrive at a ‘net profit’ for each product can
destroy the validity of the analysis and lead to
disastrous decisions being taken.
As shown in Figure 20.11, the allocation of
product-specific costs to appropriately grouped
products can highlight significant differences in
the relative profit contributions from these
differing products. Once again, if this analysis
is to be used to support long-term strategic
decisions (such as to identify those products

which should be launched internationally), the

analysis must consider the long-term sustain-

able profitability of the products.

In some industries this can be done by

using product life cycle costing techniques

which have been developed over many years. It

is now well established that the costs of

producing many products (both goods and

services) decline, in real terms, over time due to

a number of factors. These include learning by

employees which makes them more efficient,

the introduction of new technologies and

economies of scale and scope. These are com-

bined together in the ‘experience curve’ con-

cept, which enables businesses to predict the

rate of decline of their real production costs per

unit as cumulative volume increases.

Figure 20.11 Direct product profitability analyses: illustrative example of a manufacturing company’s DPP
analysis