Marketing Finance- Evaluating Products


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In this presentation, we will discuss the basic concept of product, types of product and terms and their meaning in the context of evaluating the value of a certain product.
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Marketing Finance- Evaluating Products

  1. 1. Learning Objectives Understand The Basic Concept of Product What are different types of products. Appreciation of terms “ Revenue”, “Net Realization”, “Mark ups and margins”, “ Net profitability”, “ Investments”, and “Profit Center.” Chapter Two Evaluating Products 1
  2. 2. Structure 2.1 Introduction 2.2 Product 2.3 Setting up an Evaluation Format 2.4 Summary Chapter Two Evaluating Products 2
  3. 3. 2.1 Introduction A product can be ‘anything’ that can be offered to a market for attention acquisition use consumption that might satisfy a need or a want. Products can be physical objects, services, events, persons, places, organizations, ideas or a mix of any of these entities. Service is an activity that is intangible, and does not result in ownership of anything. Chapter Two Evaluating Products 3
  4. 4. 2.2 Product Product Core {benefit} Functional Augmented What the consumer / product per se service other buyer Is really buying back ups {cosmetics – may actually { the cake of soap} {Lux soap of Sell ‘beauty hope’.} good fresh ‘sitaaronka saboon’ quality in the market} Chapter Two Evaluating Products 4
  5. 5. 2.2 Product Consumer Products Convenience Shopping Specialty Unsought bought without bought after bought bought comparison . some research after a lot once in when needed. & comparison research, a while evaluation. {Bread, milk {clothing {costly {insurance} Cereals} small appliances} appliances} Chapter Two Evaluating Products 5
  6. 6. 2.2 Product Industrial products are purchased for further processing or for use in conducting business. Product Attributes 1. Product quality: ability of product to perform its functions. Includes product durability, reliability, precision, ease of operation and other valued attributes. 2. Product features: a product can come with varying features – you can buy unassembled and assemble later. 3. Product style / design: design can go deeper. 4. Branding – a name sign, logo, style or a combination of these that gives a product / service a separate identity. Chapter Two Evaluating Products 6
  7. 7. 2.2 Product Distribution Reaching the customers. Optimization of expenses for serving the supply chain. Improvement in customer service levels. So far we broadly covered several aspects connected with marketing. Now we shall develop a framework to evaluate marketing activities from their overall effectiveness and cost benefits. Chapter Two Evaluating Products 7
  8. 8. 2.3 Setting up an Evaluation Format Definitions [1] Revenue – Amount earned through the business activities. starting point of any profitability analysis. Revenue = volume x net realization. [2] Net Realization - Actual income per piece. May not be the MRP. [3] Margins & Markups – Differential between the net realization and the cost of goods sold. When it is described as a % of sales it is termed Margin and if as a % cost of goods sold then Markup. Chapter Two Evaluating Products 8
  9. 9. 2.3 Setting up an Evaluation Format Definitions [4] Net Contribution – Revenue minus cost of goods sold provides Gross Contribution. Gross Contribution minus total of Marketing, Selling, Administrative and Distribution expenses provides Net Contribution. [5] Measure of Profitability - The most common measure is margin as % of sales. The product that yields higher margin is profitable. Product A next. But to decide preferable profit center, we have to consider investments required to earn the margin. Profit center preference is decided by return on investment i.e. Total margin earned per year divided by total investment. Higher %, more profitable the center. Product B next. Chapter Two Evaluating Products 9
  10. 10. 2.3 Setting up an Evaluation Format [5] Measure of Profitability - an example Product A Product B Unit selling price Rs. 1000 Rs. 1000 Cost of goods sold Rs. 800 Rs. 900 Margin 20% Rs. 200 Rs. 100 10% Sale per year 120# 120# Margin per year Rs 24000 Rs 12000 Stocks – average days 40# 10# Debtors – average days 15 7 Value – stocks Rs. 32000 Rs. 9000 - debtors Rs. 5000 Rs. 2500 Total Rs. 37000 Rs 11500 Return on Investment 65% 104% Chapter Two Evaluating Products 10
  11. 11. 2.3 Setting up an Evaluation Format Investments To keep business operational & ongoing , investments are required. They can be capital assets like plant, machinery, equipment, vehicles etc. Investment can be in working capital like stocks, receivables etc. The recurring costs of investments have also to be absorbed by the business on an ongoing basis. Cost of Investments recurring costs on investment such as depreciation, or diminution in value of assets as well as inventory which are non cash, and finance or interest charges payable for such investments which are paid in cash. Chapter Two Evaluating Products 11
  12. 12. 2.3 Setting up an Evaluation Format Profit Center Profit center has to deliver profits after accounting for opportunity costs of for the funds employed in the center’s activity. For running the business there would be requirements of funds. Funds are used for investments that can be for long term assets and short term assets. Funds so invested are blocked and thus cannot be used for other opportunities in any other business. Chapter Two Evaluating Products 12
  13. 13. 2.3 Setting up an Evaluation Format Profit Center We evaluate the use of these blocked investments from opportunities in other business or We load cost of the funds on the business activity. Cost of the funds is calculated either by what the business pays for procuring such funds or at weighted average cost of all funds used by the organization Chapter Two Evaluating Products 13
  14. 14. 2.3 Setting up an Evaluation Format Marketing / Sales Function Evaluation It has to cover Evaluation of performance Effectiveness Efficiency Cost control At Product level & Territory level. Chapter Two Evaluating Products 14
  15. 15. 2.4 Summary Functional product – is the product per se for example the cake of soap. Augmented product – service / other back ups, examples, Lux soap of good fresh quality available in the market. Consumer products – products that are purchased for personal consumption and not for business use. Different types of Consumer Products Convenience items Shopping items Specialty items Unsought items Chapter Two Evaluating Products 15
  16. 16. That is the end of our session # 02 Next we move to session # 03 Covering chapter 03 “ Profit Center Evaluation.” Good Luck ! Chapter Two Evaluating Products 16