Marketing Finance 218 v1

Marketing Finance
Sub Code-218
Developed by
Prof. B.N. Chatterjee
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
!  
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe  2. Dr. B.P. Sabale  3. Prof. Dr. Vijay Khole  4. Prof. Anuradha Deshmukh 
Group Director  Chancellor, D.Y. Patil University, Former Vice-Chancellor  Former Director 
Welingkar Institute of Navi Mumbai  (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

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NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.
1st Edition (Jan, 2009). 2nd Edition (July, 2011). 3rd Edition (Feb. 2016)
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CONTENTS
Contents
Chapter No. Chapter Name Page No.

1 Introduction 3-11
2 Evaluating Products 12-21
3 Profit Center Evaluation 22-29
4 Territory and Product Level Profitability 30-54
5 Pricing 55-96
6 Sales Force Evaluation 97-112
7 Working Capital 113-120
8 Budgets 121-132
9 Evaluation of Promotional Spends 133-139
10 Evaluation of Channels 140-149
11 Brand Valuation 150-164
12 Problems for Exercise 165-202
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INTRODUCTION
Chapter 1
INTRODUCTION
Learning Objectives
After going through this chapter you should be able to know:
• A brief definition of terms and concepts.

• The logical connect between the two functions of marketing and finance.
• Elements of the marketing mix and their role in profits through customer
satisfaction.
• Importance of customers in the entire business process.
Structure:
1.1 Marketing Activities

1.2 Summary
1.3 Self Assessment Questions
When one has to write about a subject such as Marketing Finance the issue
that comes up foremost in the mind is what constitutes the framework of
such a topic.
Marketing generally is more external oriented – out ward looking (seeking

sales, market shares, in the markets) whereas Finance is more internal
oriented – inward looking (looking at controls over expenses, costs, and
increasing returns on investments). However they have to depend upon
each other
• either one has to complement the other

• they can not afford to be in conflict.
As a matter of fact in business one observes that after a stage all the basic
functions, surrender their individual identities, to merge into one whole
organizational objective which in most cases have to, in one way or the
other, do with profitability.
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INTRODUCTION
Therefore finance has more to do with controls, arranging and managing

funds, keeping tabs on expenses, and on the overall, ensuring that owners’
net worth is protected and enhanced.
Let me start with defining the subjects, a little more in detail.
We’ll start with defining what is Marketing:
Marketing has at times been defined as ‘a set of human activities

directed at facilitating and consummating exchange’.
Finance as all of you know has to do with the monetary part of business,
be it revenue i.e. income, or expenses i.e. costs.
“Marketing is the process of planning and executing the conception,

development, pricing, promotion, and distribution of ideas, goods, and
services to create exchanges that satisfy individual and organizational
goals.” – American Marketing Association.
“There will always be, one can assume, the need for some selling. But the
aim of Marketing is to make selling superfluous. The aim of Marketing is to
know and understand the customer so well that the product or service fits
him and sells itself. Ideally, Marketing should result in a customer who is
ready to buy. All that should be needed then is to make the Product and or
Service available” Peter Drucker.
Another very apt definition of Marketing can be 'managing profitable

customer relationships’ or 'satisfying customer needs profitably’.
In both the above definitions one may note the emphasis put on
customers and profit.
We can also look at marketing and selling from a different perspective:
Step wise the entire process would be:
1. Through a scan of the environment, locating a particular need or

problem area, which is not being fulfilled, or being catered to, either
fully or below a satisfactory level, which in other words means –
identifying a need gap (that in turn means presence of an
opportunity)
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INTRODUCTION
2. Devising a product/service/solution i.e., – creating an offering that will

address the particular identified void.
3. To make economic sense of this opportune situation.
• First find out whether a meaningful/substantial segment exists for that

particular offering.
• What is the cost of manufacturing/delivering/servicing the market.
• What is the price the identified segment is willing to pay for the
offering.
When we start looking at the several aspects of servicing the market/

segment:
• We also have to look at the cost of communicating the particular offering

to the identified target audience.
• We have to look at competitors to find out the threats from their end.
• We have to evaluate incentives to be given to obtain and retain buyers,

motivate intermediaries and other stake holders.
• Look at the various costs that the organization has to incur to keep the
chain moving.
• Evaluate the several functions that form part of the entire process.
• Evaluate the effectiveness of all such functions as to whether they are

individually delivering to their agreed expected levels.
After all this, a good marketer will look at ways and means to improve the
success of the marketing initiative that the opportunity has provided.
At this point one may look at answers to the following basic questions:
What? Why? Who? Where, When, and How?
What would define the Object being purchased
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INTRODUCTION
Why would define the Objective of purchase

You may observe that someone visiting a grocery store and picking up a
tube of tooth paste is buying something to apply on a tooth brush and use
to clean and wash the teeth.
However a little probing may reveal that different people may have
different motives in buying a tube of toothpaste, such as: one may buy for
cleaning only, another may look for freshness of breath, over and above
simple cleaning, while another may look for tooth decay fighting properties
in the tooth paste, beyond the above simple cleaning functions, and so on
and so forth.
If on the other hand we were to look at the reasons prompting a retailer to

buy a tube of toothpaste, we may find his reasons may be to earn money
through resale, and hence he may evaluate the margins that he makes per
tube, the velocity with which a particular brand moves off the shelf, vis-a-
vis other brands, to decide which particular make of tooth paste he should
buy and then too, in what quantities.
The answer to the third question Who would define the Organization that
buys, which from the above explanation would define whether it is an
Individual buying, or an Organization buying, or an Intermediary buying.
Finally where, when and how, would define the Operation of purchase,
viz., how does the buyer go about selecting, evaluating, deciding, on
several issues before finally making a purchase.
We may call the above the 4 Os (Phillip Kotler):
These four aspects which we saw up to now, are more from the buyer’s
perspective.
When we look at the same from the marketer’s perspective, we come
across the very commonly called 4 Ps of Marketing, viz.
Product
Price
Place
Promotion
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INTRODUCTION
(E Jerome McCarthy)
(You may often find additional Ps being talked about, such as packaging,
people, personnel, politics, public opinion, passion. Some one will say in
services 3 more Ps are people, process, physical evidence. However
looking a bit deeply one can see that the initial 4 Ps are good enough to
take care of the various critical aspects of marketing, the to
he` are more or less variations only).
The 4 Ps can also be looked at as:
• what does the Consumer need

• what does it Cost to the consumer to satisfy the need
• what is the Convenience created for the consumer to purchase the item
• what and how should Communication be made to the consumer these
are called the 4 Cs of Marketing
(Robert Lauterborn)
The above gives a general framework within which marketing activities are
concentrated.
So if one has to lay out a framework within which marketing functions are
to be evaluated, the same should factor in all the above elements.
Many critics of marketing often opine that consumers would have been
much better off in terms of cost of items if marketing expenses were not
added on to the price.
They also feel that advertisement and promotional expenses are indeed
wastes.
While there may be some logic to such criticism, marketing does have
some positive side to it:
These can be listed as under:

• Marketing (proactive) is largely responsible for improved standard of
living, as a matter of fact, it improves the overall quality of living by
making more people aware of products on offer.
• By fueling aspirations marketing creates more demands.
! !8
INTRODUCTION
• This in turn spurs consumption and thereby production.
• When desires are increased the same leads to increased exertions on the
part of the aspirers to acquire.
However some darker sides to marketing can not be ignored:
• Con men and wheeler dealers may make false promises and claims,
thereby misleading buyers. This can also happen when sales are pushed
beyond a point.
• Quality may at times be sacrificed at the alter of quantity, as a result of

which shoddy products may be passed off to buyers.
• Selling to people, the products that they really do not need example,
selling a pair of dancing shoes to a mermaid or selling ice making
machine to an Eskimo in Greenland,may be other examples of marketers
exploiting gullible customer.
• Aggressive advertising and promotion can at times result in increased

cost of products.
1.1 MARKETING ACTIVITIES
The most visible marketing activities are those that are connected with
sales. Thus we have issues such as:
• Personal selling targets, both absolute and relative.

• Relative volume is in other words achievement of Market shares.
Activities may also cover territory coverage, customer servicing, callage,

ensuring availability of products at outlets, display of merchandise i.e.,
merchandising of products, use of POP materials.
• The other equally or even more visible marketing activity will be:
• Advertising and sales promotion.
While advertising has more to do with paid form of mass communication,

sales promotion will have a direct connection with immediate sales.
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INTRODUCTION
Thus advertising can have objectives of moving the target audience from a
stage of unawareness to awareness to comprehension to conviction which
may in turn lead to desire and then action.
Sales promotion on the other hand will be directly linked to:
• Achievement of incremental sales

• Inducement of trials
• Increased consumption
• Channel incentivisation
• Liquidation of slow moving stocks.
1.2 SUMMARY
Marketing generally is more external oriented – out ward looking (seeking

sales, market shares, in the markets) whereas Finance is more internal
oriented – inward looking (looking at controls over expenses, costs and
increasing returns on investments).
Positive Sides of Marketing
• Marketing (proactive) is largely responsible for improved standard of

living, as a matter of fact, it improves the overall quality of living by
making more people aware of products on offer.
• By fueling aspirations marketing creates more demands.
• This in turn spurs consumption and thereby production.
• When desires are increased the same leads to increased exertions on the
part of the aspirers to acquire.
Negative Sides of Marketing
• Con men and wheeler dealers may make false promises and claims,
thereby misleading buyers. This can also happen when sales are pushed
beyond a point.
! !10
INTRODUCTION
• Quality may at times be sacrificed at the alter of quantity, as a result of

which shoddy products may be passed off to buyers.
• Selling to people products that they really do not need example, selling a
pair of dancing shoes to a mermaid or selling ice making machine to an
Eskimo in Greenland, may be other examples of marketers exploiting
gullible customers.
• Aggressive advertising and promotion can at times result in increased

cost of products.
1.3 SELF ASSESSMENT QUESTIONS
1. Define 'marketing'.
2. What are 'elements of the marketing mix'?
3. What are four 'O's and how do they differ from the four 'C's?
4. What are the positive and negative sides of 'marketing'?
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INTRODUCTION
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture 
! !12
EVALUATING PRODUCTS
Chapter 2
EVALUATING PRODUCTS
Learning Objectives
After going through this chapter you should be able to understand:
• The basic concept of a product.

• What are the different types of products?
• Appreciate the terms 'revenue' 'net realisation' 'markups and margins',
'net profitability’ 'investments' and 'profit center'.
Structure:
2.1 Product
2.2 Setting up an Evaluation Format
2.3 Summary
A Product can be 'anything' that can be offered to a market for attention,

acquisition, use or consumption that might satisfy a need or want.
Products can be physical objects, services, events, persons, places,

organizations, ideas or a mix of any of these entities.
A Service which also is a product, unlike a physical object would be any

activity or benefit that one party offers to another that is essentially and/
or substantially intangible and does not result in the ownership of
anything.
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EVALUATING PRODUCTS
2.1 PRODUCT
Fig.: 2.1
Core benefit – what the consumer/customer/buyer is really buying?
Examples – Cosmetics - may actually sell 'beauty' hope

Lux - 'filmy sitaron ka saundarya saboon'
Functional product – is the product per se example, the cake of soap.
Augmented product – service/other back ups, examples, Lux soap of

good fresh quality available in the market place.
Consumer products – products that are purchased for personal

consumption, and non business use.
Consumer products can be:
• Convenience items
• Shopping items
• Specialty items
• Unsought items
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EVALUATING PRODUCTS
Convenience items are generally bought by consumers without much of a

comparison, immediately as the need arises, or the problem is noticed. e.g.
items of daily needs such as bread, milk, cereals etc.
Shopping items are normally purchased after some amount of search,

evaluation, comparison. e.g. clothing, household small appliances,
holidays, etc.
Specialty items are generally purchased after a lot of evaluation,

comparison, search, e.g. costly appliances, silk sarees, a foreign tour etc.
Unsought items are purchased once in a while, More so, when the item is
actively sold by the seller, e.g., insurance policy.
Industrial Products – Purchased for further processing or for use in

conducting business.
Product Attributes
1. Product quality – ability of a product to perform its functions - it

includes the product’s overall durability, reliability, precision, ease of
operation and other valued attributes.
2. Product features – A product can come with varying features - example,

one can have a stripped down model with out any additional features
and to which features can get added.
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.
A few other features connected with products:
Packaging – The container or wrapper
Labeling – Identification of the product
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EVALUATING PRODUCTS
Distribution
• Reaching the customers effectively and efficiently
• Optimization of expenses for servicing the supply chain
• Improvement in customer service levels
Upto here we have broadly covered several aspects connected with

marketing. Now we shall develop a framework to evaluate these activities
from their overall effectiveness and cost benefit basis.
2.2 SETTING UP AN EVALUATION FORMAT
Let us start with a few terms and their definitions:
1. REVENUE: which is the starting point of any profitability analysis

means the amount earned through the business activities, and is
calculated as: 
 
Revenue = volume X net realisation
2. NET REALIZATION: need not be the price of the offering as obtaining

in the market place, which in other words means, that, the 'MRP' or the
price for the product that a customer pays, and the price that the
manufacturing company realizes at the time of billing may not be the
same.
3. MARGINS & MARKUPS 

 
The differential between the realization and the cost of the goods sold
(which is in short known as COGS) at the point of sale, can be
expressed as a percentage of either the selling price (when it is
described as a percentge margin) or of the cost of goods sold at that
point of sale (when it is described as a percentge markup). 
 
Apart from margins/markups of intermediaries, taxes and levies also
affect the net realisation amount.
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EVALUATING PRODUCTS
4. NET CONTRIBUTION
Volume X net realization = Revenue

Less Cost of goods sold
= Gross contribution
Less
Marketing expenses
+ Selling expenses
+ Administrative expenses
+ Distribution expenses total M/S/A/D expenses
= Net contributions
5. MEASURE of PROFITABILITY 
 
The most common measure of profitability is margin as a percent ge of
sales.
This being the case one may most often be attracted to an item which
gives a higher percentge of margin
Let us take the following example:
Rs.
• Product A selling price per unit 1000
cost of sale per unit 800
margin 200 … … 20 percent
• Product B selling price per unit 1000
cost of sale per unit 900
margin 100 … … 10 percent
• Which is more attractive?
Product A margin 20 percent
Product B margin 10 percent
obviously product A, which offers a higher margin.
! !17
EVALUATING PRODUCTS
Let us take a second look
• Product A sells 10 units a month
requires avg. 40 units stocking at any point of time

is sold on 15 days’ credit
• Product B sells 10 units a month
requires avg. 10 units stocking at any point of time

is sold on 7 days’ credit
the detailed working factoring in the entire scenario will be:
• Product A 
 
sales in Rs.1000 X 10 = 10000 
gross margin in Rs. 200 X 10 = 2000 
 
Investments
stocks 40 X Rs.800 = Rs.32000
receivables Rs.10000 ÷ 2 = Rs.5000
Total = Rs.37000
• Product B 
 
sales in Rs.1000 X 10 = 10000 
gross margin in Rs.100 X 10 = 1000
Investments:
stocks 10 X 900 = 9000
receivables 10000 ÷ 4 = 2500
Total =11500
★ Product A 
Profit in Rs.2000 per month i.e., 24000 per annum on an investment of
37000 = 65 percent return on investment.
★ Product B 
Profit in Rs.1000 per month i.e., 12000 per annum on an investment of
11500 = 104 percent return on investment. 
 
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EVALUATING PRODUCTS
Post the above evaluation the product B may look more attractive. 
 
This takes us to the concept that a profit center can not be evaluated on
profit or margin percentge alone, the investment required also
determines the viability as well as the attractiveness of the venture.
Investments
To keep business operational and ongoing, investments are required. Some

investments may be on capital assets example, equipments, plants and
machineries, cars etc.
Whereas others may be on working capital example, stocks, receivables

etc.
The recurring costs on such investments have also to be absorbed by the

business on an ongoing basis
Costs of Investments
• Recurring costs on investments such as depreciation or diminution in

value of capital assets, as well as inventory, which are in the nature of
non cash costs.
• Finance or interest charges payable on investments made in assets of a
capital nature or working nature, in this case mostly cash costs.
Profit Center
• Profit centre vis a vis a Cost centre or an Activity centre – a profit centre
has not only to deliver profits but has to deliver profits after accounting
for opportunity costs for the funds deployed in the center’s activity.
• For running the business there would be requirements of funds.
• These funds are for investments in long term assets as well as short term
assets.
• The moneys invested get blocked in this business and consequently are
shut out from opportunities in any other business/investing alternative.
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EVALUATING PRODUCTS
• Hence we may either evaluate the use of this blocked fund from an angle
of what return we are getting from this business or
• We load on this activity a cost for using this fund.
• This cost may either be what the business pays for procuring such capital
or at an weighted average cost of all funds used in the organization.
Marketing/Sales Function Evaluation
It has to cover:
• Evaluation of performance
• Effectiveness
• Efficiency
• Cost control at
• Product level and
• Territory level
2.3 SUMMARY
Functional product – is the product per se example, the cake of soap.
Augmented product – service/other back ups, examples, Lux soap of

good fresh quality available in the market place.
Consumer products – products that are purchased for personal

consumption, and non business use.
Different Types of Consumer Products
• Convenience items.
• Shopping items.
• Specialty items.
• Unsought items.
! !20
EVALUATING PRODUCTS
1. Define a 'core product', a 'functional product', and an 'augmented

product’?
2. What can be the different types of consumer products?
3. How does an Industrial product differ from a consumer product?
4. How does margin differ from markup?
5. What is the most common measure of profitability?
! !21
EVALUATING PRODUCTS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !22
PROFIT CENTER EVALUATION
Chapter 3
Learning Objectives
• The concept of return on investment, along with the constituent

elements.
• Dupont control chart and its applicability in the marketing context.
Structure:
3.1 Dupont Control Chart

3.2 Summary
Let us take an example of a very small business set up.
A vendor of packaged milk sets up shop at a road crossing.

He buys liquid milk in plastic pouches @ in Rs.14.50 per litre from a dairy.
He sells the milk to customers @ in Rs.15.00 per litre.
He sells on an average 2 litres per customer per day, to 100 customers.
What is his daily Sales?
It is calculated as under:
100 customers X 2 litres per customer X Rs.5.00 per litre = Rs.3000.00 per
day
This amount is his daily revenue … … … … … … (1)

His purchase spending is Rs.14.50 per litre
So what is his daily purchase?
It is calculated as:
100 X 2 = 200 litres X Rs.14.50 per litre = Rs.2900.00 per day.

This amount is his daily purchase
! !23
Since there is no cost addition to this amount, to make the milk saleable,
we shall call this the cost of goods sold … … … (2)
The vendor’s gross profit is Rs.100 per day (1 – 2) … … … (3)
This has been derived as the difference between his Revenue and Cost of
Sales i.e., Rs.3000 minus Rs.2900. This amount of Rs.100 can be described
Either as a margin percentage of 3.33 percent i.e., 100/3000
Or as a markup percentage of 3.45 percent i.e., 100 /2900.
Margin is denoted as a percentage of sales whereas markup is denoted as

a percentage of cost.
Let us assume the vendor incurs a cost of 25 paise per litre as delivery
cost, viz., he has to keep a helper to deliver milk to customers, and he may
also have to spend some amount on tea and miscellaneous expenses.
This amount of Rs.50 i.e., 25p X 200 litres is his selling distribution
expenses … (4)
Now we can see the overall profitability of the vendor’s business as under:
Rs.
Annual sales 1095000 Rs. 3000 X 365 days
Annual Cost of Sales 1058500 Rs. 2900 X 365 days
Annual Gross Profit 36500 3.33 percent of Sales
Annual Selling/Distribution exps 18250 Rs.50 X 365 days
Annual Net profit 18250 1.67percent of Sales (5)
Do you think the business is worthwhile?
Getting up at 4.00 a.m. in the morning, facing all the elements of weather
and other ground conditions, taking care of all the transactions, and at the
end of it all making a mere 1.67 percent net margin.
! !24
You will definitely come out with a big NO!!!
But now let us look at the entire business from a slightly different angle.
While the vendor has to buy the milk by paying the money upfront, he may
not be realising the amounts from his customers immediately.
If we assume that on an average he recovers all his money from the

customers after a gap of 15 days, then we shall see that he has to invest
an amount of Rs. 43500 (Rs. 2900 X 15) in the business as rolling capital…
…. (6)
He may also have invested an amount of Rs. 1500 in some plastic trays
and stools, umbrella etc…. which we can define as his fixed capital…… (7)
If we look at the situation from a different angle viz., the amount of

earning our friend is making on his investment which is calculated by
dividing the net margin by the total investment
i.e. Rs. 18250/ Rs. 43500 + Rs. 1500

(5 above) (6 above) (7 above)
= 40.5 percent … … … … … (8)
This is the return on investment, which we call the ROI.
Which business or investment option will give 40.5 percent return on

investment?
Suddenly you will find the milk vending business looking quite attractive.
Let us analyze, what has made a business which did not seem attractive
enough as per (5) above, i.e., 1.67 percent return on sales, suddenly
become so attractive as per (8) above, i.e., a 40.5percent return on
investments.
! !25
3.1 DUPONT CONTROL CHART
Dupont Control chart was first initiated by an engineer who had joined
Dupont, the famous chemical firm of nylon fame.
This chart in its simplest form is as under:
Table no: 3.1

Sale (Revenue, which AAAAA Working capital Fixed
is Assets
volume x net
realization
Current Assets UUUU Or

Less: Current VVVV
Liabilities long term

capital
Less: Cost of goods BBBB XXXX + YYYY
sold
(volume x unit cost up
to
point of sale)
Gross Profit CCCC Total investment ZZZZ
Less: Selling,
distributing
marketing,
administrative
expenses DDDD
Net Profit EEEE Total investment ZZZZ
net profit = EEEE sales = AAAA
divided by sales = AAAA divided by total = ZZZZ

investments
(= return on sales) ( = turn around of investments)
(P) (Q)
! !26
when we multiply P by Q we get Return on Investment (ROI).
This equation can be written as
Net Profit Sales

—————- X ——————— where the Sales in the first denominator
Sales Investment
and the Sales in the second numerator cancel each other leading to
Net Profit
———————— = ROI.
Investment
If we substitute the above equations by the corresponding numbers

in the milk vendors case we get the following:
Table no: 3.2

Annual sales 1095000 Working capital Fixed captal
Less: cost of goods

sold 1058500 43500 1500
Gross profit 36500 Total

S/D/M/A expenses 18250 investment 45000
Net profit 18250 sales 1095000
18250 ÷ Sales ÷ 109500 ÷

Net profit ÷ sales 109500 investment 45000
= 1.66 percent X = 24.33 percent
= ROI 40.6 percent
This chart gives us a lot of insights into how the return on investment can
be improved.
You will observe that there are 5 important players in this entire exercise.
And these players exert their influence on the overall situation in their own
individual ways.
! !27
First and foremost if sales realization increases other things remaining

constant particularly Cost of Sales and other expenses the ROI will improve
because the margins will improve.
Second if the Cost of Sales can be reduced, Sales realization remaining
constant, then also the margin can improve leading to better ROI.
Third if the selling, distributing, marketing and administrative expenses

can be reduced, Sales and Cost of sales remaining constant the net margin
will improve resulting in better ROI.
In this case actually 4 items of expenses are playing a vital role, namely
• selling expenses,
• marketing expenses,
• distribution expenses,
• administration expenses.
Again in terms of the working capital and fixed capital, if either of them or
both of them can be reduced, Sales remaining constant, the turnaround of
investment will increase, leading to a better ROI.
3.2 SUMMARY
Margin is denoted as a percentage of sales whereas markup is denoted as

a percentage of cost.
ROI is the profit generated by the money a business owner puts into the
business.
To improve ROI:
1. Increasing sales realization, other things remaining constant,

particularly Cost of Sales and other expenses the ROI will improve
because the margins will improve.
2. If the Cost of Sales can be reduced, Sales realization remaining

constant, then also the margin can improve leading to better ROI.
! !28
3. If the selling, distributing, marketing and administrative expenses can

be reduced, Sales and Cost of sales remaining constant the net margin
will improve resulting in better ROI.
1. Describe a Dupont Control Chart.
2. ROI is simply the net profit divided by the investment, yet, why is it
important to look at the constituent elements carefully?
3. How does ROI improve if the selling & distribution expenses are
controlled?
4. A business that is carried out on the basis of sales on credit, may not
have an ROI better than one that carries on business on the basis of
sales against cash – do you agree?
! !29
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !30
TERRITORY AND PRODUCT LEVEL PROFITABILITY
Chapter 4
TERRITORY AND PRODUCT LEVEL
PROFITABILITY
Learning Objectives
After going through this chapter you should be able to:
• Evaluate performance of sales revenue, expenses and working capital

controls at territory levels as well as at product levels.
• Understand the different types of costs and how are they controlled and
allocated. Also know, methods to evaluate productivity
Structure:
4.1 Costs
4.2 Summary
In this chapter we shall look at evaluating performance at territory levels,

and also at product levels.
Marketing initiatives translate into sales revenues being generated at sales

unit levels. These levels can be as elementary as at sales men territory
levels, or can be stage wise aggregated:
• to sales supervisory levels,

• to area sales manager levels,
• to branch manager levels & ultimately,
• to zonal and/or national level.
Whenever activities are evaluated the normal frame work would be to first
break down activities to the basic tactical level.
! !31
Tactical level Functions and Analyzes performance at project or

individuals activity level as they relate to the
first two
An ideal dashboard should show the progress of marketing, help assess
productive areas, and help in the decision making. In addition, dashboards
provide an indication on the value of marketing and also help to align
marketing with the business
Thus you will observe that at an operational level, the marketing team has
to ensure that the product which the organisation has developed for
meeting consumer requirements, get marketed, sold and distributed
effectively. When we use the word 'effectively' it means that not only
should the consumer get their requirement to their satisfaction but at the
same time the organisation also earns its profits. Profits for an organisation
primarily come out from the differential between the selling price, which
can be quite different from the consumer’s purchase price because channel
commission and government taxation can erode a substantial part of this
surplus.
However even from the realization which the company gets when it sells its
product if we deduct the cost of manufacturing, which we term the gross
profit, the source has further to account for selling, distribution, marketing
and administrative expenses.
We are now going to set up evaluation parameters for the effectiveness of

the sales and marketing efforts.
These we shall be doing based on the lessons learnt from the previous
chapter.
We shall do this by way of a case.
Darham Pharmaceuticals are a medicine company who achieved an All

India sales of Rs. 174 Cr per annum, in a particular year, which we are
going to review.
The following average monthly sales figures have been obtained zone wise:
! !32
Table no: 4.1

Products N Zone E Zone W Zone S Zone
Qty Value Qty Value Qty Value Qty Value

units Rs. lacs units Rs. units Rs. lacs units Rs.
lacs lacs
Darcold 2 lacs 10 lacs 1.5 lacs 7.5 lacs 2.5 lacs 12.5 lacs 1.75 8.75
tab lacs lacs
Syrup 1 lacs 15 lacs 1 lacs 15 lacs 2 lacs 30 lacs 1.5 lacs 22.5
lacs
Darcold 4 lacs 80 lacs 5 lacs 100 lacs 6 lacs 120 lacs 3 lacs 60 lacs
tab
Syrup 5 lacs 125 lacs 6 lacs 150 lacs 7 lacs 175 lacs 4 lacs 100
lacs
Darclox 1.25 37.5 lacs 1.5 lacs 45 lacs 2 lacs 60 lacs 1 lacs 30 lacs
250 mg lacs
500 mg 1 lacs 55 lacs 2 lacs 110 lacs 1 lacs 55 lacs 0.5 lacs 27.5
lacs
Total 322.5 427.5 452.5 248.7

lacs lacs lacs lacs
From the above you will observe that the organization operates through 4
zones, and have 3 product groups viz.
Darcold, which is an anti cold and cough preparation, in the OTC (over the
counter) category,
Darmet, which is an anti diarrheal formulation, and Darclox, which is an

antibiotic.
In each product group there are 2 items, making a total of 6 product items.
In case of pharmaceutical products OTC items can be promoted through

advertising and other types of mass media.
For non OTC, ethical products, the promotion has principally to be done
through medical detailing by Medical Service Representatives.
In respect of the above company we have the following additional data.

The rate of gross margins per product items are:
! !33
Dar Cold tab 45 percent, syrup 50 percent,
Dar Met tab 35 percent, syrup 42 percent,

Dar Clox 250 mg 22 percent, 500 mg 23 percent.
The individual sales values given above are at net realization levels.
The Sales and Marketing team comprises:

a Vice President Marketing and Sales whose cost to Company (CTC) is Rs.
45 lacs per annum.
a General Manager Marketing whose cost to Company is Rs. 36 lacs per
annum.
a General Manager Sales whose cost to Company is Rs. 32 lacs per annum.
Each Zone is headed by a Regional Sales Manager (RSM), whose cost to

Company are Rs. 20 lacs per annum each.
The General Manager Marketing has a Product Manager reporting to him

whose CTC is Rs. 18 lacs per annum, and a Manager Market Research
whose CTC is Rs. 16 lacs per annum.
North Zone has 2 Branch Managers, each assisted by 4 sales supervisors,

who in turn have 5 sales men each.
East Zone comprises 2 Branches each headed by a Branch Manager. While

one Branch has 4 sales supervisors, the other manages with 3 sales
supervisors. Each sales supervisor has 4 sales men reporting to each of
them.
West Zone has 3 Branch Managers. Two of the Branches have 4 sales
supervisors each while the third has 3 sales supervisors. In this Zone the
salesmen to sales supervisor ratio is 5 to 1.
South Zone manages with 2 Branch managers, each assisted by 5 sales

supervisors. While one Branch manager has 4 sales men the other has 5
sales men reporting to the sales supervisors reporting to him.
Each Branch Manager’s CTC is Rs. 10 lacs average per annum.
Sales supervisors’ CTC is average Rs. 7.5 lacs per annum.
Sales men have a CTC of average Rs. 5 lacs per annum.
! !34
Sales men are paid commission @ 3percent on an average on OTC items

and @ 2percent on an average on the ethical products.
Traveling expenses: Vice President Rs. 20 lacs per annum,
GM Sales Rs. 30 lacs per annum, GM Marketing Rs. 16 lacs per annum,
Product Manager Rs. 12 lacs per annum, Manager MR Rs. 8 lacs per
annum.
The field traveling expenses of RSMs and BMs are reflected in the Zonal
Expenses under the head 'travelling'.
The Sales Supervisors’ average travelling expenses have been Rs. 4 lacs
per Sales Supervisor per annum in N Zone, Rs. 3.75 lacs per annum in E
Zone, Rs. 4.5 lacs per annum in W Zone and Rs. 3.5 lacs per annum in S
Zone.
As regards sales men the per Journey Cycle (JC) travelling expenses as
reflected in their Permanent Journey Plans (PJP and JC has been described
in details under the sales men evaluation methods in succeeding chapter)
are Rs. 20 K in the NZ. Rs. 18 K in the EZ, Rs. 22 K in the WZ, and Rs. 16
K in the SZ, per sales man per JC.
OTC advertising were Rs. 2.5 Crore, medical sampling Rs. 3 Crore, medical
literature Rs. 1.2 Crore, and Gift items Rs. 1 Crore during the year under
review.
The Zonal expenses were as under in Rs. lacs (for the year)
Table no: 4.2

N Zone E Zone W Zone S Zone A I
Office administration 50 42 64 38
Traveling 39 40 43 39
Communication 26 27 28 14
Sales promotion 10 7 15 6
Distribution:
C and FA 65 56 72 35
! !35
Secondary freight 35 48 53 29
Corporate allocated 600
The average stock levels are NZ, 75 days, EZ, 80 days, WZ, 90 days, SZ,
55 days.
NZ extends 17 days’ credit, EZ 18 days’ credit, WZ 26 days’ credit, and SZ

16 days’ credit in the market.
We shall now evaluate territory wise and Brand wise Marketing/Sales

performance.
When we start such an evaluation, our process must factor in

performances at both activity as well as cost levels.
4.1 COSTS
Before starting out on our evaluation exercise, we shall first look at 'costs'.
We are all familiar with Fixed costs and Variable costs.
Fixed costs are those costs that tend to remain fixed over periods of time
irrespective of volumes involved.
Whereas variable costs are those costs which vary consistently with
volumes produced.
At times we come across costs which change not in direct proportion to
volumes produced, but vary all the same at some rate, with increases in
volume produced.
To illustrate the case let us take an example of a T shirt manufacturer:

Supposing every T shirt manufactured requires cloth costing Rs. 25.00
… (a)
It also requires thread etc Rs. 6.00 … (b)
The ladies who stitch the T shirts are paid per T shirt Rs. 12.00 … (c)
! !36
The T shirts are stitched in a factory whose rental are per month Rs.
15000.00 … (d)
The factory has a manager who is paid fixed salary per month Rs. 8000.00
… (e)
The factory utilises electricity which is based on the actual time the factory
operates, depending on the number of T shirts being manufactured. So in
case large orders are received, the factory may run late in the evenings
requiring more electricity consumption. … (f)
• You will observe that while costs as per (a) (b) and (c) are variable in
nature, viz.,
• if 1 T shirt is manufactured the cost will be Rs. 43.00,
• if 2 T shirts are manufactured the costs will be Rs. 86.00 (Rs. 43.00 X 2)
• if 3 T shirts are manufactured the costs will be Rs. 129.00 (Rs. 43.00 X
3)
and so on the costs as per (d) and (e) are fixed in nature,
viz., they will not change whether 1 piece, 3 pieces, or
100 pieces are manufactured.
But the cost as per (f) can not be so easily categorized as 'variable' or
'fixed', because while for certain quantity of production the electricity
consumption may remain same, for increased production, requiring more
time for the factory to remain open, the lights and fans may have to be
operated for longer duration. But the increased consumption will not be
proportional to the increase in production, in any case not at the same
rate. This would be a typical instance of semi variable cost.
In sum we can end by saying, Fixed Cost are those that normally do not
change over a period of time and certain level of activities. Variable Cost on
the other hand changes with the volume. However one must always keep
in mind, that like anything else in life, Fixed cost will not be the same for
perpetuity i.e., beyond a certain time period and volume, Fixed cost can
also change.
! !37
You will also note that when it comes to per unit application of Fixed Cost
you will find that the Rate per unit varies with volume. Whereas in the case
of Variable cost the per unit rate remains constant.
Apart from these common categorization of costs we can also look at costs
from the angle of whether the same are controllable or uncontrollable in
the hands of the center head.
Controllable costs are those which are controllable in the hands of the
cost centre head. Example can be secondary freight on cargo transported
from the depot to the distributors where the rate fixation as well as the
utilization of the vehicle capacity is in the hands of the centre head.
But let us take a situation where the rate is fixed by the head office as well
as the load fixation is done by some other location. In such a case the cost
is uncontrollable in the hands of the location head.
But if it so happens that, while the rate fixation is not done by the cost
centre head, the load fixation is very much in his hands then the cost is
manageable in his hands.
Hence if we say managed costs we are simply trying to see how well has
the center head been successful to manage his costs.
While on the topic of costs, we shall have a look at a few other instances of
costs.
Opportunity costs open up appropriate yard sticks to choose between 2

alternatives example opportunity cost of buying a Colour TV is the interest
or return on the money invested in purchasing the TV , and against that
the purchaser may evaluate the worth of entertainment offered by the CTV
at his house, vis a vis the satisfaction he may have derived by spending
the money in some other form of entertainment, or simply through earning
interest on the money if invested in some bank deposit.
Another example can be the opportunity cost of working for self i.e., the
earning by self employment vis a vis working for another as an employee.
All opportunity costs need not always be monetary example a man lost on
an island – whether he spends his time in climbing a tree for coconuts or
! !38
he spends time in fishing, can be examples of comparative evaluation of

opportunities.
Incremental costs are the extra cost that is incurred in the extra activity/
task/input.
It differs from marginal cost in as much as marginal cost is the incremental

cost incurred in producing one extra unit and hence unless expansion of
capacity related extra costs are necessary, marginal cost in the short run is
the variable cost of manufacturing/procurement.
When we look at these costs, then we have to observe their behavior, as

well as their nature, as mentioned above.
Solution:
Now let us see how to deal with the case

Table no: 4.3
Profitability analysis inclusive of all expenses Rs. in lacs
Darham Pharmaceuticals
North Zone East Zone West Zone South Zone All India
Products Sale GM Sales GM Sales GM Sales GM Sales GM

s
Dar cold 120 54 90 40.5 150 67.5 105 47.25 465 209.25
tab
Dar cold 180 90 180 90 360 180 270 135 990 495
syrup
Dar met 960 336 1200 420 1440 504 720 252 4320 1512
tab
Dar met 1500 630 1800 756 2100 882 1200 504 6600 2772
syrup
Dar clox 450 99 540 118.8 720 158.4 360 79.2 2070 455.4
250
Dar clox 660 151.8 1320 303.6 660 151.8 330 75.9 2970 683.1
500
3870 1360.8 5130 1728.9 5430 1943.7 2985 1093.35 17415 6126.75
! !39
Gm as 0.35 0.34 0.36 0.37 0.35

apercent
ge of
sales
Ranking 3rd 4th 2nd 1st
Gross 1360.8 1728.9 1943.7 1093.35 6126.75

margins
Salary
VP (M/ 5 6.6 7 3.9 22.5

S) 50
percent
GM (S) 7.1 9.4 10 5.5 32
RSM 20 20 20 20 80
BMs 20 20 30 20 90
Sales 60 8 nos 52.5 7 nos 82.5 11 nos 75 10 nos 270 36 nos

Supervis
or
Salesme 200 40 140 28 nos 275 55 nos 225 45 nos 840 168 nos
n nos
0.08 312.1 0.048 248.6 0.078 424.5 0.117 349.3 0.077 1334.5
Travellin
g
VP (M/ 2.2 3 3.1 1.7 10

S) 50
percent
GM (S) 6.7 8.8 9.4 5.1 30
RSM/BM 39 40 43 39 161
Sales 32 8 nos 26.25 7 nos 49.5 11 nos 35 10 nos 142.75 36 nos

Supervis
or
Salesme 104 40 65.52 28 nos 157.3 55 nos 93.6 45 nos 420.42 168 nos
n nos
0.05 183.9 0.03 143.6 0.05 262.3 0.06 174.5 0.04 764.2
Commis
sion
On OTC 9 8.1 15.3 11.25 43.65

@3
percent
! !40
On Eth 71.4 97.2 98.4 52.2 319.2

@2
percent
0.021 80.4 0.021 105.3 0.021 113.7 0.021 63.45 0.021 362.85
Off 0.01 50 0.01 42 0.01 64 0.01 38 0.01 194

Admin
Commu 0.01 26 0.01 27 0.01 28 0.00 14 0.01 95

ni-
cation
Sales 0.00 10 0.00 7 0.00 15 0.00 6 0.00 38

Promotio
n
C and FA 0.02 65 0.01 56 0.01 72 0.01 35 0.01 228
Sec frt 0.01 35 0.01 48 0.01 53 0.01 29 0.01 165
Corp 0.03 133.3 0.03 176.7 0.03 187.1 0.03 102.8 0.03 600
allctd
Total S 895.7 854.2 1219.5 812.1 3781.5

and D
expns
Net 0.12 465.1 0.17 847.7 0.13 724.2 0.09 281.3 0.13 2345.2
mergins
Ranking 3rd 1st 2nd 4th
Earlier 3rd 4th 2nd 1st

Ranking
Stock 75 516 80 745 90 860 55 285 78 2406

days days days days days
Receivab 17 180 18 253 26 387 16 131 20 951

les days days days days days
Investm 696 998 1246 416 3357

ents
ROI 0.67 0.88 0.58 0.68 0.70
Ranking 3rd 1st 4th 2nd
Sales 3870 5130 5430 2985 17415
! !41
No. of 51 38 70 58 217
sales
force
Sales 75.88 135.00 77.57 51.47 80.25

force
producti
vity
C and FA 65 56 72 35 228
Stock 516 745 860 285 2406
CFA as 0.13 0.08 0.08 0.12 0.09

percent
of stock
In the above table we have plotted the total sales, total gross margins, and
thereafter the several expenses, to arrive at the net margin figures zone
wise.
On the basis of what has been mentioned earlier regarding the behavior
pattern of costs, you will observe that there are several heads of costs
which have been allocated to the zones. When I say allocated it means that
the costs were not incurred by the centers on their own, but were incurred
else where, and apportioned to the centers. For instance a General
Manager Sales who is operating from a Head Office level, visits branches
and incurs expenses on his traveling. Is this amount controllable by the
branch or zone incharge? You will observe it is not so. Where as, for a
salesman attached to the branch, expenses incurred in his traveling, you
will observe are controllable.
Thus in the solution, you will find expenses, which are controllable by the
unit heads and those which are not controllable by the unit head.
Very broadly the expenses that are controllable would be:
RSM, BM, Sales Supervisors’, sales men’s traveling, commission,

communication, sales promotion, C&FA (carrying and forwarding agent)
expenses, and secondary freight (freight or transportation expenses
incurred in delivering goods to distributors).
Even where the expenses are controllable or uncontrollable, one can also
have a look as to how the unit head is deriving mileage from the expenses
being incurred. This we will call as Cost Management.
! !42
For Example- In the solution above you will find that on an expense of Rs.
200 lacs incurred by North zone, the total sales obtained is Rs. 38 crores.
Whereas East zone has able to get much higher return on sales man salary
cost as compared to North zone. Across all the cost you will observe that
such evaluation of center heads can be carried out.
Certain expenses such as -
• Vice - president’s Salary and Traveling.

• General Manager’s Salary and Traveling.
• Corporate allocated expenses.
have to be apportioned to the different centers on some basis. These basis

can be
1. In proportion to sales.
2. In proportion to the Gross Margin.
3. Equally to all the centers.
4. In proportion to the number of staff.
5. In proportion to the no. of branches/establishments in each zone.
We shall show the allocations on each of the above basis.
For that we shall first calculate each zone’s sales as a percent of the total
All India sales, to decide the proportion of apportionment.
Next we shall calculate each zones gross margins as a percent of the All
India gross margins, again to decide the proportion of apportionment.
Table no: 4.4

Sales 3870 5130 5430 2985 17415
Sales as a
percentge of
total Al sales 22 30 31 17 100
Gross 1943.7
Margin 1360.8 1728.9 1093.35 6126.75

Gross margin
as a percentge
to Al gross
margin 22 28 32 18 100
! !43
So we find that in respect of sales, north zone contributes 22 percent of

total All India sales. This has been calculated by dividing north zone sales
Rs. 3870 lacs by All India sales Rs. 17415 lacs, which is 22 percent.
Similarly the percentge of the other zones have also been calculated using
the same procedure, which shows that east zone contributes 30 percent,
west zone contributes 31 percent, and south zone contributes 17 percent
of the All India sales.
In case of the gross margins too a similar set of calculations show north
zone contributing 22 percent of the All India gross margins, and east zone
28 percent, west zone 32 percent, and south zone 18 percent of the All
India gross margins.
Below we shall do an exercise to apportion the general manager sales’

salary to the four zones, on the basis of:
1. Equally to all zones

2. On the basis of sales
3. On the basis of gross margins
4. On the basis of number of staff in each zone
5. On the basis of number of establishments in each zone
Zonal sales and gross margins are known. When it comes to number of
staff and number of establishments, we can find out the same from the
case:
Table no: 4.5
North Total East Total West Total South Total All Total
Zone Zone Zone Zone India
RSM 1 1 1 1 4
BM 2 2 3 2 9
Sales 8 7 11 10 36
superv
isor
Sales 40 51 28 38 55 70 45 58 168 217

men
Number of Staff 23 18 32 27 100

as percentge of
total
! !44
Numbe 1 zone 3 1 3 1 zone 4 1 zone 3 4 zone 13

r of offices zone
2 3 2 9
branch 2 branch branch branch
branc
h
Number of offices 23 23 31 23 100

as percentge of
total
Let us see the pros and cons of such allocations
Table no: 4.6

Sales 3870 5130 5430 2985 17415
Gross margin 1360.8 1728.9 1943.7 1093.35 6126.75
Gross margin 35.2 33.7 35.8 36.6 35.2

as a
percentge of
sales
We shall now be apportioning 50percent of the VP’s salary Rs. 22.5

lacs + GM Sales salary Rs. 32 lacs + 50percent of VP’s travel Rs. 10
lacs and GM Sales traveling Rs. 30 lacs i.e., total Rs. 94.5 lacs to
the 4 zones on different basis
1. equally 23.625 23.625 23.625 23.625 23.625
Net margin 1337.17 1705.28 1920.08 1069.73 6032.25

i.e. GM less
"1"Net
margin based
on "1" as a
percentge of
sales 34.6 33.2 35.4 35.8 34.6
! !45
2. on the 21 27.8 29.46 16.2 94.5

basis of
sales
Net margin
based on “2" 1339.8 1701.0 1914.2 1077.1 6032.2
i.e. GM less 6 4 5 5
“2" Net
margin based
on "2" as a
percentge of
sales 34.6 33.2 35.3 36 34.6
3. on the 21 26.7 30 16.9 94.5

basis of
gross
margins
Net margin
based on “3" 1339.8 1702.2 1913.7 6032.2
i.e. GM less 1076.5 5
“3" Net
margin based
on "3" as a
percentge of
sales 34.6 33.18 35.2 36 34.6
4. on the
basis of (51) (38) (70) (58) (217)
number of 22.2 16.55 30.48 25.26 94.5
staff
Net margin
based on “4"
i.e. GM less
“4" Net
1338.6 17.12.4 1913.2 1068.1 6032.25
margin based
on "4" as a
percentge of
sales 34.6 33.4 35.2 35.8 34.6
! !46
5. On the (3) (3) (4) (3) (13)

basis of 21.81 21.81 29.08 21.81 94.5
number of
establishm
ents Net
margin
based on
“5" ie. GM
less “5" 1339 1707 1914.6 1071.5 6032.2
5
Net margin
based on “5"
as a
percentge of
sales 34.6 33.3 35.3 35.9 34.6
You would have observed that the different basis of allocation has resulted
in the net margins at the four zones undergoing changes. The amount
apportioned not being high, the changes may seem insignificant, but
please note they are changes all the same.
Of these several methods of apportionment, the one based in proportion to

sales is the most appropriate, and equitable.
Since the gross margins are calculated as a percent ge of sales, which

means that the gross margins are the numerator, sales being the
denominator, any reduction in the gross margins by apportionment of
expenses, if done in proportion to the respective sales, will retain the initial
parity between the zones.
Table no: 4.7
Zones Gm as Nm as Nm as Nm as Nm as Nm as
Percentage percentage percentage percentage percentage percentage
of sales of sales of sales of sales of sales of sales
on on on on on
method 1 method 2 method 3 method 4 method 5
North 35.2 (3rd) 34.6(3rd) 34.6(3rd) 34.6(3rd) 34.6(3rd) 34.6(3rd)
East 33.7 (4th) 33.2 (4th) 33.2 (4th) 33.18(4th) 33.4(4th) 33.4(4th)
West 35.8 (2nd) 35.4 (2nd) 35.3(2nd) 35.2 (2nd) 35.2(2nd) 35.3(2nd)
South 36.6 (1st) 35.8 (1st) 36 (1st) 36 (1st) 35.8 (1st) 35.9 (1st)
In the table below we can see their comparative parity:
! !47
Table no: 4.8

Zones Gm as Nm as Nm as Nm as Nm as Nm as
percentage percentage percentage percentage percentage percentage
of sales of sales of sales of sales of sales of sales
on on on on on
method 1 method 2 method 3 method 4 method 5
North 35.2 34.6 34.6 34.6 34.6 34.6
East 33.7 33.2 33.2 33.18 33.4 33.3
West 35.8 35.4 35.3 35.2 35.2 35.3
South 36.6 35.8 36 36 35.8 35.9
South/ 1.02234637 1.0112994 1.01983 1.022727 1.017045 1.016997

west
South/ 1.03977273 1.0346821 1.040462 1.040462 1.034682 1.037572

north
South/ 1.08605341 1.0783133 1.084337 1.084991 1.071856 1.078078

east
The initial parity between the south zone which is 1st ranking with the 2nd,
the 3rd, and the 4th is given in the column A. When we see the parity in
the subsequent columns, we can see that in column 2 (where the net
margin has been calculated post apportionment of expenses on the
proportion of sales), the parity is the closest to the relation in column A.
This is the reason why in most of the cases the non center expenses are
apportioned on the basis of sales.
In the solution to the case provided above, you may have noticed that
while the gross margin rates for the products are uniform across the
country, some zones have scored better gross margin rates than others.
This is due to the zones achieving different product mix. Thus selling
more of products having a higher gross margin rate can improve the
overall profitability.
We shall illustrate this phenomenon by an example.
In the table below we are depicting the target set and the actuals achieved
by a sales person:
! !48
Table no: 4.9

Product Target Gross Actuals Achieved Gross
margin margin
Sales Gross Sales Gross
margin Percentage margin Percentage
Rs. Rs. Rs. Rs.
A 2000 300 15percent 3000 450 15 percent
B 3000 1200 40percent 2000 800 40 percent
C 1000 100 10percent 4000 400 10 percent
D 4000 2000 50percent 2000 1000 50 percent
total 10,000 3600 36 percent 11,000 2650 24 percent
The sales person involved has achieved Rs. 11000 sales against a target of
Rs. 1000 i.e., 10 percent above target achievement. But in gross margins
where his target was Rs. 3600 he has been able to garner only Rs. 2650 in
absolute amount, which translates to only 24 percent of sales. This is
because he has sold more of products A and C which have lesser gross
margins, and less of products B and D which have higher gross margins.
Thus the sales team should not only sell more, but also concentrate on
selling more of products that have a higher gross margin.
In the solution to the case above, you would have seen that after
apportionment of all the expenses to the different territories, (in this case
the 4 zones) we can easily evaluate how each territory has performed.
While the general method would be to find out and compare the net
margins as a percentage of sales (higher the better), and in which context,
we described earlier, why apportionment on the basis of respective sales is
the most equitable method, we can also evaluate how each center head
has been able to manage the expenses.
For this typical yard sticks would be:
productivity of sales personnel, i.e., Sales per head, gross margins

earned per head
! !49
travelling expenses as an overall percentage of sales,
value of stocks held per “000 expenses on warehouses,
secondary freight incurred in sending goods to
distributors, etc.
From the Dupont control chart, we have also observed that the profit
center’s performance must factor in investments made in the center.
In case of typical marketing/sales setups, investment is normally in the

following areas:
1. Inventory/stocks of finished goods

2. Idle cash/Bank balance lying in collection accounts
3. Market outstanding
4. Amount paid against future expenses
5. Advances given to the suppliers
The above constitute assets.
Vis-a-vis the above assets, the organization may have received:

1. Products and services for which payments have not been made
2. Advances from customers
3. Security deposits from Business associates
The above constitute liabilities.
In the Darham case after the net profits have been calculated, we have to
find out the involvement in working capital.
The case states, the number of days’ stock holding at each zone. Similarly
the case also details the number of days’ receivables at each zone.
! !50
Table no: 4.10

Sales GM Sales GM Sales GM Sales GM Sales GM
3870 1360.8 5130 1728.9 5430 1943.7 2985 1093.35 17415 6126.75
cost of sale 2509.2 3401.1 3486.3 1891.65 11288.25

goods less
sold gross
margin
total s 895.7 854.2 1219.5 812.1 3781.5

and d
expns
net gm 465.1 874.7 724.2 281.3 2345.2

margi less s
ns and d
expns
Stock 75 516 80 745 90 860 55 285 78 2406

days days days days days
Receiv 17 180 18 253 26 387 16 131 20 951

ables days days days days days
Invest 696 998 1246 416 3357

ments
ROI net 0.67 0.88 0.58 0.68 0.70

margin
÷
invest
ments
For finding out All India stocks Rs. 2406 lacs, represent how many days’
equivalent of stocks, divide the All India stocks of Rs. 2406 lacs by Rs.
11288.25 (which is All India cost of goods sold, by 365 to get one day’s
cost of goods sold, Rs. 30.9 lacs) to get 78 days.
Similarly the total All India receivables of Rs. 951 lacs can be found out to
represent 20 days’ receivables. (951 ÷ 17415 X 365)
Thus we can see that the zones have performed as under:
1. In terms of gross margin earnings as a percent of sales, South leads

with West coming second, followed by North & East as the last.
! !51
2. In terms of net margin earnings as a percent of sales, the rankings

change. Here East is number one followed by West, North coming third
and South slipping to the last position.  
 
What does that mean? It means that, while South zone was very good
in managing the product mix, it slipped when it came to managing
expenses. It’s management of productivity could have been better.
While South may have managed it’s product mix well, there is also a
possibility that the market for the products could have been favourable
for such high gross margin earning products.
3. When we finally look at the ROI, a different picture emerges. Here we

find that East zone has given the best ROI at 88 percent, followed by
South zone with 68 percent, followed very closely by North zone with 67
percent, and West zone doing very badly with only 58 percent ROI. 
 
This only emphasizes that territory wise performance has to be
evaluated on several parameters, to really find out which territory is
doing well. 
 
We’ll close this chapter with a look at how one should evaluate a
product group.
This case lists three product groups:
Darcold.
Darmet and
Darclox
Let us evaluate one of them viz. Darcold, and the same method can be
replicated for evaluating the other product groups.
! !52
Table no: 4.11

all figures in Rs. lacs
Darcold Sales Gross Marketing expenses
margins which were not
apportioned to the
zones
tablet 465 209.25 VP salary 22.5
50percent
syrup 990 495 GM Mktg salary 36
total 1455 704.25 prdct mgr salary 18
less prorata of salary/ 11.57 (138.5 Mgr MR salary 16

travel Rs.138.5 lacs ÷ 17415 X
1455)
advertising full 250 VP travelling 50percent 10

amount because
Darcold is the only
OTC product
Sales and 315.94 GM Mktg traveling 16

distribution (3781.5 ÷
expenses prorata 17415 X 1455)
net 126.74 product Mgr traveling 12

margin
working stocks 78 days of 160 Mgr MR traveling 8

capital COGS (1455 –
704.25)
receivables 20 80 total 138.5

days' of sales
(1455)
total 240
ROI 52.8 percent
The above explains how evaluation of marketing efforts both at a territory

level, as well as a product level is carried out.
! !53
4.2 SUMMARY
• Controllable costs are those which are controllable in the hands of the
cost centre head.
• Opportunity costs open up appropriate yard sticks to choose between 2

alternatives. Opportunity cost of working for self ie. the earning by self
employment vis a vis working for another as an employee.
• Incremental costs are the extra cost that is incurred in the extra
activity/task/input.
1. What are OTC items?
2. What are controllable costs?
3. What are managed costs?
4. What are the different ways of apportioning Head Office costs to

branches? Which method is the most equitable, and why?
! !54
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2 
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PRICING
Chapter 5
PRICING
Learning Objectives
After going through this chapter you should be able to:
• Understand the role of pricing as an element of the marketing mix.

• Look at pricing from the perspective of the seller as well as the buyer.
• Different methods of pricing ranging from economic based theories to
marketing based to cost based models.
• Familiarize students with sample pricing situations.
Structure:
5.1 Introduction
5.2 Role and Perception of Price
5.3 External Influences on Pricing Decisions
5.4 Internal Influences on Pricing Decisions
5.5 Pricing Strategies
5.6 Summary
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PRICING
5.1 INTRODUCTION
Price not only directly generates revenues that allow organizations to

create and retain customers at profit but can also be used as a
communicator/as a bargaining tool/and also as a competitive weapon.
Pricing can also have emotive dimensions example 'high price' 'low price' it
is thus important to understand the meaning of price from the customer’s
point of view and to price products in accordance with the 'value' that the
customer places on the benefits offered.
5.2 ROLE AND PERCEPTION OF PRICE
Price is the value that is placed on something. It can mean different things
to different people, A buyer or a seller may view price differently:
Customer’s Perspective
From the buyer’s perspective price represents the value they attach to
whatever is being exchanged. In assessing the price the customer is
looking specifically at the expected benefits of the product:
A. Functional relate to the design of the product and its ability to fulfill it’s
desired function, Example, a washing machine can handle washing and
drying of different types of clothes conveniently.
B. Quality customer may expect price to reflect the quality level e.g. may
pay more for leather upholstery in car or hand crafted china ware or
sometimes for a premium corporate image eg. Mercedes BMW.
C. Operational in B2B markets price may be judged in relation to the

product’s ability to influence the production process example, a new
machine improving the productivity may attract a higher price.
D. Financial particularly in B2B markets purchases are seen as

investments & hence the expected returns on the investments can
influence the perception whether the price is justified or not. Questions
like, in how many years will the investment in the machine pay back are
likely to affect the perception of price.
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PRICING
E. Personal benefits are a little difficult to gauge particularly as they

measure price against intangibles/individual/psychological benefits such
as status, comfort, self image.
Price perceptions can vary according to circumstances, example, a house

wife may compare price of water pipes needed for replacement in normal
times, but in case of a plumbing burst emergency, the same house wife
may pay a premium price for the same product
Seller’s Perspective:
For the seller price generates revenue
Profit = total revenue – total cost
Total revenue is volume X price per unit. seller must however take care to
evaluate price from the customer’s point of view.
While in pure economic terms one may assume that a reduction in price
would lead to higher sales, it is also possible that a reduced price may have
a negative connotation regarding quality, hence a sudden reduction in the
price of an existing product may have a negative impact on sales. Similarly
if buyers equate a high price with better quality an increase in price may
actually attract more customers.
At times the cost to a customer can be more than the actual price example
for a DVD player it may be also the cost of CDs, or in the case of a camera,
the cost of the films may have to be added.
Pricing Contexts
Pricing is not just a cost driven exercise but a skill that requires knowledge
and understanding of both customers and external environments
Consumer Markets
There is always keen competition for consumer’s disposable income.
Consumers also have a lot of discretion over whether they spend or not.
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PRICING
At times consumers buy because they 'want to', rather than they 'need to'.
Normally in consumer markets, scope for price negotiation is not
substantial, except in certain cases, such as cars or appliances.
Price banding can also be useful in the consumer market, example,

consumers may decide on a price band of say Rs. 100 to Rs. 150 within
which to buy T shirts, hence the marketer knowing the most common
bands may price products accordingly.
There can be times, when customers may have price as the main
consideration while buying. These are instances when they are price
sensitive.
Retail and Wholesale Markets
Intermediaries take a more rational approach to pricing. They have to look

both at the manufacturers as well as the consumers.
Price discipline is expected by resellers as manufacturers should not be

seen to be selling cheaper than the intermediaries.
Intermediaries being aware about alternative price offerings can bargain

better and manufacturers make concessions to secure patronage of
powerful retail chains.
Service Markets
Since a service is more intangible, it is often difficult to assess quality

before purchasing. Price comparison is the nearest a potential buyer can
get, example of 2 restaurants offering same product and same
environment, the costlier one may predict better taste/larger serving/
better ingredients.
At times for high end services like special dentistry, or hair styling cum
dressing, where resources are limited, a high price structure can be used to
preclude demand.
Non Profit Markets
Non profit organizations differ from others in as much as, they see
themselves as existing and operating for the benefits of the public rather
than for the creation of profits.
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PRICING
Their objectives are to encourage people to use their services/products/

participate in their activities.
Pricing here plays a major role to demonstrate that the offerings are at
below market rates.
B2B Markets
In B2B markets there is always a marked difference between price and the
real cost.
Lowest price may not be the lowest, cost wise.
An organization’s sensitivity to price may vary according to the item being

purchased.
Organizations may use value engineering/value management, to eliminate

unnecessary costs.
5.3 EXTERNAL INFLUENCES ON PRICING DECISIONS
The main areas of external influences are:

• Customers and consumers/demand and price elasticity
• Competitors
• Channels of distribution
• Legal and regulatory requirements
(i)Customers and Consumers
No pricing decision can be taken without taking into consideration the

feelings and sensitivities of the end buyer.
Marketer sets price within an area bound by cost at the bottom and what
the market will tolerate, at the top. The bigger the area, more is the
discretion the marketer has in setting price.
Consumers’ upper threshold is linked closely with the perception of the

product, Example, a common, non brand – loyalty driven, product will have
relatively a lower threshold than a product enjoying a strong brand loyalty,
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PRICING
because a product’s strong desirability may to some extent blunt its price
sensitivity.
Demand and Price Elasticity
Consumers’ attitudes towards price and their responsiveness to it are

reflected in economic theories of demand
a. Demand Determinants
For most products it is logical to assume that when price goes up the
demand falls and conversely when price falls demand goes up, Classic
demand curve may relate either to a market or to a product, Example,
when the Indian Rupee gets weak against other currencies, Indians may
find foreign travels costly and refrain from traveling abroad.
The shape of the demand curve may be influenced by other factors such as
changing consumer tastes and needs.
At times ability to pay may exist, but willingness may not be there,
whereas at other times, willingness may exist, but ability may be lacking.
Availability and pricing of close substitutes may also have effect on

demand, Example, cheap CDs put an end to record players.
!
Fig. no.: 5.1
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In certain cases, where the product has deep psychological relationships

with the consumers (having a high status dimension), a reverse price
demand curve may be exhibited, i.e., as the price moves up the demand
moves up. However when the price crosses an upper threshold the demand
again starts dropping, Example, property prices, exclusive club
memberships, certain perfumes.
!
Fig. no.: 5.2
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PRICING
b. Price Elasticity of Demand
It is important for the marketer to understand the sensitivity of demand of

the product to price changes. The steepness of the curve reflects this
sensitivity.
Fig. no.: 5.3
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PRICING
Factors Influencing Price Sensitivity in General
Table no: 5.1

1 Unique value effect Better differentiated the product lower the price
sensitivity
2 Substitute awareness Greater number of substitutes more the price

effect sensitivity
3 Difficulty in comparing More difficult to make direct comparisons the

effect lower the price sensitivity
4 Total expenditure effect Smaller the proportion of total spend the

product represents lower the price sensitivity
5 End benefit effect Greater and more valued the end benefit of the
product lower the price sensitivity
6 Shared cost effect A buyer bearing only a part of the total cost will
be less price sensitive
7 Sunk investment effect Buyers who have already bought complementary

products or who are locked in to a system will be
more price sensitive to a new product
8 Price quality effect Higher the quality/prestige/image lower the

sensitivity price
9 Inventory effect Buyers who hold stocks of a product are likely to

be more price sensitive to the product than
those who just buy & consume
Factors Influencing Price Sensitivity in B2B Markets
Table no: 5.1

1 Total expenditure effect Smaller the proportion of total spend the
product represents lower the price sensitivity
2 Penalty for failure effect Greater the cost of failure if wrong choice made
lower the price sensitivity
3 Overall savings effect Greater the overall savings or improvement in

performance the product makes lower the price
sensitivity
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PRICING
4 Contribution to quality Higher the quality of the buyer’s own product

5 Degree of customization More customized/differentiated the product

6 End customer sensitivity More price sensitive the buyer’s customers more
price sensitive the buyer will tend to be
7 Buyer’s ability to absorb More profitable the buyer’s business less price
costs sensitive the buyer will be
8 Buyer’s ignorance Less the buyer is conscious about market

conditions less price sensitive the buyer tends to
be
9 Decision maker’s Lesser the decision maker is motivated to lower

motivation effect costs lower is the price sensitivity
(ii)Channels of Distribution
Organization’s approach to pricing must factor in needs and expectations of

channel partners in the distribution chain, example, their margins/
markups.
(iii)Competitors
Pricing can not be done in isolation without factoring what competitors are
doing.
a. Monopoly traditionally these are state owned enterprises providing

public services but where monoliths in pvt sectors exist Government
intervenes to ensure pricing are within justified means.
b. Oligopoly even in deregulated telecommunications sector, airlines,

typically a small number of powerful providers dominate the markets.
Pricing is a very sensitive issue in these markets as oligopolists
choose to price very closely with each other whereby accusations of
collusions may arise.
c. Monopolistic competition where there are competitors, but still large

organisations curve out a special niche be it in terms of quality/
uniqueness of offering and rule as virtual monopolists in that domain.
Examples can be mobile hand sets, PCs etc.
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PRICING
d. Perfect competition implies there are many sellers in the same

category with products that are indistinguishable from each other in
the eyes of the buyer hence little flexibility in price because no one
seller can lead the others example, vegetables/small way side
eateries.
5.4 INTERNAL INFLUENCES ON PRICING DECISIONS
Pricing is also influenced by internal factors. It needs to reflect both

corporate and marketing objectives consistent with the rest of the
marketing mix.
(i) Organizational Objectives
Linked with corporate strategy, marketing plans not only have to satisfy the
customers’ needs but also reflect aspirations of the organization.
Corporate strategy can be concerned with the organization’s relative

position in the market compared with competition.
Pricing can be used as a tool to take leadership:
Price leadership – by offering lowest price.
Example, many value stores offering products at very low price where they
create a leadership in terms of value for money.
Quality/premium position leadership – by offering high quality at a high

price.
Organizational objectives can change over time, as organizations and

markets evolve over time – for example at an entry level, where survival
itself may be a problem, they may price very low to establish themselves in
the market.
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PRICING
(ii)Marketing Objectives
Focused on specific target markets and position desired within them, an

organization may have several products in separate segments requiring
different pricing approaches
Maruti selling 800 as well as SX 4.
Different approaches may be taken at different stages of the Product Life

Cycle, also
(iii)COSTS
While pricing primarily relates to what the customers are willing to pay it
cannot be oblivious to costs. While as a strategy, one may sell not
recovering total costs, one cannot price at below variable costs.
We’ll see more of this a bit later.
5.5 PRICING STRATEGIES
Objectives
Understand managerial process that leads to price settings and influences

that affect its outcomes.
Appreciate the multiple and sometimes conflicting objectives impacting

pricing decisions define range of available pricing strategies and their
applications in different markets and competitive situations.
Understand available pricing methods and tactics and their most

appropriate use appreciate some of the special issues affecting pricing in
B2B markets.
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PRICING
Determining a price range overview
Fig. no.: 5.4
Since price is a delicate balance between serving customers needs/wants

and simultaneously serving the need of the Organization to recoup its costs
of manufacturing/marketing and to make profit, pricing objectives should
be closely linked with organizational and marketing objectives.
Some may be financially based, while others may be related to sales

volumes example, in a short run the finance department may be facing a
cash flow problem prompting the marketing department to liquidate
inventory at a lower price, or at another stage the marketing strategy may
want to kill the competitor for long term survival and may use low price as
a tool.
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PRICING
Conflicting Price Objectives
Fig. no.: 5.5
Financial Objectives
Can be short term as well as long term, example, generate enough cash to
take care of cash flow requirements, can be short term whereas need to
generate funds to invest in capacity expansion/research can be long term
Profit based objectives can be,
i) Return on investment: where pricing is used to ensure a specified

return on the investment made. In short term this may mean a
performance orientation, product put under pressure to generate clear
profits, or can at times be counter productive, because in pursuit of
short term profits long term strategy to build market strength can be
defeated.
ii) Profit maximization is idealistic but practically impossible to achieve

as it implies thorough knowledge of cost and demand functions. What is
normally done is a profit satisfaction based on targets negotiated
through business plans. Too much of profit based high pricing may
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PRICING
encourage competitors to enter and capture markets through lesser

price.
Cash flow – pressure to generate cash flow may be high when the product
has a relatively short life, Example, merchandising associated with a film –
Harry Porter/Lord of the Rings.
Sales and Marketing Objectives
Very important influencers of pricing decisions, as target market share,

relative positioning, target sales volumes can all be affected by pricing.
Market share and positioning an organization’s marketing objectives

may relate to maintaining or increasing market shares.
# Maintenance of market share in a highly competitive market may mean

that prices cannot be increased for the next trading period.
# They may have to be reduced to thwart competition who undercuts.
# Increasing market share may mean reducing price to attract switchers

from other brands.
# A high pricing may be adopted to establish a high quality position that

appeals to discerning customers.
Price Quality Matrix

Table no: 5.3
PRODUCT QUALITY
LOW MEDIUM HIGH
P LOW Economy position Value position Excellent value

strategy under
R
priced?
I MEDIUM Poor value position Medium value Value position

Overpriced? position under priced?
C HIGH Poor value strategy Poor value position Premium

over priced? unsupported price positioning
E
premium
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PRICING
Volume sales while it may be related to market share objectives it also

arises from operational focus on capacity.
A company may build stocks for production efficiency, during recession

some industries such as automotive may have stock piles, in service
sectors where perishability of the service such as hotel rooms or plane
seats can mean loss due to low occupancy, pricing to increase sales
volumes may become important.
Status quo – linked closely with maintaining market share the objective of
maintaining status quo implies the organization’s readiness to continue as
it is, going aggressive in gaining market share through price cuts can
precipitate price wars which can be costly hence using a price matching
response.
Survival Objectives – in difficult times like in case of recession for ship

building industries pricing may be used for survival i.e., sell at no profit or
even at slight losses not covering fixed expenses just to tide over the
difficult times, but it cannot be a long term tactic.
Pricing Policies and Strategies
• These guide and direct pricing decisions

• Provide a framework within which decisions can be made.
• How to respond to competitive price threats in a mass market.
New Product Pricing Strategy
It is important to get the launch price right as later it may be difficult to

correct.
A low entry price may give wrong signal of low quality and hence may offer
it as an introductory price off and later after acceptance bring it up.
The other aspect is how competition will react to the price, a high price
may invite more competitors to enter, a very high price may prompt
customers to reject the product because of price sensitivity.
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Me too product – a new brand in a crowded market will get other

established brands as a reference point to set price.
Innovative product – a completely new product may not have a

reference point like the very first domestic video cd.
Product Mix Pricing Strategy
A product which is part of a product range cannot be priced in isolation

from the rest of the products. Thus when Maruti has to take a pricing
decision for its 800 it has also to consider the prices of Alto, Zen, Wagon R
so if it has to make some price change it may do so by adding frills.
Managing Price Changes
Prices are never static particularly for long periods. Competition, costs,
governmental policies, changing customer habits, substitutes, all can force
price changes. Price changes will have some effect on sales volumes.
Initiating price cuts price cuts will have impact on profitability besides
the likely response from customers/competitors. A ready recknor may be
prepared to evaluate how much volume increase may be required to
compensate for reduction in prices to make up the loss of absolute profits.
Impact of price reduction on sales volumes price cuts may be prompted by
Table no: 5.4

If price If gross profit margin is (percentage)
cut by
(percent)
10 percent 15 percent 20 percent 25 percent 30 percent
Need an increase in unit sales of (percent)
1 percent 11.1 7.1 percent 5.3 percent 4.2 percent 3.4 percent
percent
2 percent 25 percent 15.4 11.1 8.7 percent 7.1 percent

percent percent
3 percent 42.9 15 percent 17.6 13.6 percent 11.1

percent percent percent
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PRICING
4 percent 66.7 36.4 25 percent 19 percent 15.4

5 percent 100 percent 50 percent 33.3 25 percent 20 percent

percent
6 percent 150 percent 66.7 42.9 31.6 percent 25 percent

percent percent
7 percent 233.3 87.5 53.8 38.9 percent 30.4
percent percent percent percent
8 percent 114.3 66.7 47.1 percent 36.4

9 percent 150 percent 81.8 56.3 percent 42.9

percent percent
(i) Capacity utilization: where excess production capacity is available

organization may be prompted to cut prices and sell more volumes to
utilize capacity.
(ii) Market dominance: if the organization enjoys a price and cost

leadership position and is not likely to fall foul of competition it can
take initiative to cut prices to squeeze out smaller players to get a
better stronger hold on the market – like what Big Bazaar today is
trying.
Besides basing pricing decisions on Economic considerations, emphasis has

also to be laid on Marketing and Cost issues. Marketing issues are external
in nature. This means, these issues are influenced by factors existing in the
environment outside the organization.
Whereas Cost issues are internal in nature, which means they are very
much dependant on the organizations internal issues.
We must however remember that no decision on pricing can be done on

the basis of any one factor: It has to have a bearing on all the 3 issues.
Viz- the Economic Scenario.

The Market Environment and.
The Cost Consideration.
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Market Based Pricing
We shall view here some of the marketing considerations that can influence
our pricing decisions:
1. Going Rate Pricing for ‘me-too’ Products

Where a company is introducing a new product, which is not a totally new
concept but rather is a copy of some other existing product, then it is an
instance of a 'me-too' product. Example can be ITC introducing, biscuits,
soaps or snack foods.
In such cases the new entrant has to decide on a pricing strategy keeping
in view 2 parameters viz comparative price and comparative quality.
Price
High Low
Quality High Premium Superb value
Low Non-Workable Cheap
From the above table you can see, there are 4 possible combinations, and
of these there are 2 options which are workable. (a). Premium price, which
means offering a comparatively high quality product at a comparatively
high price. It may work.
Similarly one can offer (b). a cheap price product, which means offering a
lower price product which may be of a slightly lower quality. However lower
quality cannot be at the cost of compromising on the basic utility of the
products viz. the function that it is supposed to perform.
Thus if a ‘me-too’ product is being launched in bathing soap category, the

new introduction must fulfill the basic function of a soap. Viz, it must clean
the skin, be acceptable on the skin and not create any rash or other
unpleasant sensation.
But where it can be lower in quality may be in terms of fragrance,

packaging, moisturising effect etc.
The other two options viz. 'Superb value' and 'non workable' cannot work.
Superb value cannot work because in the long run the marketer will
unnecessarily be giving costlier material at lower price, leading to losses.
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Better quality will come at an increasing cost, and hence a business model
of offering a costlier item at a lower price may not be sustainable in the
long run.
Similarly “non-workable” is a variant where the marketer is basically trying

to pass off a poorer quality product at a higher price, and consumers in the
short run itself will find that out and discard the item.
2. Geographic Pricing
In this method one tries to price a product, factoring in geographic
preferences. Thus if there is a preference for a particular product or
product variant at a particular location, it may make commercial sense, to
price the same slightly higher, in that particular location. It may also make
sense to price the product slightly less in areas of low preference, to build
more consumption. This may particularly work for women apparel and food
items.
3. Sealed bid Pricing

Big projects particularly in the Government sector may call for sealed
tenders. The procedure may require bidders to put up their quotations in
sealed bids, which are opened on a predetermined date for evaluation and
acceptance. In such cases the marketer has to evolve his price estimate on
the basis of marketing considerations particularly what way the likely bid
from other competitor may be anticipated.
4. Skimming the Cream, Pricing

Organizations which may come out with absolutely new products, based on
costly research or otherwise, and where they may not anticipate
competition response immediately, due to either the nature of the products
itself or the investments involved in making such products, may for some
time price the product very high and make as much high profit as possible
in the time window available to them. This however will work if the product
is of a nature that has high demand potential.
This works successfully in the case of research based new pharmaceutical

molecules or high technical products which have a great latent need in the
market..
The marketer however must be careful about this pricing, because this
method may cause a consumer backlash.
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5. Loss Leader Pricing

At times the marketer can strategically price a product/service at a
substantially lower price, with the objective of gaining market acceptance,
and subsequently when the buyer is used to that particular product, the
marketer can hike the price of accessories, parts, supplements at a
substantially high rate.
Examples of these can be in the area of large machines such as JCB,

Excavators, Cranes etc… where once an organization has purchased a
particular machine; they would have to depend upon the supplier for spare
parts and accessories. Printers are also an example of these as buyers of
the printers have to buy the ink cartridges from the same manufacturers.
Similar instances can also be seen in the case of system software where
subsequent upgrades or patches have to be bought from the original
manufacturers.
6. Bait Pricing
Just like fishing baits where the bait is attached to the fishing line to lure
the fish, in this type of pricing the marketer advertises a lower price as an
offer to attract the customer into the shop, where products at regular
prices are also available for sale, and as a matter of fact the intention is
basically to sell those products. Example of these can be found in apparel,
leather goods, personal use retail outlets where big signage announcing
messages such as 'Upto 50 percent off' or 'Big reduction in price' are put
up boldly in the shop front, whereas regular products are displayed more
prominently inside the store.
7. Keystone Pricing
In certain fashion items, particularly ladies wear, where styles may change
very fast, depending upon the demand for any particular fashion based on
the popularity of the celebrity, endorsing the style, the marketer can take a
very high markup, even at hundred percent, for a short duration, knowing
very well that the opportunity may last only for a short while. Marketers
must be very careful in this type of pricing, because if it back fires then the
marketer will be left with unsold stocks.
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8. Penetration Pricing
This is a pricing method, where deliberately a lower price is kept to
increase consumption. Example- Coca-cola coming with a 5 rupee bottle to
increase consumption of soft drink.
Though not exactly a lower price, 2 rupee sachets for products such as
shampoos and high end detergents are also examples of penetration
pricing.
9. Snob-value Pricing
Sometimes very exclusive items such as designer clothes designer
watches, ladies handbags, club membership etc. are deliberately priced
very high to ensure that the customers can derive their ego satisfaction
through these high prices.
10. Cartels
At times some marketers get together and somehow come to a common
pricing strategy for their product. Examples are Cement, Tyre, Cell phone
rates etc. where all the competitors price their products in a similar band.
Sometimes government has to intervene to break such cartels to protect
consumer interest.
Cost Based Pricing

1. Full Cost Pricing Vis a Vis Pricing Based on Marginal Cost
Lets take a very simple example of a marketer of soap.
The manufacturing set up consists of a workshop where monthly rental is

Rs. 50000. The workshop has a manager, a clerk and two security persons-
whose salaries all put together comes to Rs. 20000 per month.
Soap being a very low technology product, the machinery and equipments
are quite simple. However their annual depreciation is Rs. 48000 which
translates to Rs. 4000 per month. Some electricity and water charges are
incurred by the factory which amounts to Rs. 1000 per month.
All the above charges are incurred per month, irrespective of whether any
soap is manufactured or not.
Now, the marketer decides to manufacture and sell 50000 pieces of soap a
month.
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For this, the variable cost of producing soap would be as under:

Rs.
Raw material per cake of soap 5.00

(including all ingredients such as vegetable oil, perfumes,
binding agents etc….)
Packing Material (Including tissue, wrapping etc….) 4.00
Labor variable charges per cake of soap 1.00
Total 10.00
To this would have to be added an additional Rs. 1.50 (based on total of
salaries Rs. 20000, depreciation Rs. 4000, rental Rs. 50000 and water,
electricity Rs. 1000 i.e., total Rs. 75000 apportioned to 50000 units of
soap).
Thus the full cost of production would be Rs. 11.50 … … … (1)
Now if the marketer wishes to sell the soap and continue in business he will
have to price the cake of soap @ Rs. 11.50 + some amount be it 0.50
paise. Rs. 1, Rs. 2 or whatever.
In this method the marketer has limited himself to a cost of Rs. 11.50,
above which only he has to price his product. Here he has gone by a
concept, called full cost pricing.
Supposing on the basis of (1) above, taking a 0.50 p margin per cake of
soap the marketer feels that the estimated demand would be 50000 cakes
of soap … … (2)
He would make a profit as shown below:
Sales of 50000 * 12.00 = Rs. 600000.00
Less: Cost of Soap (variable) 50000*10.00 = Rs. 500000.00
+ Fixed Cost = 75000.00 Rs. 575000.00
Profit Rs. 25000.00…(3)
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But supposing @ Rs. 12.00 per cake the actual demand turns out to be
only 40000 cakes
Then he would have sales of 40000 * 12.00 = Rs. 480000.00
Less: variable cost 40000 * 10.00 = Rs. 400000.00
+ fixed Cost 75000.00

Rs. 475000.00
Profit Rs. 5000.00
+ Unsold 1000 cakes of soap @ Rs. 10.00 = Rs. 100000 worth of idle
stocks….. (4)
There is another way to look at the issue. In this other method, the
marketer will look at the issue from the perspective of variable cost, viz.,
Rs. 10.00 per cake of soap, and try to fix prices at different levels to
estimate likely demand.
He would approach the issue in the following way:
He would now take into consideration the marginal cost of Rs. 10.00 per
cake of soap.
You will observe that whatever units of soaps the plant is going to produce,
the variable cost will remain @ Rs. 10 per unit. Thus, if one unit is
produced the variable cost will be Rs. 10.00, if 2 units are produced the
cost will be 2*10= Rs. 20.00, if 20 units are produced the cost would be
20*10 = Rs. 200.00.
Now the marketer may carry out a market survey and find that if the price
is reduced to Rs. 11.75 the likely demand may be 60000 units. … … …
(5)
If the price is reduced to Rs. 11.50 the likely demand may be 80000 units
… … (6)
and if the price is reduced to Rs. 11.25 the likely demand may be 90,000
units… … (7)
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Market survey may indicate that reducing prices further may not
significantly impact the demand.
By taking a marginal cost approach, where the two types of costs viz.
variable cost of manufacturing a unit of soap Rs. 10.00 and the total
monthly fixed cost Rs. 75000.00 which would be incurred irrespective of
values produced, are treated separately the marketer will see how the
profit scenario changes:
At price level Rs. 12.00 total demand 50000 units

The total contribution is (12.00-10.00) * 50000 = Rs. 100000
Less: Fixed cost Rs. 75000
Profit Rs. 25000 .(8)

The total contribution is (11.75-10.00)* 60000 = Rs. 105000
Profit Rs. 30000…(9)

Profit Rs. 45000 ..(10)
At price level ! 11.25 total demand 90000 units

Profit Rs. 37500 …(11)
The marketer finds that of the different options the pricing @ Rs. 11.50
maximizes his profit is. Rs. 45000.00
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This decision was possible when the approach was changed from a full cost
basis to marginal cost basis. You would have observed, in this particular
case, if the marketer had limited his options at full cost Rs. 11.50 recovery,
he would not even have explored the other possibilities, including at a price
of Rs. 11.50.
Of course for the purpose of your understanding a very simple case has
been given as an illustrative example, but the concept would remain the
same.
An important issue from the marketing angle would be to estimate what is

the gap between expected sales volume and the break even volume.
Break even volume, which is the level at which total contribution equals
total fixed cost and is found by dividing the total fixed cost by the
contribution (Selling price minus variable cost) per unit.
Thus at Rs. 12.00 S P. the break even volume would be 75000/(12 – 10) =
37500 units
And the estimated sales volume being 50000 units the margin of safety is
50000 – 37500 = 12500 units
At Rs. 11.75 S P. the break even volume would be 75000/(11.75 – 10) =

42857 units
60000 – 42857 = 17143 units

50000 units
80000 – 50000 = 30000 units
60000 units
90000 – 60000 = 30000 units
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From the above you will find the different price levels may lead to different
margins of safety. A higher margin of safety obviously is a better safety
measure, because even if the demand comes down the organisation will
have a larger band to fall between profit and loss.
One important point to note is that pricing CAN NOT be at any level below
the variable cost –because in that case every unit sold will only add to loss.
2. Conversion Cost Based Pricing

When gold ornaments are manufactured by goldsmiths, they normally fix
the price on the basis of the quantity of gold that is present in the piece of
ornament at the ruling rate for gold, and add to it the cost of workmanship
and cost of stones and other artifacts if used. Similarly in the case of
furniture making, the cost of wood that is used on the basis of running foot
is taken at its original price, and the carpenter craftsmanship is added to
arrive at the price for a particular piece of furniture. This method of pricing,
that calculates the margins based on the additional work, crafting inputs,
maintaining the costs of the material inputs at the procuring price is called
Pricing based on conversion Cost. The underlying principle in this type of
pricing is, retaining the cost of the basic material input at par and fixing
the price on additional labor, and process, that may have been applied to
convert the input into a finished product.
3. Joint Product Pricing

Let us take the case of a dairy product manufacturing unit that buys raw
milk and sells the same as liquid milk, skimmed milk powder, butter and
ghee. A look at the process would show that liquid milk would have to be
boiled to get the cream which when removed will leave skimmed milk,
which can be further processed to get skimmed milk powder. The cream
again after processing may give butter, which again after processing would
yield ghee. Let us take a situation where the dairy buys 1000 liters of liquid
milk at Rs. 15 per liter. This milk after heating and processing gives125 kg
of cream and 750 liters of skimmed milk. The 750 litres of skimmed milk
after boiling/heating and drying may give 100 kgs of skimmed milk powder
and the 125 kg of cream may give 65 kg of butter. Now if the cost of 1000
litres of liquid milk was to be apportioned – to the 2 end products viz
skimmed milk powder and butter in terms of their proportion of use we
would have calculated as under-
Cost of 1000 liters of milk @ Rs. 15 per liter = Rs. 15000.00
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If the cost of heating/boiling 1000 liters of liquid

milk is Rs. 800
Rs. 800.00
For 1000 litres of milk Rs. 15800.00
The next step we find 1000 liters of liquid milk yields 750 litres of skimmed
milk and 125 kg of cream.
Thus Rs. 15800 should be apportioned to
750 litres skimmed milk ingredient = Rs. 13542 (Rs. 15800/875 *750)
125 kgs butter ingredient = Rs. 2257 (Rs. 15800/875 *125)
But if we were to do that, then the ultimate cost of the 100 kg of skimmed
milk powder would have to bear a material cost of Rs. 13542, i.e., Rs.
135.42 per kg. and 65 kg of butter would similarly end up with an allocated
material cost of Rs. 2257, i.e., Rs. 34 per kg.
It would be evident that the skimmed milk powder with such an initial cost
load would become quite unmarketable.
But if we take cognisance of the likely market price of the two products,
say skimmed milk powder at Rs. 200/kg and butter at Rs. 210/kg then the
cost of Rs. 15800 can get apportioned as
210 *65 = 13560 -------- Butter
200* 100 = 20000 -------- Skimmed milk
33650
15800/33650 * 13650 = Rs. 6429 Butter
15850/33650 * 20000 = Rs. 9420 Skimmed milk
Rs. 15850
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PRICING
Here the apportionment has been made, factoring in the ultimate sale price
of the finished product and thus butter gets a raw material cost
apportionment now 6429.00 against the earlier apportioned amount of Rs.
2257.00. Whereas in the case of skimmed milk powder the new
apportioned amount is Rs. 9420.00 against the earlier higher amount of
Rs. 13542.00, which makes the skimmed milk powder a more workable
proposition now.
4. Return on Investment Based Pricing

An organisation may decide to have a return on investment objective,
when deciding the price. Of course even then they would have to refer
back to the market to check whether the market would be willing to buy at
that price and if not, change the return expectation. Let us see how the
method works through an example.
A company manufacture and sells a bathing soap. The cost of the

ingredients are –
Raw material per cake of soap Rs. 6.00

Packing material per cake of soap Rs. 6.00
Labour incurred per cake of soap Rs. 2.00
Rs. 14.00
The factory where the soap is manufactured has a fixed overheads burden
of Rs. 2,40,000 per month. The investment in various fixed assets of the
company is Rs. 10 lakhs
The company can manage with average one month of finished goods
stocks and has to on an average extend 15 days credit in the market.
Let’s say the company plans to manufacture and sell 60000 units per
month.
What should be the price per piece that can offer the company a 12
percent return on investment. If we look at the cost and investment
figures, we find that the price ‘P’ for the product should be such that 60000
pieces sold per month will cover all the cost and thereafter provide a 12
percent return on investment per annum, which in other order words mean
a 1 percent return on investment per month.
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So 60000 P = 60000* Variable Cost per unit
+ Fixed overheads per month
+ 1 percent return on (12 percent p.a. = 1 percent p.m.

Fixed capital + Working capital
Fixed capital we can reckon the figure of Rs. 10 lacs. To calculate working
capital we shall have to find out investments in stock and oustandings. The
company holds on an average one month’s equivalent of finished goods
stock. Stocks are valued at cost. If the variable cost of manufacture of
soaps is Rs. 14.00 per unit and the fixed overheads are Rs. 240000 p.m.
then the cost of goods sold per cake of soap is Rs. 14.00 + (Rs.
240000/60000 = Rs. 4 per unit) = Rs. 18.00 per cake of soap.
So the value of stocks would be 60000 * 18 = Rs. 1080000.00.
For calculating the amount of funds blocked in market outstandings, we will

similarly take 15 days equivalent of monthly sales i.e. 60000/2 = 30000 at
Price ‘P’ = 30000 P.
This is because market outstandings are always valued at selling price.
So the equation would now look like
60000 P = 60000 * 14 + 240000 + 0.01 (1000000 + 1080000 + 30000 P)

= 840000 + 240000 + 20800 + 300 P
= 1100800 + 300 P
or (60000 – 300) P = 1100800
or 59700 P = 1100800
or P = Rs. 18.44
So a price of Rs. 18.44 per piece would enable the firm to earn a return of
12 percent p.a. on monthly sale of 60000 units under the above cost and
investment situation. Now the firm may have to validate on the basis of
market survey, whether the market would respond at price Rs. 18.44 per
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piece with a monthly demand of at best 60000 pcs. If not, then what may
be the price, and rework at that level what may the return expected.
5. Pricing for Exports Markets

Whenever pricing for exports, a firm has to factor in a few very critical
issues:
1. The likely rate of exchange.

2. The incentives that are available for exports.
3. Any special expenses that have to incurred specifically for the export
deal.
Currently $ is exchanged for Rs. 48.00 Indian rupees. If Indian rupees

becomes stronger vis-a-vis $. like some time back when $ = Rs. 42.00 the
INR equivalent of $ earnings can deplete substantially. While our Indian
currency becoming stronger than foreign currency bids well for the
importers, who have to pay in foreign currency, it works the other way for
exporters because the INR equivalent of their earnings in foreign exchange
shrink.
Since the costs are all incurred in INR, excepting some portion that may
have been imported, the export pricing must factor in this situation.
Export prices can be quoted as:
CIF – Cost insurance freight (the price includes insurance and freight
changes)
C&F – Cost and freight (the price includes only cost and freight).
FOB – free on board (the price includes cost plus all expenses upto the
merchandise being put on board the vessel).
FOR – free on rail (it is the price quoted inclusive of all costs upto and at
the location where it is being offered FOR).
The implication of such different prices are that the additional costs
specifically associated with the basis of quote, would have an impact on the
profitability.
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Let us take an example to understand the entire working better:
ABC Co. manufactures and sells industrial fasteners in the domestic

market.
There are 3 products M3, N2 and O5.
The factory has equipments that can manufacture all the three items. All
the items utilise equal amount of equipment time in production.
Currently the Co. manufactures and sells per month
M3, 17 lacs units, N2, 13 lacs units, O5, 14 lacs units
The cost of production (cop) at this level of manufacturing are:
M3, Rs. 6 per unit, N2, Rs. 7 per unit, O5, Rs. 4 per unit.
(cost of production includes variable costs and equipment utilization
charges on the basis of apportionment of the equipment standing/running
charges to the total units produced)
The standing charges on the equipments including running expenses at the

current level of production are Rs. 55 lacs per month. (cost of production
has been calculated at this level of standing charges). These will become
Rs. 66 lacs if production is increased beyond the current
level, till 150 percent of current levels, and if doubled, the standing
charges are likely to be Rs. 71.5 lacs.
Other fixed factory overheads are Rs. 240 lacs per annum.
The Company observes a works transfer pricing system, under which the
WTPs are:
M3 Rs. 7 per unit, N2 Rs. 8 per unit, O5 Rs. 5 per unit.
The Company’s selling prices (net realization) are M3 Rs. 12 lacs per unit,
N2 Rs. 14 per unit, O5 Rs. 11 per unit.
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PRICING
The selling and distribution overheads are Rs. 300 lacs per annum, fixed,
and 2percent of selling price, variable.
The domestic market for industrial fasteners is becoming very competitive,

and in future the selling prices may have to be reduced.
The Co. is negotiating an export order for 22 lacs pieces of N2 at a best

possible price of 15 cents per piece c and f. Freight component will be 1.1
cents per piece and forwarding/handling costs upto on board the ship will
be Rs. 0.80. (Exchange rate can be reckoned @ 1 US $ = Rs. 48.00).
Export incentives will be @ 5 percent of sales price less freight component

(i.e., c and f less f).
Market information reveals that the party may place orders on a

continuous basis and may also take upto 44 lacs per month if satisfied.
Should the Company accept the export order?
Solution:
Since the company has a system of work transfer price, we can evaluate
the profitability
1. At the factory level,

2. At the marketing level, and also
3. Overall at the company level.
1. At the Factory Level

Table no: 5.5
Product Cop wtp Contributi Volume Total Less Net Per
Rs. Rs. on in units contribut fixed contrbto unit
per unit ion cost per n per variabl
(wtp – Rs. month month e cost
cop) Rs. at Fcty of
Rs. level produc
tion in
Rs.
M3 6 7 1 17 lacs 17 lacs 4.75
N2 7 8 1 13 lacs 13 lacs 5.75
O5 4 5 1 14 lacs 14 lacs 2.75
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44 lacs 20 lacs 24 lacs
The per unit variable cost of production has been arrived at by deducting
from the cost of production, the machine utilization charges which work out
to Rs. 1.25 per unit, based on total equipment standing/running charges of
Rs. 55 lacs at current level of production of 44 lacs units (the machine
utilization time for all products being equal). Deducting the machine
utilisation charges from the cost of production we arrive at the variable
cost of production.
2. At the Marketing Level

Table no: 5.6
Product wtp Selling Contributi Volume Total Less Less Net
Rs. price on in units contribut fixed variable contrbt
Rs. per unit ion cost per S and D on per
(sls price- Rs. month cost per month
wtp) Rs. Rs. month at Mktg
Rs. level
M3 7 12 5 17 lacs 85 lacs
N2 8 14 6 13 lacs 78 lacs
O5 5 11 6 14 lacs 84 lacs
247 lacs 25 lacs* 10.8lacs Rs.

** 211.2
lacs
* the marketing and sales fixed expenses per month has been arrived at
by dividing annual fixed expenses of Rs. 300 lacs by 12.
** the per month variable selling and distribution expenses has been
arrived at by first calculating the total monthly sales value as
M3 – 17 lacs units X Rs. 12 per unit selling price = Rs. 204 lacs +
N2 – 13 lacs units X Rs. 14 per unit selling price = Rs. 182 lacs +
O5 – 14 lacs units X Rs. 11 per unit selling price = Rs. 154 lacs
total = Rs. 540 lacs
and thereafter calculating 2 percent of the total sales to come to Rs.

10.8 lacs
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3. Overall at the Company Level
Table no: 5.7

Produc cop Sellin contribut volum total less less less net
t Rs. g ion e contribu fcty S and D variab contrb
price per unit in tion fixed fixed le ton at
Rs. (sales units Rs. cost per cost S&D Co.
price- month per cost level
cop) Rs. Rs. month per
Rs. month
Rs.
M3 6 12 6 17 lacs 102 lacs
N2 7 14 7 13 lacs 91 lacs
O5 4 11 7 14 lacs 98 lacs
291 lacs 20 lacs 25 lacs 10.8 235.2

lacs lacs
You will observe that the profit at the overall company level Rs. 235.2 lacs
is equal to the total of the profits generated at the factory and marketing
levels.
The export enquiry which we have to evaluate has the following issues:
The cif price is ¢ 15 which at an exchange rate of $ = Inr 48 comes to Rs.

7.2
freight is ¢ 1.1 which when converted to Inr will be Rs. 0.53
which when deducted from Rs. 7.2 will leave a net realization of Rs. 6.67
there is a government export incentive at 5 percent of the net realisation

i.e., cif less f
which works out to Rs. 0.33, when added to the net realization gives Rs.
7.00. From this, one has to deduct the extra cost that has to be borne to
get the items on board the ship Rs. 0.80
finally the amount the company is receiving is Rs. 6.20
should the company accept the export order?
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PRICING
At first sight one would observe that the net amount in hand against the
export order would be Rs. 6.20 for N2 whose cop is Rs. 7.00. Obviously
one would not entertain an enquiry where the net realization is less than
the cost of production.
But if we look deeper, we observe that in the cost of production of Rs. 7 for
N2, an amount of Rs. 1.25 of machine utilization charges is included. If this
amount is taken separately then the variable component is Rs. 5.75, and
the net amount being realised at an exchange rate of $ = Rs. 48 is Rs.
6.20, which is generating a margin of Rs. 0.45 per unit, which when
multiplied by 22 lacs units would yield a profit of Rs. 9.90 lacs.
However for producing this extra quantity of 22 lacs of N2, the factory will
incur additional machine standing charges. As per the situation prevailing,
the current level of production of 44 lacs units is taking place under
standing charges of Rs. 55 lacs, which would become Rs. 66 lacs, if
production is raised beyond current levels till 150 percent of existing
capacity ie. production upto 66 lacs units.
Hence if the export order is accepted, the company has to incur an

additional standing charge of Rs. 11 lacs.
One can see that the current level of production and sales after absorbing
the standing charge of Rs. 55 lacs, is generating a profit of Rs. 235.2 lacs
per month at the overall company level.
Hence the export order will have to take care of the additional standing
charges of Rs. 11 lacs for this order of 22 lacs pieces of N2.
The detailed calculation earlier has shown a net profit of Rs. 9.9 lacs after
accounting the variable cost of production. Thus the export order will not
be able to cover Rs. 1.1 lacs of extra machine standing charges.
At this stage one has to evaluate the scenario from a slightly different
perspective.
Purely from an accountant’s point of view, one would reject the export
order, because the sale is going to result in a loss of Rs. 1.1 lacs which is
the uncovered standing charge for the additional production.
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But a marketer would also view the export order as an opportunity to open
into a new market, particularly in the light of the background information
that the domestic market is likely to become more and more competitive.
Additionally, one must weigh the following factors:
1. the company is making a comfortable profit of Rs. 235.2 lacs in the

domestic market, out of which the export order will make a dent of
just Rs. 1.1 lacs, at which cost the company will get an opportunity to
open up in a foreign market
2. the overall realisation at the export price is Rs. 6.20 which is above
the variable cost of Rs. 5.75, in other words the bare variable cost is
being covered
3. against Rs. 55 lacs machine standing charges at a production level of

44 lacs pieces per month, meaning a per unit machine cost of Rs.
1.25, the rate comes down to Rs. 1.00 per unit at total machine
standing charges of Rs. 66 lacs for a production of 66 lac units, which
can further drop to Rs. 0.81 paise per unit at total machine standing
charges of Rs. 71.5 lacs for a production of 88 lacs units, and this will
become a possibility only if more export orders are received.
Post weighing the above factors one may take a view that on the whole it
may be worthwhile to accept the export order.
However one point should be always borne in mind and that is no order can
be accepted if the bare variable cost of production is not being covered,
because in that case the more one sells the more one will end up losing.
4. Pricing Products having Service and Warranty Components

When the product being priced has an element of warranty attached,
involving replacement of parts and components, the manufacturer will have
to estimate failure rate of such parts and components over the period for
which the warranty is being extended, and cover the cost in the pricing.
Thus in the case of a room airconditioner, the manufacturer may have to

estimate the likely failure rate of compressors, fans, relays, etc. which
would have to be replaced during the warranty period, in case of their
failure, and add the cost of the same onto the manufacturing cost to arrive
at the final cost of sales.
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The same process will apply in case of pricing for annual maintenance
contracts, where the estimation of failures will require closer accuracy,
since the failure rate of older equipments are likely to go up with age.
5. Pricing for Projects where the Same is Spread Over Time
Whenever projects may have a time spread during which the funds may be
flowing in and out at different points, a profitability calculation requires
compounding and discounting the inflows and outflows, so that the net
present values of the profits or otherwise are estimated correctly.
Best is to understand with an example:
A company is bidding for an airconditioning project which will be

undertaken over a period of 4 years.
The estimated cost of the project is pegged at Rs. 150 Crore while the
price quoted is Rs. 200 Crores.
However the cost is not to be incurred at one go, and similarly the
revenues are not going to come in at one shot.
The spread is estimated to be as under:

All figures in Rs. crores
Table no: 5.8
Yr –> 2008 2009 2010 2011 2012
start end start end start end start end start end
cost 20 25 50 25 30
revenue 10 40 50 50 50
net -10 -25 -50 -40 -25 +50 -30 +50 +50
At the end of the period the net effect is + Rs. 50 crores.
Let us presume the company works on a internal rate of return of 12

percent per annum, ie. it expects a return of 12 percent on its investments.
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The calculation of the present value of all the inflows and outflows at the
different points in time can be reckoned by discounting all the future
inflows and outflows at 12 percent per annum.
The method to calculate is reversing the process of compounding.
Suppose one was to invest Rs. 100 at a compound interest of 12 percent

then the amount will earn Rs. 12 (100 X .12 = 12) interest in the first year,
which when added to the initial Rs. 100 will make the revised principal
amount Rs. 112 which will now earn an interest of Rs. 13.44 (112 X .12 =
13.44), revising the new principal amount to Rs. 125.44, and so on year
after year.
When discounting the process is reversed. So if one was to receive Rs.

125.44 after a period of two years and an expected rate of return is
reckoned at 12 percent per annum, then the amount of Rs. 125.44 would
be divided by 112 and multiplied by 100, twice over to arrive at the net
present value of Rs. 125.44.
{(125.44 ÷ 112 X100) ÷ 112 X 100} = 112 ÷ 112 X100 = 100
Applying the above formula to the cash flow figures given above we can
find the net present value as under:
Table no: 5.9
Time Outflow Discounted value Inflow Discounted value
current 20 20 10 10
after 1 year 25 + 50 = 75 67
after 2 years 25 20 40 32
after 3 years 30 21 50 36
after 4 years 50 32
after 5 years 50 28
Total 128 138
Thus we observe that the initial business which was showing a profit
possibility of Rs. 50 crores on a sale of Rs. 200 crores ie. 25 percent, now
after calculating the present values of future earnings and spendings, is
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showing a profit possibility of Rs. 10 crores on a sale of Rs. 138 crores ie.
only 7 percent.
5.6 SUMMARY
Price not only directly generates revenues that allow organizations to
create and retain customers at profit but can also be used as a
communicator/as a bargaining tool/and also as a competitive weapon.
Price is the value that is placed on something. It can mean different things
to different people a buyer or a seller may view differently:
1. Customer's perspective.
2. Seller's perspective.
3. Pricing contexts.
➡ Consumer markets.
➡ Retail and wholesale markets.
➡ Service markets.
➡ Non-profit markets.
➡ B2B markets.
Main Areas of External Influences on Pricing Decisions
• Customers and consumers/demand and price elasticity.

• Competitors.
• Channels of distribution.
• Legal and regulatory requirements.
Main Internal Factors Influencing Pricing Decisions
1. Organizational objectives.
2. Marketing objectives.
3. Costs.
Market Based Pricing
Marketing considerations that can influence our pricing decisions:
1. Going rate pricing for 'me-too' products.

2. Geographic pricing.
! !95
PRICING
3. Sealed bid pricing.

4. Skimming the cream, pricing.
5. Loss leader pricing.
6. Bait pricing.
7. Keystone pricing.
8. Penetration pricing.
9. Snob-value pricing.
10.Cartels.
Cost Based Pricing
1. Full cost pricing vis-a-vis based on marginal cost.

2. Conversion cost based pricing.
3. Joint product pricing.
4. Return on investment based pricing.
5. Pricing for Exports Markets.
1. What is the role of pricing in the entire marketing mix?
2. What are the different factors that influence pricing decisions?
3. Explain the ROI based pricing model?
4. Explain 4 different marketing based pricing models.
5. What are the issues that may influence pricing for export markets?
! !96
PRICING
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2 
! !97
SALES FORCE EVALUATION
Chapter 6
Learning Objectives
• The criticality of the role of salesmen in any marketing organization.

• The importance of personal selling in the promotion mix.
• Problems in sales force evaluation, setting their effectiveness standards,
control procedures, and evaluation theories in practice.
Structure:
6.1 Sales Force Evaluation

6.2 Summary
! !98
6.1 SALES FORCE EVALUATION
In any marketing organization, one fundamental reality is that the product/

service has got to be sold.
In today’s marketing environment, a lot of emphasis is put on building

relations with consumers, creating continuous pull, for the product/service,
through advertising and communication, but in the end analysis, one
cannot ignore the criticality of the selling function.
At one end of the spectrum can be products/services, which do not require

any personal selling efforts, example – vending machines, self help stores,
plane and cinema tickets bought on the net, whereas we have products
sold by train hawkers, where every unit has to be physically sold with a
whole lot of personal efforts.
Between these two extremes we have a range of products/services which

require a combination of pull through advertising and mass communication
and push through personal selling by sales persons. Hence sales persons
are very crucial in the marketing space.
Sales persons, you will appreciate, are often working in the market place,
away from the direct supervision ambit of the superior, who may be based
in the office. Exceptions of course are counter salesman or any such
situations where the superior and the subordinate work in close proximity,
like in the case of tele selling.
But generally, the sales persons, by and large work away from their
superiors.
This locational distance, creates a need for having sound methods to

evaluate the performance of sales persons. Remember, the methods and
processes to be used, must ensure, good controls and at the same time be
able to motivate the sales persons.
The first area where controls need to be exercised is in respect of market

coverage.
Salesmen are assigned distinct territories which they must cover regularly.
It is very important to ensure that the territory gets visited and covered
! !99
regularly, systematically and also methodically. No part of the territory can

be left uncovered. For this the following steps need to be taken:
1. Define in detail all the parts of the territory that needs coverage.
2. Define the periodicity of coverage, i.e., at what particular interval of

time should that spot be visited and covered.
3. Give a sequential plan of coverage, i.e., which visit should follow which
visit and which location should succeed which location/ prospects.
4. Specify the time of coverage, i.e., the duration per visit (on an average).
5. One can also incorporate in this plan the market coverage expenses
permitted.
Many organizations ensure this discipline through a formal detailed market

coverage plan.
A sample format is provided below:
Table no: 6.1

Permanent Journey Plan
Name of Sales man: Head quarter: Pune
Day Town Marke Distrib Startin Noof Night Local Fare Night Total
t uter g point OL halt conve Rs. halt
y- allow
ance -ance
Rs.
Mon Pune Sadasi Mehta Shah 30 75 75

v Peth bros stores
Tue Pune cantt dorabj 40 75 75

ee
Wed Pipri dapodi arihant 38 75 80 155

marke
t
Thu Chinc tata arihant waysid 30 75 100 175

h wad mkt e
! !100
Fri Lonav statio shyam kamat 25 Lonav 75 80 250 405

ala n trdrs ala
Sat Khopo main ram star 20 back 75 140 215

li mkt stores trdrs to
Pune
Sun
Mon
Tue
Wed
Thu
Fri
Sat
Sun
Upto
4
Weeks
In the above format, you would observe that a detailed market visit plan
day wise has been prepared. The plan is in respect of a sales man who is
headquartered in Pune. On the first Monday he is to work in Pune, at the
Sadashiv Peth market. His starting point is one 'Shah Store’, and on this
day he will also visit his allocated Distributor Mehta Brothers. He will be
covering 35 outlets in that particular market. Since he will be working in a
local market he will be paid only local conveyance Rs. 75.
The next day i.e., Tuesday he will be working the Cantonment market,
Dorabjee stores being his starting point. This day he has to visit 40 outlets.
Again since it is a local market he will be entitled to local conveyance of Rs.
75 only.
The next day he is scheduled to visit Pimpri, and since he has to go to a

market outside his head quarter he is allowed train fare of Rs. 80 which is
over and above his local conveyance of Rs. 75. This process goes on and
whenever his visit may involve a night stay outside his head quarters, like
in the instance of his visiting Lonavala on Friday he will be allowed to
charge night allowance as in this case, an amount of Rs. 250.
! !101
This detailed coverage plan helps in not only having a fixed schedule of
field coverage, but is also helpful in controlling the sales man’s actual
travelling.
Since this plan can be made a regular coverage guide, one can call it a
Permanent Journey Plan – or a PJP in short.
Some FMCG (Fast Moving Consumer Goods) companies divide a year into
13 equal journey cycles – JC of 4 weeks duration each. This has the
distinct advantage of lending equal periodicity to the plan period because a
4 week period repeats 13 times a year with a fixed periodicity whereas if
we divide the cycles on the basis of months, there are months having
varying number of days between 28 and 31, with one having 29 days every
4th year.
However in case of journey cycles with 28 days duration, at the year end
one odd day would be left out (2 every leap year) which can be used for
some other work and let the journey cycle based PJP start on the regular
day again.
The sample permanent journey plan given above has been made
incorporating 28 days as per a journey cycle.
The sales men should also fill a daily sales report (SDR) as per
specimen given below:
Table no: 6.2
Sales men daily report (SDR)
Sales man:
Town: Market: Date:
prdct A prdct B prdct C prdct D prdct E total gross

value margin
Ratan stores 26 12 O X 16 100
Hill top 34 X 16 12 O 150
Chedda # 35 X 9 26 130
Sapna medicals 46 8 12 9 O 60
Fresh bakery # 12 80 X 35 20
New stores 25 15 O O X 36
! !102
More stores…
! ! !
O Product available in sufficient quantities hence not taken.

# Out let does not deal in the category.
X Though out let deals in category, does not have the item, yet not taken.
In the salesman’s daily report one can also incorporate certain qualitative
feed back mechanism. In the specimen format shown above three symbolic
codes have been given:
O Product available in sufficient quantities hence not taken

# Out let does not deal in the category
X Though out let deals in category, does not have the item, yet not
taken
They have a tremendous amount of information value.
If the SDR depicts a number of 'O's, it would imply that the product is not
moving off the shelf, they are available in plenty in the market, and the
Marketing department needs to do something urgently to ensure
liquidation of the stocks.
If the SDR depicts a number of '#'s, it would imply that the salesman is
unnecessarily visiting a number of outlets that do not deal in that product
category, and the visiting schedule needs redrawing drastically.
An abundance of 'X's, in the SDR would be indicative of a very deep and

serious problem. It would point out that something in the relationship
management part of the channel requires urgent intervention.
If the dealers are dealing in the category, and have exhausted their stocks
of the product, and yet are not buying the same, there must either be
some pending dispute, or there may be something with the product itself
that is coming in the way of their purchasing further quantities. If the issue
is all pervasive then the problem may be with the product itself, but if it is
only with a few outlets, then most likely the problem is with individual
retailers and can be resolved more easily.
From the Salesman’s daily report, one can also find out the total value of
sales made on any particular day and the consequent gross margin earned
! !103
by the organization. By comparing the expenses incurred on covering that

particular area (the salesman’s daily wages + expenses in connection with
coverage) it will be possible to judge whether the visit has been
worthwhile.
Besides the above overall review of the earnings vis-a-vis expenses, we

shall also view here in below a particular sales force evaluation model.
Generally it is known as criteria based evaluation method.
In this method, initially every salesman is given a target for achievement

under several criteria that may be evaluated.
Let us take the following criteria, the salesman are to be evaluated for:
1. Sales volume target.

2. Sales value target.
3. Gross margin target.
4. Average calls to be made per day, target.
5. Average value of orders per day, target.
6. Average Percentage of calls productivity, target.
Now we shall take 3 salesmen, for whom we will list the targets and there
against list their actual achievements. For building up the model, we’ll
create some ground rules of evaluation.
They would be:
If the salesman achieves the target he will be awarded 10 marks for the
criteria.
Performance above or below the target will entitle the salesman to some
bonus marks (in case of exceeding target) or some penalty marks (for
performing below target).
For these the range would be:
1. For sales volume 10 marks for achieving target 

 
In case of exceeding or not matching the targets, the bonus/ penalty
will be +/- '1' for every 2 percent, +/- or part thereof. Thus if the
performance is at 100 percent the marks awarded would be 10. But if
! !104
performance is say 99 percent it will be 9 (10-1), if 97 percent it will be

8(10 – 2), because 3 percent is 2 percent + 1 percent (part of next 2
percent). 
 
Similarly if performance is 105 percent the marks will be 13 (10+3)
because 5 percent is twice of 2 percent, i.e. 2 for exceeding by 4
percent + 1 for the next 1 percent(part of next 2 percent)
2. For the value target similarly there would be +/- '1' for every +/-
deviation of 2 percent or part thereof. Now you may say how can there
be counter deviation (in different directions) in achievements of volume/
value targets. This, you would realize, would be due to differences in
product mix – recall the Darham Pharmaceutical case, discussed earlier.
3. In respect of Gross margins we’ll set the same parameters with a

stipulation that the +/-, bonus/ penalty would be +/- '1' for ! !
movements of gross margin in range of 1 percent or part thereof.
4. In respect of no. of calls made per day, the reckonings will be 10 marks
for making targeted number of calls per day, and bonus/penalty of +/-
'1' for deviation in multiples of 3 calls or part thereof. Thus if the target
set was 35 calls per day, and a salesman makes 32 calls per day, his
marks would be 10 – 1 = 9, whereas if there is another salesman who
does average 40 calls per day his marks would be 10 + 2 = 12.
5. Similarly in the value of average order per day the bonus/penalty, would
be per deviations from targets, in bands of Rs. 1000 or part thereof.
Thus if the targeted value of order per day was Rs. 15000.00 and a
salesman was achieving average of Rs. 13000.00 per day he would get
10 – 2 = 8. Whereas if another salesman with a target of Rs. 15000.00
per day was clocking Rs. 16500 per day, he would score 10 + 2 = 12
marks.
6. In respect of average percentage of calls productivity, the bonus/penalty

can be fixed on deviation bands of 2 percent and part thereof.
From the above you will observe that the evaluation is not limited to value
and volume figures only. There is representation given to qualitative
aspects too, such as calls made per day, productivity of calls etc…
Depending upon the organizational needs these criteria can be changed.
! !105
For instance, if the product is of a nature where a lot of developmental pre

selling activities are involved, emphasis may have to be put more on
qualitative aspects, such as customer conviction, generation of productive
leads etc.
You will also observe that if any sales man performs actuals equal to
targets, he gets 10 marks. Thus the marks for performance at target on all
6 criteria will earn 6*10= 60 marks.
Now if we decide to give different weightages to these different criteria,

ranging in values that cumulatively add up to 10, than the total score at
achievement of target would be 100 (10*10). The actual scores would be
either higher or lower depending upon the deviation.
We will now do the actual evaluation of 3 salesmen.
Table no: 6.3

Sr. Criteria Weights Sales man A
No.
Target Actual Score Weighted

Score
1 Sales Volume 3 1000 99 percent 9 27
2 Sales Value 2 1000 97 percent 8 16
3 Gross Margin 2 20 percent 21 percent 11 22
4 Avg. calls per day 1 36 37 11 11
5 Avg. value of orders/ 1 20000 19000 9 9

day
6 Average percentage 1 16 percent 17 percent 11 11

of calls productivity
Total 10 96
! !106
Table no: 6.4

Sr. Criteria Weights Sales man B
No.

Score
5 Avg. value of 1 22000 23000 11 11

orders/day
6 Average 1 16 percent 15 percent 9 9

percentage of calls
productivity
Total 10 102
Sr. Criteria Weights Sales man C

No.

Score
5 Avg. value of 1 21000 24000 13 13

orders/day
6 Average 1 16 percent 18 percent 11 11

percentage of calls
productivity
Total 10 107
From the above calculations it would be evident that of the three salesmen
whose performance have been evaluated salesman C has the best score of
! !107
107, followed by salesman B with a score of 102, and salesman C scoring

the lowest 96.
This can also be linked with the compensation of the salesmen.

Organizations normally have a fixed and a variable component in the
overall compensation package of salesmen. Supposing a company follows
such a pattern where they would like to compensate their salesmen an
average Rs. 15,000 per month, in which the fixed component is Rs. 10,000
and the variable component is Rs. 5,000, and they would also like to link
the same with their overall performance, they may decide a plan as
follows:
The fixed component will be paid irrespective of the performance.
But for the variable component, a scale to be used:
Performance 75 percent, variable component = nil
Performance 76 percent to 85 percent, variable component = 85 percent
Performance 101 percent to 105 percent, variable component = 110

percent
Performance 106 percent & above, variable component = 115 percent
Applying the above yard stick to the three salesmen their compensation
would be:
Table no: 6.5
Sales Fixed Performance Variable component Total
man component percentge compensation
A 10000 96 percent 95 percent of 5000 = 4750 14750
B 10000 102 percent 110 percent of 5000 = 5500 15500
C 10000 107 percent 115 percent of 5000 = 5750 15750
! !108
In most of the FMCG or Pharmaceutical sales, the company tracks sales at

two levels viz. primary and secondary. Primary sales are the sales that take
place from the company to the first link in the external chain of
intermediaries viz. the Distributor or the Stockist. This sale is the one that
is reckoned to calculate the company’s turnover. However the company
needs also to track the movement of stocks from the Distributor’s or
Stockist’s end, because that will show the off take and also be indicative of
the future likely billing to the Distributor/ Stockist. This sale from the
Distributor/ Stockist to the Retailers is termed Secondary sales. Though
Secondary sales do not add to the turn over of the company, they are
extremely important for the company to keep a track of. Companies link
the secondary sales to the primary sales and collect/ book orders from the
Distributors/ Stockists after a comparative evaluation of the sales at both
the levels.
A sample order form incorporating the above factors is given below:
Table no: 6.6

Journey stock sales and order form
Distributor: Sales man:
Date: prdct A prdct B prdct C prdct D prdct E
12.06.08 stocks on hand as on 35 190 0 25 87

date
11.07.08 opening stocks on 35 190 0 25 87

13.06.08 (copied
from previous visit’s
recorded closing
stocks)
11.07.08 previous visit’s 120 36 260 96 0

ordered materials,
that have been
supplied in the
interim period
(13.06.08 to
11.07.08)
11.07.08 total 155 226 260 121 87
11.07.08 stocks on hand as on 36 200 0 36 83

date
! !109
11.07.08 secondary sales 119 26 260 85 4

(during the period
13.06.08 to
11.07.08)
11.07.08 current order taken 120 0 300 90 0
In the above 'Journey stock sales and order form' the salesman during
his visit first copies from the previous visit records the opening stocks for
the period under observation.
He then adds the material that has been supplied to the Distributor in the
period under consideration (primary sales of the company). He also obtains
the stocks on hand as on the current date of his visit. He can then derive
the Secondary sales made by the Distributor, during the period under
review, in this case the period 13.06.08 to 11.07.08. Now his task of taking
the next order is made very scientific, as he can easily estimate what may
be the likely off take during the next period, and after accounting for the
stocks that are in hand, and also factoring in any impact due to
promotional inputs planned for the ensuing period he can make a fairly
reasonable estimate of the order that should be taken. The Distributor also
does not need unnecessary persuasion to accept the order.
Another format based salesmen evaluation tool is a “merchandising

evaluation form” which can be used to check the effectiveness of the
salesmen in getting company’s products competitive shelf space in retail
outlets. In any retail outlet there is always keen competition for shelf
space. While a company would like its products to be kept on shelves with
the broad side panels visible from the front, the shopkeeper would always
prefer to push them in with the narrow front or back flaps visible because
in that way he can accommodate more varieties in a shelf. If the company
sales man has rapport with the retailer he can ensure more visibility for the
company products in the shop. So a supervisor can visit a number of shops
along with the salesman responsible for the area, and as per a specimen
format given below, make an inspection of a few randomly selected shops,
and take a survey of the number of the company’s product visible at an
eye level, on entering the shop, vis a vis competitive products visible brand
wise. A comparative visibility will give an indication of how the company’s
products are faring in terms of visibility.
! !110
A specimen 'Merchandising Evaluation Form' where Colgate is being

evaluated is given below:
Table no: 6.7

Merchandising Evaluation Form
Sale Man: Town/Market:
Colgate Pepsodent Promise Anchor Total Own

Toothpaste Percentage
ratan stores 36 35 7 25 103 0.35
hill top 24 12 5 12 53 0.45
chedda 14 42 2 26 84 0.17
sapna medicals 20 24 6 12 62 0.32
fresh bakery 12 11 0 2 25 0.48
new stores 14 20 11 3 48 0.29
total 120 144 31 80 375 0.32
percentge of 32 percent 38 percent 8 percent 21

brands percent
From the above one can easily observe that on a comparative basis
'Colgate' is occupying 32 percent of the retail visible space against
'Pepsodent' having 38 percent, and the others occupying 29 percent
between them. (Please note these are fictious figures for understanding the
concept and are not factual)
In this exercise a qualitative aspect of field work has been captured in a

quantitative format.
6.2 SUMMARY
Sales persons are often working in the market place, away from the direct
supervision ambit of the superior, who may be based in the office.
! !111
This locational distance, creates a need for having sound methods to

evaluate the performance of sales persons. The methods and processes to
be used, must ensure, good controls and at the same time be able to
motivate the sales persons.
Salesmen are assigned distinct territories which they must cover regularly.
It is very important to ensure that the territory gets visited and covered
regularly, systematically and also methodically. No part of the territory can
be left uncovered.
1. What is meant by the term 'Journey Cycle'? What are it’s usefulness?
2. What is the full form of 'PJP'? Explain the concept of a PJP, and describe
it’s use and applicability.
3. Explain a 'Criteria Based' evaluation process.
4. How would one quantitatively evaluate a sales man’s control over and
rapport with retailers in a particular market?
! !112
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !113
WORKING CAPITAL
Chapter 7
WORKING CAPITAL
Learning Objectives
• Understand and appreciate the role and importance of working capital in

a marketing setup.
• Get an idea of the several components of working capital and how to
control them.
• Appreciate the criticality of inventory and credit management.
Structure:
7.1 Credit Checks

7.2 Stocks/Inventory
7.3 Summary
Any marketing set up must also factor in how much investment has gone in
to the business. Working capital in simple terms means the capital required
for day to day running of the business.
In accounting terms the amount is the difference between current assets

and current liabilities. Any business will need money to invest in stocks and
inventory. Stocks are required to service orders from customers. The
nature and amount of stocks may vary business to business, depending
upon the specific business requirements and procedure of procurement.
Inventory, stocks, block fund and hence they are investments. Similarly,
sales may also at times have to be made on credit. This means the stocks
are sold but the payments are not received. Which in turn means, the
money paid in obtaining, and manufacturing goods are not recovered
simultaneously with sales, resulting in blockage of the funds for some more
time.
Sales on credit are usually made to increase sales, in case the buyers are
not willing to buy against cash payments.
! !114
WORKING CAPITAL
But sometimes sales on credit may have to be resorted to, when industry
conditions require the same. Particularly if competitors are offering credit,
it may be very difficult for an organization to continuously sell against
cash.
At times credit may have to be extended to a particular customer to

forestall a competitor making inroads. This would normally be common in
the B2B i.e., business to business market.
However, when extending credit, one must be very careful that the
recovery is secured.
Particularly, in the case of sales to intermediaries, i.e., resellers viz.

Distributors, stockists, and large retailers, it should not happen that items
sold on credit only go and block the inventory space of the buyer. The
primary sales must be commensurate with the secondary off take.
Credit sales have the following costs associated with it:
1. Cost of Capital – this is basically the cost of funds blocked in the

receivables.
2. Cost of control – any credit extended in the market has got to be

properly followed up and kept track of. This involves a lot of work, which
in turn means costs.
3. Cost of collection – there are costs involved in recovering out standings,

which are costs of collection. At times cost of collection can be
significant. For instance if payments for items purchased are made by
up country cheques, the collection charges of such cheques can be quite
high. In case these cheques are discounted, then too, while the funds
may be immediately available, resulting in better liquidity, the cost of
discounting can be pretty high. In case of discounting, one must also
understand that the risk of default is not over. Because if the buyer
defaults on payment the bank will debit the sellers account, if the credit
has been given “under recourse”.
4. Cost of delinquency – which in other words means the cost associated

with the buyer not adhering to the agreed period of credit, in other
words delaying on the payments.
! !115
WORKING CAPITAL
5. Cost of default – this is the cost associated with debts going bad, the
party not paying at all.
So when extending credit in the market place, one has to ensure that the
benefits accrued out of credit extension, do more than cover, the several
costs associated with such sales on credit.
7.1 CREDIT CHECKS
To reduce the risks of sales on credit one must very carefully evaluate the
credit worthiness of the party to whom credit is being extended.
While referrals and vetting by associates may be relied upon, there is no

substitute to spot ground checks. The party must be assessed on the
basis of business standings, resource ownership, impressions of associates
and also history of past business dealings.
For example, if one is to appoint a distributor in a market place and plans

to sell products to the distributor on credit, it may be judicious to carry out
a survey of retailers in the market place and find out the business behavior
and credentials of the distributor in respect of other products.
Some gaps in market servicing in the past in respect of any other

company’s products, the distributor is dealing in, may indicate that the
supply flow was disrupted. Quite possible the disruption may have been
due to payment default. A further probing may be called for in such
instances.
In the case of industrial buyers, a visit to the buyer can reveal a lot of facts
about the party’s current financial status. It may also be worthwhile to
evaluate the state of the market in which the buyer organisation operates.
If the market is not growing well, it may not be advisable to sell on credit
to a manufacturer who is catering to such a market.
Banks often do credit risk evaluation based on several factors and weight
ages are assigned to them. Similar type of credit evaluation formats can be
devised involving factors that can influence the credit worthiness of a
party.
! !116
WORKING CAPITAL
Post evaluation of the credit worthiness of the party one must also set
limits of credit to be extended. These limits can be both time limit and
amount limit. Time limit will set, up to what length of time credit will be
extended to that party and similarly amount limit will specify the maximum
amount for which credit can be extended.
Once these limits are set, it must be strictly monitored and deviations
avoided.
Depending upon the party’s behavior on the payment front, the limits can
be revised upwards, downwards or stopped too.
Incase of default of any terms of credit purchase, if the company wishes to

continue business with the party, post clearance of all dues (or amicable
settlement), credit sales can be resumed (if deemed necessary) but only
after a few transactions on advance cash payment. This is just to ensure
the party’s genuineness of intentions to buy.
7.2 STOCKS/INVENTORY
Stocks are also a big constituent of the current assets.
Costs Associated with Inventory
Just as we saw in the case of sales on credit, similarly there are certain
costs associated with holding of inventory:
1. Cost of Capital – this is basically the cost of funds blocked in the

inventories.
2. Cost of control – there is always a cost associated with keeping track of

the items kept in stock.
3. Cost of holding – which will cover all costs of warehouse, handling staff,
security, insurance, staff, license fees if required, cold storage charges
for certain products etc.
4. Cost of damages – stocks may up to a point get damaged in storage for

several reasons and those costs may have to be absorbed.
! !117
WORKING CAPITAL
5. Cost of shrinkage – this may cover costs associated with small

pilferages, reduction in quantities over a period of time due to
evaporation in case of certain products.
6. Cost of obsolescence – products becoming outdated or obsolete due to

new products being available.
While a purely commercial stand would be to hold as minimum a quantity

of stock as possible, one has to factor in that too much of lean stock
holding can result in situations of stock outs, which again is not desirable.
When stock outs happen, that is, a situation of nil stocks, the net visible
effect is in term of sales loss, which also means loss of gross margins. But
at times there can be another very adverse fall out, and that is, customers
moving away from the product. This can happen, when in case of easily
substitutable products, a regular customer facing a stock out situation buys
a competing product, develops a liking for the competing product and
continues patronizing the same. Such situation can be very bad for the
company in the long run.
So one has to be very careful in controlling inventories. While on the one

hand excess inventories can lead to following costs:
1. Cost of Capital
2. Cost of holding (storage, insurance, damage etc…)
3. Cost of obsolescence (products getting unsalable either due to date
expiry or newer versions coming in the market)
We have also seen that nil stocks can have very serious loss consequences.
Hence stocks have to be properly balanced.
One must also know that in any trading operation, idle cash lying in the
banks can also contribute to the cost of current assets.
Hence collection account cash (which is normally kept in the current

account) should be transferred to company’s operational accounts, where
they can be put to productive use such as reducing bank overdrafts or
repayments against interest bearing borrowings.
! !118
WORKING CAPITAL
Other heads of accounts that can contribute to increase in current assets

and consequently working capital are prepaid expenses, advances given to
suppliers and deposits to outside parties.
Prepaid expenses are instances of payments to suppliers of goods or

services, ahead of the due date of payments. These advances made to
suppliers in effect result in blocking, the organization’s funds ahead of the
business realization and are to that extent investments.
So what should a good business manager do? The manager would look for
opportunities to balance such investments by obtaining credit from
suppliers.
Thus getting suppliers of goods and services to extend credit to the

company, would result in obtaining suppliers’ credit, whose effect would be
to reduce to that extent involvement of own funds in the business. In a
typical marketing organization, such suppliers can be, not only material
suppliers but also service suppliers such as transporters, C and FAs,
advertising/ media agencies. Interest free deposits from Distributors can
also be source of such funds.
7.3 SUMMARY
Working capital in simple terms means the capital required for day to day
running of the business.
In accounting terms the amount is the difference between current assets

and current liabilities.
Cost Associated with Credit Sales
1. Cost of capital.
2. Cost of control.
3. Cost of collection.
4. Cost of delinquency.
5. Cost of default.
To reduce the risks of sales on credit one must very carefully evaluate the
credit worthiness of the party to whom credit is being extended.
! !119
WORKING CAPITAL
Post evaluation of the credit worthiness of the party one must also set
limits of credit to be extended. These limits can be both time limit and
amount limit. Time limit will set, up to what length of time credit will be
extended to that party and similarly amount limit will specify the maximum
amount for which credit can be extended.
Cost Associated with Inventory
1. Cost of capital.
2. Cost of Control.
3. Cost of holding.
4. Cost of damages.
5. Cost of shrinkage.
6. Cost of obsolescence.
Excess inventories can lead to following costs:
1. Cost of Capital.
2. Cost of holding (storage, insurance, damage etc…).
3. Cost of obsolescence (products getting unsalable either due to date
expiry or newer versions coming in the market).
1. What is meant by stock out? What can be fall out of such a situation?
2. What is meant by the term 'working capital' ?
3. Give 2 examples of current assets and 2 examples of current liabilities.
4. What are the several costs associated with extension of credit?
! !120
WORKING CAPITAL
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !121
BUDGETS
Chapter 8
BUDGETS
Learning Objectives
• Understand and appreciate the meaning and scope budgets.

• Appreciate the role of budgets in planning and controlling the marketing
activities.
• Learn how to prepare sales and marketing budgets.
Structure:
8.1 Budgets
8.2 Marketing Expenses
8.3 Summary
8.1 BUDGETS
Budgets are simultaneously tools for both planning and controlling. While
primarily budgets are a planned statement of revenues and expenditures
based on
(i) A pre planned set of activities,
(ii) Having a pre-defined time dimension, viz., for a certain fixed period,
along with
(iii) A place dimension, viz., covering a certain geographical area, and also
(iv) A situational dimension, viz., under certain given conditions,  

 
One should also appreciate that the same budget can be used for
controls.
! !122
BUDGETS
Plotting actual activity progress against planned activities, forms the

essence of budgetary controls.
When we mention 'under given conditions' we emphasize that the budget

performance assumes certain environmental and support activity pre
conditions. If these change then the budget needs modifications. Thus the
concept of contingency plans or flexible budget arises. If for instance a
Government order permits free import of a product which can substitute
the organization’s product (for which budget had been made), the changed
condition may warrant a downward revision in the sales estimate and a
consequent change in the entire budget, or, for instance, a sudden problem
in a competitor’s unit creates a situation where the competitor’s products
are not available in the market for some time, the situation may warrant
an upward revision in the budget.
In the case of marketing and sales the budget will start with estimating the
sales forecast. A detailed sales forecasting exercise covering all the product
lines/items marketed by the organization, starting from the most basic unit
level is made, each SKU (stock keeping unit) wise. This detailed forecast is
then aggregated upwards to arrive at the overall organization level sales
plan.
Let us take for example an organization that is marketing 2 types of soap

'fresh' and ‘clean'. Each variety is sold in 100gms and 150gms size. It also
sells 2 types of shampoo 'dark hair' and 'glossy hair'. These are again sold
in 120ml and 200 ml bottles.
Now one SKU (Stock keeping unit) is Fresh 100 gm. Similarly Fresh 150
gm is an SKU. Like wise Glossy hair 200 ml is an SKU and so on.
For the study we shall contain our exercise to the company’s West zone
operations. Let’s presume the company has a Zonal office at Mumbai. It
has branches in Mumbai, Nagpur, Ahmedabad and Bhopal. If under each
branch there are 2 areas (each area managed by an area manager) and in
each area there are 3 sales supervisors with independent territories, and in
each territory there are 4 salesmen, the organisation structure would look
like:
! !123
BUDGETS
Fig. no.: 8.1
When the budgeting for sales quantity has to be done, it has to start from
the lowest level.example, Glossy hair 200 for sales men 1, 2, 3 and 4
——— cumulating to sales supervisor 1 of ASM 1 of Mumbai branch. The
same exercise will be repeated for each SKU for each level and when they
are aggregated they will cumulate to the sales plan for that SKU for W
Zone.
! !124
BUDGETS
This exercise can also give us the sales plan at different levels of the
hierarchy viz., at sales man level, at sales supervisor level, at area Sales
manager level, at the Branch level and finally at the Zonal level.
This planned sale is the starting point of any marketing/sales budget.
The approach to this sales plan can be either starting from the grass root
level (belief being that the salesman at the lowest point of the hierarchy
are best suited to sense the pulse of the market and capture it in their
estimate) and build bottom upwards.
The other method is for the top people to estimate the sales plan (belief
being that since they are more aware of the macro economic scene – 'the
big picture' – they are better equipped to estimate the trend. This belief is
also coupled with a feeling that salesmen instinctively may predict or
inform a lower target – their variable earnings being linked with
achievements, it makes sense for them to hide a bit – so that they can
come out with better achievements) and
then sell or impose down the line.
Both being extreme views, many companies resort to a combination of

both these method viz. taking estimates from grass roots, deliberating and
modifying with macro inputs and then discussing with lower levels and
convincing them to a consensus figure. This also ensures ownership for the
targets and can lead to better motivation across the levels.
The Sales target figure serves as the starting point of the following plans:
1. Production plan,
2. Procurement plan,
3. Dispatching and transportation plans.
The volume targets when translated to revenue figures would also help in
preparing the
4. Cash flow plans and fund requirement plans.
! !125
BUDGETS
While these above plans are more at a corporate level, our this chapter is
devoted more towards the marketing and sales budget.
For the marketing and sales department the starting point is the SKU wise/
item-wise (because in the case of industrial products SKU’s may be more
like product items example, a particular type of paint or a particular
chemical or a particular steel sheet/wire etc.), volume sales.
These volume sales will have to be converted into value revenue. For
example if a bottle of shampoo is available in the market place to a
customer at an mrp of Rs. 132.00 per bottle, the company’s revenue
cannot be calculated at Rs. 132 per unit. If the product is distributed
through a chain of distributor and retailers and they are offered
intermediary margins and vat is applicable multistage, then all these
amounts would have to be reduced from the mrp amount of Rs. 132.00 to
arrive at the net realization amount. It is quite likely that after adjusting
for all these, we may get an amount of Rs. 96.00 per bottle as the
company’s billing price to the distributor. Then the revenue will have to be
calculated at the price at which the product is billed by the company ex –
its warehouse.
From this amount we have to deduct the cost of goods sold (COGS) to
arrive at the gross margin. To calculate COGS one must take the cost of
the product ex factory gate, add excise duty (as applicable) and all costs of
transportation and handling and any other levies such as octroi, central
sales tax, cess etc., (as applicable) to arrive at the cost of goods sold.
This gross margin per product, taken in conjunction with the volume
planned to be sold, will give the total gross margin per sales activity unit
(viz., territory, area, branch or zone)
From the gross margin one has to deduct the marketing, selling,
distributing and administrative expenses to arrive at the net margin.
8.2 MARKETING EXPENSES
Elements of the marketing expenses would be
1. The staff expenses including salary, travel, incidental expenses such as

communication, office, and entertainment etc. of the marketing staff.
! !126
BUDGETS
2. Advertising and mass communication expenses
3. Promotional expenses
4. Any validatory market research expenses.
For each of these the company has to decide how much to spend.
For Example advertising budget can be objective based such as how

much awareness to create, how much brand recall to create, how much
conviction needs to be done or it may be affordability based viz., as a
percentage of sales or some portion above previous year’s spend, or even
curtailed due to adverse market conditions or it can be based on
competitive spending viz., if competitors are spending a certain amount,
then the company needs to spend a certain
amount to maintain its share of voice.
When it comes to promotional budget, the spending is more focused and

they have to dovetail with increased sales expected. Promotions can be
trade oriented or consumer oriented. The company will budget for
promotional spends factoring in the additional sales that the promotional
spend should generate. There may be times when the promotional spend
may not translate into immediate sales like sampling made to generate
trials. Example – Nescafe doing free sampling of coffee to people at shops,
or Kissan trying to sample a new brand of Ketchup to people with potato
chips.
The selling and distribution expenses are similarly budgeted, based on the
sales coverage planned. This would entail planning number of sales person
required to cover the territory, their travel and communication expenses,
and also incidental expenses that may be required to distribute products.
Distribution expenses would include costs of secondary transportation from

depots to Distributor points, reimbursement of any van working expenses
to be reimbursed to stockists etc. The carrying and forwarding agents
charges also need to be planned and estimated.
For Administrative expense the planning would include determining the

office expenses such as establishment cost, staff cost, communication cost,
! !127
BUDGETS
facilities costs that are required for running branch and area offices. Thus
the budget would ultimately be a plan of likely revenues accruing, the
gross margins resulting there from, and the expenses likely to be incurred,
to finally arrive at a net contribution from the marketing activities.
The budget has also to plan for the likely requirement of working capital.
Of this the two main elements namely stocks and market receivables have
to be planned very carefully. Estimates have to be made of the likely
'number of days Stocks' that need to be carried. Similarly an estimate of
'number of days equivalent of credit to be extended in the market' needs
also to be estimated, because no budgeting is complete unless the
investment requirement are also plugged in.
A typical format of marketing/sales budget would be as under:
Table no: 8.1
Sku N Zone E Zone W Zone S Zone All India
Sales Gm Sales Gm Sales Gm Sales Gm Sales Gm
Total
Less
Expenses
Sales:
Salaries
Conveyance
Travelling
Communication
Bonus
! !128
BUDGETS
Establishment:
Office staff
Facilities
Conservancy
Security
Sls promotion
Distribution:
Sec freight
C and FA
Insuranc e
Wkg capital:
Stocks
Receivables
Marketing
Staff
Staff travels
Staff incidentals
Advertising
Product level
Profits
While the above is at a Zonal cum All India level, the same exercise has to
be repeated at each Zonal level, breaking up the same to branch, area, and
upto even territory level:
! !129
BUDGETS
Table no: 8.2

Sku Mumbai Ahmedabad Indore Goa West
Branch Branch Branch Branch Branch
Sales Gm Sales Gm Sales Gm Sales Gm Sales Gm
Total
Less
Expenses
Sales:
Salaries
Conveyance
Travelling
Communication
Bonus
Establishment:
Office staff
Facilities
Conservancy
Security
Sls promotion
Distribution:
Sec freight
C and FA
Insuranc e
! !130
BUDGETS
Wkg capital:
Stocks
Receivables
Marketing
Staff
Staff travels
Staff incidentals
Advertising
Product level
Profit
8.3 SUMMARY
Budgets are simultaneously tools for both planning and controlling. While
primarily budgets are a planned statement of revenues and expenditures
based on
(i) A pre planned set of activities,
(ii) Having a pre-defined time dimension, viz., for a certain fixed period,
along with
(iii) A place dimension, viz., covering a certain geographical area, and also
(iv) A situational dimension, viz., under certain given conditions
Elements of the Marketing Expenses
1. The staff expenses including salary, travel, incidental expenses such as

communication, office, and entertainment etc. of the marketing staff.
2. Advertising and mass communication expenses.
3. Promotional expenses.
4. Any validatory market research expenses.
! !131
BUDGETS
1. What is the function of a sales budget?
2. On what basis are advertising budgets prepared?
3. How can budgets be used for controls?
4. What are the different types of selling expenses that have to be planned
for when one prepares a sales and marketing budget?
! !132
BUDGETS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !133
EVALUATION OF PROMOTIONAL SPENDS
Chapter 9
Learning Objectives
• Understand what is meant by and the scope of promotional spendings.

• Learn to set up some standards to measure and evaluate such activities.
• Be in a position to question the logic of promotional expenditure.
Structure:
9.1 Advertising
9.2 Sales Promotion
9.3 Summary
9.1 ADVERTISING
Promotional spending can be in 2 distinct areas. The first one is

advertising. By definition advertising is any form of paid mass
communication. Advertising by its nature is a one way communication and
hence lacks the element of engaging some one in a two way interaction.
Advertising generally carries out the following tasks:
It creates awareness through drawing the attention of the target audience.

Through this drawing the attention of the target audience it creates
interest (or at best it tries to) amongst the target group in its offering. If
the interest is aroused then a desire for the offering may be created
amongst the audience which in turn can hopefully lead to a positive action
of buying the offering. This model is the basic AIDA model of advertising.
Another way of looking at advertising is that it takes the audience through

a stage of unawareness to awareness from which it goes to the next step
of imparting comprehension about the offering, and then it tries to
convince the group about the efficacy and worth of the product or service
being advertised. This hopefully can lead to desire and purchase action.
! !134
This model is depicted as a journey of the audience from a stage of

unawareness to awareness, to comprehension to conviction, to desire to
action.
In this task advertising has to be selective about the medium being used.
On the one end can be broadcasting medium such as Radio, TV, and
Cinema, whereas at the other end can be stationary outdoor media such as
hoardings, bill boards, wall paintings and other numerous adaptations like
bus shelter, shop signages, dealer boards, kiosks etc. There can be mobile
adaptation of this such as bus bodies, taxi sides, mobile hoardings.
The other major media is print – extending from lay press to magazines to
hand-bills to mailers.
Today electronic based medium are also becoming very popular.
Each of these mediums has characteristics that have compatibility values

for the objective of advertising. For instance if the objectives is to create
quick awareness, which is more at the cognitive stage, then broad cast
medium will be more effective, because any advertisement spot on a
broadcast medium, will be seen and heard by numerous people if they are
caught seeing or listening to the channel. The message just comes to them
and they are subjected to the message without any effort on their part.
But because of the medium being spontaneous, in as much as, the
message being there one instance and disappearing the next, the medium
is not good for making the target audience understand intricate features of
the offering, if they are complex. For instance while a broadcast medium
may do well to advertise a snack food item, it may not be effective to
advertise a complex feature of a computer.
For the latter, print medium may be more suitable because the features
can be better explained. However at times a simple level of comprehension
can be advertised through TV medium also – like explaining a sample
visual evidence of a particular cleaning liquid’s efficacy, or a shampoo
giving a headful of shining and glossy hair, or some holiday seekers
enjoying a particular stay in a holiday resort.
From all the above you would observe that advertising performs several
tasks that may ultimately lead to sales.
! !135
But how do we measure the influence of advertising in generating sales.

The difficulty also arises from the fact that we often do not know whether
the advertisement has at all been seen or heard by the actual customer.
A financial model that is used to evaluate the effectiveness of advertising,

called a return on promotional investment (ROPI), however has a big
limitation in as much as it does not really show how much sales the
advertisement is generating, but it becomes an indicative model to find out
amongst a portfolio of products, which product is responding well to
advertising.
The following illustrations will explain the method:
Supposing a company has 5 products A,B,C,D and E. Over a two year

period their sales are tracked. Similarly the advertisement spends on the 5
products over a 2 year period can also be tracked.
Table no: 9.1

Product Sales in Rs. Advertising Spends in Rs.
2007 2008 Difference 2007 2008 Difference
A 190 lacs 220 lacs 30 lacs 20 lacs 30 lacs 10 lacs
B 100 lacs 170 lacs 70 lacs 20 lacs 30 lacs 10 lacs
C 250 lacs 290 lacs 40 lacs 20 lacs 30 lacs 10 lacs
D 60 lacs 76 lacs 16 lacs 20 lacs 30 lacs 10 lacs
E 300 lacs 370 lacs 70 lacs 20 lacs 30 lacs 10 lacs
1126 100 150

900 lacs 226 lacs 50 lacs
lacs lacs lacs
A look at the above chart shows that on the overall the sales have grown
by Rs. 216 lacs on an additional advertising spend of Rs. 50 lacs i.e., a
4.52 fold increase in incremental sales over incremental advertising.
But against this overall 4.52 fold increase in incremental sales over
incremental advertising, a closer look will reveal that the increase is not
uniform across all 5 products.
! !136
In case of product A, the increase is 3 times (30/10), in case of product B

and E it is 7 times (70/10), in case of product C it is only 4 times (40/10),
incase of product D it is only 1.6 times (16/10).
While by themselves these figures may not mean something very

significant, they are at least indicative of a general pattern viz., that while
in the case of products B and E the incremental sales have been seven fold
the incremental spend on advertising, in case of C the incremental sales
has been 4 times, and in case of A and D, more so in the case of D the
figures are not impressive at all.
While a one year figure analysis may not be very conclusive, but if the
trend/pattern remains the same over continuously 2 or 3 years the
inference can definitely be drawn that in case of products where the
incremental sales as multiple of incremental advertising continues to be
much below the average across the board, advertising may not be having
much of an effect.
Coupled with this, one can also monitor at what stage of the product life
cycle such low yeilding products are. If they are in the maturity stage or
late growth stage, then it may be advisable to divert the advertising efforts
and resources from such products to others where the return multiples are
higher.
But if study shows that such products are in growth stage or late
introduction stage, then the advertising campaign needs to be freshly
evaluated as to its contents, creative ideas and the medium being used.
One point must be noted that this model can only be used to evaluate, in
which particular product amongst the entire portfolio of products,
advertising is delivering. It will only help in focusing on products where the
return is better than others.
9.2 SALES PROMOTION
Unlike advertising, where it is difficult to correlate advertising spends with

the growth or otherwise, of sales, in the case of sales promotions the
connect can be made very clearly.
! !137
Sales promotions, which are often called as below the line activities (BTL)
as opposed to advertising which is also called above the line activities
(ATL), are very focused on the buyers, be they the end consumer or
intermediaries. Hence their effect can easily be measured and hence
evaluation can be done more closely.
Promotions can be directed at intermediaries – which is also referred to as

trade loads, because they are used to load retailers shelves, or they can be
directed towards the end consumer, either as a price off, or an extra free
quantity, or a redemption coupon, or as a free additional item as a gift.
Thus sales promotions result in a dilution in the gross margin, per unit of
sale.
Hence in this case a model for evaluation of the effectiveness or otherwise

of the scheme can be done as under:
Supposing 'g' is the gross margin earned per unit of sale of the product
under promotion,
'd' is the worth of the dilution or cost that is being offered per unit as
promotion,
'A' is the amount that will be spent in announcing and making known or
communicating the promotion to the target audience,
'X' is the volume that is normally sold during a period, similar to the period
during which the promotion will be run and
'Y' will the volume that is planned to be sold during the promotion period,
needless to mention that 'Y' should be more than ‘X',
then a promotion can be stated to be successful only if
Y (g-d) – A > X(g).

Which in other words mean, the increased volume sold under promotion
multiplied by the reduced gross margin per unit, less the amount spent in
announcing and communicating the promotion, should be more than the
normal gross margin per unit multiplied by the quantity sold normally
during similar period.
! !138
9.3 SUMMARY
A financial model that is used to evaluate the effectiveness of advertising,

called a return on promotional investment (ROPI), however has a big
limitation in as much as it does not really show how much sales the
advertisement is generating, but it becomes an indicative model to find out
amongst a portfolio of products, which product is responding well to
advertising.
This model can only be used to evaluate, in which particular product

amongst the entire portfolio of products, advertising is delivering. It will
only help in focusing on products where the return is better than others.
Sales promotions, which are often called as below the line activities (BTL)
as opposed to advertising which is also called above the line activities
(ATL), are very focused on the buyers, be they the end consumer or
intermediaries. Hence their effect can easily be measured and hence
evaluation can be done more closely.
Promotions can be directed at intermediaries – which is also referred to as

trade loads, because they are used to load retailers shelves, or they can be
directed towards the end consumer, either as a price off, or an extra free
quantity, or a redemption coupon, or as a free additional item as a gift.
Thus sales promotions result in a dilution in the gross margin, per unit of
sale.
1. What is meant by the term ATL and how is it different from BTL?
2. What can be the different objectives of advertising?
3. Explain the ROPI model. What are the limitations of this model? 
! !139
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !140
EVALUATION OF CHANNELS
Chapter 10
Learning Objectives
• Understand what is meaning and importance of channels in marketing.

• Learn to set up some standards to measure and evaluate effectiveness of
alternate channels.
• Be in a position to question the logic of setting up and or changing
Channels.
Structure:
10.1 Channel Evaluation

10.2 Summary
10.1 CHANNEL EVALUATION
We shall now look at 'place', the last of the four 'P's of Marketing mix.
You may also recall that when looked at from the customer’s perspective,
we had redefined the 'P' place by the 'C' convenience of customers. This
is important as ultimately the products have to be purchased by the
customers, and hence whatever extent of pull is created for a particular
product, unless the product is available at a point that is convenient for a
target prospect to visit and patronize, the product may never get picked
up. The wider the ambit of coverage, the larger will be the involvement of
intermediaries in the distribution process.
Distribution Channel basically consists of a chain of intermediaries, each

passing the product down the chain to the next link, before it finally
reaches the consumer or end-user. This process is known as the
‘distribution chain’ or the ‘channel.’ Each of the elements in these chains
will have their own specific needs, which the producer must take into
account, along with those of the all-important end user.
! !141
In any distribution chain, a number of alternate ‘channels’ of

distribution may be available:
Distributor, who sells to retailers
Retailer (also called dealer at times), who sells to end customers.
Distribution channels may not be restricted to physical products alone.

They may be just as important for moving a service from producer to
consumer. In certain sectors, both direct and indirect channels may be in
use. Hotels, for example, may sell their services (typically rooms) directly
or through travel agents, tour operators, airlines, tourist boards,
centralized reservation systems, etc.
As a matter of fact in the distribution of services, there has been an

increase in franchising, and in rental services – where offerings are often
clubbed, there has also been some evidence of service integration, with
services linking together, particularly in the travel and tourism sectors. For
example, links now exist between airlines, hotels and car rental services.
In addition, there has been a significant increase in retail outlets for the
service sector.
Distribution channels can have a number of levels, the simplest being, that
of a direct contact with no intermediaries involved, as the ‘zero-level’
channel.
The next level, the ‘one-level’ channel, features just one intermediary; like
in consumer goods, just a retailer, for industrial goods a distributor. In
small markets it is practical to reach the whole market using just one- and
zero-level channels.
In large markets (involving wider spread) a second level, a distributor for

example, is now mainly used to extend distribution to the large number of
small, neighborhood retailers or dealers.
Channel decision is very important. There has to be a form of trade-off

between distributing directly or through intermediaries. Generally the cost
of using intermediaries to achieve wider distribution is lower. Indeed, most
consumer goods manufacturers could never justify the cost of selling direct
to their consumers, except by mail order.
! !142
However assuming that once the product has been sold into the channel,
i.e., into the start point of the distribution chain, the job is over, is not
correct. The distribution chain is merely assuming a part of the supplier’s
responsibility; and, if they have any aspirations to be market-oriented,
their job should really be extended to managing all the processes involved
in that chain, until the product or service arrives with the end-user. This
may involve a number of decisions on the part of the supplier:
• Channel membership.
• Channel motivation.
• Monitoring and managing channels.
Channel Membership
1. Intensive distribution – Where the majority of resellers stock the

‘product’ (with convenience products, for example, and particularly the
brand leaders in consumer goods markets) price competition may be
evident.
2. Selective distribution – This is the normal pattern (in both consumer

and industrial markets) where ‘suitable’ resellers stock the product.
3. Exclusive distribution – Only specially selected resellers or authorized

dealers (typically only one per geographical area) are allowed to sell the
‘product’.
Channel Motivation
It is difficult enough to motivate direct employees to provide the necessary

sales and service support. Motivating the owners and employees of the
independent organizations in a distribution chain requires even greater
effort. There are many devices for achieving such motivation. Perhaps the
most usual is ‘incentive’: the supplier offers a better margin, to tempt the
owners in the channel to push the product rather than its competitors; or a
an incentive/commission is offered to the distributors’ sales personnel, so
that they are tempted to push the product.
! !143
Monitoring and Managing Channels
In much the same way that the organization’s own sales and distribution
activities need to be monitored and managed, so will those of the
distribution chain.
In practice, many organizations use a mix of different channels; in
particular, they may complement a direct sales force, calling on the larger
accounts, with agents, covering the smaller customers and prospects.
The manufacturer has to make a case to attract parties to be members of

its distribution channel. For this several issues, depending upon the
sophistication of the supplier and channel members and the intensity of
competition for share of the channel, are involved.
1. Growth – emphasizing the level of demand for the supplier’s products or

services and the investment it will make in stimulating demand.
2. Profitability – showing the margins, contributions, utilization of

overheads and net profitability that selling the supplier’s products or
services will deliver to the channel member. This can be augmented by
special funding and other payments made by the supplier for activities
carried out by the channel member (putting items on display or
emphasizing them in marketing materials, etc) or for performance
(achieving volume thresholds, reaching a specific segment of the
market, etc).
3. Return on capital – demonstrating the productivity of the channel

member’s investments in inventory, working capital or fixed assets will
be improved by engaging with the supplier. For example, a fast turning
product will accelerate the channel member’s inventory turns, increasing
the productivity of its warehouse, shelf space or website.
4. Brand – showing how the association with the supplier will empower the
channel member’s own brand, or allow it to 'borrow' or leverage the
supplier’s brand. For example, often seen when small dealers and
retailers sport “authorized reseller” or similar badges on their letterhead
and premises to demonstrate credibility to the end customer.
! !144
Having stated all this one needs to take an example to demonstrate how
does a manufacturer go about evaluating from it’s own side the viability or
otherwise of alternate modes of distribution.
Let us take the example of a manufacturer who is currently distributing its

products directly to retailers. For ease of understanding we presume it is
selling one product. The selling scenario is such that the sales price of the
manufacturer is at the level of the first intermediary, i.e., the margins will
be calculated at that point.
Its total sales are Rs. 2400 lacs per annum.
The gross margin earned is @ 30 percent of sales value.
It also incurs the following costs for distribution:
Table no: 10.1

Vehicle costs Rs. 55 lacs
Staff costs Rs. 25 lacs
Warehouse costs Rs. 7 lacs
Administrative costs Rs. 26 lacs
Cost of bad debts @ .5 percent of sales
Stock holdings in number of days 60 days
Market outstanding in number of days 45 days
The manufacturer has an offer from a Distributor who is ready to take on

the distribution work of the manufacturer, but he will have to be given a
distributor mark up @ 5 percent. Since the product is sold at a price that
yielded a 30 percent margin, it can be assumed that in order to retain the
price to customers at the existing level, the realization of the organization
will have to absorb the 5 percent margin to be offered to the Distributor.
However bringing in a distributor the manufacturer will be able to reduce

its expenses on sales and distribution.
Under the new setup the expenses are likely to be:
! !145
Table no: 10.2

Vehicle costs Rs. 15 lacs
Staff costs Rs. 15 lacs
Warehouse costs Rs. 2 lacs
Administrative costs Rs. 14 lacs
Cost of bad debts nil
Stock holdings in number of days 30 days
Market outstanding in number of days 15 days
if we work out the profitability of the manufacturer under the two

alternates, we shall observe:
Table no: 10.3
all figures Rs. lacs.
Current Proposed
Sales 2400 2400

Gross margins @ 30 percent 720 720
Distributor margin @ 5 percent 120
Effective gross margin 720 600
Less expenses
Vehicle cost 55 15
Staff cost 25 15
Warehouse cost 7 2
Administrative cost 26 14
Cost of bad debts 12 (.5 percent) nil
total 125 46
Net margin 595 554
so we are led to the decision that the net margins take a very large dip in
case the distributor is introduced into the chain.
! !146
However a further look will show us that while the net margins have
dropped, the manufacturer’s investments in stocks and market
outstandings have also decreased.
While earlier the manufacturer was holding 60 days of stocks, under the
new arrangements the manufacturer will hold only 30 days of stocks.
Apart from improving the distribution coverage, an intermediary such as a

distributor also shares the stock holding requirements of a manufacturer.
In monetary terms the stock holdings would reduce from Rs. 280 lacs (Rs.
2400 lacs annual sales less Rs. 720 lacs annual gross margins = Rs. 1680
lacs annual cost of sales ÷ 6, because the manufacturer is holding 2
months’ stocks) to Rs. 140 lacs (Rs. 2400 lacs annual sales less Rs. 720
lacs annual gross margins, which is Rs. 1680 lacs and to be divided by 12,
because now the manufacturer is holding only 1 month’s stocks).
Similarly, in respect of market outstandings, the company had earlier to

finance 45 days’ equivalent sales, which now will be limited to 15 days’ to
the distributor. This in monetary terms would translate to Rs. 300 lacs
earlier (Rs. 2400 lacs annual sales ÷ 8, because 45 days’ credit), coming
down to Rs. 95 lacs (Rs. 2400 lacs less distributor margin Rs. 120 lacs =
Rs. 2280 being the new annual sales ÷ 24, because the credit now being
given is for 15 days only)
One can see that the distributor also bears the credit extension cost and
risk of the manufacturer.
Thus in value terms the manufacturer’s working capital investments comes

down from Rs. 580 lacs to Rs. 235 lacs. If the company was to reckon 15
percent per annum as average cost of capital the savings on this account
would be Rs. 51.75 lacs (Rs. 345 lacs x 15 percent).
When we factor this savings due to reduced funds blockage, we observe

that the net profit under the current scenario is Rs. 508 lacs (Rs. 595 lacs
less Rs. 87 lacs which is 15 percent of Rs. 580 lacs) whereas the net profit
under the proposed scenario would be Rs. 518.75 lacs (Rs. 554 lacs less
Rs. 35.25 lacs which is 15 percent of Rs. 235 lacs), which is in fact a slight
improvement over the previous figure.
! !147
Additionally of course the intermediary will help in increasing the width of

distribution.
Thus when evaluating alternate distribution channels one has not only to
look at costs, but also at the blockage of funds and benefits accruing on
the overall distribution scenario.
10.2 SUMMARY
Distribution Channel basically consists of a chain of intermediaries, each

passing the product down the chain to the next link, before it finally
reaches the consumer or end-user. This process is known as the
‘distribution chain’ or the ‘channel.’ Each of the elements in these chains
will have their own specific needs, which the producer must take into
account, along with those of the all-important end user.
In any distribution chain, a number of alternate ‘channels’ of

distribution may be available:
Distributor, who sells to retailers
Retailer (also called dealer at times), who sells to end customers.
Intensive distribution – Where the majority of resellers stock the

‘product’ (with convenience products, for example, and particularly the
brand leaders in consumer goods markets) price competition may be
evident.
Selective distribution – This is the normal pattern (in both consumer and
industrial markets) where ‘suitable’ resellers stock the product.
Exclusive distribution – Only specially selected resellers or authorized

dealers (typically only one per geographical area) are allowed to sell the
‘product’.
! !148
1. What is 'channel' in a marketing setup?
2. What is meant by intensive and selective distribution?
3. When evaluating alternative modes of distribution, what factors besides

the cost of distribution should be considered?
4. Apart from improving the width of distribution, do intermediaries have

any other contribution to the working of a marketing initiative?
! !149
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !150
BRAND VALUATION
Chapter 11
BRAND VALUATION
Learning Objectives
• Understand the concept of Brands.

• Appreciate why and when brands needs to be valued.
• Learn different methods that may be used to assess the value of
particular brands.
Structure:
11.1 Brand
11.2 Valuation of a Brand
11.3 Summary
11.1 BRAND
Brand is a name, a term, a sign, a symbol, a design or a combination of

any or all of them that marketers use to convey the identity of its goods/
services to customers and differentiate its own products/services from
those marketed by others. 
! !151
BRAND VALUATION
! !
! !
! !
! ! !
! ! !
Fig. no.: 11.1 
! !152
BRAND VALUATION
Brands can convey:
1. Attributes/special features/distinguishing elements, Example Raymond’s

suiting are stylish
2. Benefits – the attributes should transform to benefits, Example style,

fashion, and modernity may transform to 'emotional benefits', just as
high quality will transform to 'functional benefit', viz., 'long lasting’
3. Values – most brands associate some values, Example, 'Raymonds the

complete man’ has the value proposition ‘complete/perfect'.
4. Culture – Raymonds again projects a culture of family bonding. It may

also convey personality traits, Example, Raymonds man cares for his
family and the user belongs to a higher upper class.
Brand image: it’s a schematic memory of a brand – it contains the target

market’s interpretation of the product’s attributes, benefits, usage
situations, users, as well as the manufacturer’s/marketer’s characteristics,
Example, HP is a reliable printer
Brand equity: a set of assets associated with a brand which adds to the
value provided by the product/service to its customers – it is in effect the
aggregate of the potential customers’ beliefs that it will deliver on its
promise. In a way a brand’s equity can be a manifestation of the value
consumers assign to a brand over and beyond the functional characteristics
of the product/ service.
The assets can be:
1. Brand awareness
2. Brand loyalty
3. Perceived quality of the brand and
4. Brand association
these the brand managers create and enhance to build brand equity.
Besides the above, intellectual property viz., patents can also be an asset
! !153
BRAND VALUATION
All of these comprise the identity equity of a brand
Let’s look at each of these a bit in detail:
Brand awareness: in essence it is the registration of the brand’s presence

in the mind of the consumers. It may range from mere recognition – to
recall – to, top of the mind – to, most dominant. Awareness levels are an
indicator of the company’s spends on the brand. However, mere brand
awareness may not be synonymous to brand strength example, a weak
brand may also be known 'Promise' tooth paste for example. Examples of
dominant brands would be IBM for computers, Nokia for hand sets etc.
Brand loyalty: while loyalty is an outcome of good quality, we can better

define it in terms of customer’s behavior and attitudes, Example, a
customer who has found a satisfactory brand resists the promotional
efforts of rival brands. Brand loyalty is enhanced by creating brand
awareness, improving perceived quality and establishing clear identity for
the brand.
Brand associations: consumers associate a brand with certain tangible

and intangible attributes, the endorser’s standing or a visual symbol. These
associations are derived from the brand’s identity and image, example,
Reid and Taylor endorsed by Pierce Brosnan (James Bond) or Tag heur
watches by Shah Rukh Khan may symbolize ‘class'.
Perceived quality of the brand: it is based on judgments of quality and

is not necessarily same as actual quality. At times it has much to do with
what the customers feel the quality is (image) and thus even if a product
improves the physical quality while the customers carry a poor image of
the product the perceived quality will still be low.
A strong brand equity can translate into easy acceptance of new products
introduced by the brand owner, ability to command a premium in the
market, getting preferred shelf space, increased financial clout and last but
not the least easy marketability of the brand itself.
! !154
BRAND VALUATION
11.2 VALUATION OF A BRAND
In this chapter we shall deal with two principal issues viz., what are the
uses for brand valuation, and what are the methods that may be used to
value brand.
Brand valuation is not a very old concept. Sometimes in the late 70’s and
early 80’s this concept got introduced as a response to the vulnerability of
low profile but sound business houses to the acquisitive attentions of
predatory conglomerates keen to acquire such businesses. At the time of
negotiation the balance sheet of such target business needed to be spruced
up by the intangible yet very much real worth of the brands marketed by
them.
Valuing brands therefore necessitate breaking up a company into its

component brands and then valuing these brands by some applicable
methods.
The main argument against valuing a brand and pegging a financial figure
to it, is that, all said and done there will remain an element of subjectivity
and consequent arbitrariness in the exercise.
Another big hurdle is the irregularity and infrequency in brand transactions

and therefore unlike valuing a business, where more frequent transactions
can test the suitability of some methods of business valuation, brands do
not offer such numerous examples for testing any method being scouted.
Brands operate in diverse sets of markets and in today’s age of

globalization these market diversity can indeed be very large. It is
therefore important to segregate the entire area of operations into smaller
markets in terms of their responsiveness to branding.
Methods
Over the years several methods have been used from time to time:
1. Historical Cost Method
This approach values the brand as the sum of all costs incurred in bringing
the brand to its current state. The biggest drawback of this method is
identifying the costs involved in creating a brand and how to separate that
! !155
BRAND VALUATION
part of the marketing expenditure which was responsible for brand

building. The other problem with this method is the basic question of what
relationship can historical spending bear to have, in relation to the current
value of the brand, because most marketing spends, may have been in
some context.
2. Replacement Costs Method
This approach values a brand using an estimated cost of creating a similar

but new brand. While saying 'estimating the cost' is easy, the actual task
may be extremely difficult and often hypothetical. Most of the assumptions
may be questionable, and arbitrary, plus one cannot lose sight of another
significant factor, which is the ground reality of the 'brand being valued',
existing in the market place, and therefore the market itself being
influenced by the 'existing brand' – which means that the market is not an
ideal ground zero.
3. ‘Market Value’ – Method
The Market value approach is similar to finding out what people may be
willing to pay for the brand, if the same is put up for sale. Similar to what
happens if a flat or a car is put up for sale, here the question is, putting up
a 'brand' for sale, may not be that frequent an operation, and buyers may
also not be so easy to come by. The other difficulty is that even if indicative
bids for some brands are available, it may not be so easy to interpolate
one on the other.
4. ‘Premium Price’ – Method
This method in essence tries to value a brand in terms of the price

premium that the brand may command over an unbranded or generic
equivalent. A price premium can be used to calculate the additional profits
earned by the brand (after allowing for any additional production or
marketing costs) and then, may be over a five year period, calculating a
net present value, using some inflation or interest rate, to arrive at a value
for the brand based on the profit stream over the past 5 years. The biggest
difficulty of this method is to find an equivalent unbranded or generic
product. The other drawback of this system is that the effect of the 'brand'
may not entirely be reflected in the ‘price premium', some reflection may
! !156
BRAND VALUATION
also be in the sales volume and market shares. Because a good brand does
not look at price premium alone, it also looks at increased market share.
5. Royalty Relief Method
This approach values a brand at the net present value of the royalty
payments that the company would have to pay to license the brand, if it
did not own the brand. Thus the brand’s value is equivalent to the amount
that ownership of the brand by the company, “relieves” the company from
paying as license fees or royalty. The problem is calculating the amount of
royalty. Royalties can be calculated as a simple percentage or can be on a
tiered percentage basis. Payment frequency needs to be established. The
price basis may also have to be set, viz., will be on basis of inventory price,
or vendor price, or line, item price. A maximum/ minimum amount for life
of contract needs to be set. Generally when calculating any royalty rate,
one must understand that royalty is the licensor’s share of the product’s
profit in the hands of the licensee which in arithmetical terms would be –
Royalty on sales price = Licensors share of the licensee’s profit X profit

on sales price
Thus if a licensor wants to receive 20 percent share of licensee’s profit on a

product that will sell at Rs. 50, and on which the licensor estimates the
licensee’s profit would be Rs. 15, the licensor would negotiate to apply a
royalty rate of 6percent on the sales price = 20 percent of 15/ 50 = 20
percent of 30 percent = 6 percent
One can calculate for a hypothetical case on the following parameters:
Calculation on a 7 year period.
Royalty rate @ 4 percent of sales price
Discounting rate applied 10 percent per annum
! !157
BRAND VALUATION
Table no: 11.1

Year 1 2 3 4 5 6 7
Sales Rs. Lacs 100 110 120 125 135 145 150
Royalty @4
4 4.4 4.8 5 5.4 5.8 6
percent
Discounting
1 1.1 1.21 1.33 1.46 1.61 1.77
Factor
NPV 4 4 3.97 3.76 3.70 3.60 3.39
The Royalty Relief Approached value will be Rs. 26.42 lacs.
6. Young and Rubican Brand Asset Valuator Model
This model evaluates a brand on consumer perceptions on two

dimensions which are the brand’s strengths and the brand’s stature.
Brand strength is a combination of differentiation (distinctiveness of
the brand in the market) and relevance (its appropriateness or
meaningfulness to the customer) AND
Brand stature is a combination of esteem (the quality perception i.e.,

popularity and regard for the brand in the minds of the consumers) and
knowledge (understanding by the consumer of what the brand stands for)
By measuring the brand (on a scale) on these 2 dimensions through

consumer surveys one can assess the health of a brand. This model can be
used as a diagnostic tool.
! !158
BRAND VALUATION
Brand Asset Valuator Model
!
Fig. no.: 11.2
Strength = differentiation + relevance
Stature = esteem + knowledge
7. Economic Use Method
This method attempts to calculate the value of the brand to its owners in
terms of the net present value of the profit streams attributable to the
brand. It starts with an analysis of the profitability of the brand to the
business. Two brand valuation companies Interbrand Ltd. and Brand
Finance Ltd., have their methods based on this approach.
Interbrand Group PLC value a brand against 2 factors: earnings and

strengths. Earnings reflect the profit potential of a brand and strengths
reflect the potential of future earnings.
A brand’s strength is a composite value constituted by measuring the

following variables:
1. Leadership: how the brand influences the market.
! !159
BRAND VALUATION
2. Stability: how enduring the brand has been in the market.
3. Market: how attractive is the market in terms of growth, entry barriers

etc.
4. Geographic: how appealing and acceptable the brand is across different

markets
5. Trend: how relevant is the brand viz. whether it is contemporary
6. Support: what marketing supports have been made to maintain the

brand
7. Protection: how protected is the brand legally
One approach is to base on the past few years’ profits, and the other can
be to project a few years into the future.
The approach is called an Earning multiple method or the other version is

called Future earning method.
In principle the method is based on the following steps:
1. Fix a period which is to be reckoned to calculate the brand value. Ideally

it may range from 5 to 7 years. Shorter than that may be not
representative and longer than that may not be relevant.
2. Through a process of due diligence audit get the actual net profit
attributable to the brand under valuation, year by year.
3. Calculate or estimate the engagement of funds on that brand.
4. Estimate a cost of capital, year to year, and calculate the component

amount attributable to capital in the profits. The logic here is that
capital has also contributed to the profit.
5. Adjust for inflation over the years.
6. Assign a weight age to the annual profits, weights being more in years
closer to the year of valuation.
! !160
BRAND VALUATION
7. Adjust for tax.
8. Ascertain the Price earning Ratio or P/E multiple either of the company
whose brand is being evaluated or in case it is not a listed company,
take an average P/E ratio for similar companies or companies with
similar product portfolios.
The rationale for applying P/E multiple is that if a particular share script is
being traded in the market at a price which is several times its earnings
then obviously it is a reflection of the investing communities trust and
confidence in the profit capability of the firm. Thus applying this multiple
will capture the essence of that underlying principle.
Now let us take an example to prove the above:
We take a hypothetical company and one of its brands that we wish to

value:
We are carrying out the exercise in the year 2009.
Table no: 11.2

(all figures in Rs. lacs)
2004 2005 2006 2007 2008
Sales of the Brand 120 130 135 140 146
Gross Margin 36 39 43 43 47
(30 (30 (32 (31 (32
percent) percent) percent) percent) percent)
Less:
Selling/ 18 19 20 21 23
Distribution/
Marketing/
Administrative
expenses
Net Margin 18 20 23 22 24
Capital Employed 80 85 90 88 90
! !161
BRAND VALUATION
Cost of Capital 8 8.5 10 7 6

(10 (10 (11 (8 (7
percent) percent) percent) percent) percent)
Net profit after 10 11.5 13 15 18

adjusting for cost
of capital
Adjustment for 1.31 1.23 1.14 1.07 1

inflation at a flat
range rate of 7
per
centpa
Inflation adjusted 13.1 14.15 14.82 16.05 18

net profit
Weights applied 1 2 3 4 5
(highest 2008)
Weighted net 13.1 28.3 44.46 64.2 90

profit
Weight adjusted net profit = (13.1 +28.3 + 44.46 + 64.2 + 90 =

240.6) ÷ (1 + 2 + 3 + 4 + 5=15) = 16 lacs
Let us presume the company’s script in the market is trading at average

Rs. 400 per share and the company’s earnings per share has been Rs. 16
then the P/E ratio is 400 ÷ 16= 25.
Now the valuation of the brand will be:
1. Weight adjusted, inflation corrected cost of capital Rs. 16 lacs

excluded net profit
2. Corporate tax @ let us say 33percent Rs. 5.33 lacs
Tax adjusted
Rs. 10.67 lacs
3. P/E multiple = 25
So brand value is 10.67 lacs * 25= Rs. 267 lacs
You will discover the high P/E ratio has increased the brand value
substantially.
! !162
BRAND VALUATION
If on the other hand the P/E multiple was let us say 6 the brand value
would have been 6 * 10.67 = Rs. 64 lacs only.
The future earning multiple will be an altered version where the past 5
years will be replaced by future 5 years estimated profits and calculating
the discounted net present value.
11.3 SUMMARY
Brand is a name, a term, a sign, a symbol, a design or a combination of

any or all of them that marketers use to convey the identity of its goods/
services to customers and differentiate its own products/ services from
those marketed by others.
Several methods have been used from time to time.
There are
1. Historical cost method

2. Replacement costs method
3. (Market value' - method
4. 'Premium price' - method
5. Royalty relief method
6. Young and rubican brand asset valuator model
7. Economic use method
! !163
BRAND VALUATION
1. What is a ‘brand’?
2. Why should brands be evaluated?
3. Describe 3 methods of brand valuation.
4. Explain the 'brand asset valuator' model. 
! !164
BRAND VALUATION
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !165
PROBLEMS FOR EXERCISE
Chapter 12
We are now appending below some problems for your exercise:
Sample solutions for similar types of problems are given. The others you
may use for exercise.
Problems for Exercise
1. Ronald Metal wares manufacture Stainless steel containers for Industrial

use. Their works are situated at Nasik in Maharashtra.
They have 4 types of containers, very large (VL), Large (L), Medium (M)
and Small (S)
The cost structures for the 4 types of containers are:
Table no: 1
VL L M S
Materials Rs. per unit 2000 1800 1500 1000
Direct Labour Rs. per unit 600 500 400 350
Machine Hrs reqd per unit 10 9 7 1.33
The plant has machines for manufacturing steel containers whose fixed
cost is Rs. 1.5 lacs per month.
Variable cost of plant running viz. electricity, fuel etc. is Rs. 3 per hour.
Ronald Metal Ware sells its containers in Maharashtra and Gujarat.
In Maharashtra the VAT is @12.5 percent and for Gujarat the sale attracts
central sales tax @ 2 percent, after which VAT @ 12.5 percent gets
imposed. Tax has to be reckoned on billing price so that billing price plus
tax, amounts to the buying price to the purchasing dealer.
! !166
The average freight per unit is

Table no: 2
VL L M S
For sale in Maharashtra 100 80 75 60
For sale in Gujarat 200 170 120 90
Selling and Distribution Variable expenses are:
Table no: 3
VL L M S
At percentge rate of selling price 3 percent 4 percent 6 percent 8 percent
The sales per month and the buying price for the purchasing distributors
per unit in the two regions are:
Table no: 4
VL L M S
Maharashtra: units 1500 1800 3000 5000
buying price per unit Rs. 4800 Rs. 4500 Rs. 4000 Rs. 2700
Gujarat: units 1200 1500 3000 4500
buying price per unit Rs. 4500 Rs. 4200 Rs. 3800 Rs. 2500
Work out the individual profitability of the 4 types of containers.
Solution:
First we shall calculate the cost of production of each of the varieties:
Table no: 5
VL L M S
Materials Rs. per unit 2000 1800 1500 1000
Direct Labour Rs. per unit 600 500 400 350
! !167
Machine Hrs reqd per unit 10 9 7 4
Electricity fuel @ Rs. 3 per

30 27 21 12
hour
Total units manufactured for

sales in Maharashtra and 2700 3300 6000 9500
Gujarat
2700 x 10 3300 x 9 6000 x 7 9500 x 4

Total machine hours utilised
= 27000 = 29700 = 42000 = 38000
Thus total utilization of machine per month = 136700 hours. The total fixed
cost being Rs. 150000 the apportionment to the 4 products will be:
29626 32590 46086 41697
Hence machine hour cost 10.97 9.88 7.68 4.39

per unit
2000 + 1800 + 1500 + 1000 +

Thus total cost of 600 + 30 500 + 27 400 + 21 350 + 2 +
manufacturing + 10.97 + 9.88 + 7.68 1 4.39 =
= 2640.97 = 2336.88 = 1928.68 1366.39
Now we shall calculate the realizations:
For sales in Maharastra the buying price of the dealer is inclusive of vat @
12.5 percent
Similarly for sales in Gujarat the buying price of the dealer is inclusive of
cst @ 1 percent
Table no: 6
VL L M S
Buying price of dealer in

4800 4500 4000 2700
Maharastra inclusive of vat
Billing price of Ronald (Mah) 4267 4000 3555 2400
Buying price of dealer in

4500 4200 3800 2500
Gujarat inclusive of cst
! !168
Billing price of Ronald (Guj) 4412 4118 3725 2451
Quantity sold in Maharastra 1500 1800 3000 5000
Quantity sold in Gujarat 1200 1500 3000 4500
Weighted selling price 4331 4054 3640 2424
Variable selling & distrbtn

expnss at percent ge rate of 3 percent 4 percent 6 percent 8 percent
selling price
130 162 218 194
Per unit freight for sale in

100 80 75 60
Maharashtra
Per unit freight for sale in

200 170 120 90
Gujarat
Weighted freight 144.4 120.9 97.5 74.2
Now the final profitability product wise can be arrived as:
Weightd realization 4331 4054 3640 2424
Cost of manufacturing 2640.97 2336.88 1928.68 1366.39
Variable selling and distrbtn

130 162 218 194
expnss
Weighted freight 144.4 120.9 97.5 74.2
Total cost of sales 2915.4 2619.78 2244.18 1634.59
Profit 1415.6 1434.22 1395.82 784.41
32
Profit as percentge of sale 33 percent 35 percent 38 percent
percent
Now one can make qualitative comments.
2. Ratnagiri Soaps Ltd sell 2 types of Soaps Premium and Ordinary
Their business results for the year 2005-06 are as under
! !169
Table no: 7
Sales N Zone E Zone W Zone S Zone
Premium soap in tons 200 160 220 180
Value Rs. lacs 460 368 506 414
Ordinary soaps in tons 600 600 500 400
Value Rs. lacs 720 720 600 480
Total market
Ordinary soaps in tons 4000 3500 3000 2500
The gross contribution for premium soaps is @ 40 percent of sales price

and for ordinary soaps is @ 30 percent of sales price.
Selling and Distribution expenses for the year were as under:
Table no: 8
All figures in Rs. lacs
N Zone E Zone W Zone S Zone
Regional sales manager’s

12 10 13 11
salary
Br Mgrs’ Sal 24 16 32 15
Sales Men Sal 24 18 35 17
Traveling 30 25 36 18
Communication Expenses 3 2 4 1
Commission/Incentives
Premium Soap @ 3 percent on Sales value
! !170
Table no: 9
Ordinary Soap @ 2 percent on Sales value
Distribution Expenses
C& FA expenses 24 18 30 22
Secondary Freight 12 8 13 6
Stocks in avg no.of days 45 50 36 30
Receivables avg no. of days 35 45 50 40
Comment on the zone wise performance
3. Indiana Co. Ltd produces 10,000 units of a product at a cost of Rs. 4 per
unit and sells in the domestic market at a price of Rs. 4.25 per unit.
Through its market research department the company understands that
in the year 2005 the prices will fall drastically and the product will have
to be sold at Rs. 3.72 per unit.
The cost data for 10,000 units is given below:
Table no: 10
Rs.
Materials 15000
Wages 11000
Variable Overheads 6000
Fixed Overheads 8000
However, the company has capacity to produce 30000 units and there is a
potential to sell additional 20000 units in the export market at a price of
Rs. 3.45 per unit. If the company decides to sell in the domestic as well as
export market it will have to produce 30000 units. Production up to 20000
units does not change the present fixed cost, however production and sale
beyond 20000 units will increase the present fixed cost by 20 percent.
! !171
It is further given that to meet the export order the company will have to
spend additional Rs. 0.40 per unit on packing and Rs. 0.20 per unit on
shipping. However, the export order also carries the following incentives:
• Cash incentive which works out to be Rs. 0.40 per unit and
• Duty drawback which works out to be Rs. 0.40 per unit
The company has two options:
1. Sell 20000 units only in export market and do not sell anything in
domestic market because of expected loss.
2. Produce and sell all 30000 units (10000 domestic and 20000 export)
Which option the company should select?
4. Tiara Co. Ltd is marketing all its products through a network of dealers.
All sales are on credit and dealers are given 1 month time to settle bills.
The company is thinking of changing the credit period with a view to
increase its over all profits. The Marketing department has prepared the
following estimates for the different periods of credit.
Table no: 11
Present Policy Plan I Plan II Plan III
Credit period (in months) 1 1.5 2 3
Sales (in Rs. lacs) 240 260 300 360
Fixed Costs (Rs. lacs) 60 60 70 80
Bad debts as percent of

0.5 0.8 1 2
sales
The company has contribution/sales ratio of 40percent. Further it requires

a return on investment at 20 percent before tax.
Evaluate each of the above proposals and recommend the best Credit
Period for the company.
! !172
Solution:
Table no: 12
Present Plan
Plan I Plan II
Policy III
Credit period (in months) 1 1.5 2 3
Sales (in Rs. lacs) 240 260 300 360
Contribution to sales being

40percent the 96 104 120 144
gross margins Rs. lacs:
Fixed Costs (Rs. lacs) 60 60 70 80
Gross margin post fixed cost Rs.

36 44 50 64
lacs
Bad debts as percent of sales 0.5 0.8 1 2
Actual bad debts Rs. lacs 1.2 2.08 3 7.2
Market outstandings Rs. lacs 20 32.5 50 90
20
20percen 20percen
Return on investment @ 20 percent 20 percent percen
t of 32.5 t of 50 =
Rs. lacs of 20 = 4 t of 90
= 6.5 10
= 18
44 – 64 –
Net margin after accounting for cost
36 – 1.2 – 2.08 – 50 – 3 – 7.2 –
of investment in market
4 = 30.8 6.5 = 10 = 37 18 =
out standings
35.42 38.8
10.7
12.8 13.6 12.3
Net margin as percentge of sales percen
t
apart from the profit angle where under plan I seems to be the best, one
has also to consider credit risk factor too, as it increases with the credit
period.
! !173
5. Wires India Ltd. makes 3 basic types of wire products. Production

statistics for the past year is given below:
Table no: 13
Product 1 Product 2 Product 3
No. of units manufactured 60000 40000 30000
Direct material cost Rs. 138000 68000 132000
Direct labour cost Rs. 48000 28000 30000
Manufacturing overheads Rs. 24000 14000 15000
Total Rs. 210000 110000 177000
The Selling and Administrative costs for the year were as follows:
Rs.
Sales Salaries 26000
Sales commission 71350
Advertising 14200
Travel and Entertainment 7600
Delivery Expenses 4000
Sales office Expenses 10500
Office Salaries 9250
Office supplies used 1600
Administrative Office expenses 3050
Total 147550
Product 1 and Product 2 were sold at 40 percent above manufacturing cost

while Product 3 was sold at 50 percent above its manufacturing cost. The
company has devoted a great deal of time and effort in developing sales of
product 3. The management is now questioning the wisdom of this policy
and has initiated a study of selling and administrative cost by product
lines:
! !174
Table no: 14
Basis of
Cost Product 1 Product 2 Product 3
allocation
Sales salaries, Travel Percentage of 20 20 60

and Entertainment to time devoted
each line
Advertising percentga basis 30 20 50
Sales Commisssion 10 percent of

sales
Sales office expenses No. of Orders 150 30 120
Office salaries No. of Orders 150 30 120
Office Supplies Used No. of Orders 150 30 120
Administrative No. of Orders 150 30 120

Expenses
Delivery Expenses Weight – 30 30 40

Distance Ratio
All production for the year was sold with no inventory costs carried forward
from the beginning of the year and no returns of sales by customers.
1. Prepare a profit statement with all costs broken down according to the
product line
2. Indicate which product line shows the higher rate of profit to sales and
which the least.
6. A Company has three branches and their summarized accounting

particulars for a period are given below:
! !175
Table no: 15
(Branches)
Mumbai Pune Nasik
Rs. Rs. Rs.
Sales 900000 800000 1400000
Manufacturing Cost 675000 600000 1050000
Gross Profit 225000 200000 350000
Branch Expenses:
Salaries and Commission 82000 80000 120000
Advertisement 18000 20000 22000
Other Expenses 20000 22000 24000
Head office expenses of Rs.310000 are apportioned to the branches on the

basis of sales.
By preparing profit and loss statement for the three branches give your
views on the possibility of closing down the loss making branch, assuming
that in the event of the closure of a branch the central office expenses:
1. Will remain unaffected.
2. Can be reduced by 30 percent.
The sales and manufacturing cost given for a branch will automatically
disappear in the event of its closure.
Solution:
Table no: 16
Mumbai Pune Nasik
Rs. Rs. Rs.
Sales 900000 800000 1400000
Manufacturing Cost 675000 600000 1050000

Gross Profit 225000 200000 350000
Branch Expenses:
! !176
Salaries and Commission 82000 80000 120000
Advertisement 18000 20000 22000
Other Expenses 20000 22000 24000
Total expenses 120000 122000 166000
Net profit prior to HO expenses 105000 78000 184000
HO expenses 310000 apportioned in

90000 80000 140000
proportion to sales
Profit post HO expenses allocation 15000 (2000) 44000

Because post HO expenses Pune is showing a loss if one decides to close
down Pune it will be a mistake as Pune is on its own making a profit of
78000 which will not be available to cover the HO expenses and hence if
Pune is closed and HO expenses remain same the scenario will be:
Table no: 17
Mumbai Pune Nasik
Rs. Rs. Rs.
Net profit prior to HO expenses 105000 184000
HO expenses 310000 apportioned in

121304 188695
proportion to sales (NEW)
Profit post HO expenses allocation (16304) (4695)
Thus all branches become loss
If HO expenses were to reduce by 30

percent i.e., become 217000 then the
84913 132087
expenses apportioned
would be
Profit post HO expenses allocation 20087 51913
Now the total profit becomes Rs. 72000 against earlier Rs. 57000 when all
branches were operating.
! !177
7. A Company manufactures and sells pens. The current volume of sales is

50 lacs units and selling price is Rs. 25 per unit. The fixed costs are Rs.
450 lacs. The variable cost per unit is Rs. 15.
I. Compute income for 20 percent decrease in fixed costs, 20

percent decrease in selling price, 10 percent decrease in
variable cost per unit and 40 percent increase in units sold.
II. Find breakeven point for 10 percent increase in selling price and
` 1 lacs increase in fixed costs.
8. A company manufactures 3 products A,B,C with contribution margin of

Rs. 150, Rs. 100, and Rs. 50 respectively. The sales forecasted are
20000 units of A, 100000 units of B and 80000 units of C. The fixed
costs are Rs. 127.5 lacs.
Find the breakeven quantity.
Find operating income if 20000 units of A, 80000 units of B and 100000

units of C are sold. Find the new breakeven quantity for this product mix.
Solution:
In this case one can see that the 3 products A B and C are sold in a ratio of
2:10:8. Hence the weighted contribution would be (2 x 150 + 10 x 100 + 8
x 50) ÷ ( 2 + 10 + 8) = 85.
The break even volume would be 12750000 ÷ 85 of this composite mix of

A B and C, which will be 150000. The composition being 2 : 10 : 8 of A B
and C the actual quantities would be A 15000, B 75000, and C 60000.
The rest of the problem you can use the above method to solve.
9. The Branch office of the marketing Department of an organization has

provided following details:
! !178
Table no: 18
Sales Staff concerned
Particulars Abhijit Rohit Vaibhav
Sales 80 120 180
Potential of area 100 200 320
Selling expenses 4 9.6 18
percentge of complaints attended 90 percent 70 percent 50 percent
Accounts Lost 3 6 9
No. of calls/ day 2 4 6
New accounts created (Nos) 3 6 9
Average Working Capital blocked 16 15 16
Note: Unless stated otherwise, the figures above are in Rupees lacs.
Who is the best Sales person and why? Justify explaining the basis used.
(Base answer on the details given)
10.Since the introduction of Television in 1970, Powerful Televisions Pvt.

Ltd (PTPL) enjoyed reputation as a leading brand in Black and White
Television (BTVs) Later on PTPL also introduced colour television (CTV)
and achieved 15 percent market share.
However following the entry of global MNC’s and their brands, which
become popular due to exchange offers etc, PTPL’s market share fell to 8
percent. Company found it difficult to hold dealer loyalty even though 90
days credit was extended to them.
The Managing Director of PTPL, Gaurav Saxena (GS) was concerned about
the falling market share. He believed that a price of less than ! 10000 per
set set of CTV, as compared to the present price of ! 14000 would bring in
a lot of customers to the company.
! !179
Moreover his market research agency had indicated that the TV

replacement market comprised 50 percent of the total market of CTVs
which had two main segments:
I. Upgraders from BTV to CTV.
II. Replacers of old CTV to new CTV.
Market Research further indicated that the up graders found price of over
Rs. 10000 for a new CTV to be high. This implied that enough demand
existed for old CTV (sold at Rs. 5000). But PTPL could not participate in the
exchange offers since it lacked financial strength to sustain the same.
Hence, the company launched a campaign which let consumers to book

new CTVs with contemporary features at Rs. 9995/- per set by handing
over a demand draft in favour of the company with dealers in the areas.
The dealers in turn, couriered these demand drafts to the company on the
same day. Company promised to deliver the TV set after 45 days. Against
the sale of 3000 CTVs and 5000 BTVs, currently enjoyed by the company,
the company managed to book 18000 CTVs as prices dropped from Rs.
14000 per set to Rs. 10000 per set. The price reduction naturally had to be
achieved through appropriate measures. Considering that the cost of
capital to PTPL was 20 percent in 1998, this was a challenging task.
One of the measures would be to reduce dealer margin from Rs. 2500 to
Rs. 500 per set.
As the sales volumes increased the company could get a reduction in the
cost of components (Picture Tube, Cabinets etc) to the extent of Rs. 780/-
per set. Further the factory over heads (per set) could drop by Rs. 350/-
Using the above information, answer the following questions:
Is it necessary for the company to sacrifice any amount from its own gross
margin to achieve the targeted price of Rs. 9995/- per set? If yes, how
much? If not, why not? Furnish suitable calculations.
11.Alpha Company Ltd. has a manufacturing capacity of 100000 units per

year. At the current operating level of 50000 units per year its budgeted
profit statement is as under?
! !180
Sales Rs. 5000000
Costs
Variable Rs. 2000000

Fixed Rs. 2000000
Rs. 4000000
Profit Rs. 1000000
Company has received an order for export of 40000 units over and above
the current level of production. The special costs, which are associated with
and incidental to the export order are:
I. Special Packaging Rs. 200000
II. Documentation Rs. 100000
The management expects a profit of Rs. 100000 after tax from the export
order. Find out the minimum selling price required to realize this profit. Tax
may be assumed to be zero.
12.Associated Bearing Co. Ltd has a policy granting 60 days credit to its
dealers. The current sales are Rs. 1.5 crores per year. The cost of capital
to the company is estimated to be 12 percent per year. The variable
costs are estimated to be 80 percent of sales value.
The new marketing manager has estimated that the sales will increase by
Rs. 1 crore. If the credit period to dealers is extended to 90 days, instead
of 60 days at present. However, the bad debts are likely to be at rate of 1
percent of the additional sales.
Do you think the management of the company should approve marketing

manager’s proposal for increasing the credit period?
13.Parekh Marketing Company employs 300 sales persons who are

supervised by 30 field officers in five branches having offices and
godowns. Each of the branches is headed by a branch manager. The
! !181
total costs towards salaries, commissions and business expenses work

out to Rs. 150000 per sales persons, Rs. 250000 per field officer, and
Rs. 400000 per branch manager. Further total cost of operating the
Branch offices and Godowns as well as the cost of carrying inventory
works out to Rs. 300,00,000.
Assume that you have recently taken over as General Manager – Marketing
in the Company, which has sales turnover of Rs. 42,25,00,000. Your first
assignments is to advice the management on out sourcing the distribution
to an external entity which expects discount of 15 percent on sales prices.
Further the additional advertising expenses are estimated to be Rs.
100,00.000. if the company decides to do away with the existing direct
distribution and selling arrangement.
What will be your recommendation?
14.Prabha Nursing Homes has the following three sources of Income:
I. Room charges per day
A. Rs. 1000 for private room
B. Rs. 600 for semi private room
C. Rs. 200 for general ward.
II. Operation theatre charges:
Rs. 1500 per man-hour
Following additional Information is also available:
A. Estimated Room usage Data
! !182
Table no: 19
No. of Average Occupancy
Patients stay
Patient Need Semi- General
expected (Days) Private
per year percent Private Ward
Medical attention 1000 6 10 50 40
Surgical attention 1200 12 20 70 10

E. Estimated Surgical Operations Data
Table no: 20
Type of No. of No. of hour No. of persons
Operations Operations per operation required for operation
Minor surgery 600 1 3
Major surgery 600 2 6
Prepare a detailed revenue statement.
15.The performance of the three branches of an industrial consumables

manufacturing company is summarized below:
Table no: 21
(All figures in Rs. Lacs)
Description Branch 1 Branch 2 Branch 3
Revenue
a. Sales 129 139.8 161.2

b. Allocated Interest 1.5 1.6 1.9
c. Total Revenue 130.5 141.4 163.1
d. Cost of sales standard 72 84.5 105
e. Factory Variance 6.9 8.1 10
f. Total Cost of sales 78.9 92.6 115
g. Gross Margin (c) - (f) 51.6 48.8 48.1

Expenses
h. Selling salaries 8 9 10.5
! !183
i. Direct selling Expenses 7.5 7 8.5
j. Direct Advtg and Sales Promotion 5 5.5 7.5
k. Branch office expenses 6.5 7.2 8
l. Branch warehouse Expenses 4 6 6.5
m. H.O.Sales overheads allocated 1.8 2 2.2
n. H.O. Admn Overheads allocated 4.8 5.2 6
o. Total Expenses 37.6 41.9 49.1
o. Net Profit (g)-(o) 14 6.9 (1.1)

Market share Achieved (percent) 7.6 9.2 11.5
Discuss the relative performance of the three branches in terms of:
a. Quality and quantity of sales achieved.
b. Expense control exercised in each branch, and.
c. Any other parameter you may think of.
Do you have any recommendation to make regarding the presentation of

the branch performance data? Also comment whether the company should
continue to maintain the Branch 3.
16.ABC Company markets a range of home appliances under brand name

‘HOMEMAKER’ through a network of branches. To remain competitive
the company runs a series of schemes and promotional campaigns
throughout the year to attract dealers and consumers attention and
loyalty. In a fiercely competitive market place the company follows a
strong 'dealer push' strategy backed by a subtle 'brand pull' advertising.
To ensure this, the branch managers are given a high degree of freedom
to take on the spot decisions, provided they deliver an overall consistent
performance.  
 
The performance of two of its branches (one big branch and the other
small branch) in one state is summarized below:
! !184
Table no: 22
(All figures in Rs. Lacs)
Particulars Branch 1 Branch 2
Revenue
a. Gross sales (average per month) 336.5 99
b. Sales returns(average per month) 47.7 3.67
c. Net Sales (average per month) (a-b) 288.8 95.33
d. Scheme discounts (average per month) 27.55 4.43
Expenses (average per month)
e. Employees Cost 2.88 0.66
f. Sales Promotion 0.46 0.12
g. Traveling 0.68 0.29
h. Freight and services 1.06 0.14
i. Establishment and others 9.05 2.56
j. Total Expenses 14.13 3.77
Working capital
k. Stocks (Average monthly) 14.13 3.77
l. Outstandings (Average Monthly) 514 250
m. Bank balance at the month end 228 148
Comment on the performance of these branches on issues such as:
a. Management of schemes discounts.
b. Expenses control.
c. Working capital control.
d. Warehouse functioning and.
e. Any other parameters that attract your attention.
! !185
17.ABC Ltd produces a single product in three sizes A, B and C. The

following expenses incurred on marketing are sought to be traced to
each of these sizes using the basis indicated below:
Table no: 23
Amount Basis of
Expenses
(Rs.) Allocation
a. Sales Salaries 100000 Direct charge
b. Sales commissions 60000 Sales turnover
c. Sales office expenses 20960 No. of orders

d. Advertising (General) 50000 Sales turnover
e. Advertising (specific) 220000 direct charge
f. Packaging Total volume in
30000
cubic feet
g. Delivery expenses 40000 ——do——-
h. Warehouse Expenses 10000 ——do——-
i. Credit collection expenses 12960 No. of orders
Total 543920
The following additional information is also available:
Table no: 24
Particulars Total Size A Size B Size C
a. No. of sales people (all paid salaries) 10 4 5 1
b. Units sold (Nos) 10400 3400 4000 3000
c. No. of orders 1600 700 800 100
d. Percentage of Specific advertising 100 30 40 30
e. Sales Turnover (Rs.) 2000000 580000 800000 620000
f. Volume in cubic feet per unit of

5 8 17
product
! !186
Prepare a statement showing how these costs may be traced to each of

these sizes on the basis of information furnished above:
Also find out the following viz.
a. Marketing cost per unit sold of each size
b. Marketing cost as a percentage of sales turnover for each size
Solution:
Table no: 25
Particulars Total Size A Size B Size C
Sales Turnover (Rs.) 2000000 580000 800000 620000

No. of sales people
10 4 5 1
(all paid salaries)
Total salaries 100000 40000 50000 10000

Sales commission 60000 17400 24000 18600
No. of orders 1600 700 800 100
Sales office expenses 20960 9170 10480 1310
Advertising (General) 50000 14500 20000 15500
Advertising (specific) 220000
66000 88000 66000
30:40:30
Packaging 30000
Volume cu ft 5000 8000 17000
5:8:17
Delivery expenses 40000
Volume cu ft 6666 10667 22667
5:8:17
Ware house expenses 10000
Volume cu ft 1667 2666 5666
5:8:17
Credit collection 12960 No of
expenses orders 5670 6480 810
7:8:1
! !187
Units sold (Nos) 10400 3400 4000 3000

Since the problem states that all are marketing costs we shall be taking
marketing, selling, distribution and administrative costs as marketing costs for
the purpose of our calculation.
Total costs 166073 220293 157553

Marketing cost per unit
48.85 55.07 52.52
sold
Marketing cost as
28.6 25.4
percentage of sales 27.5 percent
percent percent
turn over
18.Cute Toys Ltd. has received an enquiry for 10000 nos of CUTIE doll for
which cost estimates are as under:
a. Direct material per unit Rs. 100.00
b. Direct Labour Cost per unit Rs. 40.00
c. Direct expenses per unit Rs. 80.00
Further the whole consignment would require packaging and forwarding

expenses of Rs. 300000/- on lump sum basis.
The company wishes to earn a profit of Rs. 500000/- from this business
Calculate the price that the company should quote.
19.Sharp Razors Ltd. follows a pricing policy of earning 20 percent return

on invested capital. It incurs the following costs for a particular product:
Table no: 26
Variable cost/unit Rs. 90
Fixed overheads/year Rs. 1500000
Depreciation and other Fixed expenses/ year Rs. 1500000
Invested capital Rs. 10000000
! !188
The company expects to produce and sell 20,00,000 units. Calculate the
target selling price.
20. A. Delhi Mixy Co. manufactured and sold 1000 units at a price of Rs.
800 each. The cost structure of a mixy is as follows:
Rs.
Materials 200
Labour 100
Variable cost 100
450
Factory
Overhead (fixed) 200
Total cost 650
Profit 250
Sales Price 900
Due to heavy competition, price has to be reduced to Rs. 750 for the
coming year, assuming no change in costs, state the number of mixies that
would have to be sold at the new price to ensure the same amount of total
profits as that of the last year. Show your answer with verification.
B. In a purely competitive market 10000 pocket cell phones can be

manufactured and sold and a certain profit is generated. It is estimated
that 2000 pocket cell phones need to be manufactured and sold in a
monopoly market to earn the same profit.
Profit under both the conditions is targeted at Rs. 200000. The variable
cost per pocket cell phone is Rs. 100 and the total fixed cost is Rs. 27000
! !189
You are required to find out the unit selling price both under monopoly and
competitive conditions.
21.The profit of GKW Ltd for the year 2002 has been worked out at 12.5
percent on the capital employed and relevant figures are as under:
Table no: 27
Rs.
Sales 500000
Direct Materials 250000
Direct Labour 100000
Variable Overheads 40000
Capital employed 400000
The new sales manager who has joined the company recently has
estimated a Profit of about 23 percent on the capital employed for the next
year, provided the volume of sales increased by 10percent, the selling price
increases by 4percent, and there is an overall cost reduction for all the cost
elements by 2 percent. You are required to find out (by giving details of
computation) the cost profit figures for the next year and make comments
on the estimate of sales manager, viz will it be possible?
22.Ponds Ltd. has a present Annual sales level of 10000 units at Rs. 300
per unit . The variable cost is Rs. 200 per unit and fixed cost amounts to
Rs. 300000 per annum. The present credit period allowed by the
company is 1 month. The company is considering a proposal to increase
the credit period to 2 months and 3 months and has made the following
estimates:
Table no: 28
Existing Proposed
Credit Policy 1 month 2 month 3 month

Increased sales - 15 percent 30 percent
percent of Bad debts 1 percent 3 percent 5 percent
! !190
There will be increase in Fixed cost by Rs. 50000 on account of increase of

sales beyond 25 percent of present level.
The company plans on pre-tax return of 20 percent in receivables.
You are required to calculate the most paying credit policy for the company
and give your comments.
23.Ravi and Sons Co. Ltd, a manufacturing company having an extensive

marketing network through out the country, sells its products through
four zonal sales offices viz, Calcutta, Mumbai, Chennai and Delhi. The
budgeted expenditure for the year is given below:
Table no: 29
Rs. Rs.
Sales Managers salary 120000
Expenses relating to Sales

80000
Mangers office
Traveling Salesman’s salaries 320000
Traveling Expenses 36000
Advertisement 30000
Godown rent zone:
Calcutta 15000
Mumbai 25200
Chennai 9800
Delhi 18000
68000 68000
Insurance on inventories 20000
Commission on sales @ 5
600000
percent on sales
The following further particulars are also available:
! !191
Table no: 30
Zone Sales in No. of Total Allocation of Avg stocks
Rs. lacs salesmen mileage advertisement Rs. lacs
covered
Calcutta 36 5 6000 30 percent 6
Mumbai 48 6 14000 30 percent 8
Chennai 16 2 4500 20 percent 2
Delhi 20 3 5500 20 percent 2
a. based on the above details compute zone wise selling overheads as

percentage to sales
b. advise any suggestions to improve.
24.Market Division of Cable India Ltd. wishes to discontinue the sale of one
of the products in view of unprofitable operations. Following details are
available with regard to turnover, costs and activity for the year ended
31st March 2005.
Products
Table no: 31
A B C D
Sales Turnover (Rs.) 600000 1000000 500000 900000
Cost of Sales (Rs.) 350000 800000 370000 180000
Storage Area (Sq. Meters) 40000 60000 70000 30000
No. of cartons Sold 200000 300000 150000 350000
No. of Bills Raised 100000 120000 80000 100000
! !192
Overhead costs and Basis of Apportionment are:
Table no: 32
Fixed Expenses: Rs.
Administrative wages and salaries 100000 No.of bills raised
Salesmen’s salaries and expenses 120000 Sales Turnover
Rent and Insurance 60000 Storage area
Depreciation 20000 No.of Cartons

Variable Costs:
Table no: 33
Commission 4 percent of Sales
Packing Materials and wages

Rs. 0.50 per cartons ( fifty paise)
Stationery Rs. 0.20 per bill (twenty paise)
Based on the above data you are required to

a. Prepare statement showing summary of selling and distribution costs to
the products
b. Prepare Profit and Loss statements showing contribution and profit or

loss on sales of each of the products to enable the marketing
department take an appropriate decision on discontinuance of the sale
of a product.
c. Give your comments briefly.
25.Surya bulb manufacturer makes an average net profit of Rs. 2.50 per
piece on a selling price of Rs. 14 by producing and selling 60000 pieces
or 60 percent of the potential capacity.
The cost of sales is

Direct Material Rs. 3.50
Direct Wages Rs. 1.25
Works Overhead Rs. 6.25 (50 percent fixed)
Sales overhead Rs. 0.80 (25 percent varying)
! !193
During the current year, Surya intends to produce the same number but
anticipates that the fixed charges will go up by 10 percent while rates of
direct labor and direct material will increase by 8percent and 6percent
respectively. But he has no option of increasing the selling price.Under this
situation he obtained an offer for a further 20 percent of his capacity. What
minimum price will you recommend for acceptance to ensure the
manufacturer an overall profit of Rs. 167300.00. Reason out your
recommendation?
26.ABC Garment Ltd. manufactures readymade garments and sells them

on credit basis through a network of dealers. Its present sale is Rs. 120
lacs. per annum with 20 days credit period. The company is
contemplating an increase in the credit period with a view to increasing
sales. Present variable costs are 70 percent of sales and the total fixed
costs Rs. 16 lacs per annum. The company expects pre tax return on
investment @25 percent. Some other details given as under:
Table no: 34
Average collection Expected annual sales

Proposed Credit Policy
(period – days) ( Rs. In lacs)
A 30 130
B 40 140
C 50 148
D 60 150
Required:
a. Which credit policy should the company adopt?

b. Present your answer in tabular forms
c. Assume 360 days a year
d. Calculations should be made up to two digits after decimal.
27.ABC Agra presently operates its plant at 80 percent of the normal

capacity to manufacture a product only to meet the demand of Govt. of
Himachal Pradesh under a rate contract.
He supplies the product for Rs. 400000/- and earns a profit margin of 20
percent on sales realizations.
! !194
Direct cost per unit is constant. The indirect costs as per his budget
projections are:
Table no: 35
20000 units 22500 units 25000 units
Indirect Costs (80 percent (90 percent (100 percent
capacity) Rs. capacity) Rs. capacity) Rs.
Variable 80000 90000 100000
Semi variable 40000 42500 45000
Fixed 80000 80000 80000
He has received an export order for the product equal to 20 percent of its
present operations. Additional packing charges on this order will be Rs.
1000/-
Arrive at the price to be quoted for the export order to give him a profit
margin of 10 percent on the export price. Give your comments.
28.The cost structure of a product is
Direct Material Rs. 12

Direct Labor Rs. 4
Variable Overheads Rs. 8
Fixed Overhead Rs. 10, 20,000
Sales 1,00,000 units per annum.
The capital employed in fixed assets is 24 lacs and in current assets is 50

percent of sales. Determine the selling price per unit to earn 20 percent on
capital employed.
29.Kalyan manufacturing company is making a relative profitability of two

products A and B. In addition to direct costs, indirect selling and
distribution costs are to be allocated between the two products.
! !195
Table no: 36
Rs.
Insurance charges for (Finished) inventory 78000
Storage costs 140000
Packaging and forwarding charges 720000
Salesmen’s salaries 850000
Invoice costs 450000
Other details are:

Table no: 37
Particulars Product A Product B Rs.
Rs.
Selling price per unit 500 1000
Cost per unit (inclusive of indirect 300 600

selling and distribution costs)
Annual sales (units) 10000 8000
Average inventory (units) 1000 800
Number of invoices 2500 2000
Storage space occupied for A is 10 and for B is 4 (i.e., 10 : 4). Insurance

charges are to be allocated on the basis of total average inventory value.
The cost to pack and forward one unit is the same for both the products.
Salesman’s salaries are shared equally by both the products. Salesman are
paid commission @ 5percent on sales in addition to their salaries.
Required:
I. Apportion the indirect selling and distribution costs between the two
products.
II. Prepare a statement showing the relative profitability of two products.
30. The following figures are obtained from the records of a company
! !196
Sales (4000 units @ 25/-) Rs. 100000

Less Rs.
Materials consumed 40000
Labor 20000
Variable overheads 12000
Fixed overheads 18000
Total Cost Rs. 90000
Profit Rs. 10000
It is proposed to reduce the selling price by 20 percent. What extra unit

has to be sold to obtain the above profit?
31. Given are the following information-
Selling price per unit Rs. 5

Variable cost per unit Rs. 2
Fixed cost Rs. 750000
Number of units that can be produced and sold: 500000 units
Required: The sales needed to obtain a profit of Rs. 600000
32. City Sports Co. dealing in sports goods has an annual sales of Rs. 50
lacs and are currently extending 30 days credit to the dealers. It is felt
that the sales can increase considerably if the dealers are willing to
carry increased stocks, but the dealers have difficulty in financing the
inventory. City Sports co. is therefore considering shifts in its credit
policy.
The following information is available. Average collection period is now 30

days.
Variable costs: 80 percent on sales

Fixed costs: Rs. 6 lacs per annum
Required (pre tax) return on investment 20percent
! !197
Table no: 38
Annual Sales
Credit Policy Average Collection Period (days)
(Rs. Lacs)
A 45 56
B 60 60
C 75 62
D 90 63
Required: Advice the company which credit policy is beneficial. Show your
calculations
33. Bharat industrial products manufacture three different products and the
following information has been collected from the books of accounts.
Table no: 39
Particulars Products
A B C
Sales Mix 35 percent 35 percent 30 percent
Selling price per unit Rs. 30 Rs. 40 Rs. 20
Variable cost per unit Rs. 15 Rs. 20 Rs. 12
Total fixed costs Rs. 180000
Total sales Rs. 600000
The Company has currently under discussion a proposal to discontinue the

manufacture of product ‘C’ and replace it with product ‘D’, and then the
following results are anticipated:
! !198
Table no: 40
Particulars Products
A B C
Sales Mix 50 percent 25 percent 25 percent
Selling price per unit Rs. 30 Rs. 40 Rs. 30
Variable cost per unit Rs. 15 Rs. 20 Rs. 15
Total fixed costs Rs. 180000
Total sales Rs. 640000
You are required to advice the company whether change over to production
of ‘D’ is beneficial? Show your calculations.
34. India Garments Ltd. manufactures ready made garments and sells
them on credit through their dealer network. Present sales of the
company are Rs. 120 lacs per annum with a credit period of 30 days.
The company is considering liberalizing credit period to increase sales.
Present variable costs are 70 percent of sales. Fixed costs are 16 lacs
per annum. The company expects a pretax return of 20 percent on
investments in receivables. Estimated projections of alternative credit
policy are given below:
Table no: 41
Credit policy Avg collection Annual sales Bad debts as
Annual sales Rs. lacs Rs. lacs percentge of sales
Bad debts as period
in no. of days
current 30 days 120 actuals 1 percent
proposal A 45 days 150 estimated 1 percent
proposal A 60 days 170 estimated 2 percent
proposal C 90 days 200 estimated 5 percent
Analyse the credit policy options and recommend one with your comments.
Assume 360 days in a year.
! !199
35. Vishnu electronics manufacture and market Exotica brand of color TV

sets, DVD players and Music systems. The performance data for the
year 2007 is as follows:
Table no: 42
Rs.
Lacs
Sales 12500
Cost of Sales 7500
Gross Margin 5000
Marketing Costs:
Salesmen’s salaries 625

Sales men’s commission 250
Conveyance and travels 375
Advertising 750
Sales promotion 575
Warehouse rent and salaries 325
Packing and shipping 125
transportation 250
Credit collection 125
Bad debts 75
3475
Administrative expenses 865
4340
Net profit 660
! !200
Additional Information:
Table no: 43
Rs. in Lacs
Colour Music DVD Total
TV’s Systems players
sales 4375 6875 3250 14500
cost of sales 2625 3875 1000 7500
gross margin 1750 3000 2250 7000
Table no: 44
Salaries Equally allocated to all products
Commission Allocated on basis of percent of sales
Conveyance and travel Allocated as percent of sales
Advertising and sales promotion Equally allocated to all products
Warehouse rent and salaries Equally allocated to all products
Packing and shipping Allocated on basis of invoice lines in the ratio

50:40:10
Transportation Allocated to all products on the basis of sales
Credit collections Allocated on the basis of sales
Bad debts Allocated in the ratio 50:30:20
General and administrative Allocated on the basis of product sales

expenses
The company sells all products through a common field force. All products
are jointly advertised.
(a) Analyze performance of each product line with your comments

(b) If a product was generating a negative profit, will you recommend
dropping it? Why?
(c) What strategies will you recommend for each of the products?
! !201
36. Wonder products manufacture 10000 units of their product and sell in
the Indian market at Rs. 5 per unit, cost of production is Rs. 4 per unit.
Production capacity of Wonder is 30000 units
Cost data for producing 10000 units is as follows:
Rs.
Direct materials 15000
Direct Labor 11000
Variable overheads 6000
Fixed overheads 8000
The company estimates that, due to increased competition the product

would have to be sold at Rs. 4.50 per unit next year.
However the company can export 20000 units at Rs. 3.50 per unit
The company is considering entering the export market and is considering

two options-
i. Export 20000 units at Rs. 3.50 per unit and sell nothing in the domestic
market
ii. Sell 10000 units in the domestic market at Rs. 4.50 per unit and export
20000 units at Rs. 3.50 per unit
Fixed costs remain unchanged up to 20000 units of production but go up

by 25 percent beyond 20000 units.
For exports, the company will have to incur additional costs as follows-
Packing 40 paise per unit.

Shipping 20 paise per unit.
However the Company will get export incentives of 80 paise per unit
Analyze the two options for the company and recommend with reasons the
option the company should choose.
! !202
37. Murphy Sales Ltd. provides the following data on performance of its
salesmen-
Table no: 45
Particulars Pramod Piyush Ajay
Sales Rs. lacs 75 120 150
Sales potential Rs. lacs 100 150 200
Sales expenses Rs. lacs 5 10 15
Salaries and bonuses 2 3 3
Daily allowances 100 100 100
No. of calls per day 6 10 10
Avg. orders booked per day 5 8 15
Avg. collection period 30 days 45 days 50 days
Evaluate the performance of the 3 salesmen. Give appropriate comments.
If you were the sales manager, mention criteria you would use in
evaluation of your salesmen in addition to the criteria used above.
! !203

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Marketing Finance

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

Chapter No. Chapter Name Page No.

After going through this chapter you should be able to know:

• A brief definition of terms and concepts.

1.1 Marketing Activities

Marketing generally is more external oriented – out ward looking (seeking

• either one has to complement the other

Therefore finance has more to do with controls, arranging and managing

Let me start with defining the subjects, a little more in detail.

We’ll start with defining what is Marketing:

Marketing has at times been defined as ‘a set of human activities

“Marketing is the process of planning and executing the conception,

Another very apt definition of Marketing can be 'managing profitable

We can also look at marketing and selling from a different perspective:

Step wise the entire process would be:

1. Through a scan of the environment, locating a particular need or

2. Devising a product/service/solution i.e., – creating an offering that will

3. To make economic sense of this opportune situation.

• First find out whether a meaningful/substantial segment exists for that

• What is the cost of manufacturing/delivering/servicing the market.

When we start looking at the several aspects of servicing the market/

• We also have to look at the cost of communicating the particular offering

• We have to evaluate incentives to be given to obtain and retain buyers,

• Evaluate the effectiveness of all such functions as to whether they are

What? Why? Who? Where, When, and How?

What would define the Object being purchased

Why would define the Objective of purchase

If on the other hand we were to look at the reasons prompting a retailer to

We may call the above the 4 Os (Phillip Kotler):

The 4 Ps can also be looked at as:

• what does the Consumer need

These can be listed as under:

• By fueling aspirations marketing creates more demands.

• This in turn spurs consumption and thereby production.

However some darker sides to marketing can not be ignored:

• Quality may at times be sacrificed at the alter of quantity, as a result of

• Aggressive advertising and promotion can at times result in increased

1.1 MARKETING ACTIVITIES

• Personal selling targets, both absolute and relative.

Activities may also cover territory coverage, customer servicing, callage,

While advertising has more to do with paid form of mass communication,

Sales promotion on the other hand will be directly linked to:

• Achievement of incremental sales

3. MARGINS & MARKUPS 