Margin or Contribution Analysis

Margin Analysis, also referred as Contribution Analysis, is a tabular data to track the prices, variable costs and profit margins for all the members in a value chain (producer, distributor, retailer) for every relevant product within the firm’s product line and across competitors. This data is mainly used to understand the below:

  1. Which among the N products is the most profitable?
  2. What is the relative power of various channel partners or partners in the value chain?
  3. Are we leaving money on the table?

Definitions for the components of a margin analyses are:

  • Retail Price or End-User Price is the price paid by the end-user to the channel member from which the product is purchased.
  • Wholesale Price or Manufacturer’s Unit Price is the price paid to the firm.
  • Channel Margin is the difference between the Retail Price that the reseller gets from the end-user and the Wholesale Price that it pays to the manufacturer.
  • Unit Variable Cost is the sum of all variable costs incurred by the firm that can be directly assigned to the product on a per unit basis.
  • Unit Contribution is the difference between the Unit Price and the Unit Variable Cost. It is also called Unit Margin or Unit Profit Margin.

margin analysis

One can also look at the annual contribution by each product and how much it costs the customer annually, if needed for decisions.

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How the visibility budgets are used for price undercutting in FMCG?

If you speak to any Territory Sales In-charge or Manager (TSM) of a large FMCG company, they are going to mention one huge problem called price undercutting that affects their daily work. In an earlier post, I have written about how the wholesale trade leads to price undercutting. In this post, I am going to write about how the Territory Sales Persons use the so called ‘visibility budgets’ for undercutting practices.

Wikipedia defines price undercutting as: ‘Price cutting, or undercutting, is a sales technique that reduces the retail prices to a level low enough to eliminate competition‘. In most cases (more than 95%) the competition is not with a competitor’s product, but it is the competition between a company salesman and a wholesaler selling the same branded product at different prices.

Let’s understand this with an example. Let’s say there is a brand X of soap which the TSM is supposed to sell at Rs.32 per piece to the retailer. Let’s say, the area allocated to this TSM is adjacent to a big wholesale market called Bhindi Bazaar. There are twenty retailers distributed across his area and some of the retailers are at a stone’s throw distance from the wholesale market.

So, when the TSM goes to the retailer, the TSM realizes that the nearby wholesaler is selling at a very reduced price. Typically, the conversation between the retailer and the TSM goes like the below:

TSM: Naya scheme aaya he, aap bees pete (20 cartons) lelo… itne price mein milega aapko

Retailer: Kitna padega? Rs.32?

Retailer: Saab, Bhindi Bazaar mein Rs.26 per piece mein mein mil raha he (single carton mein bhi)

So, the TSM thinks that he cannot compete with the wholesaler’s undercutted price. The TSM calls the Area Sales Manager (ASM) or his supervisor and tells him the problem.

TSM: Rate ka problem he Sir

ASM or Supervisor:  Mein samajhsakta  hoon… per manage karlo

ASM or Supervisor: Aapka monthly target se shortfall hora hein

So, the TSM realizes that he is not going to get much help and he has to reach his monthly target by any means.

The TSM uses the visibility budget to get out of the problem

Generally, FMCG companies put up some display material or place their product very attractively in the shelves or as separate displays in the retail stores. The company pays a certain amount of money to the retailer for doing so. The TSM gets a certain budget to pay the retailers to place or stick the brand display material. Typically, the price for a shelf in a retail shop may range from Rs.300 to Rs.1000 per month. Generally, companies buy 1-4 shelves and pay the respective money per month to the retailer.

The TSM uses this money to reach his sales targets instead of giving it to the retailers. In our example, as the wholesaler is selling at Rs.26 per piece, the TSM will sell the stock at Rs.25 per piece (Re.1 less than the wholesaler’s price), but tells the retailer to give the bill at Rs.32 so that the company cannot find out about his undercutting practice. The TSM reaches his monthly target through price undercutting.

So, what happens to the display material of the company?

All the display material provided by the company will be placed in the TSM’s house and will probably be used by his son for making paper rockets.

What happens during the visibility audits?

FMCG companies also do some visibility audits or sometimes the brand guys would like to visit the field for some reason. Suddenly, the TSM will come to know that tomorrow morning there is going to be an audit of the display material. Within a few hours, the TSM and his salespersons will place or stick the display material in all the stores or a subset of stores where the audit is going to happen. They tell the retailer that they are going to remove it tomorrow and it is only for one day. Most retailers don’t mind it.

On the next day, when the auditors come and check, they find everything to be fine and they go back and send appreciation mails that this area is 100% compliant and that the TSM is doing a brilliant job. On the next evening, the TSM tells his salesperson to remove all the display material.

This is how the TSM achieves his sales target through undercutting practices. It is important not to blame the TSM completely but to understand that the origin of the problem is mainly due to large wholesalers. The sales teams do talk to the wholesalers and fix their prices or sometimes they solve the problem by re-allocating the markets.

The big danger in all this process is that the retailer is getting used to this practice, and it will impact have a negative impact on the brand in the long term. Nevertheless, price undercutting is a harsh reality of sales in the FMCG world.

Analysis of New Triers, Repeaters, and Lapsers of a Brand

At any period of time, the consumer base of a brand is comprised of two sets of buyers:  New Triers, and Repeat Purchasers.

Repeats, New Triers

The terms are self-explanatory. To put it simply, Repeat Purchasers are consumers (or households) who repeated the purchase of the brand, and New Triers are consumers (or households) who bought the brand now, but who didn’t buy earlier.

A little more detail

For example, lets take two annual periods 2007 and 2008. Repeat Purchasers of a brand X are those who bought the brand atleast once in 2007 and also who bought the brand atleast once in 2008. New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. Lapsers are those who bought the brand atleast once in 2007, but didn’t buy the brand in 2008. So, it is evident that whenever we refer to the terms New Triers, Repeaters, and Lapsers, we should always have two periods for reference. These periods can be an year, a quarter, a month,  or a week. Similarly, the terms New Triers, Repeaters, and Lapsers can refer to the number of consumers or households depending on the industry. In Telecom or IT, typically it might refer to the number of consumers or users of your device or app, whereas in FMCG it might indicate the number of households that bought the brand. So, whether it refers to consumers or companies or households depends on the industry data, but the philosophy remains the same.

Various Segments of the New Triers of a Brand

So, continuing with the previous example, New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. The important thing to notice is the criteria ‘atleast once‘, which means some number of new triers might have bought the brand multiple times in 2008 (say once in February, June and October of 2008). Don’t get confused with Repeater because the Repeater has bought the brand atleast once in both 2007 and 2008.

So,  a New Trier of a Brand X in 2008 comprises of all consumers (or households) that have:

– Not bought the brand in 2007, and bought the brand in Jan’2008 and never bought the brand again in 2008.
– Not bought the brand in 2007, and bought the brand in Jan’2008 and repeated the purchase in Jun’2008
– Not bought the brand in 2007, and bought the brand in Feb’08 and Aug’08 and Dec’08.
– Not bought the brand in 2007, and bought the brand only in Dec’08
– Not bought the brand in 2007, and bought in ………………

So, regarding New Triers of a brand,  the marketer is interested in finding out:

– How many New Triers have bought the brand in the year 2008?

– Out of the New Triers of 2008, how many consumers (or households) went on to repeat purchase my brand in the next 12 months? For example, if a New Trier purchased the brand in May 2008, then did he repeat purchase my brand in the next 12 months or in 2008. You can define the period as you wish. This shows us the effectiveness in understanding if the problem is in converting the new trials to repeat purchases or is the problem of the brand not getting enough trials? (Please note that these repeaters are different from the brand repeaters in 2008).

– How many First Time Ever Buyers?  If you observe carefully, the new triers in our example are consumers (or households) who didn’t buy in 2007, and bought atleast once in 2008. So, the consumer (or household) could’ve bought in 2006, but didn’t buy in 2007 and then bought in 2008. So, these type of consumers are also New Triers in 2008, but they are not buying the brand for the first time.

So, First Time Ever Buyers of Brand X in 2008 are those who didn’t buy the brand anytime before, but bought the brand X in 2008.

– Among the New Triers (consumers or households) that my brand got in 2008, how many of them are category entrants (consumers or households that were not using the category before, but entered the category with my brand), and how many of them are brand entrants (consumers or households that were using some other brand in the category, but not using your brand). This is especially important for SKUs that are launched to drive the category and brand recruitment.

– How many of the New Triers of my brand in 2008, were using some specific brand ABC before. For example, if a user was using a brand Cinthol in 2007, but now she bought the brand Dove of the same category in 2008.  So, this will help the marketer understand which are the brands that I am pulling consumers from?

– What is the Average Revenue Per User (ARPU) or the Average Volume Consumption of the New Trier? Am I recruiting the high category volume consumers? Do my New Triers increase the volume consumption along the line?

– Is my New Trier also buying some other brand? Is he buying both Cinthol and Dove ?

Similarly, there are a lot of things that can be done on the New Triers, Repeaters and Lapsers. So, one can slice and dice the data in anyway we want to look at and analyze for key insights. I will write down more details in another post.

Thank you.

Entertainment in Television Advertisements

As I mentioned in earlier blog posts, to communicate something to a recipient one has to command the recipient’s attention and then be relevant to the recipient.

Communication:  Command Attention (Clutter breaking) ->  Be Relevant

This holds true even for communication among two individuals or two groups of people or for television commercials (TVCs). For the rest of this blog we will discuss it in the context of TVCs.

Though the rules seem simple, commanding attention is itself a very daunting task in this fragmented and cluttered world of media. On top of it, the message is driven home only if you are relevant to your fragmented consumer segments. Currently, we shall focus on the first part of the problem – clutter breaking and commanding attention.

What have commercials been doing to break clutter?

Historically, entertainment has proved to be one of the most effective ways to command attention of people. Entertainment is a very pervasive element of television ads today. Research shows that creative entertainment increases the attention to view the entire ad, reduces the resistance to persuasion, and has positive effects on purchase intention.

Wikipedia defines entertainment as – “Entertainment is something that holds the attention and interest of an audience or gives pleasure and delight.”  Psychologists define entertainment as “attainment of gratification of senses”.

Though people have different personal preferences of entertainment, it has been observed that across cultures and time there are recognisable and familiar forms of entertainment such as story-telling, music, dance, drama, sex, sports, horror etc. So, most ads today have atleast one form of content used to entertain consumer such as humour, music, and creative stories, etc.

The answer to the question is – Commercials have been using entertainment as one of the effective ways to break clutter and maintain attention levels, increasing people’s interest to view the entire ad, and research shows that creative entertainment has positive effects on persuasion and purchase intentions.

If all is well, what is the problem about entertainment in commercials?

One observation that always intrigued and puzzled me is that the commercials that are very entertaining and enjoyable don’t always drive home the intended purpose. There are many commercials that are enjoyed a lot and has high ad recall, but they just become only a source of entertainment for the audience.

My observation of several ads and people made me come to the hypothesis that the entertainment provided in the ad actually fulfils the consumer and conflicts with the consumers’ process of synthesizing the brand/product message.  This negative influence of entertainment is especially seen when the brand purpose is not weaved into the story provided for entertainment. For example, in ads where the entertainment part comes first and the brand is shown very late in the ad and they are not so well connected. If entertainment is used to break clutter, then it is important that the brand is shown as a part of the entertainment at the beginning of the ad, else there is a risk that the TVC may be very entertaining but not serving the objective of the ad.

Harvard professor Thales Teixeira has conducted interesting research on this regard and wrote a paper – “Why, When, and How much to entertain consumers in advertisements?” This is based on a facial tracking study (software used to track the facial emotions) in response to the TVCs. This is a first of its kind study and is the latest (dated January 2013).

One of the key hypotheses for the study is – Does high entertainment in advertisements have detrimental effects on persuasion and purchase intent, while having beneficial effects on a person’s willingness to watch the ad?

Key Results from the Study:

1. Entertainment can overcrowd your product message.

2. Viewers tend to pay less attention to the message associated with the brand once they’re already entertained.

3. If entertainment is not brand-associated (brand comes first and then the entertainment part starts or both at once), then it works only as an attention capturing device.

4. An excessive amount of entertainment is ineffective because it reduces the ad’s persuasiveness, as the entertainment conflicts with the persuasiveness.

5. Medium level of positive entertainment leads to a higher intent to purchase the advertised brand than low or high levels.

Entertainment plays both a co-operating and a conflicting role

Prof. Teixeira found that entertainment plays both a co-operating and a conflicting role, depending on its type (i.e., location in the ad). Entertainment that is associated with the brand is co-operating, as it acts as a persuasion device both in the interest and purchase stages. Entertainment that is not associated with the brand acts predominantly as an attraction device at the interest stage, thus indirectly cooperating but also directly conflicting with the ultimate goal of the ad.

The paper talks about the role of the location of entertainment and brand in the ad and its effects on the purchase funnel. If the ad is solely intended to induce purchase from previously aware or interested consumers, early placement of the brand is recommended. This might be the case for established brands or mature products. Yet, if the purpose of the ad is to generate awareness and interest, for example for new brands or products, and other marketing tools will be used to trigger purchase, then placing the brand later in the ad will be more effective to increase its attractiveness. Lastly, for ads intended to increase interest and purchase, ad persuasiveness and attractiveness should be balanced.

The study shows that entertainment, while increasing interest, can hurt purchase intent, especially if it appears before the brand, and can help purchase intent, when it occurs after the brand. So having the brand appear later may work if the objective is more towards building awareness. But still I am not a strong supporter of entertainment coming first and then brand later. If you want to be safe, make sure that the brand has an appearance somewhere in the beginning of the ad (especially when entertainment is used for clutter-breakthrough).

Thank you.

Similar Posts on this blog:

https://brandalyzer.wordpress.com/2012/09/20/centuryplys-latest-gorilla-tvc/

https://brandalyzer.wordpress.com/2012/01/15/television-advertisements-and-relevance/

https://brandalyzer.wordpress.com/2011/09/03/flipkart-attacks-the-online-fears-with-its-new-set-of-tvcs/

References for this post:

https://brandalyzer.wordpress.com/2012/01/15/television-advertisements-and-relevance/

http://www.hbs.edu/faculty/Pages/event.aspx?num=387

http://www.affectiva.com/assets/Entertainment-effects-on-Purchase-Funnel.pdf

CENTURYPLY’s latest Gorilla TVC

CENTURYPLY is undoubtedly one of the major furniture brands in India. Century Plyboard stayed away from TV advertising from the last four years, before it came back on TV with its new TVC on the World Anger Day – 28th Aug, 2012.

In this blog post, we shall evaluate this TVC from Century Plyboard and understand if it met its objectives. Please watch the TVC below.

TVC

Objectives:

Though Century Plyboard is a major brand in India and consumers trusted the brand, research suggested that it is not an aspirational brand in the eyes of the consumers. So, Century Plyboard wanted to build a campaign that brings out the brand as a “lifestyle brand” and truly make it aspirational. As we all know, for any brand, the ultimate apex in brand hierarchy is to be aspirational for its target group.

However, in process of making it a lifestyle/aspirational brand, Century Plyboard also wanted to communicate a key functional aspect – “durability of the furniture“.

Let us check the TVC on some of the key parameters.

1. Does it command the attention of the recipient?  √

No doubt that the thrown car and the angry gorilla at the beginning of TVC attracts your attention, and is clutter-breaking among any group of advertisements. I would say 100 out of 100 for the Bates team for such a clearly clutter-breaking start for the TVC.

Great! Now that it got the attention of the consumer, it would have to be relevant and communicate the message.

2. Communication of Durability √

As the consumer watches attentively, the next scene that attracts attention is that the gorilla is not able to break the door and it enters the house breaking through the roof. As the gorilla lands on a dining-table, the dining table doesn’t break and the gorilla chases the person in the scene to the cupboard. Until this point, the consumer is still attentively wondering “what is the gorilla upto?”.

Now, as it turns out that the gorilla is the husband’s imagination of his wife’s anger, it brings out an element of empathy and fun making the whole commercial very enjoyable. The message in the background also re-emphasizes on the visual communication.

It is a great story with an element of suspense, and clearly communicating the durability of the furniture.  I give 100/100 in the communication of the functional aspect “durability”.

3. Does it bring the Lifestyle/Aspirational element? Χ

Though the advertisement communicates the durability aspect, it communicates it in a raw manner and definitely doesn’t communicate it creating an aspiration for the brand. The point of concern is: is “durability” a differentiated factor among branded furniture or is it a hygiene factor where the consumer is looking for more than durability. This is why Century Plyboard as a brand should become a lifestyle brand and be more aspirational in the consumer’s mind. This helps to enhance the product portfolio and target the up-class consumers, together bringing in the brand aspiration.

The TVC clearly falls short in the aspect of creating aspiration. The commercial is definitely enjoyable and it has the brand recall with “CENTURY PLY” cards at the end of the ad. The advertisement would have been perfect, had the situation been that people don’t have much trust in its durability. However, the situation here is to somehow create an element of aspiration for the brand.

On the whole, it definitely does well on breaking the clutter, consumers will enjoy the ad, communicates the aspect of durability and increases the awareness of “CENTURYPLY”. However it falls short in creating aspiration.

CDM launches a new TVC before Friendship Day

For years, Cadbury Dairy Milk (CDM), India’s favorite chocolate brand, has been trying to be the symbol of celebration and expression of every sweet moment in your lives. In continuation of its pursuit, Cadbury Dairy Milk celebrates the beginning of new friendships with its latest TVC, ‘nayi dosti ka shubh aarambh’. The TVC showcases the first magical moments of a blossoming friendship between a young girl and boy on the sidelines of a wedding, an occasion that in itself connotes new relationships.

watch?v=s2jsCGLO56g&feature=player_embedded

The new commercial plays out at a traditional wedding ceremony. A teenage girl and boy exchange notes on how every family has a “dancing uncle/aunty” and an “allergy aunty/uncle”. They quickly realize that the two families have much more in common than they thought. When the girl excitedly asks, Tumhaari family mein mere jaisa kaun hai?” the boy smiles and replies ”Main”. A piece of Cadbury Dairy Milk is exchanged to celebrate their new found friendship and the closing VO states, ”Nayi Dosti Ka Shubh Aarambh. Also, the commercial plays the same jingle which would help establish a strong brand recall.

On Air on July 21

It is set to hit TV screens nationwide on July 21, 2012 and is expected to have a presence in over 70 television channels. To further
strengthen the brand’s digital presence, the TVC was released online on YouTube and Facebook on July 13.

Ad Timing: Friendship Day and College Re-opening

The campaign is perfectly timed to be on-air two weeks before the Friendship Day on 5th August. Also, with most colleges opening in June of the year, it also has good timing with students just starting to make new friends in colleges. CDM wants to be the chocolate through which the students express their emotions of the ‘friendship moments’.

The TVC will be supported by a robust integrated marketing campaign, including on-ground activations in 80 colleges, creative print placements, interesting radio capsules in leading radio stations across many cities and outdoor, to urge people to make new friends and celebrate special “friendship moments”.

Symbol of different things in different contextual situations

Cadbury Dairy Milk is trying to own every sweet moment of celebration and expression in your lives. This is part of the long-term brand building campaign ‘Shubh Aarambh‘. CDM has taken a very difficult challenge  and it has done a decent  job by partly owning the festival and family celebrations with its product line ‘Cadbury Celebrations’. It later built on the valentine moment between a boy and a girl.

It now comes up with this intelligent TVC trying to own the moment of ‘friendship’ with the message and building on its earlier moments – valentine, family, and celebration – with the background of marriage.  This is intelligent, as CDM is trying to become the message itself within different contexts, and bringing all the moments together.

It is very encouraging to see Kraft Foods continuing its strong brand-building activities, despite the inflationary times. With the consumers feeling the price increases on all products, consumers are already decreasing their discretionary spends such as chocolates. So, it is very interesting to see whether this will translate into sales in the short-term or not, but it definitely is going to help the brand in the long-term.  This is a classic example of a strong campaign with a long-term vision for the brand.

The press release for this advertisement has been shared by the strategic communications agency, The PRactice (www.the-practice.net).