In large companies, a category of products or services may be managed by an entire staff. All category related expenses, departments or SBUs (strategic business units) are accounted for. In most small and medium sized businesses, category management is not so clear, as it may represent just several thousand dollars.
Many businesses correctly believe that they have all the necessary information, based on their income statement. I find this to be true in a large percentage of cases, but the structure of most accounting programs and income statements is not for marketing purposes!
Test your financial statements. If you can’t find the gross margin of every category of products or services (expressed as a percentage) for last month’s business within two minutes, you don’t have the tools you need to market by the numbers.
Category management requires businesses to capture the information necessary to determine revenue and gross profit. While this level of information gathering was difficult for some types of businesses five years ago, today’s advances in computing makes this process much easier to accomplish. Several inexpensive accounting software programs also have inventory modules today. These can be critical in gathering the necessay information to determine profitability of merchandise or service catagories.
Key numbers useful in comparing categories, departments, products or services are:
- Sales revenues and gross margins
- Direct selling or distribution costs for each category
- Approximate fixed expenses related to the category
- Break-even sales volume in both dollars and units
Using this foundation, information in each category can now be “planned”–what a novel concept! This enables crucial questions to be answered:
- Does the category represent single sales or repeating sales?
- Is it realistic to sell more? (How big is the market?)
- How much more?
If the market for the category is saturated, the promotional strategy is different than if the market is growing; a saturated market is normally crowded with competitors, while the emphases in a growing market is
rapid market development. Armed with information about your market, and the profitability of a category, an individual category can be planned for increases in profits.
Many marketing programs are inefficiently designed. A category products might be planned for an increase by lowering the price. The plan is that the increase in volume will create better buying leverage and efficiency, boosting profits. However if the price isn’t low enough and additional money is spent on advertising, and more salespeople, the increased business may not yield a profit. However, many times the accounting is not even able to produce category reports with revenue, less costs to determine the gross profit. Therefore poor decisions are made about how to increase sales in the beginning. Add the need to manage as many as hundreds of categories in a company, and it becomes no wonder that profit eludes small business.
In addition lack of marketing information creates quotas based on last year’s numbers, plus a percentage, or equally poor goal setting. This type of “top down” planning creates unrealistic sales goals; they too high to be achievable, or don’t push hard enough to capture the existing market.
These issues are fundamental contributing factors in the downfall of small to medium sized companies. Without proper understanding of how the numbers affect the market, or how the market impacts financial reports, maximum success will never be completely achieved.
Ron Burgess is a business development consultant specializing in strategic marketing planning, relationship marketing and integrated marketing systems. Burgess may be contacted at www.burgessmanagement.com