In this presentation, we will discuss the basic concept of product, types of product and terms and their meaning in the context of evaluating the value of a certain product. To know more about Welingkar School’s Distance Learning Program and courses offered, visit: http://www.welingkaronline.org/distance-learning/online-mba.html

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