Market share analysis is another useful marketing control tool. However, if it is not handled properly and interpreted correctly, it can throw up highly misleading information. It becomes an effective control tool only when it meets the following pre-conditions â€“ it is accurately measured; it is measured both at macro and micro levels; the comparison of targeted and actual market shares are also made both at macro and micro levels; all the comparisons are made over reasonable long spells of time.
Before a firm attempts a market share based evaluation and control, it must have clarity on whether it is consciously seeking a definite share of the market or not. It is implied in any market share evaluation that the marketing performance will be assessed based on the market share. It is also implied that a definite minimum share is the real aim of the firm. Otherwise, the evaluation becomes a mechanical exercise and loses its control potential.
Market share analysis can be utilized for evaluating the performance of a firm; for setting targets and for developing long term sales forecasts.
Market share has to be measured on rational grounds. Comparisons may be made with the most efficient firms in the industry, or the industry leader, or group of growing firms. Comparisons can also be made against the industryâ€™s average performance. It is also essential to understand oneâ€™s product/market boundaries correctly to make share analysis purposeful. Shares can be worked out at product sub category level, product category level, national level, and regional level. Each measurement has its own use and implications.
In addition to the budget actual variance analysis described above and the standard costing comparison described earlier, most firms use ratio analysis also as a control device in marketing as well as other areas. As far as marketing is concerned, ratio analysis seeks to measure the effectiveness and profitability of the various marketing functions/activities by the use of certain ratios. Whereas budgetary control reveals absolute figures, ratio analysis focuses attention on relative figures. Some of the important ratios used in marketing control are:
1. Return in investment (ROI) â€“ ratio of net profit to capital employed
2. Return on net worth (RONW) â€“ ratio of net profit to net worth.
3. Net profit to sales ratio.
4. Sales to capital employed ratio.
5. Gross profit to sales ratio
6. Turnover to working capital ratio
7. Inventory to turnover ratio
8. Turnover to distribution expenses ratio
9. Turnover to promotion expenses ratio
10. Turnover to bad debts ratio.
Contribution Margin Analysis
We often come across instances where a particular product or customer does not bring in any net profit to the firm, but still makes a useful contribution by carrying a part of the overheads. It is unwise to summarily drop such products or customers on the ground that they do not bring in any net profit. At the same time, they cannot be carried on blindly. The firm should know to what extent these products and customers absorb the firmâ€™s overheads. The control technique that comes to the rescue of the marketer in this respect is called contribution margin analysis. It is useful in both pricing and marketing control.
To find out the contribution margin of a particular product, the costs incurred as a direct result of the product must first be found. In other words, those costs, which could have been avoided if the particular product had been discontinued, must be found. Such costs are the escapable costs. The other costs are non-escapable costs or joint costs. Joint costs must be allocated to those products that are profitable and, therefore, in a position to absorb these costs. It must then be examined whether the unprofitable product is at least in a position to absorb the escapable costs and produce a slight surplus. By this analysis, we can find out if a particular product is at least bringing in a little more revenue than the escapable costs, even though it may not be contributing to profits. In other words, the product though unable to bear its share of the joint costs in full measure, is able to meet the escapable costs in full measure and the joint cost to some extent. But for this product carrying this part of the joint costs, these would have been added on to the overheads of the other products, thereby making them less profitable. It will be better for the firm to make such a contribution analysis and then decide whether the â€˜not so profitable products and customersâ€™ should be dropped or continued.