TITLE

Accounting Profits Versus Marketing Profits: A Relevant Matric for Category Management

AUTHOR(S)
Yuxin Chen; Hess, James D.; Wilcox, Ronald T.; Zhang, Z. John
PUB. DATE
September 1999
SOURCE
Marketing Science;1999, Vol. 18 Issue 3, p208
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Retailers have long recognized that some categories are more important than others in consumers' store choice decisions. The overall profitability of a store requires careful category- level merchandising decisions to draw the most desirable consumers into the store. However, the traditional accounting measure of category profits offers imperfect help making these decisions since it does not take into account the effect of merchandising one category on the profits of other categories in the store. A profit measure which takes into account these important cross-effects is the most relevant performance metric for category management. We call this new construct marketing profits, as it focuses on consumers and their store choice behavior, and is particularly pertinent to the calculus of marketing decision making. Despite its practical importance, the total impact of merchandising a specific product category on a store's profit- ability is difficult to measure, and in practice managers can only rely on intuitive calibration of marketing profits in making many retailing decisions. The difficulty arises from the fact that to directly observe the marketing profits of a category, one has to know how consumer store shopping behavior would change and hence what a store's profit would be if the category were to disappear from the consumers' store choice decision. Furthermore, it is difficult to devise a demand structure that is rich enough to capture bundled purchases on the part of consumers in a reasonable manner, but is simple enough to allow estimation on the basis of commanly observed variables. These two technical difficulties explain the conspicuous lack of research that systematically examines how to quantify what we call marketing profits. This paper builds a formal model of marketing profits. We start by formalizing shopper types, and then establish the implied relationship between accounting profits and marketing profits by examining shelf space allocations by a retailer. On the consumer side, we assume that some consumers pay attention to the assortments offered by different retailers when making their store choice decisions. This assumption allows us to establish the demand-side linkage between accounting profits and marketing profits. Consumer store choice decisions put pressure on the retailer to carry wide assortments in categories which are particularly critical to the store choice decisions of the most desirable consumers. Thus, the allocation of shelf space gives rise to the supply-side linkage between accounting profits and marketing profits. By examining the outcome of the supermarket's shelf space decision, we can merge these two linkages and determine the exact relationship between the accounting and marketing profits. Central to our theoretical structure is our assumption on retailers' shelf space allocation decisions. Because of the well-documented pressure that retailers face in making shelf space allocation decisions, we assume that they are acting in a reasonably close-to-optimal fashion by using either an automated planogram or simply by trial-and-error. Optimization requires that returns on shelf space allocated to any category in the store must be identical on the margin and equate to the shadow price of shelf space. It is this outcome of shelf- space allocation that allows us to uncover the implied relationship between accounting and marketing profits. This theoretical structure allows us to construct a measure of marketing profits which can be estimated with data commonly available to retailers. We demonstrate this measurement technique by using publicly available data, provided by Marsh Supermarkets, and show how marketing profits can improve merchandising decisions. In our particular application, we find many categories where the marketing profits of a category are very different from the traditional accounting profits. Further, we find that using this new marketing profits metric to make category-level feature advertising space decisions significantly improves the profit- ability of the retailer. The paper concludes by discussing how our measure of marketing profits might be improved by additional research, particularly if the researcher has data across many stores.
ACCESSION #
2727531

 

Related Articles

  • Category Management and Coordination in Retail Assortment Planning in the Presence of Basket Shopping Consumers. Cachon, Gérard P.; Kök, A. Gürhan // Management Science;Jun2007, Vol. 53 Issue 6, p934 

    This paper studies the assortment planning problem with multiple merchandise categories and basket shopping consumers (i.e., consumers who desire to purchase from multiple categories). We present a duopoly model in which retailers choose prices and variety level in each category and consumers...

  • Adding consumer behavior insights to category management: Improving item placement decisions Desrochers, Debra M.; Nelson, Paul // Journal of Retailing;2006, Vol. 82 Issue 4, p357 

    Although practitioners attribute significant sales growth to category management, many believe more potential lies untapped. This paper suggests improvements through the use of consumer behavior research as a supplement to point-of-purchase scanner information. In particular, we outline several...

  • The Variety of an Assortment: An Extension to the Attribute-Based Approach. Van Herpen, Erica; Pieters, Rik // Marketing Science;Summer2002, Vol. 21 Issue 3, p331 

    In recent years, interest in category management has surged, and as a consequence, large retailers now systematically review their product assortments. Variety is a key property of assortments. Assortment variety can determine consumers' store choice and is only gaining in importance with...

  • The Role of Visual Merchandising in Apparel Purchase Decision. Krishnakumar, M. // IUP Journal of Management Research;Jan2014, Vol. 13 Issue 1, p37 

    As retail business is moving towards new phases, the emphasis is slowly changing from the product to the space--the store--where all the things happen. The shopping ambience becomes so important now, with retailers being interested in giving their stores a contemporary and consumer-friendly...

  • Category management concept gains momentum. Hume, Scott; Bayor, Lesli // Advertising Age;4/12/1993, Vol. 64 Issue 15, p26 

    This article reports on the increasing popularity of category management among U.S. retailers as of April 1993. by using category management, retailers require manufacturers to drive a whole category through their stores rather than just their brands. The philosophy is that by increasing...

  • Category management: marketing for the '90s.  // Marketing News;9/14/1992, Vol. 26 Issue 19, p12 

    The article offers information on trade promotions and category management in September 1992. In the consumer packaged goods industry manufacturers have increased spending for trade promotions which are going into retailer incentives as a strategy to increase volume. Retailers welcome this...

  • Planogram this. Dowdell, Stephen // Progressive Grocer;11/15/2006, Vol. 85 Issue 17, p3 

    The article mentions several articles featured in the issue. This issue is one of the most important because it is packed with information on category management. Mark Boyer discusses the challenge on the fresh side of the store. E&J Gallo Winery and Safeway used the tableau of the Lifestyle...

  • Honoring retail's finest. Roy, Sree // Display & Design Ideas;Mar2005, Vol. 17 Issue 3, p22 

    The article reports the winner of 2005 Markopolus Award, James Damian has expressed gratitude to person who have guided his career. The first influence who guided Damian's career was his then-girlfriend, now wife, Deborah. She steered the would-be orchestra conductor, who was questioning his...

  • THIS WEEK ONLINE.  // DSN Retailing Today;5/9/2005, Vol. 44 Issue 9, p5 

    The article discusses the topics covered in the online edition of the journal "DSNRetailing Today." Some of the topics covered are merchandising innovations for new homes; special report related to meijer supercenters, new leadership and new vision in the retail sector; significance of retail...

Share

Read the Article

Courtesy of VIRGINIA BEACH PUBLIC LIBRARY AND SYSTEM

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics