Mar’gin’ And Tonic

Everyone goes after margin these days and forgets about earnings. Even at a lower margin, there can be higher earnings. It all depends on sales volume and value. Margin is intoxicating, but earnings are healthy and wholesome.

Undue emphasis is given to margin, which often leads to conflicts between the channel and companies. However, during these conflicts, the real ‘tonic’ of sales volume, value, and earnings is ignored.

Very often, margin is compared between companies and channels, whereas the comparison, if at all, should be with oneself in terms of the growth of volume, value sales, and earnings.

Let us take an example:

• Situation One: A trade channel gets a margin of 50% and has a sales value of ₹10,000. Thus, the earnings are ₹5,000.
• Situation Two: A trade channel gets a margin of 10% and has a sales value of ₹10 lakh. Here, the earnings are ₹1 lakh.

Thus, in Situation Two, the earnings are higher even though the margin is lower. This proves that it all depends on sales volume and value.

The above example clearly shows that undue emphasis and obsession with margin may not be the right approach. You need to look at the tonic of earnings, through higher sales volume and value.

Most of the time, we see salespeople and trade channels repeatedly saying: ‘increase the margin’ ad nauseam! Instead, if the concentration is on:

• Increasing sales volume and value
• Expanding distribution
• Selling the full range of products
• Improving the quality of customer service
• Achieving deeper penetration at retail and household levels

Then, the tonic of earnings will grow, and the dependence on margin will reduce.

The amount of time spent on negotiating, bargaining, and protesting about the lack of good margin could be better spent if the focus shifts to the real elements of brand, marketing, and sales. However, this shift requires:

• More effort
• Better planning
• Strong strategy
• Efficient implementation
• Patience

So, is trying to get a higher margin an excuse for less effort or a shortcut to avoid a well-planned approach?

No one is against the trade getting a higher margin—if all other efforts are also put in with the same vigor. But using a higher margin as a substitute for effort raises a crucial question:

Isn’t a reasonable margin, with excellent planned efforts, far better than a huge margin with a less effort-oriented, lazy approach?

Actually, what is a margin? It is just the difference between the selling price and the purchase price of an item, usually expressed as a percentage of the selling price.

The strategy and planning of what the margin should be are crucial decisions. If these decisions are made casually or in haste, they can have serious ramifications.

Another issue to consider at the sales and trade levels is the misuse of a higher margin. When large margins are given, there is a higher chance of:

• Discounting and undercutting by the trade and sales forces
• Erosion of brand equity due to excessive price competition

This can ultimately weaken the perceived value of the brand and impact long-term profitability.

If large margins are envisaged, there is a good chance that discounting and undercutting will occur, shifting the brand’s image from strong and premium to a commonplace commodity.

Thus, the decision regarding:

• What the margin should be
• How much it should be
• How it should be presented
• The consistency of margin policies

…is critical for sustaining brand equity.

It may seem like a small issue, but finding the right strategic balance between margin and the ‘tonic’ of earnings is crucial. The implications of an appropriate strategy in this regard are significant—the right decision can make the brand progress and prosper, while the wrong decision could hurt and harm it.

Cheers to mar‘gin’ and ‘tonic’!