NP= SR * percent gross profit-operating expenses

NP= NMC- Operating Expenses

ROS= Gross Profit(%of Sales) – Marketing Expenses (%of Sales)

ROI= Marketing ROS/ Marketing Expense(%sales)

=market demand*market share*average selling price* channel discount *%margin- marketing expenses

Sales Revenue – COGS

Percent Margin = —————————————-

(i.e., Gross Profit %) Sales Revenue

Since Gross Profit in this case is $4 million and Sales Revenue is $10 million, the Percent Margin would be 40%.

NMC = (MD x MS x ASP x CD) x Percent Margin – Marketing Expenses

This is a good time to note that Best’s use of the term “Channel Discount” here is a bit of a misnomer. Technically, the calculation assumes the inverse of the channel discount, or 1 minus the channel discount. Thus, a better way to think of the equation above is to consider the CD term to be the “Percentage of the Retail Price Captured by the Manufacturer,” or simply the Retail Price Capture %.

Here’s a quick example: If Nike sells to Scheels a product for $60 that “retails” for $100, then Nike has captured 60% of the retail price (i.e., $60 out of $100). The so-called channel discount would be 40% (i.e., Scheels buys the Nike product for 40% less than the retail price), BUT the percentage of the retail price captured by the manufacturer would actually be 60% (i.e., 1 – CD% or 1 – 40%). So when calculating the expanded NMC above, you should ALWAYS use the percentage of the retail price captured by the manufacturer.

Net Selling Price – Average Cost

Percent Margin = —————————————————-

(i.e., Gross Profit %) Net Selling Price

With some simple algebra, we solve for the Net Selling Price as follows:

Average Cost per Unit

Net Selling Price = —————————————————-

(i.e., Wholesale Price) (1 – Percent Margin)

Since Percent Margin here is 60%, then the answer is $50, based on $20 divided by .40.

Cost of Goods Sold

Sales Revenue = —————————————————-

(1 – Percent Margin)

Since Percent Margin here is 60%, then the answer is $5 million, based on $2 million divided by .40. Pretty sneaky, huh?

Note that this also tells us that the so-called channel discount is a mere 10%. But remember that the expanded NMC equation uses 1 minus the CD%, so the capture percentage in this case is 90%.

Of course we have to note that marketing expenses will naturally increase in this scenario because the company is now responsible for all of the distribution expenses normally associated with the retailer. So the question becomes, is there a net gain available for selling direct, i.e., does the additional revenue outweigh the added distribution and promotional expenses?

Market Demand = 7 million customers

Market Share = 9%

Average Revenue per Customer = $180

Retail Price Capture % = 60% (i.e., CD% = 40%)

Percent Margin = 40%

Marketing Expenses = $7 million

What is their NMC for the segment?

NMC = (7 million x .09 x $180 x .60) x .40 – $7 million

= $68.04 million x .40 – $7 million

= $27.2 million – $7 million

= $20.2 million

NMC = (8 million x .09 x $180 x .60) x .40 – $8 million

= $77.76 million x .40 – $8 million

= $31.1 million – $8 million

= $23.1 million

NMC = (7 million x .11 x $162 x .60) x .333 – $7 million

= $77.84 million x .333 – $7 million

= $24.92 million – $7 million

= $17.92 million

NMC = (7 million x .09 x $200 x .60) x .46 – $10 million

= $75.60 million x .46 – $10 million

= $34.77 million – $10 million

= $24.77 million

NMC = (7 million x .09 x $120 x 1.00) x .50 – $14 million

= $75.6 million x .50 – $14 million

= $37.8 million – $14 million

= $23.8 million