How important is the P/V Ratio?

January 15, 2017 General Flood No comments exist

The P/V Ratio is not just an important commercial attribute of a brand, it is the most important. As defined in an earlier Blog the Profit to Volume (P/V) ratio is the amount that falls to the bottom line from an incremental sale. Usually it is the Gross Margin less selling and distribution costs. Let’s assume a leading brand has a net sales value of $250/case and a Cost of Goods of $75 per case yielding a Gross Margin $150 per case. Assuming selling costs of 10% and distribution costs of 7% the P/V ratio would be $107.50. Compare this to a price brand or generic in the same category whose P/V ratio is likely $40-50 and you can see the advantage. The P/V ratio defined the brands “will to live”. In battle it can deploy twice the resources. On an every day basis it can afford superior advertising and merchandising. Marketing is Advertising and Merchandising! In an emergency the premium brand can deliver “shock and awe” and still make its money back after competition has been forced to leave the field of battle. Naturally the General prefers premium priced brands because they have more firepower. Such a brand should never consider cutting its price long term as this is an unforgivable “act of surrender” in the face of combat. Always protect your P/V ratio to the last combatant.

The Story:
Long ago and far away there was a major battle in Australia. Unilever was preparing to enter the dishwashing detergent category in Australia where Finish DWD had an 75% share and represented 80% of the local companies profit. General Flood was consulting to the Finish brand and prepared a strategic response to Unilever, warning the local GM to hold his price when attacked. Unilever launched the Sunlight brand into the category. Sunlight is a brand in many hard surface cleaning categories around the world that offers and fresh lemon scent and a 7-10% price advantage. In response to the Sunlight launch the local GM cut the price of Finish and was immediately removed
from the battle. The price cut would reduce the P/V ratio to the point where no defense could be justified as spending and payback opportunities were evaporated by the lowered price. Immediately the Finish brand prior pricing was restored and the proper attack was implemented. A line extension Lemon Finish version was launched along side Regular Finish DWD. Simultaneously a “works okay and costs 30% less” price-flanker brand was launched. This way the “news value” of Sunlight brand position was totally destroyed. It was a me too lemon version and at a higher price than the price flanker brand. Finish, with its high P/V ratio restored had the will to win and Sunlight had great difficulty buffeted around by heavy shelf merchandising and with nothing new to say. Unilever withdrew from the market place.

Does this mean that the Sunlight brand is potentially vulnerable everywhere in the world where it is currently sold? Probably.

This story shows both the importance of P/V ratio and the importance of unique and compelling Brand Positioning, the subject of an earlier Blog. Contact TopDeck and ask for General Flood. I will be glad to assist you to measure and improve both Brand Positioning and Brand P/V ratio.

Yours Truly,
G.F.

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