Between 2007 and 2011, Apple’s sales grew from $24 billion (2007) to $108 billion (2011). This growth in sales is the equivalent of creating 12 average-sized Fortune 500 companies or creating a new company the size of Procter & Gamble ($82 billion in 2011). However, the astronomical growth in sales is only half of the Apple success story.
As shown in Figure 1, Apple’s gross profit as a percent of sales also grew from 34 percent in 2007 to 42.2 percent in 2011, due to the exploding growth on higher margin products such as the iPhone and iPad. Apple was also able to reduce it’s spending on marketing and sales from 9.3 percent in 2007 to 5.3 percent in 2011. This allowed marketing profits as a percent of sales (marketing ROS) to grow from 26 percent in 2007 to 37 percent in 2011.
Marketing profits are measured as net marketing contribution (NMC). Net marketing contribution is composed of three major components: sales, percent gross margin and marketing & sales expenses (M&SE). In 2011, Apple marketing strategies produced total sales of $108.3 billion. The percent gross margin was 42.2 percent and their investment in marketing and sales was $5.7 billion. As shown below, this produced a net marketing contribution of roughly $39.9 billion.
Marketing profits pay for all other expenses, interest and taxes, resulting in a net profit, as shown in Figure 2. The goal of marketing strategies should be to grow net marketing contribution, not simply sales. Also shown in Figure 2 is the relationship between Apple’s net marketing contribution and operating income (profit before interest and taxes) for the last 5 years. This is an incredible correlation and one not found in all companies.
Marketing Profitability – Ratio Metrics
In order to make comparisons between different companies, many financial metrics are expressed as ratio or percentage metrics. Financial metrics, such as return on sales, return on assets, return on equity and return on capital, are percentage metrics that help gauge the relative performance of a business. The same issue is relevant for comparing the marketing profitability across businesses, product lines, or markets that are drastically different in sales.
To make fair performance comparisons we have two marketing profitability ratio metrics. The first is marketing return on sales. As shown below, this is simply the net marketing contribution produced by a region, market, or company divided by its sales. Apple’s marketing ROS in 2011 was 27.5 percent.
A topic that seems to perplex many is how to measure the return on a marketing and sales investment. We have taken a financial approach, which is simply net marketing contribution divided by the investment in marketing and sales needed to produce that level of net marketing contribution. As shown below, in Apple’s marketing ROI was 701 percent in 2011.
Figure 3 examines the relationship between marketing ROI and operating income as a percent of sales for a sample of Fortune 500 companies. In general, companies with a higher marketing ROI have a higher pre-tax return on sales. As shown, Apple has steadily improved its marketing ROI as it improved its operating income as a percent of sales. The growth rate of Apple sales and profits may be difficult to sustain at the levels of the past 5 years, but we can expect their marketing ROS and marketing ROI to remain at levels that other companies can only dream of.
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