The numbers: ALDI suit £ 28,- , margin estimate 15%. Marks&Spencer lowest price suit £ 49,50, margin estimate 45% (based on average gross profit of 41%) .
Margin per suit in pounds: Aldi £28 x 0,15 = £ 4,20, Marks & Spencer £49,50 x 0,45 = £ 22,28
The Contribution per suit is the margin in pounds x TOS. If Marks & Spencer goes toe to toe with ALDI, finds a supplier with a similar offer ands sells it to customers at the same price, than it will be making money if the suits sell 6 times faster than their present lowest offer. This can be calculated by dividing the absolute margin of the present Marks & Spencer suit by the margin of the ALDI suit: £ 22,28 / £ 4,20 = 5,3
If the suit sold 6 times faster the result would be a lower gross profit %, but much higher sales and thus lower costs expressed as a percentage of sales and a higher bottom line profit.
As always comments and criticism are welcome.
E-mail: ajbrenninkmeijer (a) cs.com
2 comments:
Interesting thought and it raises a question here. If I were to buy at Aldi my "perspective" (of Aldi) is that I buy "cheap" with an equal (cheap) "quality". My perception of Marks & Spencer is that they deliver quality over price. By selling their suits cheaper they might damage that image.
I compare Marks & Spencer to the Dutch Adam's Wear stores. My motives for buying at Adam's Wear would be "quality (including correct customer service!) over price". If Aldi finds a way to prove that their £28 suit is of equal quality as the £49.50 suit at Marks & Spencer and Aldi would provide the same customer service (customer service is included in 'quality' as far as I am concerned), Marks & Spencer would be in trouble, especially in the current economic times.
Thanks for your insight. I do support the thought of removing the average gross margin % target.
The customers decide which product is most successful. What's important to me is the way success is measured. If the £28,- suits sell twice as well as the £ 49,50 suits, then they are a commercial failure and don't add to the bottom line. "Measuring is knowing." (in Dutch: Meten is weten.)
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