Marketing Profits as a New Profitability Metric Based on Lead Products: Comparison with Accounting Profits and Implications for Retailers

Conventional profits are viewed from an accounting perspective that focuses on individual products, understandably without considering marketing aspects of business. To find out a product’s contribution to the overall store profits, retail managers calculate profits of the product by subtracting its cost from its revenue, which is referred to as “accounting profits” of the product. Even though accounting profits have been widely adopted and used, it is questionable to what extent they can help retail managers make better “marketing” decisions. Accounting profits do not provide an accurate picture of which products draw consumers to stores and thus more important to retail managers. Consumers make a physical or mental shopping list before a shopping trip, and the shopping list usually contains multiple products. With the shopping list, they buy the listed products at a store. Among the listed products, some are more influential in consumers’ store choice decisions than others. In this paper, those influential products are referred to as “lead products,” which are defined as products on a shopping list that are the most influential items for the shopping trip that are associated with particular stores. In many cases, consumers choose a store on the basis of lead products, and thus lead products play a crucial role in consumers’ store choice decisions and determine at which store the entire listed products in the shopping list will be purchased. In this sense, lead products make significant contributions to the total profits for the store by drawing sales of the less influential products on the shopping list to the store while those less influential products make no contribution to the store profits. A profitability measure for individual products based on this logic would be quite different from measures based on accounting principles.