Question

Topic: Strategy

What Is Margin Pool?

Posted by Anonymous on 2/15/2007 at 9:38 AM ET 125 Points
I am participating in strategy planning for my company and often people use the word "margin pool." As in, we need to get the market size and margin pool for the target segment. I understand what market size is - but after googling the term "margin pool" I did not find any definitions.

Please help!
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  • Posted on 2/15/2007 at 9:55 AM Member
    I'm not sure of the context but in my experience have heard the term in the following ways.

    Within any specific target market segment, there is demographic, psychographic and behavioral variability in how members of that segment make decisions and spend money. So there are some who are comparison shoppers, who but things only on sale, or pursue their buying decisions in ways that pressure margins. Then there are those who simply act when they see what they like or have an immediate real or perceived need, who tend to be willing to pay full price and therefore generate higher margins. Within a segment, there may be a sweet spot, a group of 20-50% that generate 75-80% of the potential profits. They constitute bulk of the "margin pool" within the segment.

    In a sense, the concept is that there is a margin distribution function across the segment and mindfulness about it helps to determine how to maximize margins and what sort of marketing programs ensure that each point along the curve generates a margin that cumulatively allows the goal for the segment to be achieved.
  • Posted by steven.alker on 2/15/2007 at 11:22 AM Accepted
    Well, August Busch III the CEO of Anheuser-Busch used the term to refer to the total margin available in his sector (Booze). For example, referring to Microbreweries,

    “Well, you can put microbreweries in that category [of new competition]. If you had asked us ten years ago whether there would be X-hundred little tiny brewers across this country who will end up with 3% of the market and 6% of the margin pool, we would've said no. We didn't expect it, and we are moving now to join some of the micros in ownership-distribution alliances.”

    Interview with Gary Hamel, Ken Lay (!) and August Busch in 1997 Fortune Magazine. I wonder which one Mr Hamel still thinks is a visionary!!

    I think that essentially, he’s referring to the same idea that Mark is: It recognises that there is not only a market share defined by your % of a whole market sector, but that there is a share of the profitable and unprofitable areas of business. August was pissed off because a set of minnows had taken 3% of his market share and generated twice the profit from it than he could.

    Be careful in your analysis though. The optimisation of profit within an enterprise is rarely the process of maximizing sales of the most profitable items to the sector which can afford to pay the highest price and thus generate the highest margin. It is an iterative process which involves linear programming to discern a foolish strategy from a sound one. Chasing the 20% which generates the 80% of profits might just involve enough expense and effort to spend the profits! It might also produce an unhealthy short term strategy which neglects long term growth.

    Another use of the word Margin Pool is to define a hypothecated fund of profit in a company or trading organisation which can be made available to the company or the partners for their own purposes. It’s usually called a bonus pool if you are talking about a bank!

    Also be wary in case your colleagues have made up the term or borrowed it without understanding what it means. When I used to head up the EMEA operations for an American Company, they invented so many of their own business terms that we used to do likewise. My General Sales Manager and I would agree on what new terms we would use in our latest reports and then fire away. No one ever questioned what we were talking about – the figures justified our competence – and when I left I got a glowing reference from the sales and marketing VP with the waspish verbal comment that he personally never understood a word that I was saying but he understood very clearly what I did.

    If in doubt, armed with these definitions, ask.

    Best wishes

    Steve Alker
    Unimax Solutions
  • Posted by CarolBlaha on 2/15/2007 at 1:33 PM Member
    I like to use BPI, or buying power index. It not only will give you the market figures nationally, but you can break it down geographically.

    Carol
    Sell Well and Prosper tm
  • Posted by Frank Hurtte on 2/15/2007 at 4:45 PM Member
    Margin pool--- refers to the available before expense money that can be pulled from a group of companies
  • Posted on 2/16/2007 at 12:00 PM Author
    Thank you for the responses. I will let you know what responses I get when I go do some digging :)
  • Posted on 2/20/2007 at 10:46 AM Author
    I have talked to several people and no one at my company can answer me directly as to what it means. I do believe the term itself is fluff.....

    Every time I ask someone what it means they say something like...hmm I am not sure how we calculated it last time.

    From what I can gather it is a way to estimate how profitable a segment is based on many assumptions.
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