As with most aspects of business activity, there are various theories concerning the nature of profits. The first of these has been called the increased net-worth theory. Basically, it argues that the difference which exists between the net worth or value of the business organization at the commencement and the completion of a specific period of trading represents the profit which has been achieved during that time. The figure will, of course, be adjusted to allow for any extra capital which may have been introduced and any drawings which have taken place. As a simple, rule-of-thumb approach, it is not without merit although it ignores the effect which has been achieved by forward planning by failing to differentiate between profit which has been deliberately engineered and that which has occurred by chance-'windfall profit'.

An alternative approach is that known as the cost and revenue theory. Here one takes the total revenue which the business has earned during a specific period and deducts from that figure the total of all costs incurred. The result represents the profit gained. While this theory may be helpful in assessing the profitability of specific activities it does create certain problems such as how to deal with the question of items purchased during the period under review yet only partially used during that period, as well as the whole question of depreciation.

A more practical means of judging profitability is the adoption of the return on capital employed theory. This states that all the resources of the company have a value and that the profit achieved over a given period should relate to this value. From the long-term point of view, this implies that every expenditure is an investment. Seen .in this light it is apparent that all management personnel who have authority to make investments have the ability to influence profits.

The area of investment over which the ONLINE MARKETING Manager will exert the greatest influence is that of product strategy. He is responsible for the investment of resources in his product range with a view to maximizing the profit gained per unit of capital employed. He must, therefore, appraise the value he will derive from this investment and decide whether his strategy for each product is appropriate for this purpose.

There are many businesses where 80 per cent of the sales turnover is being achieved by only 20 per cent of the product range A reduction in the variety of products which are marketed can often result in a marked increase in overall profits. Of course, there will be many situations where it may be considered undesirable to reduce the number of one's products. In certain fields it is often necessary to offer a complete range of merchandise in order to remain competitive.

Sometimes, however, the poor showing of one product is due to the fact that too much emphasis has been placed on another. In product ranges, as in families, there are 'poor relations' and a product should not be dropped until the reason for its apparent failure to earn a satisfactory return has been fully investigated.

More - Price Changes and Sales Volume

Please Note

The Trade is, of course, a major source of product ideas. All manufacturers examine, with avid interest, the new products of their competitors.