A framework for analysis of sources of profit contribution variance between actual and plan

Marketing controllers traditionally analyze the profit contribution variance between actual and plan by decomposing it into a quantity and a price variance. This, however, enables them only to identify areas where problems exist rather than to diagnose their causes. In order to get more insights, this paper proposes making the planning assumptions for achieving a certain profit contribution explicit beforehand by specifying appropriate response functions. This information can be used after the fact to calculate the amount of profit contribution variance associated with different sources. In particular, the paper offers a novel decomposition principle of total variance into partial variances associated with possible sources such as incorrect market response assumptions (planning variance), deviations of actual marketing actions from planned ones (execution variance) and misanticipation of competitive reactions (reaction variance). Each of these variances can be decomposed further into the separate effects of single marketing instruments. By distinguishing between a response function for market share and one for market size, controllers can also estimate for which part of the variance the product manager may be responsible. (C) 1998 Elsevier Science B.V.