Cumulative margin as an authority management tool

Shapovalov Aleksandr Andreevich ORCID: 0009-0008-5677-8088 Graduate student; Institute of Economics and Management; Ural Federal University named after the first President of Russia B.N. Yeltsin Head of Sales Department; LLC Stroytechkomplekt 620137, Russia, Yekaterinburg, Danila Zvereva str., 12, sq. 16 Shibox@mail.ru

Suvorova Arina Valerievna ORCID: 0000-0003-4050-2083 PhD in Economics Deputy Director for Scientific Work; Institute of Economics of the Ural Branch of the Russian Academy of Sciences 29 Moskovskaya str., Yekaterinburg, 620000, Russia Suvorova.av@uiec.ru

Introduction

The automotive business in Russia has been actively developing since the beginning of the two thousandth, overcoming the effects of external factors and adapting to new realities. The latest cardinal change in Russian retail can be considered the replacement of familiar Western car brands with car brands from China.

According to the AUTOSTAT agency, sales of new passenger cars increased by 69% in 2023. By the end of 2023, 1.06 million new passenger cars were sold in Russia, which is 69% more than in 2022. From January to March 2024, 391,865 units of new vehicles were sold in Russia (+74% compared to the same period in 2023 — 225,686 units). Such data follow from the statistics of the Ministry of Industry and Trade. The offer is formed mainly from domestic and Chinese cars.

The growth of this market segment stimulates the strengthening of the positions of its participants, as well as the entry of new players into the market, which in turn naturally provokes increased competition, pushing dealers to improve their business models.

The main part

Successful business development at a high level of competition depends on a well-chosen management strategy, which can be implemented using various approaches and tools. Each approach has its own distinctive features and purpose. Let's consider the most famous:

MBO (Management by objectives) is an approach proposed by Peter Drucker in 1954. It focuses on the process of agreeing goals within the company in such a way that all employees of the organization clearly understand the goals and objectives of the organization, as well as their role and responsibility for achieving the goals set. The use of a goal-based management system allows the company to define strategic goals and related tasks, allocate the resources necessary to achieve them, and set priorities and priorities in operational activities. ^[1,2]

The goals in the MBO are set according to the "SMART" methodology, which can be defined as an independent tool for improving the efficiency of business management. [Ilyina] The methodology proposed in the 20th century is a kind of structure for setting goals for employees and is determined by five main criteria: concreteness, measurability, achievability, reality, temporal certainty. ^[3]

Goal management formed the basis of the BSC (Balanced Scorecard) technology, a Balanced Scorecard proposed in the early 1990s by David Norton and Robert Kaplan. Today, it is considered an optimal and effective business management system that takes into account both financial and non-financial indicators of the company and allows you to assess the degree of achievement of your goals. A balanced scorecard provides management and owners with the opportunity to translate the goals and objectives of the enterprise to the level of operational activity. ^[4,5]

The TPS (Total Performance Scorecard) system is considered to be a continuation of the BSC concept - a universal system of indicators focused more on training and employee engagement. ^[6]

Task performance is monitored by means of the unit's performance indicators – Key performance indicators (KPI). The tool is used both for indicators related to the strategic goal of the company, and for any other indicators that evaluate the work of an organization's department or an individual employee. ^[7]

One of the directions of the evolution of the MBO method is OKR (Objectives and Key Results) Goals and key results — a technique for setting and monitoring the achievement of goals and key results at the level of the organization, team and individual employee. It allows you to increase the efficiency of the company by setting ambitious goals, speed up work and keep the focus on priority tasks. OKR was created on the basis of old approaches to improving business efficiency adapted and rebuilt to meet modern realities. ^[8,9]

Speaking about approaches to business management aimed at improving the quality of the organization, it is necessary to highlight TQM (Total quality management) - Universal quality management. The term appeared in the 1960s to denote the Japanese approach to company management and is considered as a philosophy covering the entire structure of the organization and its activities, aimed at meeting the needs of the client, society and employees of the company. ^[10,11]

In the 1980s, Motorola offered its own management approach focused on improving the quality of production - Six sigma. The essence of the concept is to minimize defects in operational activities. ^[12,13]

Business management and increasing its efficiency is impossible without modeling and improving the business processes of an organization, these tasks can be solved by such tools as BPR (Business Process Reengineering) Business Process Reengineering ^[14,15] and BPM (Business Performance Management) Business Efficiency Management ^[16,17]

We also note the approach to managing an organization based on business value VBM (Value Based Management) - Cost Management (US) and the financial indicator EVA (Economic Value Added), which is the basis of this approach. ^[18,19,20]

Each of the management concepts presented above has its own purpose and features, some have a common basis and can complement each other. The main differences are shown in Table 1.

Table No. 1

Differences in business management concepts

Well-chosen approaches to business management allow us to form key advantages of the company, such as: competent strategic and operational-tactical planning, in-demand and competitive goods, high-quality service, competent staff, well-established business processes. ^[21]

One of the key advantages of an organization can be a competent pricing strategy, which implies flexible pricing of goods, allowing you to interest the customer by making him a competitive price offer. ^[22]

Effective pricing policy is an important aspect of business development and is aimed at solving the following tasks: maximizing profit; reducing costs; "survival" when there is high competition in the market and customer needs change, in such cases companies need to reduce prices to maintain demand for goods. Also, companies choose a price reduction strategy when the priority is to capture and increase market share. ^[23]

The activities of car dealers involve balancing the interests of key players in this process. On the one hand, to satisfy the interests of business owners in maximizing profits, on the other hand, to fulfill obligations to distribution and the manufacturer to achieve a car sales plan, which requires a special approach to pricing policy both at the level of strategic planning and at the level of operational actions, by which the authors understand directly sales carried out by managers of the sales floor.

Car pricing is influenced by many factors: economic and political, the interests of business owners and partners, consumer needs, competitors, and company costs. ^[24,25]

Thus, at present, for the effective implementation of car sales activities in a changing market and high competition, modern tools and methods are needed, focused on creating key advantages, complemented by the ability to influence pricing.

One of these tools is the "cumulative margin" (KM), which claims to be an independent approach.

The term "Cumulative margin" is most often found in the business of selling new and used cars. This is due to the fact that cars belong to the goods of the high price segment, and often additional tools are required for their purchase by the client, for example, lending and trade-in services (exchange of the client's used car for a new one).

The concept of sales management based on "Cumulative margin" came to our country from the West. The foreign market for the sale of cars is ahead of the domestic one in terms of development, Western retailers used to think about the development of sales of additional services and goods as a source of increasing company profits.

The word "margin" refers to the difference between the price and the cost of goods (a synonym for the word profit), cumulative is interpreted as gradually accumulated, collected, summed up over time.

The authors propose the following interpretation of the concept of "Cumulative margin" – an approach to sales management, which implies obtaining a cumulative financial result from the sale of goods and services accompanying the sale of the main product.

The main idea is to combine the margin from the sale of the car itself, the so-called "iron margin", profits from the sale of financial and insurance products (loans, insurance), additional equipment and accessories. It is also possible to take into account the profit from the sale of the customer's used car, purchased as part of the transaction for the purchase of a new car by the customer and the customer's car maintenance service in future periods. This approach allows you to look at each individual transaction both within the framework of the work of one department of the company and collectively.

The nature of the use of KM in sales management implies compatibility with other management tools and business efficiency improvement. It is possible to set up a system of goal setting and achieving results based on OKR, MBO or BSC, simulate and configure business processes of interaction between departments using BPM and BPR, and track performance conveniently based on KPIs.

In sales, there are often calls to strengthen customer relationships by applying cross-selling and bundling to "create as much business as possible." Long-term relationships also create a cumulative effect and the longer they last, the better the financial result of the company. ^[26] Therefore, it is important to pay attention to the close relationship of cumulative margin with the concept of the customer's life cycle - Customer lifetime value (CLV), the meaning of which is to predict future profits from a particular buyer as a result of long-term mutually beneficial relationships with the company. ^[27]

Before using the KM model, dealers operated only on iron margins and compensation from the distributor, without focusing on the decomposition of profit channels for each car.

KM has become a logical evolution of sales of related products and services within the framework of a single transaction, combining them and establishing relationships between the company's divisions, thereby forming a kind of ecosystem that increases the value of cooperation between the company and the client (Fig. 1). ^[28]

James Moore first proposed to consider business as an ecosystem. In his opinion, business is an ecosystem characterized by various forms of production, contributing to the joint development of companies. In 2014, in its report in the collection "Ecosystems come on age", Deloitte Limited defined ecosystems as "dynamic and jointly developing communities consisting of diverse actors creating and receiving new content in the process of both interaction and competition." ^[29]

Drawing. 1 The ecosystem of the company's divisions. Compiled by the author during the research.

Within the framework of the study, the authors understand the ecosystem as a structure for cooperation between various divisions (departments) of the company, distribution and customers operating regulatory documents and business processes.

Thanks to the simultaneous participation of related departments offering related products and services, interrelated and fruitful work is carried out aimed at achieving the best economic result.

Thus, the KM-based approach to sales management can be described as the basis that forms the ecosystem of the company's extractive divisions.

As part of the work of this ecosystem, value is created both for the company: increasing profits, increasing competitiveness and life cycle of the client, and for the client: the comfort of the transaction and the most profitable offer. ^[30]

Cumulative margin can be applied at two levels of sales management: strategic and operational.

The strategic level of management implies planning and forecasting the company's activities for a relatively long period of time. The "iron margin" of the main product, cars, is taken as the basis for budgeting, it is calculated based on the cost of new cars, the sales plan and compensation from the distributor, the indicator is summed up with the planned profits of related departments, as a result, an indicator of the total cumulative margin is obtained without taking into account operating costs and expenses (table 2). This approach simplifies the work of managers at the operational level. Speaking of expenses, it is worth mentioning the cumulative margin of the second level, which takes into account variable operating expenses and is used for internal financial analysis.

Each division of the company has its own budget, goals and targets. The divisions involved in the profit-making processes are called "mining divisions", among them the following can be distinguished:

The New Car Sales Department (OP), specializing directly in the sale of the company's main product – cars. The financial indicator of the sales department is the "iron margin", which, in turn, is taken as the basis for planning related departments.

The Insurance and Credit Department (USC) offers credit and insurance products. The planning takes into account the profits from their sales, the so-called "agency fees" (AB).

The department of additional equipment and spare parts (UP and DOWN) offers equipment for cars, spare parts and accessories. The planning takes into account the profit from sales, as well as equipment installation services.

The department of basic service or the workshop of basic service (COR) carries out repair and maintenance of cars. The planning takes into account the profit from the sale of service services, the so-called "Package maintenance" - a set of works on servicing the customer's car in future periods.

The trade-In hotel buys the customer's used car. The planning takes into account the profit from the sale of purchased cars. It should be noted that the work of this department largely corresponds to the work of the hotel for the sale of new cars.

Table 2

An example of planning the budget of an auto center using a cumulative margin for a month

The strategic and operational levels are closely linked, and the link is the head of the sales department. His task is to predict and coordinate a plan (budget) based on an analysis of the external environment and the market situation and cascade goals to achieve targets to direct performers - sales department managers - indicating to them the framework and opportunities for independent decision-making while working with clients. Performance is tracked using key performance indicators.

Under ideal conditions, the cumulative income per car from the budget plan is translated into the goals of the sales department without changes. In practice, under the influence of the environment and the constantly changing market, this indicator is subject to correction up or down.

At the operational level, working with KM allows flexible pricing in real time, in other words, sales managers have the opportunity to change the cost of each specific car depending on the participation of goods and services of related departments in the transaction.

Cumulative margin is suitable for use on the scale of a multi-component transaction, for example, if not one, but several cars with different pricing are considered for purchase, which allows solving problems in the B2B and B2G segments.

It is worth noting that the work of the OP manager in agreement with the client on the cost of the car (price negotiations) within the framework of the transaction requires high competencies, developed negotiation skills and flexible thinking. ^[31]

Let's consider the calculation of cumulative margin using the example of a car (Table 3).

The recommended retail price of the car (RRC), set by the manufacturer, is 2,150,000.00 rubles. The cost of the car (the cost at which the car was purchased by the dealer from the distributor) is 2,000,000.00 rubles. Iron margin = 150,000.00 rubles. To stimulate demand for a car, there are promotions from the distribution network: a discount on a car in the amount of 50,000 rubles for purchase at the expense of credit funds from the partner's bank, and a similar discount for using the Trade-In service. Thus, the RRC of the car can be reduced by 100,000.00 rubles due to the support of the distributor.

The client puts forward a counteroffer – to purchase a car for 2,000,000.00 rubles, because a similar price is offered in a nearby car dealership for a similar car of another brand.

The sales manager finds out the customer's needs in real time and, clarifying the details of the transaction, makes calculations based on plans and KPIs. Let's assume that the plan for the minimum cumulative margin for 1 car is 150,000.00 rubles.

If the customer purchases a set of additional equipment worth 50,000.00 rubles, the company's profit will amount to 15,000.00 rubles.

If the client applies for a car loan in the amount of 9500.00 rubles, then the bank fee will amount to 57,000.00 rubles, the CASCO insurance policy will bring another 15,000.00 rubles, compensation from the distributor 25,000.00 rubles.

The projected profit from the sale of a Trade-In car purchased from a customer is 100,000 rubles. Compensation from the distributor is 25,000.00 rubles.

Thus, in order to reach the price desired by the client, taking into account additional equipment, a discount of 200,000.00 rubles is required, and the minimum profit for the company should be at least 150,000 rubles. Having calculated the cumulative economic effect of a comprehensive sale involving related departments, the manager can make an offer to the client that satisfies both sides of the transaction: the client will receive the price of the car 2 million rubles, and the company will receive 187,000 rubles of cumulative margin.

Table 3

An example of car pricing based on the calculation of cumulative margin

An important point should be noted - cumulative margin is not equivalent to iron margin, in other words, the customer is given a direct discount on the car with "clean" money, and cumulative profit, firstly, has a deferred effect, and secondly, may differ from the calculated one. This is explained by the following factors:

Agency fees from banks and insurance companies are credited to the dealer's current account after a certain time after the transaction. The client can completely refuse insurance services in the near future after the transaction, during the so-called "cooling off period", and prematurely close credit obligations, thereby depriving the dealer of an AB.

The customer's car is also sold after some time, and its sale price may be either higher or lower than predicted at the time of the transaction, depending on demand.

The estimated profit from the sale of the customer's "old" car does not take into account the costs of sale, which include car preparation, storage and marketing promotion.

Compensation from the distributor, depending on the terms of cooperation, can be received by transfer to the dealer's current account, or can be offset against the payment of a new batch of cars by reducing the selling price.

Based on the above, it follows that accounting for cumulative margin requires special attention and control. To do this, it would be correct to maintain two forms of reporting: the calculated one, which takes into account the forecast of the total profits of all departments of the company, including compensation from the distributor, and the actual one, which takes into account the actual profit received at the dealer's account. Control lies with the heads of the mining divisions, the finance department and the accounting department.

As for staff motivation, within the framework of sales management using cumulative margin, a flexible motivation system is possible, aimed at achieving common goals and results, linking the activities of several departments of the company. The basis in such a system is the profitability indicator of the unit, and secondary tasks expressed in natural terms will help stimulate the work of related departments.

In practice, a situation may arise that significantly affects the psychological state of employees. Since the sales manager partially manages the financial component of the transaction, he projects the financial result on his salary. With abrupt changes in the price level in the market, a situation may arise when the profitability of the company will increase sharply, while the income of the manager remains approximately at the same level. In this case, it is necessary to carry out additional explanatory work with employees in order to rebuild their perception and maintain a loyal attitude towards the company.

There may be conflicts of interest at the level of mining divisions related to internal goals and KPIs, for example, the manager of the trade-In department has completed a car buyback plan, and the OP manager needs another transaction involving an adjacent department to complete the plan. In such a situation, most likely, the trade-In department will offer the client the lowest possible purchase price, and the OP manager, in order not to lose the deal, will have to make the maximum possible discount on a new car. Most likely, a higher profit from the sale of the customer's "old" car in the future will compensate for a direct discount on a new car, but at the department level, for the sales department and the manager, such a transaction can be demotivating.

Speaking about the development of this approach to business management, we can say that it is due to the flexibility of cumulative margin, the mood of business owners from the financial result and changes in the market. The tool allows you to create targets with different levels of detail of parameters, take into account or not take into account certain revenues and expenses of the company, or even the activities of specific departments. For example, recently car dealers have been discussing the prospect of taking the activities of the trade-In department beyond the cumulative margin of the new car sales department. This is due to the long turnover period and the increasing number of factors affecting the final profit. After all, the car can be sold after a few months, which will entail additional costs for its maintenance and sale, and the income from the sale will be the cumulative result of the activities of several departments, which again affects the "purity" of profit.

Results and conclusions

Summing up, we note the advantages of the cumulative margin approach:

· Cumulative margin is a universal tool for strategic planning and operational work.

· It allows you to define and coordinate goals at all levels and divisions of the company. The development of goals is carried out both "from top to bottom" and "from bottom to top" - these qualities are inherent in such globally recognized business management concepts as BSC, OKR and MBO.

· KM involves all mining divisions of the company in its work, forming an ecosystem, thereby increasing the involvement of personnel in the common cause.

· It provides efficiency and flexibility in real-time decision-making, which directly affects the increase in the competitiveness of the company.

· It helps to increase the customer's life cycle in the format of long-term and mutually beneficial relationships.

· Management based on cumulative margin implies the possibility of increasing the profitability of the company.

· Thanks to an integrated approach, the quality of service increases, the transaction becomes more comfortable for the client, therefore, the client's loyalty to the company increases.

· Within the framework of this approach, it is possible to consider the company's activities both in detail and comprehensively, decomposing profit channels for each car.

· KM is compatible with other approaches and tools for managing and improving business efficiency.

· As a pricing tool at the operational level, it is suitable for conducting multi-component transactions.

We also note the disadvantages of the approach under study:

· As noted earlier, working with the cumulative margin model is based on forecast values. The actual results may be significantly lower than the calculated ones. The more departments involved in the transaction and the more factors influence it, the higher the risk of deviation of actual indicators from the calculated ones.

· Conflicts of interest between mining units related to the internal objectives of the units,

· Cumulative margin implies double reporting, which requires more attention and resources.

· Sales managers need developed personal qualities and professional competencies.

· Knowing the financial side of the business, employees may ambiguously perceive a sharp increase in the company's income and project it onto their salary.

It can be concluded that sales management using the cumulative margin approach is quite effective, although it is not a panacea for the automotive business. The approach is convenient for its versatility, it allows you to manage both a single department of the company and consider the activities of the organization in a complex. Planning is carried out in a two-way format, both "top-down" and "bottom-up", which allows you to see the situation in a single field at different levels, strategic and operational, and, if necessary, quickly respond to changes in market conditions. At the operational level, the company receives an effective pricing tool for working with customers in real time.

The significant disadvantages of the campaign include the fact that during the price formation, the real "net" profit is replaced by a hypothetical one, the estimated value of which may differ from the actual one under the influence of time and other factors. Therefore, you should pay more attention to planning and calculations and take into account the possible risks of reducing income.

The approach includes the ability to manage goal setting, consider the company's departments as a single ecosystem, as well as influence the pricing of goods, which is its key feature in comparison with other business management approaches.

It is important to understand that the effectiveness of KM-based management depends on the degree of involvement of the company's employees from related departments and the high level of competence of the staff.

Projecting this approach to other areas of business in the field of sales, it can be assumed that it will be relevant in the real estate segment, since this segment implies high cost and the same tools are used to make transactions as in automotive sales. Or in sales of low and medium price segments, for example, household appliances and electronics, where the order can be expanded by the number of positions, and credit, insurance products and trade-In can also be used as tools.

Conclusion

It is assumed that in order to achieve the best results, the business must develop evenly and in a balanced manner, however, external factors that have a significant impact on it can cause distortions in the activities of a single division of the company. In other words, some divisions can earn, others remain without profit.

The task of top managers and owners is to react quickly and make the right management decisions. In such situations, management using a cumulative margin approach becomes justified.

KM is a tool that affects pricing and takes into account the interests of the seller and the buyer in the operational activities of the company, thereby allowing to increase the number of transactions, raise the company's profit, and also help the client achieve the goal of purchasing goods.

For the well-coordinated activities of all departments of the company as a single ecosystem, it is necessary to carry out constant work with personnel aimed at their involvement and interest in performing tasks focused on the overall result.

Perhaps over time, this approach will arouse greater interest among researchers and serve as the basis for new promising management solutions for business.