Marketing spending

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Marketing spending is an organization's total expenditure on marketing activities. This typically includes advertising and non-price promotion. It sometimes includes sales force spending and may also include price promotions. In a survey of nearly 200 senior marketing managers, 52 percent responded that they found the "marketing spending" metric very useful. [1]

Contents

To predict how selling costs change with sales, a firm must distinguish between fixed selling costs and variable selling costs. Recognizing the difference between fixed and variable selling costs can help firms account for the relative risks associated with alternative sales strategies. In general, strategies that incur variable selling costs are less risky because variable selling costs will remain lower in the event that sales fail to meet expectations. [1]

Purpose

This metric's purpose is to forecast marketing spending and assess budgeting risk. Marketing costs are often a major part of a firm’s overall discretionary expenditures. As such, they are important determinants of short-term profits. Of course, marketing and selling budgets can also be viewed as investments in acquiring and maintaining customers. From either perspective, however, it is useful to distinguish between fixed marketing costs and variable marketing costs. That is, managers must recognize which marketing costs will hold steady, and which will change with sales. Generally, this classification will require a "line-item by line-item" review of the entire marketing budget. [1]

Rather than varying with unit sales, total variable selling costs are more likely to vary directly with the monetary value of the units sold – that is, with revenue. Thus, it is more likely that variable selling costs will be expressed as a percentage of revenue, rather than a certain monetary amount per unit. The classification of selling costs as fixed or variable will depend on an organization’s structure and on the specific decisions of management. A number of items, however, typically fall into one category or the other – with the proviso that their status as fixed or variable can be time specific. In the long run, all costs eventually become variable. [1]

Over typical planning periods of a quarter or a year, fixed marketing costs might include: [1]

Variable marketing costs might include: [1]

Marketers often do not consider their budgets in fixed and variable terms, but they can derive at least two benefits by doing so. [1]

First, if marketing spending is in fact variable, then budgeting in this way is more accurate. Some marketers budget a fixed amount and then face an end-of-period discrepancy or "variance" if sales miss their declared targets. By contrast, a flexible budget – that is, one that takes account of its genuinely variable components – will reflect actual results, regardless of where sales end up. Second, the short-term risks associated with fixed marketing costs are greater than those associated with variable marketing costs. If marketers expect revenues to be sensitive to factors outside their control – such as competitive actions or production shortages – they can reduce risk by including more variable and less fixed spending in their budgets. [1]

A classic decision that hinges on fixed marketing costs versus variable marketing costs is the choice between engaging third-party contract sales representatives versus an in-house sales force. Hiring a salaried – or predominantly salaried – sales force entails more risk than the alternative because salaries must be paid even if the firm fails to achieve its revenue targets. By contrast, when a firm uses third-party brokers to sell its goods on commission, its selling costs decline when sales targets are not met. [1]

Construction

Total selling (marketing) costs ($) = Total fixed selling costs ($) + Total variable selling costs ($) [1]
Total variable selling costs ($) = Revenue ($) * Variable selling cost (%) [1]

Variable costs

There are many types of variable selling costs. For example, selling costs could be based upon a complicated formula, specified in a firm’s contracts with its brokers and dealers. Selling costs might include incentives to local dealers, which are tied to the achievement of specific sales targets. They might include promises to reimburse retailers for spending on cooperative advertising. Sales commissions represent one example of selling costs that vary in proportion to revenue. Consequently, any sales commissions should be included in variable selling costs. [1]

Fixed costs

By contrast, payments to a website for a fixed number of impressions or click-throughs, in a contract that calls for specific financial compensation, would more likely be classified as fixed costs. On the other hand, payments for conversions (sales) would be classified as variable marketing costs. [1]

Related Research Articles

In marketing, customer lifetime value, lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.

<span class="mw-page-title-main">Fixed cost</span> Business expenses not dependant on output

In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or rents being paid per month. These costs also tend to be capital costs. This is in contrast to variable costs, which are volume-related and unknown at the beginning of the accounting year. Fixed costs have an effect on the nature of certain variable costs.

<span class="mw-page-title-main">Variable cost</span> Sum of marginal costs over all units produced

Variable costs are costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of marginal costs over all units produced. They can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct costs are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

<span class="mw-page-title-main">Net income</span> Measure of the profitability of a business venture

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income to net sales, usually expressed in percent.

<span class="mw-page-title-main">Gross margin</span> Gross profit as a percentage

Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount and "gross margin" is technically a percentage or ratio.

<span class="mw-page-title-main">Contribution margin</span> Unit selling price minus its variable cost

Contribution margin (CM), or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. "Contribution" represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs. This concept is one of the key building blocks of break-even analysis.

<span class="mw-page-title-main">Total cost</span> Total economic cost of production

In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes inputs such as labor and raw materials, plus fixed cost, which is independent of the quantity of a good produced and includes inputs that cannot be varied in the short term such as buildings and machinery, including possibly sunk costs.

<span class="mw-page-title-main">Market share</span> Relative market adoption

Market share is the percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a 10 percent share in that market.

The following outline is provided as an overview of and topical guide to marketing:

Return on marketing investment (ROMI) is the contribution to profit attributable to marketing, divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) metrics because marketing is not the same kind of investment. Instead of money that is 'tied' up in plants and inventories, marketing funds are typically 'risked'. Marketing spending is typically expensed in the current period.

In bookkeeping, accounting, and financial accounting, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.

A product's average price is the result of dividing the product's total sales revenue by the total units sold. When one product is sold in variants, such as bottle sizes, managers must define "comparable" units. Average prices can be calculated by weighting different unit selling prices by the percentage of unit sales (mix) for each product variant. If we use a standard, rather than an actual mix of sizes and product varieties, the result is price per statistical unit. Statistical units are also called equivalent units.

Sales effectiveness refers to the ability of a company's sales professionals to “win” at each stage of the customer's buying process, and ultimately earn the business on the right terms and in the right timeframe. Improving sales effectiveness is not just a sales function issue; it's a company issue, as it requires deep collaboration between sales and marketing to understand what is working and not working, and continuous improvement of the knowledge, messages, skills, and strategies that sales people apply as they work sales opportunities.

In Marketing, Product category volume (PCV) is the weighted measure of distribution based on store sales within the product category. PCV is a refinement of all commodity volume (ACV). It examines the share of the relevant product category sold by stores in which a given product has gained distribution.

A sales territory is the customer group or geographical area for which an individual salesperson or a sales team holds responsibility. Territories can be defined on the basis of geography, sales potential, history, or a combination of factors. Companies strive to balance their territories because this can reduce costs and increase sales. Sales territory can be varied by salesperson or sales team depending on the product they sell or the company that they work for, with companies needing to account for their products price, frequency of sales, and costs in order to determine sales territory to sell their product in.

The purpose of profit-based sales target metrics is "to ensure that marketing and sales objectives mesh with profit targets." In target volume and target revenue calculations, managers go beyond break-even analysis to "determine the level of unit sales or revenues needed not only to cover a firm’s costs but also to attain its profit targets."

Volume projections enable marketers to forecast sales by sampling customer intentions through surveys and market studies. By estimating how many customers will try a new product, and how often they’ll make repeat purchases, marketers can establish the basis for such projections.. .. Projections from customer surveys are especially useful in the early stages of product development and in setting the timing for product launch. Through such projections, customer response can be estimated without the expense of a full product launch. In a survey of nearly 200 senior marketing managers, 56 percent responded that they found volume projections very useful.

Numeric distribution is based on the number of outlets that carry a product. It is defined as the percentage of stores that stock a given brand or SKU, within the universe of stores in the relevant market.

Category performance ratio refers to the relative performance of a retailer in a given product category, compared with its performance in all product categories. Distribution metrics quantify the availability of products sold through retailers, usually as a percentage of all potential outlets. Often, outlets are weighted by their share of category sales or “all commodity” sales. For marketers who sell through resellers, distribution metrics reveal a brand’s percentage of market access. Balancing a firm’s efforts in “push” and “pull” is an ongoing strategic concern for marketers.

References

  1. 1 2 3 4 5 6 7 8 9 10 11 12 13 Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN   0137058292. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project.
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