Cost Benefit Analysis – Marketing

The cost incurred by each of the marketing entities should be measured against the results produced by the respective entities. Results here mean sales volume generated gross margins achieved and net realization made by the entity. Furthermore, the productivity of each of these entities, i.e. how efficient or productive each product, each channel type, each customer (or customer class) and each salesman had been, should be analyzed by measuring their respective contributions to profits of the firm on the one hand, and to the overheads of the firm on the other. The unprofitable product, channel or customer should be discontinued. Or, they may be continued as a matter of conscious decision in view of their carrying a part of the overheads of the firm, though they are not contributing to profits directly. Each product, channel, customer class, salesman method/policy has an associated cost. This will come to the fore by systematic marketing cost analysis. Each of these entities also has an associated gross profit. This will also come to the fore by the analysis. The associated costs and profits of each entity should be weighted against each other and the cost return position of one entity should be compared against that of the others, and appropriate marketing decisions taken.

If marketing cost analysis is to be effective, it should include standard costing for the various marketing functions and entities. The firm should develop standard costs for each function and measure the actual costs against them. It may not be enough, if marketing costs are compared with the budget. The standard cost approach will reveal what ought to have happened, or what could have happened under very efficient conditions. Costs can also be compared with industry averages, where they are available.

Business firms are often forced to extend credit to increase sales. In some businesses, the entire sales take place on credit, cash sales being negligible. In certain other businesses, hire purchase and installment payments are the normal practice. Even in those cases where sales to consumers are on a cash basis, credit is extended to the distribution channels. It is essential for any business firm to evolve a policy on credit and exercise proper control on it.

The firm must ensure that customers and channels do not exploit the credit policy of the firm. Credit transaction should not turn into bad debts. Credit has two cost dimensions, (i) the interest on the money involved in the credit transaction, and (ii) the risk of bad debts. Bad debts must be seen and understood as an important part of the cost of credit. They erode the profits of the firm.

When a proper credit control system is absent, executives permit planned and unplanned, authorized and unauthorized credit to customers and the channels. They extend credit before a proper credit rating or before the credit department makes appraisal of the credit worthiness of the client. In others cases, they wait for the credit appraisal but do not adhere to the prescribed credit limits. In either case, the risk of bad debts is enhanced. Sometimes the cost of credit is not built into the price at all. All marketing executives and salesmen can avoid this, if a proper credit control system is instituted and it is ensured that the system is instituted and it is ensured that the system is strictly adhered to.

There must also be a mechanism as part of the credit control system for analyzing the accounts receivables and bad debts. The number, type extent and intensity of the receivables and the bad debts as well as the reasons for some of them becoming bad must be brought out by the analysis. All credit transactions have the potential of becoming a bad debt. And even if they are sound, credit transactions always have another serious implication of affecting the cash flow/liquidity of the firm. An analysis of outstanding and over dues will highlight the corrective action to be taken. Some firms offer cash rebates to customers in lieu of credit with a view to reducing credit transactions and accelerating recoveries.

Example of Asian Paints: It will be apt to recall here the system of credit control practiced by Asian paints, which was discussed in the case study on the company’s distribution strategy. Asian Paints (AP) had instituted an innovative credit control system, offering attractive financial incentives to the dealers for payment of each invoice on due dates and additional incentives for cash down purchases. The system of credit control and incentives was designed in an intelligent way and administered effectively, with the result that the company gained enormously more in relation to what it paid out as incentives. —