Marketing Cost Analysis

Marketing cost analysis is another important tool of marketing control. In recent years, business firms all over the world have experienced steep escalations in their marketing and distribution costs. They have found, to their dismay, that increased sales do not necessarily bring them increased profits. Containing marketing and distribution costs has become an imperative for optimizing profits. It has also become an imperative for survival against the growing competition.

Importance of Marketing Cost Analysis:

The first requirement in controlling the marketing costs is to comprehend the components of the marketing costs and the methods available for their control.

Benefits of Marketing Cost Analysis:

Careful and systematic marketing cost analysis confers a variety of benefits on the firm.

Types of marketing Costs:

Marketing costs in modern, large-sized firms belong to a kaleidoscopic variety. There are ever so many components of the marketing cost and they vary in their significance, size, measurability and controllability.

Generally, marketing costs are more difficult to measure and control, compared with other costs, such as material costs and manufacturing costs. Within the various components of marketing costs, some are relatively more amenable for measurement and control than others

Analyzing the costs by function:

The first step in marketing cost analysis is to gather the cost details of the various marketing function and analyze the function wise cost. For doing this, in the first instance various marketing activities have to be grouped into a few major and clearly identified functions. The marketing expenditure must be broken up over these functions.

Components of marketing costs:

* Physical distribution
* Inventory costs or costs of holding stocks
* Channel costs or costs of remunerating and administering the marketing channels.
* Selling/sales administration costs
* Promotion costs
* Cost of credit extended
* Cost of marketing information and marketing research

The costs incurred by each function must then be measured against the budgeted figures and the standard costs for that function. The cost incurred by the function should be compared with the results accomplished e.g. sales volume achieved, gross margins achieved and net realization made.

Steps involved in Marketing Cost Analysis:

* Assigning the marketing costs to the various functions of marketing.
* Analyzing the costs function by function.
* Assigning the functional expenses to the various marketing entities,
Each product
Each customer group
Each territory
Each channel type
* Analyzing the cost entity by entity
* Examining the cost benefit position for each function, broken up over each entity.
* Determining what corrective action is needed.

Analyzing the Costs by marketing entities:

After analyzing the costs function wise the firm should analyze the costs by each marketing entity – each product, each territory etc. For this purpose, the firm must put in place an accounting system that facilitates the assignment of functional expenses to the various entities like products, markets and customers.

Lines on Which Marketing Costs are analyzed:

By Product:

* By brand
* By ‘order size’ in each product
* By stock turnover ratio of the respective product; expenditure for fast selling products and slow selling products.
* By the warehousing cost incurred by each product.

By customer group:

* By customer type
* By ‘order size’ of customers’ purchases
* By the proportion of cash and credit sales in each customer type.
* By the mode/manner of delivery taken by customers

By territory:

* By the selling expenses incurred by each territory
* By the promotion expenses incurred by each territory
* By the cost of credit incurred by each territory
* By the rate of turn round of stocks in each territory

By marketing method and channel type:

* By the method of sale; direct to customer, or through wholesaler or retailer, or commission agent.
* By order size and order handling cost to the firm.
* By salesman; cost of sales calls, cost of orders booked, order to call ratio etc.
* By price category and discount classification; cost incurred at each price category.