More and more firms are using some form of contribution accounting to determine the profitability of products, channel units, and market segments. Such a method assigns first all variable marketing and production costs to a product. Variable production costs are direct labor and materials. The variable marketing costs are due to credit, shipping, sales commissions, merchandising and advertising. Some firms go further and allocate certain fixed joint costs, but this should only be done when one can find a logical relationship between the assigned expenditure and the product sales. All questionable costs should be treated as overheads. While overhead must eventually be absorbed, the contribution method makes it more clear what will be gained or lost by adding or dropping a product or a customer.
Ultimately, the objective of any distribution cost analysis the computation of potentials is to help the marketing manager make better decisions regarding how to allocate the firm’s marketing resources. Since the potential in any area is a function of the number and worth of prospective customers, and since the cost analysis relates cost to scale of buying, the logical next step is to undertake a marginal analysis to determine which accounts within which areas represent the most likely units on which to exert additional pressure.
Since the response to marketing effort will vary by customer and by product, marketing managers must decide how their marketing efforts will be allocated among customers and products. Thus, marketing managers must have knowledge of each major account, including its potential by product. They must also know if they are getting a greater or lesser share of an account’s potential, and whether they have been applying increasing or decreasing amounts of marketing effort to the account. Through ex post facto types of analyses or through experiments managers can estimate the likely results of applying additional marketing efforts to accounts of certain sizes, given the share of the account’s potential that has already been obtained by the firm. For example, one company determined that with accounts representing $100,000 and more annual potential, it was most unlikely that they could obtain better than a 30 percent share regardless of the nature and magnitude of the inputs.
Analyses of this type with consumer products are more difficult than with industrial products. However, an example of one approach to distribution cost analysis with a consumer is shown. In this table the researcher has attempted to identify marketing costs and profit contributions by market areas. Some explanation is necessary to understand the terminology in the table. The following accounting format was used to determine the gross margin and contribution to earnings.
Note that the objective is to isolate these important measures: (1) gross margin; (2) the advertising and sales promotion expenditures that caused, or led to, the gross margin; and (3) the contribution to earnings. By isolating these three measures, management can identify the response (the gross margin) of individual markets to the marketing effort (advertising and promotion expenditures) used in those markets.
Marketing Decision Support Systems (MDSS):
All of the sales analysis procedures described above rely on analysis of the same basic data broken down in different ways. As the student would suspect, the computer has had a major impact on such analyses. Once the basic sales data are put in computer memory, any of the above analyses can be accomplished quickly and cheaply. But the computer is having even more impact than this suggests.
As computers made the retrieval of data speedy, cheap, and accurate, management information systems (MIS) developed. These were systems for providing the information wanted by management, in the format desired, at the time desired, on a routine basis. Researchers discussed with managers the types of decisions they made or should make information they needed to make such decisions correctly. Then the researchers designed data bases that would contain the basic data, report formats that would present the data in the manner desired, and computer programs that would do the analyses and print the prints. Some reports would be prepared daily, others weekly, monthly, annually or otherwise.