Posted in Marketing and Strategy Terms, Total Reads: 544
Definition: Marketing Cost
The total costs incurred while delivering goods to customers is known as the marketing costs. These expenses include expenses incurred to change the title of goods, promotion of goods, inventory costs, distribution of goods etc. Marketing costs are generally composed of two factors- fixed costs and variable costs. The marketing cost is also used to determine the risk associated with budgets.
Typically, in a marketing costs, the various factors are:
a. Fixed costs
ii) Advertising costs
iii) Cost associated with salaries of salespersons
iv) Production and distribution costs
b. Variable costs
i) Sales commission paid on per goods sold basis.
ii) Sales bonuses.
iii) Costs associated with present production.
More the variable cost and less the fixed costs, the risk associated with the budget is less. It is very useful for a business to calculate their marketing costs in order to function smoothly and achieve desired profits. There are different methods to calculate marketing cost for a business. They are:
i) Percentage of sale- In this method, the marketing cost is calculated as a percentage of the cost of sales. A desired percentage of the overall budget is kept aside for marketing. The prime advantage of this method is that the marketing cost will increase or decrease with the sales of the company and thus, a balanced will be maintained.
ii) The Dollar approach- Many companies directly set aside a certain amount of budget to incur the marketing cost, independent of the sales of the company or any other factors. This is generally used by small companies which rely more on their affordability than on sales. For defining a flat rate, in the first year of the business, many firms enquire about the different factors from a well-established firm or take the opinion of an expert.
iii) Matching competitors- In this approach, a company decides its marketing budget based on the competitors budget. It incurs the same amount that the competitor spends on a certain factor like ads. While following this approach, it is taken for granted that the competitor is following the right budget. Also, the competitor’s business should be comparable to ours. Example: If I’m a local departmental store, I cannot assume that Big Bazaar is my competitor and allocate budget to various activities like Big bazaar does.
iv) Marketing plan objectives- Any company before starting its business, has certain objectives. Depending on these objectives, the marketing cost is calculated and allocated to different factors. This is the most powerful way of defining a budget.