Marketing Cost - Definition, Importance & Factors
What is Marketing Cost?
Marketing costs are the all expenses that the company makes to market and sell its products and develop and promote its brand. These marketing costs or 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.
Basically, marketing costs is the total expenditure on the marketing activities. Marketing cost contains a long list of activities including advertising, campaigning, expenses on sales force, promotional events, celebrity endorsement, and market research. These could be fixed or variable. The fixed marketing costs include sales force expenses, advertising campaigns, sales promotion and distribution costs. Variable marketing costs include sales commission, bonuses and performance allowances.
Factors of Marketing Costs
Typically, in a marketing costs, the various factors are:
a. Fixed costs
1. Salaries
2. Advertising costs
3. Cost associated with salaries of salespersons
4. Production and distribution costs
b. Variable costs
1. Sales commission paid on per goods sold basis.
2. Sales bonuses.
3. Costs associated with present production.
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Importance of Marketing Costs
The concept is important in order to forecast marketing costs, and accordingly assess the risk in the marketing budget. Because expenditure on marketing is a discretionary expenditure, it can significantly affect the profit for the firm. This can be thought of as an investment though as the objective is to increase brand awareness and acquire new customers. Marketing cost may be fixed or variable. Managers must distinguish marketing costs onto fixed and variable and allocate funds accordingly. The fixed marketing costs include sales force expenses, advertising campaigns, sales promotion and distribution costs.
Variable marketing costs include sales commission, bonuses and performance allowances. Variable marketing costs are easier to forecast and hence bears less risk than fixed cost. Fixed cost may bear result in long term and therefore difficult to evaluate. It is an important decision for any business to decide what proportion of the revenue should be spent on marketing activities. This should enable the company to make better strategic financial decisions.
Methods to Calculate Marketing Costs
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:
1. 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.
2. The Dollar approach
Many companies directly set aside a certain amount of the 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.
3. 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.
4. 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.
Measuring Marketing Costs
Some of the key marketing KPI’s or Key performance Indicators are metrics used for measuring progress through marketing costs are:
1. Top-of-funnel Marketing: This refers to all activities and campaigns which concentrate on lead generation and targeting customers in the upper most portion of the marketing funnel. Some of such activities include content marketing expenses like paid advertising.
2. Marketing Dashboard and Real-time marketing: It highlights all important metrics for measurement and gives a fair idea to evaluate the progress. Real time marketing is about reporting data to managers in real time to help them make informed decisions.
Hence, this concludes the definition of Marketing Cost along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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