Budgeting • Marketing budget should start from the marketing strategy and plan • Forecasts used to construct a budgeted profit-and-loss statement • Profitability analysis – Costs of specific marketing activities are determined – > profitability of them in market segments, customers, products etc

Profitability • The most important measure of performance • Limitations – Market share maintaining and other similar measures are non-financial – Short-term profitability actions can prove counter-productive in long-term – Profits can be impacted by external factors (weather etc)

Profitability (2) • Direct costing approach to profitability – Involves the use of contribution accounting – Shows directly the effect of adding or dropping a product or customer – Claim: there is no way to allocate the fixed joint costs in an accurate way

• Full costing approach to profitability – Direct and indirect costs assigned to the unit of analysis • Indirect ~ fixed joint costs etc

– Claimed to be the only way to get an accurate picture of a market’s value

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Three Marketing Budget Approaches • Top-down budget – New budget based on projected sales objectives, using past marketing expenses as a percentage of sales

• Customer mix budget – Cost of customer acquisition and retention + combination of new and retained customers used in deriving new marketing budget

• Bottom-up budget – Each marketing element budgeted for specific tasks identified in the marketing plan

Customer Mix Budgets • Recognizes the customer and markets as the primary unit of focus – Instead of products and units sold

• Important strategic distinction, because – There is a limited number of potential customer, but – There is a larger range of products and service that can be sold to each customer

Customer Mix Budget Market demand x Market share (%)

Customer volume x

Revenue per customer Variable cost per customer Marketing expenses

Margin per customer

Total contribution

-

Net marketing contribution

-

Net profit

Other operating expenses

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Customer Volume • Marketing strategies affecting customer volume are – Attract new customers to grow market share – Grow the market demand by bringing more customer to the market – Enter new markets to create new sources of customer volume

• Customer purchases and collective customer volume is key component of profitability and financial performance – Without them no positive cash flow

Margin per Customer • Equals to revenue per customer minus corresponding variable costs – ~ customer contribution margin

• Should be positive – New customers often create negative margin – In the long run should be positive for all customers

• Strategies to improve customer margin – – – – –

Grow customer revenue by product extensions Grow revenue by adding services Promote higher-price products when feasible Develop more cost-effective marketing systems Eliminate customers with too low contribution

Total Contribution • = customer volume x customer margin • Important component in profitability equation – The rest of the elements are expenses

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Net Marketing Contribution • = Total contribution – marketing expenses • Expenses cover costs associated with – Sales effort – Market communications – Customer service – Marketing management

• Increases in total contribution should be higher than respective increases in marketing expenses

Net Profit (before tax) • = net marketing contribution – other operating expenses related to marketing • Other operating expenses include – Fixed costs (HR, R&D etc) – Utilities, rent, fees etc – Sometimes also corporate expenses (legal fees, corporate advertising, executive salaries etc)

Alternative Marketing Metrics Indicators • Potential – % of sales from products less than 3 years in the market – % growth projected over the next 3 years in size of targe markets – % of sales over the last 3 years from new marketing channels

• People – % of time the CEO and CMO spend on strategic marketing – % of unsuccessful sales calls, new products or marketing activities

• Performance – Price-earnings ratio relative to top competitor – Share of total market valuation today vs 5 years ago – % of unsatisfied customers (service experience)

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