Contribution and Investment define Marketing Success

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A recent article in the Chartered Institute of Marketing’s (CIM) on-line magazine “Catalyst,” seems to question the use of ROI (Return on investment) as a Marketing tool. As the article seems to limit itself to measuring ROI involved in terms of advertising and promotion, it misses the point that Marketing is a management function that produces profitable income by satisfying customer demand. Therefore measuring the ROI in satisfying customer demand is far wider than limiting it to the advertising and promotion budget.

The term “Return on Investment” (ROI), is often confused with the term “Return on Marketing Investment” (ROMI), but these terms are not interchangeable. ROI is used for overall investment while ROMI is generally limited to a specific marketing investment such as an exhibition or advertisement, but as it is difficult to identify which sales are attributable to which activity, it does not readily apply to the marketing function as a whole.

The purpose of marketing is to generate and sustain a continuous stream of profitable revenue for the business. The objective of the commercial manager responsible for producing profitable income is to maximize profitable sales revenue, while minimizing the marketing costs and assets used. The performance of the commercial manager may be judged on the amount of profitable income produced, and the efficiency of its production measured in terms of the level of costs, investment and assets used. A famously quoted saying, is that in business “if you can’t measure it, you can’t manage it.” It is important therefore that performance measurements should be applied to all the components of the marketing process, to maximise efficiency in producing income. In practise, the commercial manager may not have oversight for a number of business activities that relate to the customer, such as production, credit control and relevant IT services. However, in such circumstances, commercial managers still need to know and understand the costs and output of all the business areas that contribute to producing income, regardless of whether or not they have the responsibility for them.

Using the CIM’s definition of marketing, “the management process that identifies anticipates and satisfies customer requirements profitably”, it is soon apparent that there are many cost centres that contribute to “anticipating and satisfying customer requirements profitably” which includes:

  • Warehousing costs – Product is produced for customer demand and has to be stored before it is sold. Thus there are costs for heat, light, power and warehouse wages.
  • Distribution costs – Getting the product to the customer involves fuel, postage, freight and associated salaries.
  • Advertising cost – Communicating with the market includes media and production costs
  • Promotion costs – Promotional schemes, exhibitions and PR expenditure.
  • Web-site costs – Includes design, registration and management costs
  • Selling costs – The salaries and expenses of all direct sales staff
  • Sales office costs Sales admin and marketing salaries, office running costs.
  • Discount All discounts on accounts and invoices, because this is a direct cost against income.
  • Market research costs Market research is a pre-requisite to anticipate customer requirements.
  • Bad debt costs Bad debt results from customer credit management
  • IT costs Software costs and licences, hardware rental and lease directly associated with sales and customer support.
  • Vehicle costs the cost of vehicles uses specifically for selling and selling support, capital and leasing costs.
  • Finished stock, an investment awaiting conversion to income.

For many businesses, marketing is still seen in the narrow terms of advertising, promotion, social marketing and other communication based activities. However, for the commercial manager, as well as the chief executive and the finance director, defining all the constituents of the marketing budget is essential, if assets are to be correctly allocated and managed profitably. Ultimately every aspect of business operations must be seen in terms of its contribution to producing income.

The prime measurement in any business is one of output. The purpose of “marketing” or the collective business getting activities, must be to maximize the generation of profitable income. Measuring “sales revenue” in isolation is therefore insufficient to measure marketing performance, as it does not relate to profit. “Profitable revenue” which is the measure of marketing output, is known as the “Marketing Contribution” and is defined as:

Sales revenue less the total direct and indirect marketing costs, incurred by marketing’s activities.

The overall efficiency of the marketing function involved in the management of costs and resources in generating profitable revenue, can be expressed as a single figure known as the Optimum Marketing Performance (OMP), defined as:

The Marketing Contribution/Marketing Assets

This single management indicator enables fluctuations in marketing management performance to be easily seen, allowing comparison with other business indicators such as return on assets, stock turn, productivity etc. While measuring Sales revenue is relatively easy, establishing the total direct and indirect costs of marketing requires a detailed understanding of the full extent of customer related activities, which many businesses find difficult to define, and from which they habitually fail to collect the relevant data.

The purpose of marketing measurement is to understand what works and what doesn’t within the organization. Before measuring the marketing performance of any business, all the marketing terms, measurements and acronyms that are used should be clearly defined and understood. If measurements and their meaning are not clearly understood, the resulting management decisions will be questionable. Having extracted selected marketing measurements the next questions must be: Is the result useful? What does it tell us? Only information that actually assists in understanding and managing the marketing process should be used. Ultimately, if you don’t measure marketing performance, there is no way you can demonstrably improve marketing efficiency, effectiveness or return on investment.

© N.C.Watkis, Contract Marketing Service 24 May 24

Nicholas Watkis, AE MA DipM CMC FCIM
Nicholas Watkis set up Contract Marketing Service in 1981, providing professional interim marketing management for a wide variety of businesses. Over 30 years practical experience in organizations, large and small, national and international, led to the development of Business Performance Maximized specialist in marketing performance measurement.

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