Is your business successful? It depends how you define success. Is it the size of your market share, or the share price? Is it the number of hits on the web-page, or the number of likes on social media? Is it the amount of sales?
Profitable income derives from a number of factors including Product, market selection, market pricing, accurate costing, but principly from the anticipation and satisfaction of customer demand.
Marketing as defined by The Chartered Institute of Marketing is the “management process that anticipates and satisfies customer requirements profitably,” This management process is
responsibility of every commercial manager. While many commercial managers see their sole objective as being to maximize sales, using every means available, their real objective is to maximize a sustainable flow of profitable income for the long term future of the business, while minimising costs and the use of assets.
Investment in advertising, market research, sales incentives, discounts and competitive pricing, are all valid marketing tools which are proven in increasing sales and maintaining product and market share. However, if commercial managers only measure their increase in sales to indicate their performance, they also need to account for the costs incurred in those increased sales. . Every commercial manager will ultimately be judged on the amount of profitable income produced, and the efficiency of its production.
Some years ago, a well-known manufacturer of vacuum cleaners launched a promotion which gave free airline tickets to every purchaser of a particular vacuum cleaner. The promotion was a great success. Sales of vacuum cleaners rocketed. Unfortunately, due to some error in the wording of the air ticket offer, the company was obliged to redeem every customer’s ticket claim. The result was that while sales of vacuum cleaners raised substantially, the total cost for redeeming the airline tickets exceeded the sales revenue derived from the promotion. Not only that, the order for vacuum cleaners had increased so much that additional production had to be made at extra cost to meet the demand. It was also found that because the value of the air tickets outweighed the price of the vacuum cleaner, many customers were buying vacuum cleaners as a source of discounted air tickets, before dumping them onto the second hand market, damaging future sales.
Measured on unit sales and increased revenue the promotion had been a major marketing success. However, looked at more closely, the whole exercise was an expensive disaster. Why? Because the sales revenue generated was less than the costs involved in terms of the total cost of air tickets supplied, as well as the additional production costs incurred in meeting the increased demand. In addition there was considerable negative publicity due to customers’ problems in obtaining their promotional tickets that damaged the company’s reputation and image.
The efficiency of the management process of marketing may be summed up in two principle indicators; the Optimum Marketing Performance (OMP) and Marketing Contribution. The OMP expresses the overall marketing performance by directly relating revenue with marketing investment, while Marketing Contribution, expresses marketing output as the derived from the revenue generated less the direct and indirect costs incurred by marketing activity.
Marketing on its own does not make the profit for a business. All the elements of the business, finance, production, supply, and personnel, directly or indirectly contribute to overall profit. Only marketing provides the source of profitable revenue. However, the illustration of the vacuum cleaner promotion shows that the successful efforts to generate sales revenue, if not thought through carefully can impinge on other areas of the business, creating variable and unforeseen costs outside the marketing area. Any marketing action which results in additional costs in areas outside marketing, is a cost against the marketing budget, and will reduce the value of the overall marketing contribution.
Successful performance by the marketing function does not guarantee net profit for the business. It is quite possible for other areas in the business, such as finance, production, supply or personnel to turn the profitable revenue and the potential gross profit generated by marketing, into a business net loss. But it is the commercial manager’s responsibility to ensure any unforeseen costs incurred by other departments are not as a result of Marketing’s activities.
Commercial managers must also be aware of and understand the necessary support of the other business activities, as well as the effects and consequences of its actions on them. For marketing to function in satisfying customer demand profitably, it requires funds from the finance department, the provision of a product or service, and personnel able to carry out the marketing activities. All the business functions are interdependent with the ultimate purpose of making profits for the business.
Although there are many and varied measures of aspects of marketing performance, only the values of Marketing Contribution and the Optimum Marketing Performance give a clear measurement of marketing success. However to get a true picture of performance, both these indicators must be viewed in context of other management indicators from elsewhere in the business and not in isolation.
