Controlling the costs of marketing and promotion

Pavel Lebedev, an independent consultant, a member of the network of the National Guild of Professional Consultants Russia

Developing a program to attract new customers, the company has allocated more funds for its financing. However, significant results this marketing move has brought. As a result, management was faced with a choice: turn on funding for the program or try to resuscitate her.

In the battle for market share the company can succeed in the presence of an aggressive marketing strategy. But often, it requires a high level of spending on promotion. In practice, a thorough analysis of these costs, in spite of their considerable value, is not as common as it should.

When deciding on the investment of a production nature, companies tend to prepare a business plan or make projections. First of all estimated return on capital employed, taking into account the duration of the economic life of investment (ROI - Return on Investments). When evaluating the ROI is assumed that the losses in the early period must be compensated in the future. However, to the costs of marketing in the traditional accounting systems financiers suited up "to the contrary." As a rule, they are recognized as short-term and write off to the income statement. This approach does not assess how effective and appropriate costs have been incurred.

Marketing costs are underestimated

Traditional accounting system calls in recent years more and more criticism. One reason for this is that it virtually ignores the intangible component of the business. At the same time, the financial community, spread the notion that the company's value is determined by discounting the future cash flows. Essentially future cash flow gives an evaluation of the usefulness of the market the company offers potential customers. So the cost of the organization, calculated using the discount rate that reflects the inherent value of its intangible assets. For example, such as internally generated goodwill (the difference between the potential business value and the book).

The methodology of the traditional accounting does not allow considering the costs of marketing and promotion as an asset. However, from a strategic point of view, they have one of the main criteria of an asset - the potential to generate revenue in the future. Of course, there is the problem of a reliable measurement of the cost of that asset. But it does seem that for the purposes of strategic management accounting can be neglected.

Investment in marketing and promotion can be analyzed similarly to investments in tangible assets. One of the main tools of controlling in this case is the calculation of return on investment. This indicator is defined as the ratio of the effect on investment of their value. With the definition of the rate of investment is achieved more or less simple: it is the entire amount of the expenditure. But what about the definition of the effect?

Features of the calculation of profitability

When calculating the return on investment in the numerator of the indicator of profit. To measure the return on marketing activities in the area will have to resort to certain assumptions.

First of all it is necessary to develop standard procedures for the measurement and interpretation of indicators. Exploring marketingvye assets, determine their properties and describe them using measurable parameters. This will provide an opportunity to assess what was going on or what will happen with the asset. Among such properties, for example, include:

consumer awareness of the brand or product;

knowledge of consumers of product;

propensity to shop at the company, etc.

The definition of these properties involves three stages. The first - to set specific objectives for market products, consumer groups, trade channels. The second phase - the development of qualitative and quantitative marketingvyh purposes, as well as a choice of ways to achieve them. Third - linking goals and activities with the strategic management accounting and controlling.

Changing these properties will have an impact on the profitability of the product. Having clear criteria can be determined's incremental revenue, expenses and profit. The calculated profit and are encouraged to consider how an effect size of investment needed to calculate ROI.

Is often difficult to determine what would be the utility of the asset to the business. In this case, you should ask the question: is there an asset at all, or have been ineffective spending, and in fact damages? So, it is easy to determine the potential effect of a carefully planned promotions. Entirely different is the situation with "automatic" spending budget - simply because such a practice has always existed in the company. In this case, management should consider the feasibility of developing a more effective marketingvyh programs.

How to measure the value of a customer

To illustrate the possibility of applying this instrument in practice, give an example. In one of the consulting projects we needed to develop an algorithm for estimating the cost-effectiveness of the company to attract new subscribers and increased circulation of the magazine (see table).

In this case, the return on investment should be measured as the ratio of the effect of attracting new subscribers to the cost of their attraction. Price attract one subscriber can be calculated as the ratio of the total cost of this marketingvuyu program to the expected number of new customers. The cost of the program was determined by the budget spending to attract subscribers. However, there were difficulties with the assessment of the size of the effect.

The value of the subscriber for the company, it was decided to measure the value based on the forecast of profit it can bring. In this case, the life cycle of the subscriber was identified in five years. A further prediction was not considered necessary because of the high level of uncertainty.

The rate of return subscriber, we calculated the following way. Initially identified forecast revenue per subscriber per year. Then, based on the current structure of revenue (cost was 73% of its value), calculated the profit. Income attributable to the period from the second to fifth years, prodiskontirovali at the weighted average cost of capital (WACC - Weighted A verage C ost of C apital) and sum. In this case, the calculation was considered the undiscounted value of the cash flows of the first year, which was adopted as the reference. On the basis of the resulting performance has been calculated ROI.

Thus, the problem was solved of a strategic nature, were made extremely important assessments. We used the traditional tools of financial management: building a financial model, discounting, the calculation of return on equity. Less important and was a correct statement of the problem.

Possible errors

In conclusion, I would caution against mistakes that companies' specialists often allows the use of return on investment. One of them is the assignment to the investment of the totality of the costs of marketing. It is important to distinguish between the costs that the company risks, that is, the actual investment and operating costs to maintain sales.

Another common mistake, the observed return on investment will not be correlated with the cost of capital employed. Creating value assumes that the generated return on investment will be greater than the cost of invested resources. Thus, a positive value of the ROI is not enough. For example, if the ROI is 10 percent per annum, and the resources invested in 12 percent of the cost, then we are the losers.

When implementing the described instrument and it should be remembered that all management decisions are based on forecasts of the future, which is uncertain. These forecasts are inevitably flawed. At the same time, other, more optimal, method of study of strategic decisions is not there yet.

References

For preparation of this work were used materials from the site http://www.troek.net/