Chapter Summary

A marketing cost analysis is a detailed study of a company’s distribution costs. It is undertaken to discover which segments (territories, products, customers) of the company’s marketing program are profitable and which are not. A marketing cost analysis is a part of a company’s evaluation of its marketing performance.

In marketing cost analysis, we need to understand the differences between accounting-ledger costs and activity-category costs. Another useful distinction is the one between direct and indirect expenses. In a marketing cost analysis, one of the major problems is the difficulty of allocating costs. Management must allocate ledger accounts into activity categories. Then each total activity cost must be allocated to the marketing segment (territory, product, customer group) being analyzed. Cost allocation is especially difficult in the case of indirect expenses.

The difficulty of allocating indirect costs leads to the contribution-margin versus full-cost controversy. In the contribution-margin approach to marketing cost analysis, only the direct costs incurred by the marketing unit (territory or product, for example) are allocated to that unit. The unit’s gross margin minus its direct costs equals the amount the unit contributes to pay the company’s overhead (indirect expense). In the full-cost approach, all costs (direct and indirect) are allocated to the various marketing units being studied. In this way, management tries to determine the unit’s net profit.

The company’s marketing costs can be analyzed in three ways. One way is to analyze the costs as they appear in the accounting ledgers and on the company’s income and expense (profit-and-loss) statement. A second approach is to analyze the marketing costs after they have been allocated to activity categories. The third type occurs after each activity cost has been allocated to the sales territories, products, or other marketing units being studied.

The types of analyses we have summarized tell management what happened. Then the executives must try to determine why these results occurred. Finally, management must decide what changes are needed in the marketing program to correct the misdirected effort.

A marketing cost analysis can be especially useful in identifying and remedying the small-order problem that occurs in so many firms.

Return on investment (ROI) is another tool that management can use in evaluating sales performance and in making marketing decisions. A variation of the ROI concept is ROAM, return on assets managed. The ROAM concept is especially useful for evaluating the performance of field sales managers.