Table

Rrafll-and-LtHK Sla^eiKSiVs t&r Chamisls this must be deducted (ho jiruportIons flf the functional t^fj-t?rises hardware stones cdii-sumed. According to'J a hie 4 .ft, hardwareswies received 200 out of 275 Dotal sales calls. Af an bppuied value of S20 a tall, hardware stores have to be charged with a $4,01)0 selling expense. Table J .ft also shows that hardware s Lores were (he target of 5(1 ads. At S31 an ad, the hard-ivare stores are ettnrged with £1.550 or advert isjjty$ The same reasoning applies in computing the share of the oilier functional expenses to charge to hardware stores. The rc^uEi is that hardware si ores gfive rise tn £1(1,051) of ihe total expenses. Subtracting this from ihe ^ross margin, die profit of setting through hardware stores is only S-I5Q.

This analysts is repeated for the other channels. I "he company is. losing money in selling th rough garden supply s ho [is and ma kes virtug I fy a II of i ls p rofi is l 11 ro ugl i d epa rti nttflfst ores. Notice that gross salts is not a reliable indicator ot the net profits for each channel.

It would be naive to conclude tliiit the company should drop garden supply shops and possibly hardware stores so that it can concentrate on department stores. The lot luwing questions need to tit: answered first".

H To what extent do buyers buy on the basis of type of retail outlet versus brand? ■ What are the trends with respect to the importance of these three channels? I low good arc the Company marketing strategies directed ai (lie three channels?

On the basis of ihe answers, marketing management can evaluate five at tec natives1;

1. I lsiabJish a s |wciaI charge f§r handling snial le r Orders,

2. nive mure promotional aid to garden supply shop* at til hardware stores.

a. Heducc the number of sale? citl Is afrd the amount of advertising going to gittden supply shops and hardware stores. -I. Do not abandon any channel entirety but only the ivcakest retail unils in each channel. 5. po nothing.

in general, marketing-profitability analysis indicates the relative profitability of different channels, products, territories, or other marketing entities. It dors not prove that the best Course of action is to drop the unprofitable marketing entities, nor does it capture the likely profit improvement if these marginal marketing entities arc dropped.

I-L ¡.ike all information tools, marketing-pro fit ability analy sis can iead or mislead marfct'iingcseculives, depending on how well they understand ¡is methods and limitations. Ihe lawnmowat eompiiny showed some arbitrariness in its choice of bases for allocating the functional expenses to its marketing entities. "Number of sales calls" was used to allocate selling expenses, when in piircipie "number of sales working hours" is a more accurate indicator of cost. The former base was used because it involves less record keeping and computation.

Far more serious is another judgmental element affecting profitability analysis, The issue is whether to allocate full costs or only direct and traceable costs iti evaluating a marketing entity's performance, The lawnmowcr company sidestepped this problem by assuming only Simple costs diat fit in with marketing activities, but the question eaniujt he avoided In re ill-world analyses of profitability, lhree types ofcosis have to be distinguished;

1. Direct costs*-1 he.seare costs itial can he assigned directly tip [lieproper marketing entitles. Sales commissions are a direct cost iti a profitability analysis of sales territories, sales representatives, or customers, Advertising expenditures [ti e a direct cost in a profitability analysis of products to the extent that each advertisement promotes only one product, Other direct costs for specific purposes are sales force salaries and traveling expenses.

2. Tracattble common costs - 'I hese are costs that can be assigned only indirectly, but on a plausible basis, to the marketing entities. In tile example, rent was analyzed this way.

>1. Nontfactabtecimwt(/ii costs - 1 hese are common costs whose allocation to the marketing entities is highly arbitrary, lb allocate "corporate image" expend it u res equally to all products would be arbitraty. because all products do not benefit equally. To allocate them proportionately in the sales of the various products Mould be arbitrary because relative product sales reflect many factors besides corporate image making. Other examples are top management salaries, taxes, interest, and other overhead.

No nttc disputes the inclusion of direct costs in marketing cost analysis. There is a small a mo 11 m of co n i pjvr1 rsy ab< iu t i ncl ud i n g ti acei i tile ct mi mot t costs, wh ich I u in p t oget he r cos ts thai would change with the scale of marketing activity ¡bin! costs ihin would not rhange. If the lawnijirjwei company droits garden supply shops, it would probably continue to pay the same rem. hi this event, its profits Mould not rise immediately by the amount of [he present loss in selling to garden supply shops (S310).

fhe major controversy concerns whether 1 he nontraceable common costs should he allocated to the marketing entities. Sudft allocation Is called the [nil-cost approach, and its advocates argue that all costs must ultimately be Imputed In order to detenuine true profitability. However, this argument confuses the use of accounting for financial reporting wiili its use tor managerial decision making. f:ull costing has three major w eaknesses:

1. J"he relative profitability of different marketing entitles can shift radically when one arbitrary way to allocate n out rateable common costs is replaced by another.

2. The arbitrariness demoralizes managers, who feel thai their performance is judged adversely.

3. I lie inclusion of nonlrateable common costs could weaken efforts til real cost com ml.

Operating management! is most effective In control I ins; direct costs and traceable com-moi) costs. Arbitrary assignments of noil traceable common costs can lead managers to spend their time fighting arbitrary cost allocations instead of managing controllable costs well.

Companies arc showing a growing interest in using marketuig-profiiability analysis or its broader version, activity-based cost accounting {ACQ, to quantify the true profitability of different activities.1' In improve profitability, managers can then examine ways to reduce the tvseurces required to perform various activities, or make the resources more productive or □cqtiiie them at lower cost. Alternatively, management may raise prices on products that con. sunn: heavy amounts of support resources. The eoniri but ion of ABC isto refocus management's attention away from using only labor or material standard costs to allocate full cust, and toward capturing the actual costs of supporting individual products, customers, and other entities,

Marketing-Mix Modeling

Marketing accoun lability also means that marketers can more precisely estimate lite effects (if different marketing Investments. Marketing-mix mudeh analyze data from a variety of sources, stith as mailer scanner data, company shipment data, pricing, media, and promotion spending dala, lo understand more precisely the effects of specific marketing activities, To deepen understanding multivariate analyses art; conducted to sort through how each marketing element influences marketing ouiconics of interest such as brand sales or market si litre.-1"

Especially popular with packaged-goods marketers sitch as Procter Si Gamble, Guro\. and Colgate, the findings from marketing-mix modeling arc used lo allocate or reallocate Qpcndi Lures. Analyses explore which pan of ad budgets are wasted, whal optimal spending levels a re. and what minimum Investment levels should he.39 Although marketing-mix modeling helps to Isolate effects, it is less effective at assessing how different marketing elements ivnrk in combination.

Ill Forecasting and Demand Measurement

One major reason for undertaking marketing research Is to identify market opportunities. Once the research is complete, the company must measure and forecast the size, growth, and profit potential of each market opportunity. Sales forecasts arc used by finance m raise the needed cash for investment and operations; by the manufacturing department to establish capacity and output levels; by purchasing to acquire the riglu amount of supplies: and l>y human resources in hire the needed number of Workers, Marketing is responsible for preparing the sales forecasts, if its forecast is far off ihe mark, the company will he saddled with excess inventory or have Inadequate inventory. Sales forecasts arc based oil estimates uf demand. Managers need to define whal they mean by market demand. Here is a good example of tbe importance of defining lite market correctly:

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