Market Based Scorecard Analysis

Most company measurement systems amount to preparing a financial-performance scorecard at the expense of more qualitative measures. Companies would do well to prepare two market-based scorecards that reflect performance and provide possible early warning signals.

A customer-performance scorecard records how well the company is doing year after year on such customer-based measures as:

■ New customers ■ Target market preference

■ Dissatisfied customers ■ Relative product quality

■ Lost customers ■ Relative service quality

■ Target market awareness

Norms should be set for each measure, and management should take action when results get out of bounds.

The second measure is called a stakeholder-performance scorecard. Companies need to track the satisfaction of various constituencies who have a critical interest in and impact on the company's performance: employees, suppliers, banks, distributors, retailers, stockholders. Again, norms should be set for each group and management should take action when one or more groups register increased levels of dissatisfac-tion.27 Consider Hewlett-Packard's program:

Financial Model of Return on Net Worth part five

Managing and Delivering Marketing Programs

Profit margin

Profit margin

Net sales Total assets part five

Managing and Delivering Marketing Programs 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 in evaluating a marketing entity's performance. The lawnmower company sidestepped this problem by assuming only simple costs that fit in with marketing activities. But the question cannot be avoided in real-world analyses of profitability. Three types of costs have to be distinguished:

1. Direct costs: These are costs that can be assigned directly to the proper marketing entities. Sales commissions are a direct cost in a profitability analysis of sales territories, sales representatives, or customers. Advertising expenditures are 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. Traceable common costs: These are costs that can be assigned only indirectly, but on a plausible basis, to the marketing entities. In the example, rent was analyzed in this way.

3. Nontraceable common costs: These are costs whose allocation to the marketing entities is highly arbitrary. To allocate "corporate image" expenditures equally to all products would be arbitrary, because all products do not benefit equally. To allocate them proportionately to the sales of the various products would 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 one disputes including direct costs in marketing cost analysis. There is a small amount of controversy about including traceable common costs, which lump together costs that would change with the scale of marketing activity and costs that would not change. If the lawnmower company drops garden supply shops, it will probably continue to pay the same rent. In this event, its profits would not rise immediately by the amount of the present loss in selling to garden supply shops ($310).

The major controversy concerns whether the nontraceable common costs should be allocated to the marketing entities. Such allocation is called the full-cost approach, and its advocates argue that all costs must ultimately be imputed in order to determine true profitability. But this argument confuses the use of accounting for financial reporting with its use for managerial decision making. Full costing has three major weaknesses:

1. The relative profitability of different marketing entities can shift radically when one arbitrary way to allocate nontraceable common costs is replaced by another.

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

3. The inclusion of nontraceable common costs could weaken efforts at real cost control. Operating management is most effective in controlling direct costs and traceable common costs. Arbitrary assignments of nontraceable common costs can lead them to spend their time fighting arbitrary cost allocations rather than managing controllable costs well.

Companies are showing a growing interest in using marketing-profitability analysis or its broader version, activity-based cost accounting (ABC), to quantify the true profitability of different activities. According to Cooper and Kaplan, ABC "can give managers a clear picture of how products, brands, customers, facilities, regions, or distribution channels both generate revenues and consume resources."30 To improve profitability, managers can then examine ways to reduce the resources required to perform various activities, or make the resources more productive or acquire them at a lower cost. Alternatively, management may raise prices on products that consume heavy amounts of support resources. The contribution of ABC is to refocus management's attention away from using only labor or material standard costs to allocate full cost, and toward capturing the actual costs of supporting individual products, customers, and other entities.


Suppose a profitability analysis reveals that the company is earning poor profits in certain products, territories, or markets. Are there more efficient ways to manage the sales force, advertising, sales promotion, and distribution in connection with these marketing entities?

Some companies have established a marketing controller position to improve marketing efficiency. Marketing controllers work out of the controller's office but specialize in the marketing side of the business. At companies such as General Foods, DuPont, and Johnson & Johnson, they perform a sophisticated financial analysis of marketing expenditures and results. They examine adherence to profit plans, help prepare brand managers' budgets, measure the efficiency of promotions, analyze media production costs, evaluate customer and geographic profitability, and educate marketing personnel on the financial implications of marketing decisions.31

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