Copyright © 2001 by Harcourt, Inc. All rights reserved.

P ART VI C ONTROLING THE S ALES T EAM

Copyright © 2001 by Harcourt, Inc. All rights reserved. C HAPTER 15 A NALYSIS OF S ALES AND M ARKETING C OSTS

Copyright © 2001 by Harcourt, Inc. All rights reserved. L EARNING O BJECTIVES Control of the marketing program is very important and is partially achieved by an analysis of net sales volume and marketing costs. This chapter should help you understand:  The importance of marketing and sales audits and how they differ.  That misdirected marketing effort can result in a loss of sales and profit.  What sales analysis is and what it is used for.  The important elements involved in marketing cost analysis.

Copyright © 2001 by Harcourt, Inc. All rights reserved. M ARKETING A UDIT The marketing audit is an evaluation tool designed to appraise the entire marketing operation in a systematic and comprehensive manner.

Copyright © 2001 by Harcourt, Inc. All rights reserved. S ALES F ORCE A UDIT A sales force audit involves the same six factors the marketing audit measures but is designed to evaluate selling strategy and to improve overall sales force effectiveness.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Some questions a sales force audit answers: 1.Are motivational techniques contributing to overall goals? 2.What are the target market’s characteristics, and how is the company/ the competition responding to them? 3.What are the product line’s characteristics, and how competitive are the product lines and sales policies of salespeople?

Copyright © 2001 by Harcourt, Inc. All rights reserved. Some questions a sales force audit answers: 4.Are adequate controls available to direct the selling effort? 5.How well defined are the sales strategies, and how effectively are they contributing to the sales division’s objectives? continued

Copyright © 2001 by Harcourt, Inc. All rights reserved. The 80/20 or “concentration” principle states that the majority of a company’s sales (or profits) may result directly from a very small number of the company’s accounts, product or price lines, or geographic areas.

Copyright © 2001 by Harcourt, Inc. All rights reserved. D IRECTING THE M ARKETING E FFORT Marketing dollars must be allocated in a way that best generates high sales volume and net profits by concentrating marketing effort in the most profitable areas.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Iceberg Principle The iceberg principle refers to the effect that averaging, summarizing, and aggregating data can have on presenting the true sales or profit picture and underlying problems.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Analysis is necessary to uncover the reason for poor performance: 1.Was the quota set too high? 2.Are salespeople having trouble with a particular product line? 3.Can the problem be narrowed down to a particular salesperson, sales district, product, or price line? 4.Do any sales divisions or districts have poor management?

Copyright © 2001 by Harcourt, Inc. All rights reserved. N ET S ALES V OLUME A NALYSIS W HAT I S S ALES A NALYSIS? Sales analysis is the detailed examination of a company’s sales data and involves assimilating, classifying, comparing, and drawing conclusions.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Accumulation of Sales Analysis Information Product lines Geographic areas Customer classes Order sizes Time periods Methods of sale Organizational units Salespeople

Copyright © 2001 by Harcourt, Inc. All rights reserved. Uses of Sales Analysis Establishment of the sales forecasting system. Development of sales performance measures. Evaluation of market position. Production planning and inventory control. Maintaining appropriate product mixes. Modifying the sales territory structures.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Use of Sales Analysis continued Planning sales force activities. Evaluation of salespeople’s performance. Measuring the effect of advertising and other sales promotional activities. Modifying channels of distribution. Evaluating channels of distribution.

Copyright © 2001 by Harcourt, Inc. All rights reserved. ANALYZING SALES VOLUME Total sales volume is the first indication of how the company is faring in the marketplace. Retail sales index is a relative measure of the dollar volume of retail sales that normally occur in each respective district.

Copyright © 2001 by Harcourt, Inc. All rights reserved. M ARKETING C OST A NALYSIS Marketing cost analysis, or distribution cost analysis, is the analysis of costs that affect sales volume, with the purpose of determining the profitability of different segment operations. Profitability is determined by sales volume and its associated costs and expenses. W HAT I S M ARKETING C OST A NALYSIS?

Copyright © 2001 by Harcourt, Inc. All rights reserved. Which customers/accounts are unprofitable because of order size or geographic location? What is the minimum order size that can be filled profitably? Which distribution channel will be the most profitable for the firm to use? Which territories are potentially most profitable? Marketing costs analysis can be invaluable in determining answers to these questions:

Copyright © 2001 by Harcourt, Inc. All rights reserved. What profit contribution does each salesperson make? Can cost improvements be made in physical distribution facilities? Which product lines are unprofitable or could be improved in their profitability? Marketing costs analysis can be invaluable in determining answers to these questions: continued

Copyright © 2001 by Harcourt, Inc. All rights reserved. U SES OF M ARKETING C OST A NALYSIS An integral part of the decision-making process. Serves as the basis for management decisions. Accountability.

Copyright © 2001 by Harcourt, Inc. All rights reserved. O BJECTIVES OF M ARKETING C OST A NALYSIS The major objectives of marketing cost analysis are to determine the isolated contributions made to profitability and to evaluate the efficiency of all phases of the company’s marketing structure in terms of corporate goals and objectives.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Two important uses of marketing cost analysis are: 1.Determining which marketing strategies are the best. 2.Isolating problem areas.

Copyright © 2001 by Harcourt, Inc. All rights reserved. A SSIGNING M ARKETING C OSTS Marketing vs. Production Costs A production cost is the cost incurred by processing a product from its raw elements to a finished state.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Marketing, or distribution costs, can be broken down into two distinct categories: Costs incurred by getting orders. Costs incurred by filling orders.

Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 15.1 CATEGORIES OF MARKETING COSTS Marketing (Distribution) Costs Order-Getting Costs Direct Selling Sales Promotion Advertising Market Research Sales Promotion Administrative Order-Filling Costs Physical Distribution Shipping Transportation Warehousing Material Handling Credit and Collection Administrative

Copyright © 2001 by Harcourt, Inc. All rights reserved. Functional marketing groups are groups within the marketing operation that perform similar functions.

Copyright © 2001 by Harcourt, Inc. All rights reserved. M ETHODS FOR D ETERMINING P ROFITABILITY With the full cost (or net profit) approach, all costs (variable and fixed) are allocated among the market segments using the categories of goods sold (production costs) and operating expenses (nonproduction costs, including marketing costs). In the contribution margin approach, costs are separated according to controllability.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Commonly Used Cost Classifications Direct cost Indirect cost Fixed cost Variable cost Standard cost Controllable cost Uncontrollable cost

Copyright © 2001 by Harcourt, Inc. All rights reserved. T ECHNIQUES OF C OST A NALYSIS 1.Direct expenses are measured and assigned to their respective segments. 2.Indirect expenses are allocated to functional cost groups. 3.Assignable fixed costs are included in the functional cost groups.

Copyright © 2001 by Harcourt, Inc. All rights reserved. T ECHNIQUES OF C OST A NALYSIS continued 4.A variable activity is chosen for a cost allocation basis, and total variable activity is measured. 5.The variable-activity share of each of the functional cost groups is noted. 6.A segment’s relative profitability is determined by gross margin less direct expenses and costs assignable to functional cost groups.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Productivity may be increased for marketing operations in three ways: 1.Sales increases 2.Cost reductions 3.Eliminate or reduce emphasis on unprofitable products

Copyright © 2001 by Harcourt, Inc. All rights reserved. P ROBLEMS IN C OST A NALYSIS Less exact than managerial cost. Constrained by the marketing manager’s limitations.

Copyright © 2001 by Harcourt, Inc. All rights reserved. T HE B OTTOM L INE Net sales volume analysis and marketing cost analysis are useful to the marketing manager for planning and controlling the marketing program. A marketing audit is a systematic appraisal of the marketing operations as a whole, which aids in effective control and in developing new strategies. Misdirected marketing effort occurs when management ignores the effects of the 80/20 and iceberg principles. Sales analysis is the detailed analysis of a company’s sales data and may incorporate breakdowns by account, customer class, territory, product line, and other categories.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Sales volume analysis alone is insufficient as a basis for marketing decisions. Marketing cost analysis is primarily concerned with marketing costs. Commonly used cost classifications include direct versus indirect costs, fixed versus variable costs, standard costs, and controllable versus uncontrollable costs. Two separate approaches may be taken for determining aggregate or segment profitability: full cost or contribution margin. The productivity of marketing operations can be increased by minimizing unit costs and maximizing net profit. Variance analysis is useful for cost control. T HE B OTTOM L INE