Marketing Cost and Profitability Analysis

Marketing cost analysis is a strategy applied in marketing where

the costsconnected with selling, storing, advertising and distributing of
products to particular buyers, are analysed in order to determine their
profitability.

Objectives of Marketing Cost Analysis:

1.Controlling the cost—the effect or the influence that costs on sales volume
2. More concerned with the planning and control of the future
3.Select the most profitable sales territory
4. Determine the minimum profitable order size
5. Decide what product to dropfrom the line 6. Handling the small order problem
Steps involved in Marketing Cost Analysis:
* Assigning the marketing costs to the various functions of marketing.
* Analyzing the costs function by function.
* Assigning the functional expenses to the various marketing entities. Each product
Each customer group Each territory Each channel type
* Analyzing the cost entity by entity
* Examining the cost benefit position for each function, broken up over each entity.
* Determining what corrective action is needed. Analyzing the Costs by marketing
entities

Profitability Analysis : measures the amount of profit earned due to the

efficiency of any operation in a business. Profitability Analysis in
operations essentially includes evaluation of market segments or
Strategic business units.
• Purpose: To measure profitability of company’s marketing units such as
territories, market segments,
products, channels, & customers
• This information helps to decide which marketing units to be expanded, reduced,
or eliminated in future.

Procedure
• State purpose of the analysis
• Identity major functional (or activity) expenses
• Convert natural accounting expenses into functional expenses
• Allocate functional expenses to marketing units
• Prepare profitability of marketing units, by using “fullcost approach”, or
“contribution approach”

Example: In a bank or credit union setting, profitability analysis has five main
goals:
1. Segment and analyze members/customers. ...
2. Segment and analyze branches, employees, and third parties such as auto
dealers.
3. Establish product pricing.
4. Optimize operational inefficiencies.
5. Perform efficient and cost effective analysis.

Purpose of the Analysis

• Before starting cost and profitability analysis, it is necessary to know for which
marketing units the analysis would be done
• This helps to classify costs into direct and indirect. E.G. Salesperson’s salary is
direct cost for territory analysis, but indirect cost for analysis of products or
segments

Identify Major Functional Expenses

• The company should prepare a list of major functions or activities with respect to
marketing expenses
• E.G. Personal selling expenses, order processing expenses, packing and delivery
expenses, warehousing and inventory expenses, administration expenses
Prepare Profitability of Marketing Units
• This is done by preparing profit & loss statements for the marketing units under
study
• Two approaches are available in allocating marketing costs for profitability
analysis: (1) Full-cost, (2) Contribution
• Full-cost approach: All marketing costs, both direct & indirect, are allocated to
the marketing unit
• Useful for long-term profitability studies of products and market segments
• Contribution approach: Only direct marketing costs are allocated to the marketing
unit
• Useful for short-term decisions like profitability of branches / regions