financial aspects of marketing

8/15/2019 Financial Aspects of Marketing

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MARKETING & FINANCE


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• In business, revenue or turnover is income that acompany receives from its normal business activities,usually from the sale of goods and services tocustomers.

• Sales revenue or revenues is income received fromselling goods or services over a period of time.

• Income from sales of goods and services, minus the

cost associated with things like returned orundeliverable merchandise. Also called "Sales", "NetSales", "Net Revenue", and just plain "Revenue".

Introduction


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• Financial aspects of marketing earlier named

as “Marketing Finance”.

• It is refer to any effort to quantify the

contribution of marketing to increased

business value.

• Quantitative measurement of any action

designed to increase customer value.

Introduction


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1. Different Financial measure for marketing like

ROI.

2. Different marketing investment to get

maximum ROMI.

3. Measuring the impact of marketing.

4. Customer value creation.5. Marketing role in business strategy like

pricing etc.

Financial aspects of Marketing fall into different

broad categories:


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1. Sales

2. Profit

3. Costs4. Cash flow

Financial and Economic performance


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1. Margin

2. Growth

3. Marketing ROI

4. Customer lifetime value

5. Revenues

6. Acquisition costs

7. Retention costs

8. Operational costs

Financial Metrics


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1. Market position –share, penetration

2. Marketing assets –brand, knowledge,relationships

3. Customers –awareness, attitudes, satisfaction,sales funnel

4. Marketing processes –research, segmentation,service, management

5. Activities –campaigns (reach, response, share ofvoice)

6. Marketing Channel

Marketing Scorecard


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• There are broadly three elements of cost –

1. Material,

2. Labor and3. Expenses

Elements of Cost


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• A sale is the exchange of a commodity for

money or service in return for money or the

action of selling something.

Sales


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• Revenue is the amount of money that is brought

into a company by its business activities, usually

from the sale of goods and services to customers.

• In general usage, revenue is income received byan organization in the form of cash or cash

equivalents.

• Sales revenue or revenues is income receivedfrom selling goods or services over a period of

time.

Revenue


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• Return on investment ROI is a popular financialmetric for evaluating the financial consequencesof individual investments and actions.

•ROI has become popular in the last few decadesas a general purpose metric for evaluating capitalacquisitions, projects, programs, initiatives, aswell as traditional financial investments in stock

shares or the use of venture capital.• ROI is sometimes said to measure profitability .

That description is accurate and useful.

ROI( Return on investment)


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• The ROI is used to compare the profitability of

the business/project.

ROI= NIBT/Total Assets

Investment Framework by ROI


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• Suppose a Division with assets of Rs. 90,000 andnet income before tax of Rs. 20,000. What will beits ROI?

Solution:

ROI= NIBT/Total Assets

= 20,000/90,000=.22

=22%

Example


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• Suppose a cost of capital for the division is

15% and a new opportunity appears that

require an investment of Rs. 15,000, yielding

an annual profit improvement of Rs. 3,000/yr.the rate from this new investment opportunity

is 20%, which is well above the division`s cost

of capital. What will be the new ROI ?

Numerical


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ROI= (20,000+3,000)/(90,000+15,000)

=23,000/1,05,000

=.219=21.9%

Solution


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• If the division has an asset carried at a Rs.

20,000, cost that earns Rs. 3600/yr (18%

return) the division can increase its ROI by

disposing of the asset.

Numerical


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ROI= (20,000-3600)/(90,000-20,000)

= 16,400/70,000

= 0.234= 23.4%

Solution


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1. Lack of agreement on the right or optimum rate

of return might discourage managers whose

opinion is that the rate is set at an unfair level.

2. Proper allocation requires certain data regardingsales, costs, and assets. The accounting and cost

system might not give such needed details.

3. Values and valuations of assets, particularly withregard to jointly used assets, might give rise to

difficulties and misunderstandings.

Disadvantages of ROI


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4. Excessive preoccupation with financial factors due toconstant attention to ratios and trends might distractmanagement’s interest from technical and otherresponsibilities.

5. Managers may be influenced to make decisions thatare not the best for the long-run interests of the firm.

6. A single measure of performance (e.g., return oncapital employed) may result in a fixation on improving

the components of the one measure to the neglect ofneeded attention to other desirable activities — bothshort- and long-run.

Continue…


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• Calculating profitability is a key part of revenueanalysis.

• An analysis of your revenue from sales make

informed decisions regarding business strategy.• You can determine key variables and calculate

business ratios that tell you how your business isperforming.

• From a revenue analysis, you can tell where itmakes sense to invest and what activities youmay want to discontinue.

Sales Revenue Analysis


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• Analyzing your revenue from sales , compare theamounts from the most recent period to the revenuefrom previous years.

• Such a comparison gives you an indication of how well

your business is performing.• A steady increase from year to year is a positive trend

and lets you plan future strategies with confidence.

• A decreasing trend means you have to make majorchanges.

• Uneven increases and decreases mean your company isresponding to market influences, and you have to workon making your strategies more effective to keep yourcompany on track.

Comparison


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•

A key part of revenue analysis is allocating parts ofoverall revenue to the items that generated theunderlying sales.

• This allocation influences your future marketingstrategies, because it is direct feedback on what thecustomers of your target market valued.

• If a product with certain features generated a lot ofrevenue and the revenue increased substantially fromthe previous year, you have to promote products withthose features more heavily.

• At the same time, you can reduce emphasis on productsthat didn't generate much revenue or whose revenue isdeclining.

Allocation


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• While revenue is a key variable for analyzing businessperformance, your company has to generate profits. •

• Based on your revenue analysis and the costs youincurred to produce that revenue, you can decide

whether to expand product lines or abandon them,depending on their profitability.

• Determining your profit from revenue and costs letsyou find your break-even point by calculating how

much profit you need to cover your overhead and howmuch you have to sell to generate that amount ofprofit.

Profitability


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• In addition to providing data on actualperformance, revenue analysis lets you projectpresent trends into the future.

•

If revenue has increased steadily by about 4percent per year for the last five years, forexample, it is likely to rise by 4 percent again nextyear.

• For trends that have variations, you can eithersmooth out the changes or find reasons for themand remove the effects from the numbers.

Projections


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• If you know about a change in your market

situation that will impact future numbers, you

may have to adjust your calculations for this

effect.

• Revenue projections let you develop

corresponding strategies and plan future

levels of staffing and investment.

Continue..


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• Sales Analysis – a detailed examination of a

company's sales data, involving assimilating,

classifying comparing, and drawing

conclusions.

• Accumulation of sales analysis information.

What Is Sales Analysis?


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• Several major broad applications of sales analysisfollow:

1. Establishment of the sales forecasting system.

2. Development of sales performance measures.

3. Evaluation of market position.

4. Production planning and inventory control.

5. Maintaining appropriate product mixes.

6. Modifying the sales territory structures.7. Planning sales force activities.

8. Evaluation of salespeople's performance

Uses of sales analysis


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9. Measuring the effect of advertising and other

sales promotional activities.

10. Modifying channels of distribution.

11. Evaluating channels of distribution.

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1. Total Sales Volume – the starting point for asales volume analysis; the total sales for aspecific period for a company, region, product,or customer.

2. Sales by region: district a) Retail Sales Index – Relative measure of the dollar volume of retailsales that normally occur.

3. Sales by salesperson.

4. Sales by customer classifications5. Sales by product

Analyzing Sales Volume


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1. Product Usage data

2. Product pricing

3. Brand of the product

4. Margin on items purchased

5. Size or value of their purchases

6. Balance volume and margin to drive net

income.

7. warehousing cost incurred by each product.

Revenue analysis by product


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• By the selling expenses incurred by each

territory

• By the promotion expenses incurred by each

territory

• By the cost of credit incurred by each territory

• By the rate of turn round of stocks in each

territory

Revenue analysis by territories


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• Revenue enhancing opportunities in the distributionchannels

• Maximizes revenues through all distribution channels

• By the method of sale; direct to customer, or through

wholesaler or retailer, or commission agent.• By order size and order handling cost to the firm.

• By salesman; cost of sales calls, cost of orders booked,order to call ratio etc.

•By price category and discount classification; costincurred at each price category.

Revenue analysis by chennal


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1. Types of customers and proper approval ofcustomer orders

2. Selection of active customers

3. Order size4. Proportion of cash and credit sales in each

customer type.

5. Mode of delivery taken by customer

Revenue analysis by customer orders


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TOP

1% of customers 50% of revenues

49% of profits

LARGE

4% of customers23% ofrevenues25% of profits

Medium-Sized

15% of customers20% of

revenues21% of profits

Small80% of customers7% of revenues5% of

profits


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MARKETING COST


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• The total delivering cost associatedwith goods or services to customers.

• The marketing cost may include expenses associatedwith transferring title of goods to a customer, storing

goods in warehouses pending delivery, promoting thegoods or services being sold, or the distribution ofthe product to points of sale.

• Examining the cost associated with each individual

marketing activity to assess the profitability of each.

Marketing cost


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• Marketing cost analysis is a strategy applied in

marketing where the costs connected with

selling, storing, advertising and distributing of

products to particular buyers, are analysed inorder to determine their profitability.

• Business firms use several tools and

techniques for marketing control.

Marketing cost analysis


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• The important ones among them are listed here:1. Marketing audit

2. Market share analysis

3. Marketing cost analysis

4. Credit control

5. Budgetary control

6. Ratio analysis

7. Contribution margin analysis

8. Marketing Information inputs and warning signals

9. MBO management by objectives

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• Engineered costs result from activities with reasonablywell defined cause and effect relationships betweeninputs and outputs and costs and benefits.

• Direct material costs provide a good example.

•

Engineers can specify precisely how many parts (inputs)are required to generate a specific output such as amicrocomputer, a coffee maker, an automobile, or atelevision set.

• Direct labor also falls into the engineered cost category

as well as indirect resources that vary with productspecifications and production volume.

• Engineered costs are variable in terms of cost behavior.

Engineered Costs


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• Many activities are viewed as beneficial to anorganization, even thought the benefits obtained, orvalue added by performing the activities cannot bedefined precisely, either before or after the activity iscompleted.

• The costs of the inputs, or resources required toperform such activities are referred to as discretionarycosts.

• Discretionary costs are usually generated by service or

support activities. Examples include employee training,advertising, sales promotion, legal advice, preventivemaintenance, and research and development.

Discretionary Costs/ managed cost


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• Committed costs refers to the costs associated withestablishing and maintaining the readiness to conductbusiness.

• The benefits obtained from these expenditures are

represented by the company's infrastructure.

• For example, the costs associated with the purchase ofa franchise, a patent, drilling rights and plant andequipment create long term obligations that fall into

the committed cost category. These costs are mainlyfixed in terms of cost behavior and expire to becomeexpenses in the form of amortization and depreciation.

Committed Costs/capacity(fixed)cost


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• Cost allocation is the assigning of a common costto several cost objects.

• Cost allocation (also called cost assignment) is the

process of finding cost of different cost objectssuch as a project, a department, a branch, acustomer, etc.

• It involves identifying the cost object, identifying

and accumulating the costs that are incurred andassigning them to the cost object on somereasonable basis.

Cost allocation


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• Cost allocation is important because it theprocess through which costs incurred inproducing a certain product or rendering acertain service is calculated.

• If costs are not accurately calculated, a businessmight never know which products are makingmoney and which ones are losing money.

• If cost are misallocated, a business may be

charging wrong price to its customers and/or itmight be wasting resources on products that arewrongly categorized as profitable.

Continue…

T i l t ll ti h i


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• Identifying the object to which the costs have

to be assigned,

• Accumulating the costs in different pools,

• Identifying the most appropriate

basis/method for allocating the cost

Typical cost allocation mechanism

involves:


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• Cost object is an item for which a business

need to separately estimate cost.

• Examples of cost object include a branch, a

product line, a service line, a customer, a

department, a brand, a project, etc.

Cost object


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• Cost pool is the account head in which costs areaccumulated for further assignment to cost objects.

• Examples of cost pools include factory rent, insurance,machine maintenance cost, factory fuel, etc. Selection

of cost pool depends on the cost allocation base used.• For example if a company uses just one allocation base

say direct labor hours, it might use a broad cost poolsuch as fixed manufacturing overheads. However, if it

uses more specific cost allocation bases, for examplelabor hours, machine hours, etc. it might definenarrower cost pools.

Cost pool


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• Cost driver is any variable that ‘drives’ some cost. If increaseor decrease in a variable causes an increase or decrease is acost that variable is a cost driver for that cost.

• Examples of cost driver include:

• Number of payments processed can be a good cost driver for

salaries of Accounts Payable section of accountingdepartment,

• Number of purchase orders can be a good cost driver for costof purchasing department,

• Number of invoices sent can be a good cost driver for cost ofbilling department,

• Number of units shipped can be a good cost driver for cost ofdistribution department, etc.

• While direct costs are easily traced to cost objects, indirect

costs are allocated using some systematic approach.

Cost driver


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• Cost allocation base is the variable that is used

for allocating/assigning costs in different cost

pools to different cost objects.

• A good cost allocation base is something

which is an appropriate cost driver for a

particular cost pool.

Cost allocation base

Example


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• T2F is a university café owned an operated by a student. While it hasplans for expansion it currently offers two products: (a) tea & coffeeand (b) shakes. It employs 2 people: Mr. A, who looks after tea &coffee and Mr. B who prepares and serves shakes & desserts.

• Its costs for the first quarter are as follows:

• Mr. A salary 16,000

• Mr. B salary 12,000

• Rent 10,000

• Electricity 8,000

• Direct materials consumed in making tea & coffee 7,000

• Direct raw materials for shakes 6,000

• Music rentals paid 800

•

Internet & wi-fi subscription 500• Magazines 400

Example


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CLASSIFICATION OF MARKETING COSTBy function


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• Cost allocation is the assigning of a common costto several cost objects.

• Cost allocation (also called cost assignment) is the

process of finding cost of different cost objectssuch as a project, a department, a branch, acustomer, etc.

• It involves identifying the cost object, identifying

and accumulating the costs that are incurred andassigning them to the cost object on somereasonable basis.

Cost allocation


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• Cost allocation is important because it theprocess through which costs incurred inproducing a certain product or rendering acertain service is calculated.

• If costs are not accurately calculated, a businessmight never know which products are makingmoney and which ones are losing money.

• If cost are misallocated, a business may be

charging wrong price to its customers and/or itmight be wasting resources on products that arewrongly categorized as profitable.

Continue…



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to be assigned,





involves:


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CASE STUDY

• India's Refrigerator market estimated at Rs. 2750 Cr. is catered mainly by 10 brands. The annualIndian Refrigerator Market


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g y y

capacity is estimated at around 4.15 million units is running head of demand of 1.5 millions. As there

is a demand and a surplus supply, all the manufacturers are trying out for new strategies in the market.

Times have changed and also the buying behaviour of the customer. Earlier it was cash and carry

system. Now dealers play an important role in selling; now the systems is exchange for old “bring your

old refrigerator and take a new one with many gifts”. A new company by name Electrolux has entered

the market which has acquired Allwyn, Kelvinator and Voltas brand. Researchers have revealed that

urban and city sales are declining and hence all manufacturers are trying to concentrate on rural

markets.

• Electrolux strategy is customization of market, with special attention to the Northern and Southern

India markets, while Godrej the main player thinks that dealer network in rural market for sales and

service will be beneficial and is trying to give more emphasis on dealer network, whereas Whirlpool

has adopted the strategy of increasing the dealer network by 30%.• The market shares of the major players are as follows:

Questions1. Could the refrigerator market be segmented on geographical base planned by

Electrolux?

2. What would be the marketing mix for rural market?

3.Would 125 L and 150 L models be an ideal choice to launch in rural market?

Godrej 30%

Videocon 13%

Kelvinator 12%

Allwyn 10%

Voltas 5%

Whirlpool 27%

Daewoo 1%

L.G 1%

Others 1%


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• There is no denying that maintenance of receivables bya firm leads to blockage of its financial resources due tothe tie log that exists between the date of sale of goodsto the customer and the date of payment made by the

customer.• But the bitter fact remains that the firm has to make

several payments to the employees, suppliers of rawmaterials and the like even during the period of timelag. As a consequence, a firm is liable to makearrangements for meeting such additional obligationsfrom sources other than sales.

• Thus, a firm in the course of expanding sales throughreceivables makes way for additional capital costs.

Capital Cost


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• Similar to delinquency cost is default cost. Delinquencycost arises as a result of customers delay in payments ofcash or his inability to make the full payment from thefirm of the receivables due to him.

•Default cost emerges a result of complete failure of adefaulter (customer) to pay anything to the firm inreturn of the goods purchased by him on credit.

• When despite of all the efforts, the firm fails to realize

the amount due to its debtors because of him completeinability to pay for the same.

• The firm treats such debts as bad debts, which are to bewritten off, as cannot be recovers in any case.

Default Cost

Factors Affecting The Size Of


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• The size of receivables is determined by a

number of factors for receivables being a

major component of current assets.

• As most of them varies from business thebusiness in accordance with the nature and

type of business.

Factors Affecting The Size Of

Receivables


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• High opportunity cost

• High risk of bad debts

• High credit administration cost

• High risk of liquidity

Consequence of excessive receivable


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What Makes up the Credit Policy for a


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• If a company does a cost/benefit analysis andmakes the very important decision to extendcredit to its customers, then it has to establishprocedures for credit and collecting accounts.

• There are usually three parts of a good creditpolicy:

1. Terms of sale

2. Credit analysis

3. Collection policy

What Makes up the Credit Policy for a

Company?


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TERMS OF SALE

I d i


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• The terms of sale for a credit customer state how thefirm will sale its products or services.

• Will the firm require a cash sale or will it extend credit?That decision is made through the process of credit

analysis and determining who should be granted credit.• If the small business decides to grant credit to a

customer, then it has to establish terms.

• These terms will include the :

1. Credit Period And

2. Any Discount

Introduction

C di P i d


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• When considering accounts receivables creditpolicy, the credit period is the time period in

which a credit customer has to pay their bill.

• If a company offers credit terms of 2/10, net30, for example, the "net 30" portion of the

equation means that if the credit customer

does not take the 2% discount offered, thenthe bill must be paid in 30 days.

Credit Period


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CREDIT ANALYSIS

I t d ti


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• When determining credit policy, a company determineshow they will grant credit to consumers andbusinesses.

• They use a number of methods to do this includingpulling credit reports, evaluation of the 5C's of credit,and credit scoring. These are:

1. Capacity

2. Collateral

3. Capital

4. Condition

5. Character

Introduction

After credit analysis , the customers may be classified in


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Category of customers Average college period Default risk

Good Within credit period 0

Marginal Moderate collectionperiod Moderate

Bad Very large collection

period

High

After credit analysis , the customers may be classified in

various categories such as follows:


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COLLECTION POLICY

I t d ti


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• If a company makes the decision to offercredit to its customers, it needs to develop a

collections policy that it will use to monitor its

credit accounts.• Most companies use two approaches:

1. Average collection period

2. Accounts receivable aging schedule.

Introduction


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Acco nts recei able aging sched le


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• An accounting table that shows the relationshipbetween a company’s bills and invoices and its duedates.

• An aging schedule often categorizes accounts ascurrent (under 30 days), 1-30 days past due, 30-60 dayspast due, 60-90 days past due, and more than 90 dayspast due. Companies can use aging schedules to seewhich bills it is overdue on paying and which customersit needs to send payment reminders to or, if they are

too far behind, send to collections.

Accounts receivable aging schedule

5 Strategies For Effective Accounts


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1. Sign a Contract and Check Credit

2. Track Accounts Receivable

3. Make Payment Easy

4. Do Your Part

5. Re-Think Your Billing Approach

g

Receivable Management


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Make Payment Easy


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• Give your customers the options they need to payyou quickly. Look into accepting credit cards or

allow direct transfers of payments.

•Depending on your business, Paypal or anothermobile payment solution could also be a good fit.

• Yes, many of these methods require a cut of the

transaction total, but if overdue payments are

haunting your business, it is likely worth the cost.

Make Payment Easy


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Re Think Your Billing Approach


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• If billing after you finish the work is causingsome problems, reassess your payment terms.

• Ask clients to pay you in installments

throughout the engagement, and/or require adeposit before work begins.

• If you’re not ready for a step this big, start

with simply shortening your payment terms.

Re-Think Your Billing Approach


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INVENTORY MANAGEMENT

Introduction


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Introduction

• Inventory is tangible property. Inventorywould include items which are held for sale in

the ordinary course of business (Finished

goods) or which are in the process ofproduction for the purpose of sale (Work-in-

Process), or which are to be used in the

production of goods or services, which will befor sale (Raw Materials).

Classification of inventory


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Classification of inventory

(A) Raw materials: Raw materials are, directly, used inmanufacturing a product.

(B) Work-in-process: Work-in-process is partly finishedgoods. They are in the process of conversion from thestage of raw materials to finished goods.

(C) Finished goods: Finished goods are those goods, whichare completely ready for sale. Finished goods of one firmcan become the raw materials to another firm.

(D) Stores and Supplies: Stores and Supplies do not enter

into production, directly. However, in their absence, entireproduction would be affected and at times, even, come toa halt. Normally, their value is very small in the totalinventory. Examples are grease, oil, bulbs, brooms etc.

OBJECTIVES OF INVENTORY


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OBJECTIVES OF INVENTORY

Inventory is held for

• Smooth production process for making

finished goods, meant for sale.

• Sale of finished goods for sale in the ordinary

course of business.

• Facilitating production process.

INVENTORY CONTROL


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INVENTORY CONTROL

•

Inventory control involves physical control of materials,preservation of stores, minimization of obsolescence anddamages through timely disposal and efficient handling.

• Effective stock control system should ensure theminimization of inventory carrying cost and materials

holding cost.• Level of stock is the important aspect of inventory control.

Stock level may be overstocking or understocking.

• Overstocking requires large capital with high cost ofholding.

• In the case of understocking , production and overallperformance of the concern as a whole will affect.

Thus, fixation of stock level is essential to maintain


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sufficient stock for the smooth flow of production and sales. The

following are the important techniques

usually adopted in different industries :

(a) Maximum Stock Level.

(b) Minimum Stock Level.(c) Danger Level.

(d) Re-Order Level.

(e) Economic Ordering Quantity (EOQ).

(f) Average of Stock Level


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Continue


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Continue..

(7) Average rate of consumption.

(8) Re-order level and lead time.

(9) Seasonal nature of supply.

(10) Risk of obsolescence, depletion, evaporation

etc.The maximum stock level can be calculated by thefollowing formula :

Maximum Stock Level = Re-Order Level + Re-

Ordering Quantity (Minimum Consumption xMinimum Re-Ordering Period)


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Danger Level


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Danger Level

• It is the stock level below the Minimum Level. Thislevel indicates the danger point to affect the normalproduction.

• When materials reach danger level, necessary stepsshould be taken to restock the materials. If there is any

emergency, special arrangements should be made forfresh issue.

• Generally this level is fixed above the minimum levelbut below the reording level. The formula fordetermination of danger level is :

Danger Level = Average Rate of Consumption xEmergency Supply Time


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Advantages of ABC Analysis


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Advantages of ABC Analysis

(1) Exercise selective control is possible.(2) Focus high attention on high value items ispossible.

(3) It helps to reduce the clerical efforts andcosts.

(4) It facilitates better planning and improvedinventory turnover.

(5) It facilitates goods storekeeping and effectivematerials handling.


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CREDIT POLICY


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Trade promotion


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•

The schemes, discounts, freebies, commissions andincentives given to the trade (retailers, wholesalers,distributors, C&Fs) to stock more, push more andhence sell more of a product come under tradepromotion.

• These are aimed at enticing the trade to stock up moreand hence reduce stock-outs, increase share of shelfspace and drive sales through the channels.

• A typical trade scheme on soaps would be buy a caseof 12 soaps, get 1 or 2 free - or a 8% discount scheme(1/12=8%). Such schemes are common in FMCG andpharma industries.

Trade promotion

Consumer sales promotions


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• Sales promotion activity aimed at the final consumer

are called consumer schemes.• These are used to create a pull for the product and are

advertised in public media to attract attention.Maximum schemes are floated in festival times, likeDiwali or Christmas.

• Examples are buy soap, get diamond free; buy biscuits,collect runs; buy TV and get some discount or a freeitem with it and so on. Consumer schemes becomevery prominent in the 'maturity or decline' stages of a

product life cycle, where companies vie to sell theirown wares against severe competition.

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Sales Promotion


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•Sales promotion is any initiative undertaken by anorganization to promote an increase in sales, usageor trial of a product or service (i.e. initiatives thatare not covered by the other elements of themarketing communications or promotions mix).Sales promotions are varied. These are:

1. Free gifts

2. Discounted price

3. Joint promotion4. Free sample

5. Voucher and coupons

Free gifts


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• Subway gave away a card with six spaces forstickers with each sandwich purchase.

• Once the card was full the consumer was

given a free sandwich.

g

Discounted prices


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• Budget airline, e-mail their customers with thelatest low-price deals once new flights are

released, or additional destinations are

announced.

p


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Free samples


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• Free samples (aka. sampling) e.g. tasting offood and drink at sampling points in

supermarkets. For example Red Bull (a

caffeinated fizzy drink) was given away topotential consumers at supermarkets, in high

streets and at petrol stations (by a promotions

team).

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Vouchers and coupons


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• Vouchers and coupons, often seen innewspapers and magazines, on packs.

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Cause-related and fair-trade


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• Cause-related and fair-trade products thatraise money for charities, and the less well off

farmers and producers, are becoming more

popular.


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Advertising: Creation Expenses


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• Media costs represent only part of theadvertising expense.

• Someone must create the ads.

• Advertising creation costs include agency fees,in-house designers, copywriting and overhead

related to the development of the ad.


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• If you sign a one-year contract with a celebrity toendorse your product, you would record the

celebrity's fee as an annual promotional expense

for accounting purposes.

• If you require the celebrity to make six

appearances each year, you can assign one-sixth

of the celebrity's fee to each of the six

appearances he makes for an internal analysis ofthe true cost of each of those six promotions.


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Example


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•

It’s our 15-15-15 Promotion!• Save 15% on ANY ABC Title or ABC Online Library for

the next 15 Days! From now until December 24, 2015,save 15% on any ABC Title or ABC Online Library! Justreference promotion code 151515 when you contact

your sales representative, [email protected] or1800-828-7571!

• Please note: This promotion cannot be combined withother ABC or ABC Online promotions. This promotion isonly valid on the first year of new subscriptions to ABCOnline collections, and cannot be used towards existingsubscriptions. Bookmark on Delicious…


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Market Research


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•

For example, a company that was considering going intobusiness might conduct market research first to test theviability of its product or service idea. If the marketresearch confirms that company's predictions, they canproceed confidently with their business plan. If not, theycan use the results of the market research to makeadjustments and do additional testing. Though marketresearch can be expensive and time consuming, it shouldbe less expensive and time consuming than fully developingand bringing to market a new product or service that willgenerate little or no interest from potential customers.


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PROBABLITY THEORY


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•Conducting an experiment or sample test provides an outcome that can be used tocompute the chance of events occurring in thefuture.

• An experiment is the observation of some activityor the act of taking some measurement.Whereas, an outcome is a particular result of anexperiment.

• The collection of one or more outcomes of anexperiment is known as an event.


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CLASSICAL PROBABILITY


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•

When there are n equally likely outcomes to anexperiment.

• The probability of certain events is already knownor the resulting probabilities are definitive.

• For example:

(1)The chance that a woman gives birth to a maleor female baby (p = 0.50 or ½),

(2)The chance that tail or head appears in a toss ofcoin (p = 0.50 or ½),


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(2) The probability that your income tax return will be audited if there are 20 lakh mailed to

your district office and 2,000 are to be audited is

2,000/20,00,000 = 0.001 or 0.10%.


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II. Probability in Manufacturing businesses can useprobability to determine the cost-benefit ratio orthe transfer of a new manufacturing technology process by addressing the likelihood of improved

profits.• In other instances, manufacturing firms use

probability to determine the possibility of financialsuccess of a new product when considering

competition from other manufacturers, marketdemand, market value and manufacturing costs..


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III. Scenario Analysis: Probability distributions canbe used to create scenario analyses.

• For example, a business might create threescenarios: worst-case, likely and best-case. The

worst-case scenario would contain some valuefrom the lower end of the probabilitydistribution; the likely scenario would contain avalue towards the middle of the distribution; and

the best-case scenario would contain a value inthe upper end of the scenario.

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IV. Risk Evaluation: In addition to predicting futuresales levels, probability distribution can be auseful tool for evaluating risk.

• For example, a company considering entering a

new business line. If the company needs togenerate 50,00,000 in revenue in order to breakeven and their probability distribution tells themthat there is a 10 percent chance that revenues willbe less than 5,00,000, the company knows roughly

what level of risk it is facing if it decides to pursuethat new business line.

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V S l F ti O ti l f b bilit


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V. Sales Forecasting: One practical use for probability

distributions and scenario analysis in business is topredict future levels of sales. It is essentiallyimpossible to predict the precise value of a futuresales level; however, businesses still need to beable to plan for future events.

• Using a scenario analysis based on a probabilitydistribution can help a company frame its possiblefuture values in terms of a likely sales level and aworst-case and best-case scenario. By doing so, thecompany can base its business plans on the likelyscenario but still be aware of the alternativepossibilities.

Importance of Statistics


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•

While theoretical probability is based on the priorknowledge on the possible outcomes, in some cases it’sdifficult to compute the theoretical probability of anevent.

•

For example, how do we know that baseball team A willwin this season? The probability depends on their pastrecord, player performance and other factors. We need tolook into the historical data to arrive at a probability; themore the team’s success rate, the better its chances of

winning the title. For this reason, statistics and statisticalanalysis is very important in deducing the probability ofcomplex events.


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DECISION TREE


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•

For example, they will be used when oil and gasexploration companies have to decide whether toinvest in a particular gas field, or in choosing toallocate resources to exploiting one gas fieldrather than another. Decision trees are a helpful

visual tool when it is possible to measure theprobability of an event occurring and the likelyfinancial outcomes of making a particulardecision.


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Drawing a Decision Tree


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•A decision tree is a diagram consisting of

1. decision nodes (squares)

2. chance nodes (circles)

3. decision branches (alternatives)

4. chance branches (state of natures)

5. terminal nodes (payoffs or utilities)


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Expected value


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•Expected value of ice-cream shop;

= 50%(1 lakh)+50%(-30k)

= 35k

• Expected value of drink stand;

= 50%(90k)+50%(-10k)

=40k


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Market Research Expenditure


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•

A marketing expenditure is simply a paymentmade for a marketing-related investment orexpense.

• Market research, product development,

promotions, sales and service are all areas inwhich companies make marketinginvestments. Companies often allocate certain

amounts toward marketing expendituresthrough a set budget amount.


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ROMI(RETURN ON MARKETING

INVESTMENTS)


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New Product Development ProcessStage 1: Idea Generation


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Stage 1: Idea Generation

• Internal idea sources:

– R & D

• External idea sources:

– Customers, competitors, distributors, suppliers

Stage 2: Idea Screening

• Product development costs increase dramatically inlater stages.

•

Ideas are evaluated against criteria;most are eliminated.


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Implement a unique slogan


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•

Prepare for your product launch by creating acatchy and unique slogan that will be used to

identify it.

•

The slogan should consist of simple languageand could rhyme or contain words beginning

with the same letter to make it more

memorable.

R h d t i il t th ' l i t

Know your competition


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• Research products similar to the one you're planning tolaunch that are already well-known by consumers.

• Use this information to direct the attention of yourlaunch at ways that your product is different and betterthan the competition.

• Evaluate how your product differs or compares tocurrent product offerings and determine the ways inwhich your product/company excels.

• Identify the reasons customers purchase elsewhereand the ways that you can entice them to purchaseyour new product instead.


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Write a product sheet


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•

Create a list of product features and details.This should explain the product to consumers

while still making it attractive.

•

Include general usage, product components oringredients and any relevant safety warnings

or liability information.

Launch a website


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•

Design a website advertising your newproduct and offering more information for

consumers.

•

Include user testimonials, productcomparisons and ordering information or

promotional offers to entice buyers.


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• GROWTH : Once the market has accepted theproduct, sales begin to rise. This is most crucial


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stage and help the brand to establish in themarket.

• MATURITY: Market becomes saturated because

,the house hold demand is satisfied anddistribution channels are full.

• DECLINE : Sooner or later actual sales begin tofall under the impact of new product

competition and changing consumer tastes andpreferences.


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Stages of PLC


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•

Product Life Cycle Examples


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•

It’s possible to provide examples of variousproducts to illustrate the different stages ofthe product life cycle more clearly. Here is theexample of watching recorded television and

the various stages of each method:1. Introduction – 3D TVs

2. Growth – Blue ray discs/DVR

3. Maturity – DVD4. Decline – Video cassette


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Financial aspects of Marketing fall into different

broad categories:


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1. Different Financial measure for marketing likeROI.

2. Different marketing investment to get

maximum ROMI.3. Measuring the impact of marketing.

4. Customer value creation.

5. Marketing role in business strategy likepricing etc.


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Financial and Economic performance


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1. Sales2. Profit

3. Costs

4. Cash flow


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1. Market position –share, penetration

Marketing Scorecard


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1. Market position share, penetration

2. Marketing assets –brand, knowledge,relationships

3. Customers –awareness, attitudes, satisfaction,sales funnel

4. Marketing processes –research, segmentation,service, management

5. Activities –campaigns (reach, response, share of

voice)6. Marketing Channel


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• A sale is the exchange of a commodity for

Sales


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A sale is the exchange of a commodity for

money or service in return for money or the

action of selling something.

•

Revenue


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Revenue is the amount of money that is broughtinto a company by its business activities, usually

from the sale of goods and services to customers.

• In general usage, revenue is income received by

an organization in the form of cash or cash

equivalents.

• Sales revenue or revenues is income received

from selling goods or services over a period oftime.


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•

Numerical


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Suppose a cost of capital for the division is15% and a new opportunity appears that

require an investment of Rs. 15,000, yielding

an annual profit improvement of Rs. 3,000/yr.

the rate from this new investment opportunity

is 20%, which is well above the division`s cost

of capital. What will be the new ROI ?

Solution


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ROI= (20,000+3,000)/(90,000+15,000)=23,000/1,05,000

=.219

=21.9%


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• In addition to providing data on actual

Projections


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performance, revenue analysis lets you projectpresent trends into the future.

• If revenue has increased steadily by about 4

percent per year for the last five years, forexample, it is likely to rise by 4 percent again nextyear.

• For trends that have variations, you can either

smooth out the changes or find reasons for themand remove the effects from the numbers.


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1. Total Sales Volume – the starting point for a

l l l i h l l f

Analyzing Sales Volume


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sales volume analysis; the total sales for aspecific period for a company, region, product,or customer.

2. Sales by region: district a) Retail Sales Index –

Relative measure of the dollar volume of retailsales that normally occur.

3. Sales by salesperson.

4. Sales by customer classifications

5. Sales by product

1. Product Usage data

Revenue analysis by product


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2. Product pricing

3. Brand of the product

4. Margin on items purchased

5. Size or value of their purchases

6. Balance volume and margin to drive netincome.

7. warehousing cost incurred by each product.


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1. Types of customers and proper approval of

t d

Revenue analysis by customer orders


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customer orders2. Selection of active customers

3. Order size

4. Proportion of cash and credit sales in eachcustomer type.

5. Mode of delivery taken by customer


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MARKETING COST


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• Marketing cost analysis is a strategy applied in

Marketing cost analysis


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marketing where the costs connected with

selling, storing, advertising and distributing of

products to particular buyers, are analysed in

order to determine their profitability.

• Business firms use several tools and

techniques for marketing control.


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• Engineered costs result from activities with reasonably

well defined cause and effect relationships between

Engineered Costs


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well defined cause and effect relationships betweeninputs and outputs and costs and benefits.

• Direct material costs provide a good example.

• Engineers can specify precisely how many parts (inputs)are required to generate a specific output such as amicrocomputer, a coffee maker, an automobile, or atelevision set.

• Direct labor also falls into the engineered cost categoryas well as indirect resources that vary with product

specifications and production volume.• Engineered costs are variable in terms of cost behavior.

• Many activities are viewed as beneficial to an

organization even thought the benefits obtained or

Discretionary Costs/ managed cost


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organization, even thought the benefits obtained, orvalue added by performing the activities cannot bedefined precisely, either before or after the activity iscompleted.

• The costs of the inputs, or resources required toperform such activities are referred to as discretionarycosts.

• Discretionary costs are usually generated by service orsupport activities. Examples include employee training,

advertising, sales promotion, legal advice, preventivemaintenance, and research and development.

• Committed costs refers to the costs associated with

establishing and maintaining the readiness to conduct

Committed Costs/capacity(fixed)cost


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establishing and maintaining the readiness to conductbusiness.

• The benefits obtained from these expenditures arerepresented by the company's infrastructure.

• For example, the costs associated with the purchase ofa franchise, a patent, drilling rights and plant andequipment create long term obligations that fall intothe committed cost category. These costs are mainly

fixed in terms of cost behavior and expire to becomeexpenses in the form of amortization and depreciation.

Cost Defined in Terms of Cause and Effect

Type of Cost

Cause & Effect or Cost

Benefit Relationship Cost Behavior Examples

Relationships are

difficult or impossible

to

Fixed, variable and

mixed in the short run.

Cost of administrative and

support services such as

employee training advertising


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Discretionarytodefine.

employee training, advertising,sales promotion, legal advice,

preventive maintenance, and

research and development.

Engineered

Relationships are

relatively easy todefine.

Variable in the short

run.

Direct resources used in

production activities such asdirect materials and direct labor

and many indirect resources

such as electric power.

Committed

Relationships can be

estimated, but not

defined precisely.

Fixed in the short run. Cost of establishing and

maintaining the readiness to

conduct business, such as thecost associated with plant and

equipment.


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1. Variable

2. fixed costs

a) Programmed cost (advertisment sales promotion sales salary)

Marketing costs


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a) Programmed cost (advertisment, sales promotion, sales salary)b) Committed cost (Rent, administrative and clerical salries)

3. Relevant (promotion of new product)

4. sunk costs (test marketing, last yr advertising exp.)

4. Margins

a) Gross margin (total sales-cogs)

b) Trade margin(unit sale price-unit cost price)

c) Net profit margin

5. Selling cost

6. Distribution cost (warehouse,7. Research and distribution cost

• Cost allocation is the assigning of a common cost

to several cost objects

Cost allocation


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to several cost objects.

• Cost allocation (also called cost assignment) is theprocess of finding cost of different cost objects

such as a project, a department, a branch, acustomer, etc.

• It involves identifying the cost object, identifyingand accumulating the costs that are incurred and

assigning them to the cost object on somereasonable basis.

• Cost allocation is important because it the

process through which costs incurred in

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process through which costs incurred inproducing a certain product or rendering acertain service is calculated.

• If costs are not accurately calculated, a business

might never know which products are makingmoney and which ones are losing money.

• If cost are misallocated, a business may becharging wrong price to its customers and/or it

might be wasting resources on products that arewrongly categorized as profitable.


t b i d

Typical cost allocation mechanisminvolves:


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to be assigned,


•

Identifying the most appropriatebasis/method for allocating the cost

• Cost object is an item for which a business

d t t l ti t t

Cost object


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need to separately estimate cost.

• Examples of cost object include a branch, a

product line, a service line, a customer, a

department, a brand, a project, etc.


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• Cost driver is any variable that ‘drives’ some cost. If increase

or decrease in a variable causes an increase or decrease is acost that variable is a cost driver for that cost

Cost driver


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or decrease in a variable causes an increase or decrease is acost that variable is a cost driver for that cost.

• Examples of cost driver include:

• Number of payments processed can be a good cost driver forsalaries of Accounts Payable section of accounting

department,• Number of purchase orders can be a good cost driver for cost

of purchasing department,

• Number of invoices sent can be a good cost driver for cost ofbilling department,

• Number of units shipped can be a good cost driver for cost ofdistribution department, etc.

• While direct costs are easily traced to cost objects, indirectcosts are allocated using some systematic approach.

• Cost allocation base is the variable that is used


Cost allocation base


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pools to different cost objects.

• A good cost allocation base is something

which is an appropriate cost driver for a

particular cost pool.

• T2F is a university café owned an operated by a student. While it hasplans for expansion it currently offers two products: (a) tea & coffeeand (b) shakes. It employs 2 people: Mr. A, who looks after tea &coffee and Mr. B who prepares and serves shakes & desserts.

• Its costs for the first quarter are as follows:

Example


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Its costs for the first quarter are as follows:• Mr. A salary 16,000

• Mr. B salary 12,000

• Rent 10,000

• Electricity 8,000

• Direct materials consumed in making tea & coffee 7,000• Direct raw materials for shakes 6,000

• Music rentals paid 800

• Internet & wi-fi subscription 500

• Magazines 400

• Total tea and coffee sales and shakes sales

were 50 000 & 60 000 respectively Number of

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were 50,000 & 60,000 respectively. Number of

customers who ordered tea or coffee were

10,000 while those ordering shakes were

8,000.

• The owner is interested in finding out which

product performed better.


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1. Variable

2. fixed costs

a) Programmed cost (advertisment, sales promotion, sales salary)b) C i d (R d i i i d l i l l i )

Marketing costs


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) g ( , p , y)b) Committed cost (Rent, administrative and clerical salries)

3. Relevant (promotion of new product)

4. sunk costs (test marketing, last yr advertising exp.)

4. Margins

a) Gross margin (total sales-cogs)

b) Trade margin(unit sale price-unit cost price)

c) Net profit margin

5. Selling cost

6. Distribution cost (warehouse,7. Research and distribution cost

• Cost allocation is the assigning of a common cost

to several cost objects

Cost allocation


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to several cost objects.

• Cost allocation (also called cost assignment) is theprocess of finding cost of different cost objectssuch as a project, a department, a branch, acustomer, etc.

• It involves identifying the cost object, identifyingand accumulating the costs that are incurred and

assigning them to the cost object on somereasonable basis.

• Cost allocation is important because it the

process through which costs incurred in

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process through which costs incurred inproducing a certain product or rendering acertain service is calculated.

• If costs are not accurately calculated, a business

might never know which products are makingmoney and which ones are losing money.

• If cost are misallocated, a business may becharging wrong price to its customers and/or it

might be wasting resources on products that arewrongly categorized as profitable.


to be assigned

Typical cost allocation mechanisminvolves:


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to be assigned,





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CASE STUDY

• India's Refrigerator market estimated at Rs. 2750 Cr. is catered mainly by 10 brands. The annual

capacity is estimated at around 4.15 million units is running head of demand of 1.5 millions. As there

is a demand and a surplus supply, all the manufacturers are trying out for new strategies in the market.

Times have changed and also the buying behaviour of the customer. Earlier it was cash and carry

system. Now dealers play an important role in selling; now the systems is exchange for old “bring your

old refrigerator and take a new one with many gifts”. A new company by name Electrolux has entered

the market which has acquired Allwyn, Kelvinator and Voltas brand. Researchers have revealed that

urban and city sales are declining and hence all manufacturers are trying to concentrate on rural

markets.

Indian Refrigerator Market


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• Electrolux strategy is customization of market, with special attention to the Northern and Southern

India markets, while Godrej the main player thinks that dealer network in rural market for sales and

service will be beneficial and is trying to give more emphasis on dealer network, whereas Whirlpool

has adopted the strategy of increasing the dealer network by 30%.

• The market shares of the major players are as follows:

Questions

1. Could the refrigerator market be segmented on geographical base planned by

Electrolux?

2. What would be the marketing mix for rural market?

3.Would 125 L and 150 L models be an ideal choice to launch in rural market?

Godrej 30%

Videocon 13%

Kelvinator 12%

Allwyn 10%

Voltas 5%

Whirlpool 27%

Daewoo 1%

L.G 1%

Others 1%


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• When goods and services are sold under an agreement

permitting the customer to pay for them at a later date,the amount due from the customer is recorded as

Introduction


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p g p y ,the amount due from the customer is recorded asaccounts receivables; So, receivables are assets accountsrepresenting amounts owed to the firm as a result ofthe credit sale of goods and services in the ordinarycourse of business.

• According to Robert N. Anthony, "Accounts receivablesare amounts owed to the business enterprise, usually byits customers. Sometimes it is broken down into tradeaccounts receivables; the former refers to amountsowed by customers, and the latter refers to amountsowed by employees and others".

• Receivables are a type of investment made by a

firm. Like other investments, receivables toofeature a drawback which are required to be

Cost of Maintaining Receivables


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firm. Like other investments, receivables toofeature a drawback, which are required to bemaintained for long that it known as creditsanction.

•

Such costs associated with maintaining receivablesare detailed below: -

1. Administrative Cost

2. Capital Cost

3. Production and Selling Cost4. Delinquency Cost

5. Default Cost

• If a firm liberalizes its credit policy for the good

reasons of either maximizing sales or

Administrative Cost


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reasons of either maximizing sales or

minimizing erosion of sales, it incurs two types

of costs:

1. Credit Investigation and Supervision Cost

2. Collection Cost

• There is no denying that maintenance of receivables by

a firm leads to blockage of its financial resources due tothe tie log that exists between the date of sale of goods

Capital Cost


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gthe tie log that exists between the date of sale of goodsto the customer and the date of payment made by thecustomer.

•

But the bitter fact remains that the firm has to makeseveral payments to the employees, suppliers of rawmaterials and the like even during the period of timelag. As a consequence, a firm is liable to makearrangements for meeting such additional obligationsfrom sources other than sales.

• Thus, a firm in the course of expanding sales throughreceivables makes way for additional capital costs.

• These costs are directly proportionate to the

increase in sales volume.

Production and Selling Cost


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increase in sales volume.

• In other words, production and selling cost

increase with the very expansion in the

quantum of sales.

• This type of cost arises on account of delay in payment

on customer's part or the failure of the customers tok t f th i bl d h th

Delinquency Cost


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pmake payments of the receivables as and when theyfall due after the expiry of the credit period. Such debtsare treated as doubtful debts.

•They involve: -

1. Blocking of firm's funds for an extended period oftime,

2. Costs associated with the collection of overheads,

remainders legal expenses and on initiating othercollection efforts.

• Similar to delinquency cost is default cost. Delinquency

cost arises as a result of customers delay in payments ofcash or his inability to make the full payment from the

Default Cost


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y p ycash or his inability to make the full payment from thefirm of the receivables due to him.

• Default cost emerges a result of complete failure of a

defaulter (customer) to pay anything to the firm inreturn of the goods purchased by him on credit.

• When despite of all the efforts, the firm fails to realizethe amount due to its debtors because of him complete

inability to pay for the same.• The firm treats such debts as bad debts, which are to be

written off, as cannot be recovers in any case.

• The size of receivables is determined by a


Factors Affecting The Size OfReceivables


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major component of current assets.

• As most of them varies from business the

business in accordance with the nature and

type of business.

• High opportunity cost


Consequence of excessive receivable


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• High credit administration cost

•

High risk of liquidity

• Decrease in sales.

• Risk of loosing market share

Consequence of inadequate receivable


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• Risk of loosing market share.

1. Allocation

2 Selection of Proper Credit Terms

Principles Of Credit Management


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2. Selection of Proper Credit Terms

3. Credit Investigation

4. Sound Collection Policies and Procedures

• If a company does a cost/benefit analysis and

makes the very important decision to extend

What Makes up the Credit Policy for aCompany?


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y pcredit to its customers, then it has to establishprocedures for credit and collecting accounts.

•

There are usually three parts of a good creditpolicy:

1. Terms of sale

2. Credit analysis3. Collection policy


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TERMS OF SALE


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• When considering accounts receivables credit

policy, the credit period is the time period in

Credit Period


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p y, p p

which a credit customer has to pay their bill.

• If a company offers credit terms of 2/10, net

30, for example, the "net 30" portion of the

equation means that if the credit customer

does not take the 2% discount offered, then

the bill must be paid in 30 days.

• The discount period is the time period during

which a company offers its customers a discountth h th t k Th t

Discount Period


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on the purchases that company makes. The termis associated with the accounts receivable creditpolicy of the business firm.

• The discount period is an issue for merchantswho offer credit to their customers.

• For example; XYZ Corporation offers a 2%

discount if credit customers pay their bills within10 days.

Types of terms Effect on sales Effect on

investment in

accountreceivable

Effect on bad

debts

Effect on credit

administration

cost

The credit term may be soft or tight :


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receivable

Soft term Increase in

sales

Increase in

investment in

AR

Increase in bad

debts

Increase in

credit

administration

cost

Tight terms Decrease in

sales

Decrease in

investment in

AR

Decrease in bad

debts

Decrease in

credit

administration

cost

8/15/201

financial aspects of marketing

Documents