‘Why should marketing be accountable for profit?’
Q: I’m now VP for marketing at a fairly large FMCG [fast moving consumer good] company. I was also your student at AIM in the mid ’90s. Some two weeks ago, I treated an AIM classmate of mine at our executive lounge where he gave my marketing and brand managers a short post-lunch talk. He talked to us about “Accountable Marketing.” He told us that he drew the materials of his talk from the 15-day long mentoring-workshop program on the same subject that they contracted you to conduct in his company.
Aside from wondering why it took that long to learn accountable marketing, during his short talk we concentrated almost all our questions on what he said you told them regarding marketing’s accountability for profit.
I cannot recall your saying anything like that when I was in several of your AIM marketing courses. What I remember your repeating to us and I often and still quote you was your telling us that “marketing is all about the topline revenue of your income statement.”
Of course, you told us that it’s important to consider the relationship between the topline revenue and the bottom-line profit. I also repeat to my people your famous one-liner there: “No topline this year, no bottom line this year. No bottom line this year, no topline next year.” But that’s different from saying that marketing should be accountable for profit.
Will you please explain this new position you’re taking on profitability and marketing?
A: I now understand why you did not identify yourself. That’s because I believe you also remember that I told my marketing major students that if I found later that you’ve forgotten the more basic concepts in marketing, I will retrieve your marketing grades and bring them down by as many levels as called for by what you forgot!
Kidding aside, we will give the explanation you requested. We’re doing this because your question keeps recurring in every seminar and conference where I talk about or even just mention marketing’s accountability for profit.
We’ll start with a quick explanation; a KISS [keep it short and simple] explanation if you will, so that if this satisfies your need, you don’t have to go into our more detailed explanation.
Consider the accounting equation defining profit: Profit = (Revenue) – (Costs)
You already acknowledged that marketing is accountable for the topline revenue. That’s the first variable in the profit equation. What about the second variable, namely, costs?
Of course, we’re not saying that all the costs of doing business are costs of doing marketing. But all those costs that are traceable to marketing activities and initiatives make for the profitability that marketing must be held accountable. Many of those costs are not now included in the counting of marketing costs. But if they are, you will find that often total marketing costs are the largest expense category in the income statement (I/S). It is the more detailed explanation of marketing’s accountability for profit that will consider this redefinition of marketing costs.
Management accounting (in contrast to financial accounting) refers to marketing’s profitability metric as “Marketing Contribution.” That’s short for “Marketing Contribution to the Recovery of All Other Costs and Net Profit.”
We now turn our attention to those costs of doing business that are traceable to marketing as the 4 Ps. Just as a reminder, the 4 Ps (or the marketing mix) is now structured as first, the base P which is Product, and then as the base P’s 3 support Ps which are: (1) Placement, namely, physical distribution and sales distribution, (2) Pricing and (3) Promotion made up of advertising and sales promotion which in turn consists of trade promotion and consumer promotion. If you properly cost each and every one of these, you will understand why we said your “total marketing costs are often the largest expense category in your I/S.”
Let’s consider just two of the often unrecognized large marketing costs. Look at COG or cost of goods sold. Today, most of us complain that our gross profit has averaged at 20 percent to 30 percent. What does that mean in terms of COG? Since gross profit is revenue minus COG, then a 20 percent to 30 percent gross profit means a COG of 70 percent to 80 percent. That’s your I/S’s largest expense item.
Marketing-wise, what is COG? It’s the cost of making and offering the base P, that is, your product! Our BSBA and even MBA have trained us to look at COG as manufacturing costs. But if we are to follow the accounting principle of matching costs to revenue, COG is cost of goods SOLD and not just cost of goods MANUFACTURED.
Next consider the sales distribution costs or selling costs. If costs are resources, then we should be asking: “What are the resources utilized in selling your base P and how much do their utilization cost?” Top-of-mind will not fail to cite as selling costs the sales reps’ salaries, commissions and bonus, the depreciation, maintenance, repair and gasoline consumption of the cars and vehicles of those sales reps plus their R&R [recreation and representation] expenses, and so on. Recognition of these expense items as traceable to selling is eye-opening in terms of their profitability impact.
Implied in the foregoing is the real reason why you still do not hold marketing accountable for profit. Your Income Statement (I/S) as your scorecard for topline revenue and bottom-line profit performance does not report the “marketing reality and truth.” Its reporting standards are geared to serve the purpose of the SEC and the BIR. Have your I/S recast to serve your management accounting purpose and to give you the two profitabilities that marketing must be accountable for, namely, the gross profit, and the “marketing contribution.”
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