Marketing Control Tools Archives

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Strategic Control — Marketing Control Tools

August 30, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 9:18

The final of the four primary marketing control tools is strategic control. Every company should occasionally reevaluate its strategic approach to its marketplace. They need to determine if their overall marketing effectiveness — concerning long-term goals — meets their response to the marketing environment by reviewing their approach. Specifically, the review helps determine the firm’s overall strengths and weaknesses and answers the question,

“How far is company leadership (or marketing leaders) capable of exploiting emerging marketing opportunities and facing potential market challenges and threats?”

Strategic Control Methods

Marketing professionals use four tools to measure strategic control:

Marketing Effectiveness Review
Marketing Audit
Marketing Excellence Review
Ethical and Social Responsibility Review

Following are brief descriptions of each strategic control tool.

Marketing Effectiveness Review

The marketing effectiveness review involves a thorough analysis of marketing performance to identify if the firm has an effective-performing marketing department or an ineffective one. (See the table on the Traits of a Company with Excellent Marketing Orientation.)

The table below highlights the standards a company should follow when reviewing for marketing effectiveness. Companies that can successfully claim to follow all standards are considered a highly effective marketing organization.

Traits of an Excellent Marketing Company
The organization selects target markets it enjoys greater advantages and leaves or avoids markets where it is intrinsically weak.
All company employees are customer-minded and market-minded.
Marketing, R&D, and manufacturing share a good, collaborative working relationship.
The company shares a positive and effective working relationship between marketing, sales, and customer service.
Company incentives are established and lead to the right behavior.
The firm consistently builds and tracks customer satisfaction and customer loyalty.
The organization manages a value delivery system in partnership with strong suppliers and distributors.
The company demonstrates knowledge and skill in developing and promoting its brand name(s) and image.
The company demonstrates flexibility in meeting customers' differing needs.

The Marketing Audit

The marketing audit is a comprehensive, systematic, independent, and periodic examination of an organization’s or business unit’s marketing environment, objectives, strategies, and activities. Its purpose is to determine problem areas and opportunities then recommend a plan of action to improve its overall marketing performance.

As mentioned earlier, a marketing audit is composed of four components:

Comprehensive
Systematic
Independent
Periodic

I will examine each of the four components:

Comprehensive

Marketing audits cover all aspects of significant marketing activities, avoiding focus on smaller troubled areas. For example, in a B2B company with a large sales force, suppose the company experiences a significant turnover rate within the sales department. One attribution to the substantial turnover could be poor training. Suppose you conduct a thorough marketing audit. In that case, it may reveal that poor or weak company products and sales and marketing promotions lead to a frustrated sales force, which is the cause of a higher turnover.

Conducting a comprehensive marketing audit allows key stakeholders to identify the actual source of the problem.

Systematic

The marketing audit is an orderly (systematic) examination of the company’s:

Macro and micro marketing environments
Marketing objectives and strategies
Marketing systems
Specific activities

The marketing audit identifies the essential improvements and incorporates them into a corrective action plan with short-term and long-term actionable steps.

Independent

Whenever company representatives evaluate their operations for audit purposes, they introduce bias and lose objectivity. However, employing a third-party consultant — not associated with the firm — brings objectivity and experience in varied industries they can draw upon in their marketing audits.

Periodic

Typical firm-level behavior is to conduct a marketing audit only after issues arise and not during effective and positive performance times. Rather than wait for problems to arise, companies should conduct ongoing marketing audits when they are in good health and when their marketing systems are failing. Periodically conducting an audit can benefit a company and keep them from falling short in its marketing initiatives.

An effective marketing audit requires an explicit agreement between company officers and the marketing auditor regarding the audit’s objectives, timeframe, and who gets to ask the questions.

The marketing audit’s general rule is:

Don’t rely solely on company managers for data and opinions. Ask customers, dealers, and any other outside stakeholder or group.

Most firms are not fully aware of how their customers and dealers view them, nor do they fully understand the needs of their customers.

Marketing Excellence Review

The marketing excellence review encompasses three performance categories in regards to their level of marketing excellence:

Poor
Good
Excellent

Each category identifies a list of traits that a firm practices regarding marketing initiatives. Excellent marketing companies initiate a series of best practices that ensure they have achieved marketing excellence. See the Marketing excellence chart in the article titled, Does Your B2B Company Measure up to Marketing Excellence?

The Ethical and Social Responsibility Review

An ethical and social responsibility review is undertaken by companies that set higher standards for their overall existence and operations. These types of companies are socially conscious toward their employees, customers, community, and environment.

As part of the ethical and social responsibility review, organizations must examine their marketing policies and practices and determine whether they are ethically and socially valid. In the same way, marketing practices should adhere to societal norms and values; a company’s products, policies, and practices must not negatively impact its customers, stakeholders, and the community.

Some standards used to review the ethical and social responsibility of an organization may include the following list.

The company should have a clear set of definitions for the meaning of illegal, immoral, and antisocial activities.
The firm actively practices, promotes and communicates its moral principles (company values) while holding its employees responsible for observing the values.
A company makes contributions to the social welfare of its employees.
The company follows all local, state, and federal laws and regulations that relate to social responsibility.
They are actively engaged in business ethics in the product, price, promotion, and distribution (placement).

Companies that fall short in achieving excellence in their ethics and social review can better determine how to correct their actions to serve their employees, customers, and community.

Summary

Conducting a strategic control review requires a complete commitment from an organization’s leadership. Leadership should conduct strategic control reviews frequently to see if the organization meets its objectives. If they are not meeting their objectives, they should have a plan to improve their strategic goals.

Marketing professionals have four strategic control methods at their disposal to evaluate the company’s strategic readiness. The methods include:

Marketing Effectiveness Review
Marketing Audit
Marketing Excellence Review
Ethical and Social Responsibility Review

Each method has its own set of criteria to follow in determining its effectiveness. Companies that regularly engage in strategic control review and conduct marketing audits are market-oriented and better positioned to excel in their respective market environments.

Efficiency control illustration main header image

Efficiency Control — Marketing Control Tools

August 8, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 9:18

Efficiency Control

The efficiency control portion of the marketing control process measures spending efficiency as it relates to marketing activities. As you may have read in the Profitability Control Analysis article that profitability control concerns itself with where the firm is making or losing money in regards to:

Product
Territory
Customer
Segment
Trade channel
Order size

Efficiency control aims to evaluate and improve the firm’s spending efficiency and the impact of marketing expenditures such as:

Sales force
Advertising
Sales Promotion
Distribution

Larger firms sometimes implement a marketing controller role within the controller’s (finance) office to improve marketing efficiency. The marketing controllers may get involved with one or all of the following activities:

Examine adherence to profit plans
Help prepare a brand managers’ budget
Measure promotional efficiency
Perform media production costs analysis
Evaluate customer and geographic profitability
Staff training on the financial impact of marketing decision’s

How Efficiency Control Improves Marketing

In essence, efficiency control may improve a marketing department’s activity efficiencies in two ways.

It may improve the ability of various marketing activities to better contribute toward reaching marketing objectives.
It can help reduce waste and marketing expenses.

Let’s take a closer look at the four different efficiency control tools, sales force efficiency, advertising efficiency, sales promotion, and distribution. Each efficiency control has its set of marketing metrics to determine if the marketing initiative meets its goals or falls short.

Measuring Sales Force Efficiency Control

Sales force efficiency analyzes if a particular salesperson is efficient in meeting their goals through a set of predetermined metrics. Some standard sales metrics may include some or all of the following measures:

The average number of sales calls per salesperson per day
Average time spent on sales calls per contact
Average revenue generated per sales call
Average costs incurred per sales call
Percentage of orders per group of calls (For example, how many orders did sales receive per 50 sales calls?)
The number of new customers created during a specific period
The number of customers lost during a specific period
The sales force costs as a percentage of total sales

Marketing professionals or controllers may deploy various tactics to gather the necessary information to calculate the above metrics. Information gathering tools such as sales reports, internal databases, questionnaires, meeting discussions, and observations may aid in determining metrics for calculations to determine the sales efficiency.

Conducting a sales force efficiency examination based on the metrics mentioned earlier can lead your marketing management team to discover answers to the following questions.

What role does the sales force contribute to generating revenue? Is online marketing playing a higher position, or are your salespeople in the field generating the bulk of the sales?
Which salespeople are more or less efficient in utilizing resources to convert prospects into buyers?
What are some other reasons for poor efficiency within your sales force, assuming there are inefficiencies.
What is some course of action to take to correct and improve the efficiencies?

Measuring Advertising Efficiency

Advertising is perhaps the most costly expense of the marketing budget. Traditional (offline) marketing typically costs more than online marketing. However, both can become expensive over time. Because of its high costs, it’s essential to determine the advertising efficiency of a given campaign or the efficiency of the overall marketing budget.

While online advertising effectiveness is easier to track, offline advertising proves more challenging. While advertisings efforts and costs contributions are complicated to determine, marketing managers can develop systematic qualitative tools to measure:

Increased brand awareness
Changing attitudes toward a brand
Creating brand loyalty

Some standard advertising metrics for determining advertising efficiency may include:

Advertising costs per thousand through a specific communication vehicle such as television or online video ads
The percent of a target audience that read or viewed a print media or online advertisement
Customer opinion on advertising effectiveness
The measurement of an audience’s attitude toward an advertised product
The number of leads generated by an offline or online ad campaign.
Cost-per-lead
Cost-per-acquisition

Marketing managers can use the advertising efficiency metrics to measure internal and external benchmarks that determine if an advertising campaign and its communication channels are efficient in reaching its goals. Should the manager discover inefficiencies, some corrective actions they can initiate are to change:

The company’s advertising objectives and policies
Ad messages
Switch communication channels or media type
Media schedule or ad frequency
the advertising budget
Marketing staff training
The advertising agency if the company is using one

Depending on what metrics you measure and their results, you may need to modify or add additional corrective actions to your plan.

Measuring Sales Promotion Efficiency

Depending on the organization’s internal structure, the marketing or sales department may monitor sales promotion efficiency. The sales promotion efficiency process measures the impact of the sales promotion efforts on:

Sales
Profits
Competitiveness
Consumer Satisfaction

Generally, sales promotions offer a range of incentives to customers and vendors (dealers) to stimulate sales and product trials. Running an inefficient sales promotion can end up costing the company money and other resources. That is why marketing and sales managers need to measure the cost and impact of each sales promotion tool.

Sales promotions are applied at three levels typically. They include the:

Customer level
Dealer level
Sales force level

Some standard sales promotion efficiency metrics used to measure sales effectiveness include:

The total sales promotion percentage expense to actual sales
The cost of samples, coupons, and other tools per unit selling price
The number of inquiries or leads generated from a specific sales promotion

By analyzing the costs and contribution of the sales promotion tools, managers can determine which promotional tool, channel, and level are most efficient. Companies can use their efficiency data results to reduce or eliminate underperforming sales promotions or bolster effective promotions. Additionally, sales promotion metric results can help firms design more efficient promotional strategies in terms of:

Costs
Level of sales promotion
Promotional timing
And sales promotion strategies at each level:
- Customer
- Dealer
- Sales force

Measuring Distribution Efficiency

Distribution costs for consumer products, electronics, and apparel can be as high as 35% of retail sales prices. Distributors are the middlemen and are part of the value chain in product distribution. A distributors main assets include their:

Sales force
Transportation means
Storage capabilities

With their assets, distributors will try and optimize margins. In other words, the distribution efficiency control tool allows companies to assess the efficiency of their distribution processes. In essence, the distribution efficiency control tool measures how well a company’s distribution system is to achieve its marketing objectives. From time to time, it may be necessary to make changes to distributors or help distributors better understand the company’s goals and see if distributors may accommodate those goals in their processes and costs.

Some typical criteria used to assess the distribution efficiency process include:

The percentage of total distribution costs per unit price
The share of physical distribution costs per unit price:
- Warehousing (storage)
- Inventory
- Ordering
- Transportation
- Communication
- Fixed business costs
Percentage of channel partners’ cost per unit price:
- Wholesalers
- Retailers
- Agents
The costs and contributions associated with direct and indirect channels
The potential for using online marketing and network marketing channels or by retail chains
Evaluating costs of marketing channels as they relate to offered services to the company and consumers

Companies that regularly evaluate their distribution efficiency costs can determine the effectiveness of their distribution channels and partners. Through their analysis, a marketing manager can minimize distribution costs while maximizing or improving profits and its price and earning competitiveness. Additionally, managers can improve customer satisfaction by adjusting to enhance distribution efficiencies through improved costs and quicker product delivery or service.

Conclusion

The four efficiency control areas, sales force, advertising, sales promotion, and distribution, each have a set of metrics. Marketing managers should measure the metrics and understand the various courses of action to take if any control area is functioning inefficiently. Taking swift action and correcting any issues can boost a company’s profit and keep them competitive.

Firms that fail to establish efficiency control metrics and act on inefficiencies may find themselves bleeding resources and ultimately falling behind their competition or shutting their doors altogether.

Profitability Control — Marketing Profitability Analysis

July 20, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 7:56

Marketing Profitability Analysis Defined

Profitability control is a marketing control tool used to perform marketing profitability analysis. The profitability analysis is a systematic and logical process used to analyze profits earned from various marketing activities and marketing channels. Firms show a growing interest in using marketing profitability analysis to quantify the true profitability of varying marketing activities. Gaining insights to true profitability, marketing managers can:

Reduce unnecessary resources required to execute different actions.
Increase resource productivity.
Acquire resources at a reduced cost.
Increase prices of products that consume increased amounts of support resources.

Marketing Profitability Analysis Steps

Marketing profitability analysis involves the following steps:

Identifying functional expenses.
Assigning functional expenses to marketing entities.
Preparing a profit-and-loss statement for each marketing entity.

After marketing managers identify functional expenses, assign those expenses to marketing entities and prepare their respective profit-and-loss statements, the marketing professional then needs to determine if corrective action is necessary based on their profitability analysis.

Marketing Profitability Analysis Example

Using the marketing profitability analysis steps is better explained using an example. In our example, suppose you are the marketing director for a mid-sized vitamin (nutraceutical) manufacturer, and you want to determine the profitability of selling your product direct-to-consumer through three types of retail channels:

Health and wellness centers.
Retail supermarket chains.
Independent pharmacies.

Below is an oversimplified profit-and-loss statement for the vitamin manufacturer that I’ll use for our marketing profitability analysis example.

Let’s examine the following steps in determining our marketing profitability analysis.

Step 1: Identify Functional Expenses

Functional expenses are costs incurred for a specific product or service. In our example, the functional expenses are those costs incurred for specific marketing activities for each marketing channel.

In our analysis example, assume that the incurred expenses in the profit-and-loss statement are to:

sell the vitamin products
advertise them
pack and ship the product
bill and collect funds

Our first task is to measure the total expense for each activity. We can assume that the sales team incurred most of the costs. The rest of the salary expenses went toward the advertising manager, packing and delivery staff, and the in-house accountant. The Functional Expenses chart below demonstrates the salary, rent, and supplies cost breakdown for each activity.

The rent, in our example, is divided amongst the four activities. However, because the sales team works outside of the firm, the rent is not allocated to the sales team but divided by space used, among the other three activities.

Most of the floor space and rented equipment are for the packing and shipping department. The $7,200 allocated to the supplies activity account covers promotional and packing supplies, delivery fuel purchases, and office supplies.

Step 2: Assigning Functional Expenses to Various Marketing Entities

In step two, we measure how much functional expense is associated with selling through the various marketing channels. The table below, Allocating Functional Expenses to Channels, shows the selling effort made for each channel. The number of sales calls per channel, indicated in the sales column, refers to how many times a salesperson called or visited one of the channel locations. The total selling expense for all three channels was $7,425, and the sales team yielded 675 units. Note that a unit in our marketing profitability analysis example refers to one item, for example, one sales call or one advertisement. In our case, the cost per sales call unit to our marketing channels costs $11 per call.

Respectively, we ran 450 ads with a total expense of $5,400, which yielded $12 per advertisement. The cost for packing, shipping, and billing follows the same formula, generating $18 per package to pack and ship and $9 per order to bill and collect.

Step 3: Preparing a Profit-and-Loss Statement for Each Marketing Entity

We can prepare the profit-and-loss statement for each channel partner in the final step. In our profit-and-loss statement example below, the health center channel earned 55% of total sales. The channel had the highest cost of goods, yet the highest gross margin as well. After expenses, the health centers channel netted a profit of $9,150 for the firm.

The total cost for calls to the health centers was the highest of the three channels, yet its advertising costs were half that of the pharmacy channel, bringing in a meager $430 net profit. On the other hand, total sales calls to retail chains were higher than the pharmacy channel, yet the retail chain channel was at a $2,975 loss for the firm.

Go through the remaining channel partner data below and see where you might identify areas that can help generate more net profit.

Analysis and Corrective Action

On the surface, it may be easy to eliminate the retail chains channel since they showed a loss compared to the two other channels. Yet, eliminating the retail chain channel may be premature or naive at best. Marketing managers need to determine the possible root causes of revenue loss before removing a channel partner. Marketing managers need answers to the following questions before eliminating a channel:

What are the factors that buyers buy based on retail outlets (channel partners) versus the brand?
Are there any trends that impact the relative importance of the three channels?
Are the firm’s marketing strategies consistent across all three channels, or does the company vary the marketing message based on channel partner?
Has the firm conducted a market analysis on competitors currently sold in each of the channels?

Marketing managers can use the answers from the above questions to evaluate the following alternatives:

Establish special charges for handling smaller orders.
Provide more promotional assistance to the retail chains and pharmacies.
Increase ad spending for the retail chain channel.
Evaluate the marketing message and make necessary changes to the messaging strategy for the retail and pharmacy channels.
Remove the poor-performing retail units of each channel.
Create an incentive plan for the retail chain channel to improve total sales.
Do nothing.

Conclusion

Marketing profitability is not without its limitations. Depending on how well marketers understand the analysis methods and constraints, the analysis can lead or mislead marketers. Some advocates argue that the full cost must be allocated to marketing entities, while others say that only direct and traceable costs are necessary for evaluating a marketing entity’s performance.

Regardless of which side of the argument you stand, marketing profitability analysis does not necessarily prove that the best course of action is to eliminate unprofitable marketing entities, like the retail chain channel in our example. The marketing profitability analysis merely indicates the relative profitability of different channels, products, territories, or other marketing entities. It is up to the marketing manager to ask clarifying questions that lead to effective corrective action of their marketing activities.

Financial Analysis Control Tool

July 20, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 5:15

Financial Analysis Control Tool Explained

The fourth tool for measuring the annual control plan is the financial analysis control tool. This analysis tool looks at the relationship between the expense-to-sales analysis (ratio) and the overall financial framework to analyze where and how the company is making or losing money concerning marketing activities. In other words, it’s an analysis tool used to determine the efficiency of how a firm is using its assets to generate revenue.

Companies efficient at generating revenue from their assets have a high asset turnover ratio. Whereas the opposite is true for firms that are not efficiently using their assets to generate sales, they have a low asset ratio.

Marketing managers and executives use the financial analysis tool to measure the return rate on their net worth.

The return on net worth is the product of two ratios: its return on assets and its financial leverage. The critical factors in determining the rate of return on net worth include:

- Profit margin (net profits / net sales)
- Asset turnover (net sales / total assets)
- Return on assets (net profits / total assets)
- Financial leverage (total assets / net worth)

There are two ways a company can improve the return on its net worth. They can:

Increase its ratio of net profits to assets.
Increase the ratio of assets to net worth.

Let’s take a look at an example of the financial analysis tool at work.

Financial Analysis Example

I will use a utility company for the financial analysis example. Utility companies strive to have an asset turnover ratio between 0.25 and 0.5. The higher the asset ratio, the more efficient the firm is in generating revenue or sales from assets. As a side note, utility and manufacturing firms often have a more extensive asset base, which results in a lower asset turnover. On the other hand, retail businesses tend to have small asset bases with a higher sales volume that lends itself to a high asset turnover ratio.

Taking a look at the diagram below — the Financial Model of Return on Net Wort — we can see that the asset turnover for our utility company is 0.5, which is within a normal range for a utility company. However, its profit margin is low at 3.2%, whereas the average profit margin for a utility firm hovers around 9%.

Financial Model of Return on Net Worth Formula Diagram

How to Improve Rate of Return on Net Worth

Before I discuss improving performance concerning the low-profit margin and average asset turnover in the utility company example, let’s address how the firm could improve its rate of return on net worth. I’ll examine the net worth first since the rate of return on net worth relates to the firm’s profit margin and asset turnover and the return on assets and financial leverage.

It’s important to note that the return on assets is the product of the profit margin and asset turnover ratio. The rate of return on net worth is the product of the return on assets and financial leverage. See the formula and calculation below for more information.

If our rate of return of net worth is 2% in our example, then for a utility company, it appears low. To improve its return on net worth, the utility company must do one of two things in this scenario. They must increase their ratio of net profits to assets or increase the proportion of assets to net worth. To achieve their goal, they should analyze their asset composition to determine if it can improve its asset management. Some assets may include:

- cash
- accounts receivable
- inventory
- plant and equipment

As discussed above, the return on assets is the product of the profit margin and asset turnover ratios. Because the asset turnover, in our example, appears to be in the normal range for utility companies, but the profit margin is low, the marketing executive can improve performance by increasing the:

1. Profit margin by increasing sales or cutting costs.
2. Asset turnover by increasing sales or reducing assets (inventory and receivables) held against a certain level of sales.

Financial Analysis Calculations

There are several calculations for arriving at the Rate of Return on Net Worth in the diagram below. Use the Financial Model of Return on Net Worth above as a model for using the formulas below.

Summary

The financial analysis control tool is simple to use when calculating if a firm efficiently uses its assets to generate sales. A high asset ratio indicates that the company is financially efficient, and a low asset ratio indicates the opposite. The tool helps guide marketing executives who want to improve financial performance concerning sales for their companies. Two ways executives can improve performance. First, they can increase the profit margin by increasing sales through marketing programs or cutting costs to produce the product. Second, they can increase the asset turnover increasing sales volume or reducing assets such as inventory and receivables held against a certain level of sales.

Marketing Expense-to-Sales Analysis

July 20, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 5:03

Marketing Expense-To-Sales Analysis Explained

The marketing expense-to-sales analysis is one of four tools in the marketing annual control plan. As discussed in the article, The Marketing Control Process for your Business, the analysis is partly responsible for ensuring that a company reaches its financial goals. The ratio helps monitor marketing expenses, ensuring that a firm does not overspend on marketing to achieve its sales goals.

Many business leaders and marketing advisors tie marketing spending to industry benchmarks. However, the expense-to-sales analysis tool is a marketing control analysis tool and not a benchmarking tool because marketing drives sales and sales do not drive marketing spending.

When determining if a company is overspending on marketing to achieve its sales goal, the key metric to measure is the marketing expense-to-sales ratio. Other metrics a company uses and that make up the marketing to sales metric are:

- Salesforce-to-sales ratio
- Advertising-to-sales ratio
- Sales promotion-to-sales ratio
- Marketing research-to-sales ratio
- Sales administration-to-sales ratio

Practical Application Question

Can you think of other possible sales ratios that a company may use to calculate the expense-to-sales ratio?

Marketing Expense-To-Sales Analysis Scenario Example

We’ll take a look at an example of how the marketing sales-to-expense analysis may impact marketing decision-makers.

A fictional manufacturing company’s marketing sales-to-expense ratio is 40 percent. That is, the firm’s marketing expenses are 40 percent of its sales revenue. Five other metrics make up the total marketing expense-to-sales ratio. The ratios are:

- Salesforce to sales (20 percent)
- advertising to sales (6 percent)
- sales promotion to sales (9 percent)
- marketing research to sales (1 percent)
- sales administration to sales (4 percent)

A benchmark for each ratio helps marketers monitor fluctuations in expenses. If expenses fall outside of the “normal” range in any of the sales ratios, there could be cause for concern. For example, if costs are rising, the firm may still have good control over expenses, and the occurrence is considered an anomaly or one-off event. On the other hand, the marketing team may have lost control over the expense, and further investigation into its cause is warranted.

To better monitor expense ratios, marketing managers need to monitor each ratios expenses using a control chart. For example, let’s explore the advertising-to-sales ratio for our manufacturing company example.

The advertising-to-sales ratio, as noted in the manufacturing company example earlier, is 6 percent. Taking a look at the control chart for this ratio, we observe expenses fluctuate between the upper limit and lower limits, with an observation that expenses steadily increased beginning in the 8th period. Marketing managers should have noted the unusual pattern and rise in expenses. An investigation into the costs should have occurred before the 14th period when expenses rose beyond the upper limit.

Practical Application Question

Can you identify possible reasons why the advertising-to-sales expense ratio may be increasing?

Marketing-to-Sales Expense Calculation/Formula

The marketing-to-sales expense ratio, along with the other ratios, is relatively simple to calculate. To calculate, divide the total marketing spending by the total sales revenue and multiply the results by 100 to get a percentage. Exclude any revenue that is not associated with the sales activity. These revenues may include royalty earnings or interest and savings. The same calculation method applies to sales-to-advertising spending and the rest of the marketing expense-to-sales ratio components.

Example Calculation

For example, if a company’s marketing expense for a particular product is $40,000 and the company generates a total of $100,000 in sales revenue, the marketing expense-to-sales revenue is 40%.

Marketing to Sales Ratio: $40,000 / $100,000 (sales revenue) = .4 x 100 = 40%.

Summary

Using the marketing-to-expense sales ratio provides marketing managers with financial insights into how their marketing budgets perform in relation to the sales revenue. With lower ratios, the company has a higher profit-earning potential. However, marketers need to monitor the ratios using a control chart with upper and lower limits to ensure that marketing expenses do not get out of control. At the first sign of heightened costs, marketers need to investigate the causes in the rise of marketing spend.

The better the financial data supplied, the better the analysis and ability to decide a marketing campaigns’ effectiveness.

Market Share Analysis Header Image of Man review metrics and data

Market Share Analysis – Annual Plan Control

July 19, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 6:41

Is Your Company or Product Leading or Trailing the Competition?

The market share analysis is another tool used as part of the marketing annual plan control and closely related to the sales analysis tool. Market share indicates how your company is doing in terms of unit or revenue sales compared to your competition. However, market share is perhaps the most overused and misused marketing metric.

Experienced marketers downplay the role of market share or ignore it outright as their processes and ways of measuring success have evolved, making market share analysis irrelevant. However, if the metric is used correctly, in context, and for the right purpose — as with all metrics — then market share is a useful tool for short-term use.

Overall Market Share Analysis

There are several ways of calculating market share. The most common metric is the overall (or total) market share analysis. The overall market share is the percentage of a market in terms of either unit sales or sales revenue. In other words, it’s the company’s total units sold or revenue generated in comparison to the market’s competitors.

Understanding the total market share helps marketing managers determine their total market growth or decline and helps them gain insights into trends for how customers make competitor selections.

Organic sales growth (or the total market growth) costs a company less and is more profitable than the firm seeking to achieve growth by capturing competitor shares. However, losses in market share may signal long-term problems that require the firm to make strategic adjustments to its marketing plan. A company with a market share below a predetermined level may not be profitable, thus not a viable business. Also, firms can use shifts in their product market shares as leading indicators of future opportunities or potential competitive challenges. If a product’s market share dips below a specified level, marketers need to look at various scenarios to determine the cause for a drop in sales. Conversely, suppose sales surge, and the firm gains market share. In that case, this could indicate a problem with the competition or other potential scenarios that require closer analysis.

How Overall Market Share is Calculated

Calculating market share is a relatively simple process. However, gathering competitive data may prove arduous without the proper primary or third-party research data. Assuming that you have this data, market share is calculated in two ways, as mentioned earlier: unit sales and sales revenue.

Unit Market Share is the units sold by a firm as a percentage of total market sales. The formula for unit market share is:

Revenue Market Share reflects the price of sold goods. The formula for calculating revenue market share is:

Relative Market Share Analysis — A Better Metric

Unlike total market share, which examines the whole market, relative market share analysis measures a firm’s market share related to its largest market competitor. Tracking relative market share over time gives you a benchmark and better understanding of what’s happening between you and your largest competitor. Relative market share allows marketing managers to compare relative market positions across different product markets.

A company or product tied for the lead with its largest competitor in the same market has a relative market share of 100-percent. Anything more than 100-percent indicates a market leader, and less than 100-percent shows the firm behind the market leader. The relative market share can help a company better understand its position or product position in the marketplace with more meaning than the total market share.

Relative market share calculation is similar to total market share. Calculated the metric by either the brand’s product units sold or revenue generated. The formula for the relative market share calculation is:

Market Share Analysis Challenges and Assumptions

While market share, precisely relative market share, is an excellent metric to measure your firm’s or brand’s leadership or lack of in a given market against competitors. It is not without challenges. Conclusions from market share analysis come with several assumptions.

First, the assumption that external forces affect all companies in the same manner is often without merit. For example, the U.S surgeon general’s notice the harmful effects smoking has on the body depressed total cigarette sales but did not affect all companies equally.

The assumption that a firm’s performance should be judged against all firms’ average performance is not always correct. The best way to evaluate a company’s performance is against that of its closest competitor.

The assumption that if a new firm enters the industry, then all existing firm’s market share may drop. A decline in market share does not necessarily mean that the company is performing worse than other companies. Share loss depends on what degree the new firm enters the company’s specific markets.

The assumption that a market share decline is deliberately engineered to improve profits. For example, marketing managers may drop unprofitable customers or products to reduce costs by driving up profits.

The final assumption is that market share can fluctuate for many minor reasons. For example, market share is affected by changes in promotional strategies because a massive promotional sale on a given date affects market share. It may also be affected by social and cultural phenomena like a sales spike for Ocean Spray Cran-Raspberry drink when a video went viral, showcasing a man skateboarding and consuming the beverage.

Summary

Market share is undoubtedly a critical metric to measure. However, marketing managers must throw caution to the wind when using the metric. In other words, marketing managers must use the metric correctly, in context, and for the right reason for it to be a useful analytical tool to guide marketing performance. While overall market share provides a high-level view of where the organization or organization’s product falls compared to the competition in the same market, relative market share is a better indicator of whether a firm or product is leading or lagging behind its closest competitor.

futuristic image of man using technology for sales analysis article

Sales Analysis – Annual Plan Control

July 19, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 3:52

Sales Analysis

In the article titled The Marketing Control Process for your Business – Explained, I outline what marketing controls are:

“Marketing control is a process where company management or executives analyze and assess their marketing activities and programs.”

The marketing control process includes four types of marketing control, they are,

Annual plan control
Profitability control
Efficiency control
Strategic control

This post focuses on the sales analysis part of the annual control plan. The other three types of measuring tools that fall under the annual control plan include,

Marketing share analysis,
Marketing expense-to-sales analysis,
Financial analysis.

The sales analysis measures and evaluates the firm’s actual sales as it relates to its sales goals. The two types of analysis tools used are the sales-variance analysis and the micro-sales analysis.

Sales-Variance Analysis

A sales-variance analysis is a metric that measures the relative contribution of different internal and external factors to a discrepancy in sales performance. The ability to calculate and identify sales variance is an essential metric to understand so that the firm may address issues in expected sales deficiencies.

Sales-Variance Example

Suppose a manufacturer planned on selling 2,000 units of Product A in the fourth quarter at $2.50 per unit. The expected total revenue is $5,000. At the end of the fourth quarter, 1,700 Product “A” units sold at $1.95 per unit for total revenue of $3,315. The following calculation shows the price decline in performance versus the price decline due to a volume decreasing.

Sales-Variance Example Calculation

Variance due to price decline:	($2.50 - $1.95) (1,700 units) = $935	55.5%
Variance due to volume decline:	($2.50) (2,000 - 1,700) = $750	44.5%
	$1,685	100%

Metrics Analysis

Notice that almost half of the variance is due to a failure to achieve the volume target. The manufacturer needs to examine why sales failed to reach their expected sales volume. Possible reasons may include poor sales performance, lack of sales staff to cover a region, inferior quality product, or weak or no sales promotion activity.

Micro-Sales Analysis

The micro-sales analysis examines specific products, sales regions or territories, and other measurable factors that underperformed the expected sales goals. For example, imagine that the manufacturer in our case above sells Product A into three regions. They set their sales goals for region one at 900 units, region two at 400 units, and region three at 700 units for the fourth quarter. However, the actual sales volumes were 800 units for region one, 498 units for region two, and 325 units for region three. Thus, the sales manager notices a 12% sales reduction for region one, a 22% increase in region two, and a dramatic 73% drop in region three sales.

From the data, the sales manager may come to several possibilities. They may conclude that the salesperson in region three is performing poorly, a new competitor entered the market in that region, or the product is priced too high for the market. Other possibilities may come into play as well.

Summary

The sales analysis is just one tool for managing marketing programs. When used to analyze sales volumes, marketers can learn if internal or external factors are to blame for sales volume deficiencies or surpluses. The data collected can help marketers make adjustments to existing marketing programs and incorporate them into new programs in new markets.

Illustration of businessmen looking toward teh future for the marketing control process article by Allen Stafford

The Marketing Control Process for your Business

July 19, 2021/in Marketing Control Tools/by Allen Stafford

Audio Version — 6:34

Understanding the Marketing Control Process

If you are like most small or medium sized businesses, marketing your company probably includes a basic marketing plan, most likely not written down. You probably have some marketing collateral (brochures) to leave with customers, a website, a social media presence that gets occasional attention, and a sales team. Like a sales analysis performed monthly or quarterly, there may be some control mechanism to determine if you are generating enough revenue to cover costs and earn a profit. If you are like most other firms your size, you are probably falling short of your marketing control process, that is, tools that help you analyze and assess your marketing activities.

What is Marketing Control?

Marketing control is a process where company management or executives analyze and assess their marketing activities and programs. Management then uses the results to make necessary adjustments or changes to their marketing plans. Think of marketing control as the navigation system on an airplane. The pilot sets the course, and the navigation system directs the plane toward its destination. However, due to weather patterns, the plane can drift off course, and the pilot must make adjustments to keep the aircraft on its path, or it can end up in a completely different location. If you are not monitoring your marketing activities and making adjustments along the way, you can end up spending too much money, generating no sales, or both.

For example, if a marketing manager implements a marketing campaign to increase sales for a specific store or product, that manager, or their team, monitors the campaign plan’s progress over a specified amount of time. The amount of time could be one week, a month, or quarterly. The marketing activity could be sales promotions, direct sales for retail floor staff or online ad spend, and conversions on their e-commerce store. If the campaign is not helping the marketing team achieve their established goals based on the team’s analysis, they will make corrections to any one of their campaign’s tactical elements. The process of monitoring and making adjustments to a marketing activity is the marketing control process.

The Marketing Control Process

As with any other business function, there is a process to follow that ensures the marketing control process’s effectiveness. Precisely, the process associated with the annual-plan control (see the explanation of annual plan control below). The process steps include:

Goal setting – What do you want your campaign or activities to achieve?
Performance measurement – How is the campaign performing. What precisely is happening. As an example, are you receiving more conversions on your eCommerce website? Are you generating more sales revenue?
Performance diagnosis – Why is what’s happening occurring? If you are not receiving the projected sales volume, what would you attribute the reason to? What if you are earning more than projected sales? Could it be that your pricing is too low?
Corrective Action – How will you correct the problem? If your marketing campaign performs lower than expected, what changes can you make to fix the issue? Were your goals unrealistic, or did you miss your target marketing?

4 Types of Marketing Control

There are four types of marketing control marketing managers can use to accomplish their analysis of marketing campaigns:

Annual Plan Control
Profitability control
Efficiency Control
Strategic Control

Control Type	Responsible Party	Control Purpose	Approaches
Annual Plan Control	Senior Managers and Middle Managers	Determine if planned marketing results are meeting expectations	• Sales analysis • Market share analysis • Sales-to-expense ratios • Financial analysis • Market-based scorecard analysis
Profitability plan	Marketing manager	Determine where the firm is earning profits and where they are losing money.	Determine profitability for: • product • territory • customer • segment • trade channel • order size or basket size
Efficiency control	Line and staff management and marketing manager	Determine marketing expenditures impact by examining and improving the spending efficiency.	Determine efficiency by: • sales force • advertising • sales promotion • distribution
Strategic control	Senior managers and Marketing manager or auditor	Determine if the business is following the best options with respect to markets, products, and channels.	• Marketing effectiveness rating instrument • Marketing audit • Marketing excellence review • Company ethical and social responsibility review

Source: Principles of Marketing, 17th Edition. Kotler and Anderson

Annual Control Plan

Annual plan control is responsible for ensuring that the company reaches its financial and other goals. Financials include sales revenue and profits. Using the marketing control process, the marketing management team establishes its monthly, quarterly, semi-annual, and annual goals. Second, they monitor the performance of their goals in the market environment. Third, if any deviations from the objectives exist, management analyzes the problems to determine what and why it’s happening. Fourth, management works to close any gaps between the issue and its goals.

There are four tools for measuring the annual control plan:

Profitability Control

The profitability control is where a company measures its products, regions, customer segments, and order sizes to help decide if they need to expand, reduce, or eliminate any products, services, or territories. The instrument used to determine the profitability measurements is a marketing profitability analysis.

Efficiency Control

Efficiency control’s primary purpose is to use the data from the profitability analysis to educate the marketing staff on the implications of the marketing decisions made for the campaign.

The profitability analysis may reveal that the firm is earning weak profits on certain products, promotions, stores, or territories. Marketers may face decisions that include determining if there are efficient ways to manage the sales force, advertising spend, sales promotions, or distribution channels.

Strategic Control

The final part of the marketing control tool is strategic control. From time to time, marketing managers should reassess their strategic approach to the market environment. The approach managers use for reassessing the market environment is the marketing audit. The marketing audit is a comprehensive, systematic, and independent examination of a company’s marketing environment. It also includes the company’s marketing objectives, strategies, and activities. The goal is to determine the firm’s challenges and opportunities to recommend a strategic plan of action that helps improve the company’s marketing performance.

Summary

Marketing is not just the arts and crafts department; it’s a control center that analyzes processes and makes adjustments to create efficient processes that yield business results. Without a marketing control process and the analysis tools that accompany the process, your business may lose sales and profits. It is up to the business owner or marketing manager to implement the marketing control process, manage the process, analyze, and make corrections to the strategic marketing plan.