Costs Marketers Need to Measure

Actionable Marketing 101

Budget season means diving into the numbers behind your marketing. For many marketers, tracking financial results is like speaking a foreign language. In reality, the process can be relatively painless with a little translation, a little planning and some simple math. Here’s a list of the salient expenses marketers need to track.

2 Major categories of P&L statement costs

As part of a company’s profit and loss statement, these expenses are important driver of a firm’s profitability. As a result, senior management, outside regulators and investors pay attention to them, at least at a high level.

  1. Variable costs are associated with producing and delivering each individual unit of a product or service delivered to customers. It increases directly with the number of items sold. In the short term, you must cover these costs or you’ll bleed cash! They can be calculated based on a cost per unit  or as a percentage of sales. There are four types of variable costs:
    • Cost of goods sold (COGS) is the cost of buying or manufacturing product that the company sells.
    • Royalties are the fees paid to use another person or entity’s design, content and/or other form of intellectual property (IP) such as the image of a comic book character or a musical song. Royalties can also apply to other forms of licensing.
    • Fulfillment covers the expenses involved in every step of getting the order to the customer from taking the order, picking and packing it, and shipping it to the customer. While many customers find shipping and handling onerous because the fees charged are often higher than the amount that appears on their package, the reality is that these expenses aren’t fully covered by shipping and handling fees.
    • Credit and bad debt includes expenses for credit card fees and returned product that can’t be returned to directly stock. For companies that offer credit directly to consumers, it also includes the cost of collecting from poor paying customers.
  2. Fixed costs are expenses that remain the same regardless of the number of items sold (at least in the short run). For most companies, these apply to marketing expenses and overhead.
    • Marketing costs apply to the expenses associated with executing and tracking marketing campaigns. This is where marketers need to focus because these are the expenses that hit their budget. [SIB1] These costs hit your marketing budget and usually include the following three major categories of expenses.
      • Fixed marketing costs are those paid ifor with a fixed fee such as creative. Fees for agencies and consultants tend to flow here (while staff head count expenses are part of overhead.)
      • Variable marketing costs are fixed costs that vary with the number of people who view your advertising. Expressed as impressions, emails, text messages or mail quantity, they’re often presented in terms of CPMs. Variable marketing costs can also include other aspects of your campaign like printing and postage.
      • Premiums are the costs for products that induce prospects to respond such as a free gift. While free shipping and handling falls into this category, it’s treated by most companies as a negative revenue.
    • Overhead refers to expenses that extend across the entire company, such as costs related to personnel like salary, benefits, office space and telephone. It also includes cross-corporate expenses like HR and Legal. Take care when distributing these costs across your organization since they can have a big impact on a division’s or product line’s profitability.

5 Costs that don’t appear on P&L statement

While these five other types of expenses don’t directly flow to your firm’s profit and loss statement, they’re instrumental in the decision making related to your marketing plan. Once you’ve chosen your marketing inputs, these costs also flow into one of the categories outlined above.

  1. Relevant costs are the projected future expenses for a project that vary between alternatives Example: ShirtsOnline spent $675,000 to build its current warehouse ten years ago. Currently, the warehouse is operating at capacity. The company ships more products than the warehouse can accommodate. ShirtsOnline’s choices are to rent another warehouse for $75 per square foot or to outsource shipping at a cost of $1.95 per order plus postage. The $75 per square foot and $1.95 per order are relevant costs since they influence the difference in expenses between the two options. The initial investment in the existing warehouse is not a relevant cost when it comes to this decision.
  2. Incremental costs are the additional expense for an item used to assess two alternatives. Example: SpecialtyBooks.com decides to publish a line of classics. Instead of a hardcover book with a paper cover, the marketing manager chooses to create a boxed edition. The box, which costs $1.25 more than a paper cover, is an incremental cost.
  3. Hidden costs aren’t apparent when the business decision is made. They’re often challenging to deal with since they tend to occur once your budget’s been set and your business must accommodate them. Example: Books-By-Mail acquired 25,000 copies of John Grisham’s The Firm. When the Marketing Manager promotes them, she discovers the books have a special cover that states “Get this book free with any full price purchase from B&N”. She decides to use a new cover that doesn’t mention B&N. The new cover costs $0.50 per book to replace. This expense is a hidden cost since the Marketing manager did not know about it until after the books were acquired.
  4. Opportunity costs are forgone profits from options that you couldn’t take advantage of as a result of another business decision. For many businesses, these costs may be difficult to assign a specific dollar value to. Think broadly in terms of your growth options to grow as well as your competitors’ actions. Example: MoreToys.com has warehouse capacity to store an additional 20,000 units. It can expand sales by 20,000 units or it can rent the space to another firm for $10,000. The opportunity cost is $10,000 whether MoreToys.com uses the space itself or rents the space out. Therefore, the additional 20,000 units must generate gross margin that can cover more than the $0.50 opportunity cost per toy.
  5. Sunk costs are expense were that incurred in the past. Sunk costs are irrelevant to future decisions since they have already been incorporated into the company’s past expenses. Example: Frannie’s Frames spent $10,000 to create a logo. The logo’s is irrelevant to the cost of current online advertising campaign since the money was already spent. The logo is a sunk cost.

Tracking costs is a critical aspect of measuring your marketing campaign. They’re your investment in acquiring customers and converting them to buyers. The better you understand your costs and their interrelationship with your marketing decisions, the smarter those decisions can be.

Happy marketing,
Heidi Cohen


Note: Examples were created for educational purposes only.

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Photo credit: Moma Musings via Flickr

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