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In economic practice, estimating the profitability of investments in marketing activities more and more often becomes a priority, but it is also a difficult and serious challenge.
In one company, a newly hired manager was given the task of examining and verifying marketing costs. As so far no specific records have been kept, the manager asked for a detailed statement from the Financial Department, which so far provided information to the company’s management about the types of these costs. The Finance Director determined that the total amount of marketing expenses last year was almost PLN 1.5 million. net – as recorded in the accounting accounts. Such information was also provided to the management board. After a detailed analysis of purchase invoices, it turned out that 20% of this amount were various administrative purchases for management purposes, 15% – typical entertainment costs, 20% – costs that were difficult to classify functionally into any department. It turned out, that only 45% of expenses can be counted in the operational marketing budget dimension. At the same time, the company’s constant practice was to book various, unallocated costs – on the accounts of the marketing unit. Not to mention the cost category called “we don’t know what to do with it”. They also made it onto the unfortunate “marketing costs” list.
In the mid-1980s, enterprises began to obtain more information related to the costs of resources used by them and their involvement in the development of individual products and brands, customer service and distribution channels. One of the solutions was the concept of Activity-Based-Costing (ABC ).
Marketing cost analysis
The ABC system made it possible to analyze the indirect costs of activities undertaken by enterprises and relate them to products, services and customer service. As the basis for estimating the effectiveness and operational effects of marketing activities is the analysis of costs related not only to the customer acquisition processes, but also to its maintenance and ongoing service, the ABC concept made it possible to develop Activity-Based Management (ABM ). Its purpose is to make decisions aimed at achieving identical economic results but with the use of fewer resources. Assumptions of the ABC and ABM conceptused in the management of marketing costs, they enable the search for such a composition of management processes, marketing tools and their effects that will ensure a more effective achievement of the assumed goals. Thanks to the operational management of marketing processes, enterprises can optimize the use of resources, correct and eliminate errors, and rationally manage fixed assets. The basic application of ABC models is not the method of cost distribution, but the determination of the places where the company engages financial resources.
The marketing budget should not be considered solely in terms of the company’s communication costs. An important factor becomes the definition of marketing cost centers, the planning and settlement of which becomes the key to assessing effectiveness. Precise definition of the budget allows for a clear answer – how many and in what components have the funds been invested? But is the “marketing budget” the only financial aspect that should be taken into account when assessing the effects? Is the mentioned budget not basically an operational element of a wider context, defined by the notion of “marketing costs”? Determining the marketing budget and its functional division is the basic issue of marketing mix financing. The decisions that marketers make are about trying to better allocate funds,
Investing in Marketing
The costs of marketing activities are of an investment nature. However, according to the current legal status in the field of accounting, the value of a trademark produced by an enterprise on its own cannot be included in its balance sheet. It is problematic from the point of view of the essence of the development of the company’s value based on o increase in the value of owned trademarks. Investments in marketing activities aimed at increasing the brand’s capital of a measurable nature at the time of its valuation and costs incurred to build buyer loyalty or related to research and development, change their tangible and intangible value. In accounting, this value is treated as a cost, not an investment. For this reason, marketing investments in brand development cannot be classified as investments and placed as a balance sheet component of the enterprise, which reduces the operating profit. On the other hand, in terms of the market, these are costs affecting current cash flows, determining their investment nature. One of the key conditions for the effectiveness of market activities is their effectiveness, i.e. the ability to produce specific, expected effects.
Assessment of the final impact of funds allocated to, for example, advertising activities, in terms of their impact on sales, is still controversial. They result from the number and variety of variables such as elements of the brand image and potential, competitive environment, sociological aspects, customer behavior models or various cultural conditions. An element that is often underestimated in this type of evaluation is the influence of creative ingredients on the final effects of promotional activities. A marketing budget is often defined as specific amounts of money that should be guaranteed in order for a marketing plan to be implemented.
Marketing costs and budget
The concept of “marketing costs” is much broader than “marketing budget”. “Marketing costs” can be treated in terms of separate components from the company’s total costs, having a direct or indirect impact on:
- current sales results and its strategic and operational profitability
- company image in a dependent and independent market environment
- increasing the company’s value (including the value of brands and trademarks)
- the degree of internal orientation on the so-called “Internal customer” (internal marketing)
- the degree of company orientation towards identifying and satisfying customer needs.
At the same time, such a treatment of these costs may suggest a very broad approach to them. Hence the need for a generic division of this structure into:
- Costs having no or very low impact on the components listed (eg back office administration costs, production and logistics costs, investments not directly related to the components listed).
- Costs affecting these elements to a medium and high degree (e.g. personnel costs for sales and marketing, sponsorship, lobbying, corporate identity, etc.).
- Costs affecting these elements to a very high degree (e.g. current operating costs of marketing activities, participation in marketing alliances, research and tests, etc.).
The “marketing budget” is thus understood as the operational component of marketing costs, including mainly costs resulting from the elements whose impact is understood as medium, large and very large and serving their financing (provided that they are defined in the marketing plan). Thus, costs not defined in the marketing plan – are not a component of the marketing budget. Every budget item is a cost, but not every cost is considered a budget item.
The creation and management of a marketing budget in Polish conditions is conditioned by a number of dependent and independent factors influenced by:
- Understanding the essence of marketing investments by the management / owners of the company.
- Binding legislative solutions in the field of accounting.
- Marketers’ skills related to the financial optimization of the elements of the marketing mix.
Stereotypes and facts about marketing costs
The management board / owners of the company depend to a large extent on the scale of approval of the budget amount and the expected estimation of the final goals that will be achieved thanks to this. From my observations and experiences, the following authentic statements from company managers are a reflection of many stereotypes in this regard:
- “Marketing is important, but we don’t have the money for it”,
- “Everyone knows me, I don’t have to advertise”,
- “I can’t advertise because I don’t have money for it”,
- “We do marketing without money”,
- “We have such good products that they sell themselves”
- “We do marketing in an economic way”
- “We have a crisis and we cannot spend money senselessly on some marketing”
- “This lady is here for marketing and she does it without money”
The aforementioned stereotypes reveal the frequent perception of the marketing budget in terms of costs, not investment. This state of affairs consists of many elements, which can basically include:
- poor managerial education in the field of assessing the effectiveness of marketing activities, the practical use of indicators and marketing controlling procedures,
- low level of use of the marketing audit as a tool that allows ongoing verification of the effects of these investments on the company’s results and its perception on the market,
- negative historical experiences related to the conducted marketing activities (in the field of e.g. unsuccessful investments in advertising campaigns, incurring high costs for unnecessary research, underinvesting or overinvesting in marketing projects, etc.),
- setting excessive expectations regarding the effectiveness of specific elements of the marketing composition (e.g. expectations of immediate returns on investment as a result of public relations projects),
- lack of coherence and coordination of current operational activities
- non-transparent organization of marketing processes within the company (low role of the marketing unit in the organizational structure, high dependence on sales managers, perception of activities only in an instrumental context).
- low level of marketers’ skills regarding the optimization of marketing-mix composition tools and marketing project management
- lack of marketers’ skills and motivation to make management / owners aware of the essence of investing in marketing activities
- perception of the budget in terms of costs, not investment,
- too much trust or excessive requests addressed to marketing services companies ,
- “Propaganda” approach to project implementation (eg conducting an intensive advertising campaign while maintaining low standards of current customer service, making unrealistic promises to customers, falsified advertising messages, etc.).
The second element influencing the shaping of the budget are legislative conditions. Tax regulations in this respect are neither clear nor transparent. The organization and conduct of marketing activities raises a number of problems in the context of both income tax and VAT regulations. For example, campaigns consisting in the free transfer of goods for advertising purposes pose many interpretation problems related to VAT.
A marketer looking for optimization of investments in marketing activities is often met with skepticism by both owners and shareholders as well as financiers. This skepticism is very often justified and conditioned by historical events in which marketing was perceived as a source of many unjustified expenses.
The traditional accounting approach treats the marketing budget in terms of costs incurred. Only in the case of increasing the value of fixed assets, accountants treat them in the investment sense. Thus, for example, all expenses related to building the brand of products, marketing communication, testing new products – are understood as costs that should be subtracted from revenues recognized in the profit and loss account. This direction of thinking shapes the thesis that the justification of marketing expenses makes sense only when they lead to a significant increase in the value of sales in order to generate profits at the appropriate level.
A marketer entrusted with managing marketing funds should, first of all:
- know the various ways of creating it,
- have specific communication skills and persuasion to the proposed solutions, both for the company’s managers / owners and financiers,
- consider the variants of the marketing mix and focus on solutions that ultimately target the increase in the company’s value,
- be perfectly prepared in terms of content – in terms of knowledge about specific tools of marketing activities, calculating and estimating their effectiveness,
- perfectly use the tools of marketing analytics: calculate indicators, interpret them and strive to turn the set goals into specific marketing programs,
- control and cooperate with marketing services companies in the scope of achieving the total and partial goals of their activities. Situations in which … the same advertising agency is invited to control the effects of an advertising campaign, in principle should never occur,
- constantly collaborate with finance units so that financiers learn about the mindset of marketers and vice versa.
Marketing managers looking for optimization of measures and ways of investing in marketing activities often encounter skepticism of owners, shareholders and representatives of the financial sphere. It is justified and conditioned by historical events, in which marketing was perceived as a source of numerous and unjustified expenses that did not bring the intended results or it was impossible to indicate direct correlation between marketing investments and the market effects achieved.
In economic practice, estimating the profitability of investments in marketing activities more and more often becomes a priority, but it is also a difficult and serious challenge. In recent years, many negative stereotypes have appeared around the entire field of marketing, also regarding the inadequacy of effects in relation to the costs incurred. The issue of marketing effectiveness itself is also a very young phenomenon, but it is gaining more and more supporters.
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