Marketing investments are made based on various considerations. Long-term considerations are as important as those of short-term ones. Managers should not rely solely on financial calculations because it would direct them to neglecting long term values created from certain marketing investment. There are various concepts which guide managers in choosing marketing campaigns that will provide them with the largest value. Nevertheless, financial consideration still poses as the most influential factor affecting marketing decision. Marketing campaigns which resulted in the highest return is generally chosen as corporate marketing programs.
Within this paper, we will discuss a marketing case, which described the issue of choosing between marketing alternatives. We pose as a marketing employee in a nation-wide company selling coffee beans, ground coffee and coffee making equipment. Several concepts about marketing campaigns will be presented to both explain and justify the assessments we make on each of the alternatives. In the final chapter, the financial calculations will be presented along with the final suggestion of which marketing campaign we should promote to the marketing manager.
II. Marketing and Profitability Concepts
II.1 Marketing ROI
One of the most popular marketing campaign evaluations is the marketing ROI concept. The basics of the Marketing ROI concept can be easily understood. In this era of competition, we can only spend money on something that provides us with a higher return. Only crazies will spend money on something which has a negative return. The marketing ROI concept helps manager to assess the rate of return of every marketing investment alternative (Lee, 2003).
According to Jim Novo (2006), the common definition of ROI involves looking at the cost of marketing campaign relative to the profit generated. The approach actually originated from ROI concept according to finance people rather than marketing people. For instance, the ROI marketing concept is very much similar to the measurement of our business portfolio and its profitability. It is an effort of creating some sense of value retrieved from marketing expenses and furthermore, to create some kind of a yardstick to compare marketing program to another.
According to Kevin Lee (2004), the Marketing ROI is performed to predict the expected return from a particular price, position, advertisement and creative idea or a combination of those strategies. The concept helps managers to search the full potential of marketing campaigns. Generally, Kevin Lee described several activities that might help managers to maximize the value of their marketing campaigns, they are: analyzing our business objectives, segmenting our businesses based on customer value, set up clusters with their own optimal ROI goals, run a broad marketing campaigns (which may require constant manual attention), and using all of the available data to run an optimal and profit-maximizing marketing campaign.
II.2 Marginal Analysis
Today, the marginal analysis is used in numerous fields of business. It is familiar to hear that NBA club manager is performing a marginal analysis to assess the value of its basketball players. Nevertheless, it is still an economic tool that reliably guides managers. It tool most of the guesswork out of decision making. The term ‘marginal revenue’ and ‘marginal cost’ is familiar in the ears of economists. Generally, there are two main utilities of the marginal analysis. First, it is performed to assess how much value is resulted from one unit of investment within a certain marketing analysis. Second it, is utilized to assess the maximal profit possible from a single investment (Freeman, 2002).
By definition, marginal cost is the increase of total product sold from one unit increase in the quantity of cost incurred. This marketing tool is usually described using the marginal product curve which display the rate of profitability resulted from the marginal cost. Generally, optimum profit is achieved when the marginal revenue equals to the marginal cost.
III. Case Background
According to the elaboration of case, the store would have a little over $40,000 in monthly revenue with 50% gross margin without any marketing campaign. That is equal to a $20,000 of profit monthly, a $480,000 of annual revenue and a $240,000 of annual profit. However, it is mentioned that the manager of the coffee shop is obligated to choose between these choices:
1. Performing advertisement campaign every three months
2. Giving away 20% sales discount every six months
IV. Financial Calculation
Below I will display the financial consequences of choosing each of the alternatives mentioned above:
1. To perform an advertising campaign every three months
The campaign cost $5,000 each, which means it would add up to $20,000 by the end of the year. However, sales will be enhanced by 20% for the first month and 10% for the second and the third month. With the assumption that the manager has agreed to perform the advertising campaign once ever three months, by the end of the year, the following will be the outcome:
§ Annual sales will be $544,000 instead of $480,000 (different by $ 64,000)
§ Annual profit will be $252,000 instead of $240,000 (different by $ 12,000)
The calculation is as follows:
Annual sales (1) = $ 40,000 x 12
= $ 480,000
Annual sales (2) = [($ 40,000 x 120%) x 4] + [($40,000 x 110%) x 8]
= ($ 48,000 x 4) + ($ 44,000 x 8)
= $ 192,000 + $ 352,000
= $ 544,000
Differences of sales = $ 544,000 – $ 480,000
= $ 64,000
Annual profit (1) = ($40,000 x 50%) x 12
= $ 240,000
Annual Profit (2) = [$ 50% x ($ 192,000 + $ 352,000)] – $20,000
Differences of gross profit = $252,000 – $240,000
MPP calculation = sales increase / cost (profit decrease)
= $64,000 / $12,000
(Which means that every dollar of profit sacrificed for the marketing investment resulted 5.33 dollar of product sale)
2. To give away a 20% discount sales every 6 months
This campaign will increase the gross profit margin to 53.13% and it will also reduce sales number by 20% once every six months. However, it will increase sales by 50% once every six month and the other 4 out of six month will experience a sales increase of 10%. Assuming that the discount will be performed once in every six months the results of this campaign are as following:
§ Annual sales will be $512,000 instead of $ 480,000 (different by $560,000)
§ Annual profit will be $272,000 instead of $ 240,000 (different by -$300,000)
Calculation is as follows:
Gross margin (1) = profit / revenue
= $240,000 / $480,000
= 50 %
Gross margin (3) = profit / revenue
= [($40,000 x 80% price x 150% of increase sales x 2 month) + (($40,000 x 110% x 8 month) + ($40,000 x 80% sales drop x 2 month) – $240,000] / ($40,000 x 80% price x 150% of increase sales x 2 month) + (($40,000 x 110% x 8 month) + ($40,000 x 80% sales drop x 2 month)
= $272,000 / $ 248,000
Annual Sales (1) = $480,000
Annual Sales (3) = [($40,000 x 80% price x 150% of increase sales x 2 month) + (($40,000 x 110% x 8 month) + ($40,000 x 80% sales drop x 2 month) – $240,000]
Differences of sales = $512,000 – $480,000
Annual profit (1) = $ 240,000
Annual profit (3) = $512,000 x 53.13%
= $ 272,000
Differences of Gross Profit = $ 272,000 – $ 240,000
MPP calculation = Sales increase / cost (profit decrease)
= $32,000 / $32,000
(Which means that every dollar of profit sacrificed resulted in 1 dollar of product sale)
According to these calculations, it is obvious that the best alternative for profitability is not to perform any marketing campaign at all. However, if the alternative is not acceptable that the best choice afterwards is to give away 20% sales discount every six months. Despite the fact that the advertising campaign alternative provides a more significant sales increase compare to performing the advertising campaign, it also resulted a significant loss of profit compare to the discount campaign. There is another schemes to boosts sales; they include cash rebate, annual additional discount etc.
The discount campaign provides a better return for the company in both the short and long term. Therefore, choosing the discount campaign is more in line with the Marketing ROI concept. Furthermore, the sales discount alternative is also the significantly more profitable investment according to the MPP calculation. Using the MPP calculation, we can asses the amount of money resulted from a single corporate activity. This is coherent with the view of marginal analysis mentioned previously.
Freeman, L Neal. 2002. ‘Maximize profitability by assessing marginal revenue and costs’. Opthalmology Times. Rterieved May 6, 2006 from http://www.ophthalmologytimes.com/ophthalmologytimes/article/articleDetail.jsp?id=31565
Lee, Kevin. 2004. ‘Portfolio PPC Campaign Management, Part 2’. LLC. Retrieved May 6, 2006 from http://www.clickz.com/experts/search/strat/article.php/search
Lee, Kevin. 2003. ‘Beyond ROI, Pursuing Profit’. LLC. Retrieved May 6, 2006 from http://www.clickz.com/experts/search/strat/article.php/search
Novo, Jim. 2006. ‘Calculating ROI’. Retrieved May 6, 2006 from http://www.jimnovo.com/ROI.htm
(1)Without any marketing campaign
(2)After performing the advertising campaign
 The $ 2,000,000 is the cost of advertising campaign which should be deducted from the profit. This deduction does not exist in the second alternative because the second alternative (the discount campaign) does not present additional cost other than the margin cut.
(3)After giving away 20% price discount
 The sales discount cuts sales revenue by 20% but cost of sales ($ 2,400,000) remain constant, which resulted gross margin to be reduced.
 Because there is a change of gross profit margin, the profit of this alternative should be calculated based on the new margin (37.5%).