January 06, 2019

Spendin' Money!!

Marketers love to spend money. And they love to optimize the money they spend, at least in theory.

However, when you look at what marketers do through the eyes of "Marketing Margin", you realize just how toxic the current marketing environment really is.

Here's the definition of Marketing Margin:



Let's think about it this way. Here's what a company did in the month of December.
  • $12,000,000 in Total Demand.
  • $2,000,000 in Returns.
  • Average December Discount Amount = 25%.
  • Company Lost $500,000 on Shipping/Handling due to Free Shipping Promotions.
  • Company Spent 20% of Total Demand on Advertising.
  • Company Spent 3% of Total Demand on Loyalty Points and Rewards.
  • Cost of Goods = $3,500,000.
Marketing Margin, according to the definition (above), is calculated as follows:
  • ($12,000,000 - $2,000,000) - $2,500,000 - $500,000 - $2,000,000 - $300,000 - $3,500,000.
  • Marketing Margin = $1,200,000.
  • Marketing Margin Percentage = $1,200,000 / $10,000,000 = 12%.
Hint - when marketing + merchandising consume 88% of every dollar sold, you have a problem.

A healthy brand possesses a very different dynamic.

  • $6,000,000 in Total Demand.
  • $1,000,000 in Returns.
  • Average December Discount Amount = 5%.
  • Company Made $200,000 on Shipping/Handling.
  • Company Spent 10% of Total Demand on Advertising.
  • Company Spent 0% of Total Demand on Loyalty Points and Rewards.
  • Cost of Goods = $1,750,000.
Marketing Margin, according to the definition (above), is calculated as follows:
  • ($6,000,000 - $1,000,000) - $250,000 + $250,000 - $500,000 - $0 - $1,750,000.
  • Marketing Margin = $2,750,000.
  • Marketing Margin Percentage = $2,750,000 / $5,000,000 = 55%.
Which business would you rather manage?

Both businesses possess a 65% gross margin / 35% cost of goods sold. Therefore, the difference in the 12% Marketing Margin vs. the 55% Marketing Margin is marketing strategy. One business must spend money ... the other business doesn't need to spend money.

Which business would you rather manage?

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