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Great Marketing Starts With Great Numbers Part II

We explored the basics of  using a break-even analysis for marketing purposes in December’s column.  This month we will explore another use of numbers as a guiding post for category management.  While the concept is basic, the percentage of businesses actually using category management as part of their monthly planning tool is very small. 

In large companies, a category of products or services may be managed by an entire staff.  All category related expenses, departments or SBUs (strategic business units) are accounted for.  In most businesses, category management is not so clear. 

Most businesses maintain records on only the sales or revenue of a particular category or department, forgetting to calculate the costs related to the selling of the product.   When this information is captured,  too many accounting programs still calculate cost-of-goods sold in three to six sub-categories, with no direct calculation against the same revenue categories. 

Many businesses correctly believe that they have all the necessary information, based on their income statement.  I find this to be true, in a large percentage of cases.  While we won’t go into the evolution of income statements here,  the point is that the structure of most accounting programs and income statements is not for marketing purposes! 

Test your financial statements. If you can’t find the gross margin of every category of products or services (expressed as a percentage) for last month’s business within two minutes, you don’t have the tools you need to market by the numbers.

Marketing numbers do not have to be from financial statements. If you find the numbers on another report, it counts!  Depending on the source,  accounting has five to seven functions.  Most businesses use only two:  financial and tax accounting.  But, management and cost accounting are also useful accounting tools. 

On behalf of my accounting friends, I should mention that the best approach available to building numbers for marketing purposes should be a part of your accounting system; this is the best way to avoid errors.  At the very least,  these marketing numbers should be cross-checked and adjusted against your financial figures. 

Now, let’s put this into perspective:  accounting for profit or loss doesn’t matter unless you sell something (except, of course, to the IRS).  If you are selling a product or service at a loss (without a specific strategy to do so), and you build a program to sell more, you will only go out of business faster.

Category management requires businesses to capture the information necessary to determine revenue and gross profit.  While this level of information gathering was difficult for some types of businesses five years ago, today’s advances in computing makes this process much easier to accomplish.

Key numbers useful in comparing categories, departments, products or services are: 

  1. Sales revenues and gross margins
  2. Direct selling or distribution costs for each category
  3. Approximate fixed expenses related to the category 

(Refer to Corner on the Market, Inland Empire Business Journal,  

 December, 1996 issue.)

  1. Break-even sales volume in both dollars and units

(Refer to Corner on the Market, Inland Empire Business Journal,  

      December, 1996 issue.)

Using this foundation, information in each category can now be “planned”--what a novel concept!  This enables crucial questions to be answered:

  • ·        Does the category represent single sales or repeating sales? 
  • ·        Is it realistic to sell  more?
  • ·        How much more? 

If the market for the category is saturated, the promotional strategy is different than if the market is growing;  a saturated market is normally crowded with competitors, while the emphases in a growing market is

rapid market development.  Armed with information about your market, 

an individual category can be “positioned.”  

David Ogilvy is one of America’s best known advertising executives.  After placing over a billion dollars in advertising, he listed thirty-two things his agency learned.  Of those thirty-two, he said that the single most important decision made has to do with positioning the product.

Category positioning is where the numbers meet the creative process.  Market positioning  is often  where small to medium sized companies fail in the marketing process.  Financial people look at the numbers as being the factors of primary importance, failing to see the impact that creative minds have upon these numbers in the area of forecasting. 

On the other hand, creative minds don’t think in a quantitative way.

As a result, since numbers are not prepared for marketers, marketers either don’t ask for this data, nor understand how to convince accountants to provide these factors.   As a result, the marketing positioning of most of these companies is faulty. 

The end result is that many marketing programs are inefficiently designed.  They produce less business than they should.  Many times, the blame is not on the advertising agency or the marketer, but lies on the doorstep of the accounting department for not providing the correct marketing numbers.

Lack of marketing information creates quotas based on last year’s numbers, plus a percentage, or equally poor goal setting.  This type of  “top down”  planning creates unrealistic sales goals; they too high to be achievable, or don’t push hard enough to capture the existing market. 

These issues are  fundamental contributing factors in the downfall of small to medium sized companies.  Without proper understanding of how the numbers affect the market, or how the market impacts financial reports,  maximum success will never be completely achieved.

 Only through an infusion of pragmatic and creative elements, (particularly, accounting and marketing processes), will businesses be able to flourish.  Marketing by numbers is more than utilizing accounting skills; it is the perfect blend of art and science: key elements in business growth and profit potential.

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