Week 5 Marketing Costs & Budgets and Contribution Margin

Study Notes

Marketing costs are calculated using the basic Total Cost equation: Total Costs = Total Fixed Costs + Total Variable Costs
Total Variable Marketing Costs are calculated using Total Revenue, not quantity in units.
Total Marketing Costs are calculated as: Total Mktg Costs = Total Fixed Mktg Costs + Total Var.Mktg Costs
Total Variable Marketing Costs are calculated as: Total Var.Mktg Costs = (Revenue $ X Variable Mktg Cost %)
Variable Marketing Costs are more likely to change with the monetary value of the units sold than the unit value of the units sold.
Examples of Fixed Mktg Costs: Sales force salaries, marketing salaries, ad development and media buys, in-store display materials
Examples of Variable Mktg Costs: Sales force commissions, off-invoice trade allowances, cost of "save xx%" promotions, cost of loyalty points programs
For a typical 1-year time period: Fixed Mktg Costs do not change with Revenue, while Variable Mktg Costs do.
Strategies with Variable Mktg Costs are considered less risky than strategies with Fixed Mktg Costs.

Fixed costs may not always be constant but "stepped" costs.
Stepped costs are fixed to a point, but beyond that point additional costs will be incurred. An example is employees' monthly cell phone airtime that is billed at a flat rate for a certain number of minutes per month and then at a per-minute rate above that.

Variable costs may not always be a constant percentage of sales.
Examples: Tiered retailer performance agreements, discounts for some customers, sales force commissions paid only on sales above quota

Marketing as a Percentage of Sales = (Mktg Spending /Revenue / Revenue /Revenue) X 100
This metric can be used to compare strategies over time, across product lines and company divisions, and to competitors.

Contribution Margin is the portion (amount) of sales revenue that is beyond (left over after) variable costs
It is the portion (amount) of sales revenue that is not taken (used up) to cover variable costs.
It is used to cover fixed costs and provide net income.
Contribution Margin per Unit and Total Contribution Margin are commonly used by managers to review revenues and expenses.

Contribution Margin Format allows marketers to focus on what they can influence on the route to profitability: revenue & variable costs.

Contribution Margin per Unit, in $ = Selling Price per unit in –Variablecostperunitin – Variable cost per unit in –Variablecostperunitin
Contribution Margin per Unit, in % = Contribution Margin per Unit in /SellingPriceperUnitin / Selling Price per Unit in /SellingPriceperUnitin X 100

Total Contribution Margin, in $ = # of Units Sold X Contribution Margin per Unit in $
Total Contribution Margin, in $ = Total Revenue – Total Variable Costs
Total Contribution Margin, in % = Total Contribution in /TotalSales / Total Sales /TotalSales X 100