Finance and budgeting.docx

Class 1 Why is finance so important for marketers? Finance is a fundamental tool that helps marketers to make informed decisions, maximise ROI and contribute to the overall success of the business. (Resource allocation, ROI measurement, Cost control, Strategic decision-making) The marketing planning...

Class 1 Why is finance so important for marketers? Finance is a fundamental tool that helps marketers to make informed decisions, maximise ROI and contribute to the overall success of the business. (Resource allocation, ROI measurement, Cost control, Strategic decision-making) The marketing planning process; Contents of marketing plan: Executive summary Current marketing situation SWOT analysis Segmentation, targeting and positioning Objectives/issues Marketing strategy and programs Financial plans and budgets Metrics and implementation controls What is it: Structured process Coordinates marketing decisions/actions Covers a specific period for a specific organization Based on: Analysis of the internal and external situation Marketing direction, objectives, strategies and programs Customer service and internal marketing support Management - through implementation, evaluation and control What are the benefits: Examination of opportunities and threats Framework for evaluating possibilities and priorities Focus on customers in the context of competition/environment Allocating resources to achieve goals Specific and flexible guide for the future !Steps: Analyse the current external and internal situation: Assessing both external and internal factors that can impact the marketing efforts. External factors: market trends, competition, economic conditions etc. Internal factors: company’s strengths, weaknesses, resources and capabilities Research and Analysis of the market/customers: gather data on customer preferences, behaviours, demographics and psychographics (surveys, focus groups and data analytics) Determining the segmentation, targeting and positioning Set marketing plan objectives and direction: clear measurable marketing objectives (SMART) Plan marketing strategies, programmes and support: devising detailed marketing strategies and tactics (marketing mix) Keywords; product and branding, price, channels and logistics, marketing communications and influence, customer service and internal marketing Plan to measure progress and performance: KPIs that reflect the objective, regularly review and make informed decisions and adjustments Keywords: progression and performance tracking, metrics, budget, forecast and schedules Implement, control and evaluate the plan: execution as per the established timeline and budget. Analyzing results and Implementation of tracking and controlling mechanisms Tools for evaluating the implementations: KPIs Key to effective performance Relate to strategic goals Relate to marketing plan objectives Important to management and also to the customer !Metrics: Tool Description Helps to understand Metrics Numerical standard - measuring performance-related outcomes in a set interval What happens as a result of the marketing and can compare outcomes Forecast Forward-looking estimate - expressed in unit or monetary terms Projects estimated level of sales and cost Budget time-defined, allocations of financial resources for specific programmes, activities and products Schedule Target dates for tasks Starting and ending dates Responsibilities Performance perspectives Forward-looking metrics Backwards-looking metrics Internal company metrics Company metrics applied during operating periods eg: Product defects Late deliveries Late payments Inventory turnover Company metrics applied at the end of an operating period eg: Sales revenues Percentage of gross profit Net profit before tax Return on Assets External marketing metrics Marketing metrics applied during an operating period eg: Customer awareness Customer satisfaction Perceived performance Intent to purchase Marketing metrics reported at the end of an operating period eg: Relative market share Market share Customer retention Revenue per customer Objectives Metric to measure progress To increase sales (financial) - can be skipped if the company is a market leader Measure: sales by product, company, location, channel and segment To build a customer base (marketing) Measure: number/percentage of new customers acquired To improve public image (societal) Measure: change in attitudes towards the company Metrics: Collect pre-implementation measures and benchmark metrics Check metrics periodically to notice trends Analyse metrics in a competitive context Compare previous results with current ones Change metrics if/when necessary Base your decision on more than just metrics Metrics in summary: Match metrics to program and marketing plan objectives Measure activities/outcomes that show progress Measure the non-financial and financial outcomes to matters to customers Use it to reinforce ongoing priorities Forecasting: Estimation of future demand, sales and costs Challenges: Dynamic environment Unpredictable competition Changeable demand Types of forecasts: Company and product sales forecast: develop a sales forecast at the company and product level Uses: Market forecasts Segment forecasts Market analysis Customer analysis Knowledge of the current situation Costs of sales forecasts: forecasts the total costs and possible occurrence of these costs Channel forecasts: a forecast for each channel, includes the cost of logistics After completion of sales and cost forecasts, we can develop an overall marketing budget. (within estimated spending for specific programs and activities in line with your marketing plan objectives) !Type of budgeting: Top-down budgeting Affordability method: senior managers set the amount of the marketing budget based on how much the company can afford. Simple but no connection to the market conditions, opportunities, potential profits or any other factors. (put in money, the company can afford) Percentage method: The marketing budget is based on a percentage of the previous year’s annual turnover, next year’s expected turnover, the product’s price or and average industry percentage without regard for market conditions. (most common) Competitive parity method: managers set a marketing budget at least equal to the competitors. (estimation at the best, least common) Floor-up budgeting: Objective and task method: common in large organizations. Allocates marketing funding according to the cost of tasks to be accomplished in order to achieve marketing plan objectives. Great accountability, high budget Econometric modelling method: calculating budget using sophisticated formulas which take into account anticipated customer response, product profitability, competitive spending, economic factors and any other relevant variable Exercise 1 - Forecasting FMCG (Ice TEA) Determine Distribution channels for every market e.g: Austria Merkur 130 POS Spar 1620 POS Penny 300 POS ADEG 400 POS DM 388 POS Bi pa 600 POS Determine the number of Points of Sales (POS) in total: approx. 4 500 Assuming there is space for an avg. 3-5 bottles per POS Assuming the sell-in price for 1 bottle of iced tea (500ml) is 0,75 cents. Sold in supermarket so assuming 2 shipments/week Monthly forecast: Sell-in x Total POS x Shipment/week x Weeks x Spaces for bottles = monthly forecast 0,75 x 4 500 x 2 x 4 x 5 = 135 000 EUR Class 3 Marketing planning: It's best to create a plan that delivers what you need based on your company's situation. Outline the scope of your marketing plan: to start, outline the time period that your marketing plan will cover (year, quarter, month) Company Introduction Products/services Markets served Plan Overview Determine your marketing plan objectives: Include a brief description of your company, the markets you serve, the product/services you sell, a high-level description of the content you plan to include in your marketing plan along with your strategic goals and high-level numeric goals. Strategic goals Increase market share Overtake competitor Better represent a value proposition Build brand awareness Add distribution channels Improve selling process Create strategic partnerships Increase publicity Enhance online selling ability Numeric goals Gross (total) revenue Revenue from new customers Revenue from existing customers Number of new customers Number of total customers Goals by distribution channel Goals by customer/client type Goals by product/service line Describe your positioning in the marketplace: Competitive positioning Define market size Typical company/customer profile in the market Market characteristics and trends Determine the market lifecycle stage Select positioning approach Market segmentation Target buyers in a particular segment Outline the strategy for your brand: Describe and optimize your product and pricing: Match Pricing Strategy to Value Proposition Reflect the value you provide versus that of your competitors Reflect on what the market will truly pay for your offering Enable you to reach your revenue and market share goals Maximize your profits Outline your distribution, sales, and retention plan The sales and customer retention section of your marketing plan outlines the distribution channels you use to access your market, along with any new channels you wish to pursue to expand your distribution. It also outlines your channel management plan, and your direct sales plan, and lists any new partnerships you plan to pursue. Finally, it addresses your plan for managing and retaining your customers, including your customer service strategy and plans for upselling and cross-selling customers. Define the detailed goals of your plan Outline your marketing campaigns to run Create your marketing plan budget Determine how often to update your marketing plan Matrix for marketing budget: Marketing plans annual goals Goals by source Sales quotas Data entry for marketing plan budget Marketing budget summary Revenue projection by lead/media source Campaign calendar Content calendar Marketing campaign budget & ROI analyzation Marketing plan update calendar Sales: Sales volume is the number of units sold within a reporting period. Within a business, sales volume may be monitored at the level of the product, product line, customer, subsidiary, or sales region. Sales volume = quantities sold: the number of units sold within a reporting period. Sales value = amount in currency Gross profit margin: a profitability ratio that measures how much of every Euro of revenues is left over after paying the cost of goods sold (COGS). Market share: is the proportion of total sales a company claims to have in a particular market over a specified period, i.e. the size of a business relative to the size of the industry. By volume Unit market share= (Number of units sold by company ÷ Number of units sold in the whole market)* 100  By value of sales Revenue market share= (Value of company′s total sale ÷ value of total market)* 100  Relative market share: is a marketing metric used to compare the company’s market share to the largest competitor in the market. Largest competitor = benchmark Relative market share= (Company′s market share ÷ largest competitor′s market share)  When NOT to increase market share: The company is close to its production capacity Profits may fall due to spending more on promotions and or slashing prices Competitors may start a price war If your company dominate the market, may result in antitrust Customer retention rate: the percentage of customers you keep relative to the number you had at the start of your period. Customer retention rate (E − N)  ÷ S) * 100  E - number of customers at the end of a period N - number of new customers acquired during that period S - number of customers at the start of the period Average revenue per user: is used by businesses to measure the factors that are contributing to the organization’s overall revenue. ARPU helps companies analyze their growth patterns and compare their success to competitors. Average revenue per user (ARPU)= (Total revenue ÷ Total number of users)  Customer lifetime value (CLTV): is a measure of what the value is, on average of a customer that signs up. Average purchase value (in a time period)= (Total revenue  ÷ Total number of purchase made)  Average purchase frequency(in a time period)= (Total number of purchase made ÷ Number of unique customers who made a purchase)  Customer value= (Average purchase value * Average purchase frequency) Average customer lifespan= Average of the number of years a customer continues purchasing from the company Performance measures Marketing performance measures Class 4 Marketing financial analysis: To understand and value a company you have to look at its financial position Financial situation analysis The statement of profit to loss = income statement Sales and cost analysis Break-even analysis Profit contribution, cash flow analysis, profit projections Return on investment Return on capital employed Sustainable growth rates Marketing managers use: they utilize the pro forma invoice statement Revenue analysis Cost analysis Cash-flow analysis Return on investment analysis Profit and loss statement or Income statement: The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods (COGS) to find gross profit From there, the gross profit is affected by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business. Shows the revenues and expenses of a business Expressed over a period of time Used to assess profitability Balance sheet: It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time Assets = Liabilities + Shareholders’ equity Shows the financial position of a business Expressed as a financial picture of the company at a specified point in time Cash flow statement: The cash flow statement displays the change in cash per period, as well as the beginning balance and ending balance of cash. Shows the increases and decreases in cash - pure cash movement Expressed over a period of time Shows the net change in the cash balance from the start to the end of the period 3 sections: Cash from operations Cash used in investing Cash from financing Net income does not equal cash flow. Net income contains non-cash items. Non-cash items are income and expenses not realized in cash form. (depreciation) Cash flow represents all income realized in cash form. Adjusting net income for non-cash items yields: Operating cash flow Investment cash flow includes: any purchases or sales of fixed assets/investments. Financing cash flow includes funds raised by issuing securities and expended by repurchasing outstanding securities. Pro forma income statement: requires a forecast of both expected revenues and operating expenses (low -pessimistic, medium - most likely, high - optimistic Then you can calculate the Expected value of sales revenue (EVSR). Estimating Judgment estimates: based on an analysis of your offering vs competitive offerings. Acceptance rate: is the proportion of the segment that will buy your product or use your service. Customer survey: a survey of potential consumers (iffy) Break-even analysis: Number of units or Revenue = Variable cost + Fixed costs Fixed costs: Depreciation Plan equipment Fixed utilities Office expense Insurance Rentals Debt interest Salaries Variable costs: Factory labour Material costs Commissions Freight in and out Variable factory expense Utilities Cost of goods sold Sales expense Profitability analysis Sustainable growth rate: is the rate of growth that a company can expect to see in the long term. It is also an indicator of what stage a company is in, in its life cycle. Retention rate = how much profit the company retains (Net income - dividends)/ Net income Return on equity = how much return investors have realized relative to the profit the company has generated. Net Income / Total Shareholder’s Equity Class 5 ROMI - return on marketing investment: is defined as the revenue or the margin generated by a marketing program divided by the cost of that program at a given risk level. You would rather have higher revenue to achieve higher profit. ROMI hurdle rate: is defined as the minimum acceptable, expected return of the marketing program at a given level of risk. ROMI=(Sales Growth - Marketing Cost) / Marketing Cost ROMI helps to: Conceptualize Plan and budget Communicate Prioritise Gain approval Execute and manage Monitor and measure Must consider: Expenditure/investment Returns Risks Hurdle rates: defined as the minimum acceptable, expected return of a marketing program at a given level of risk. Brand recognition and brand awareness (Brand equity) CANNOT be measured with the ROMI. Monitoring campaign: Time: How much time did it take to create the marketing materials? Production costs: Track the total cost of supplies, services, and software needed to create the campaign. Promotional costs Page analytics: use a tracking URL to determine if your content is driving traffic to your product's landing page. Non-financial returns: did you gain any social media engagement, unexpected traffic boosts, or other bonuses from your campaign? Marketing funnel: is a visualization for understanding the process of turning leads into customers. Funnel velocity: this can help to outline several different processes in terms of revenue. (revenue, internal movement of the company) B2C vs B2B funnel B2C consumers navigate the funnel alone or with a small group. B2B consumers have a larger, cross-departmental buying group. B2C consumers may never directly interact with a company representative. B2B consumers typically interact with a sales representative at the lower end of the tunnel. McKinsey’s consumer decision journey Customer Acquisition Cost (CAC): refers to the resources that a business must allocate in order to acquire an additional customer. Successful model = LTV > CAC (3:1) Cost per lead (CPL) Touch cost Conversion rates CAC CAC = (CPL + Touch cost) * Conversion rate CAC = Total Sales & Marketing expenses / # of New Customers Cost examples: Ad spend Employee salaries Creative costs Technical costs Publishing costs Management time Production Inventory upkeep How to reduce CAC? Optimize your funnel: understand and quantify each step Optimize your pricing strategy Strengthen the effectiveness of sales and marketing spend Quickly engage new customers and prospects Inbound Marketing CPA, CPM & CPC CPA - cost per acquisition/cost per action (Total cost of a campaign ÷ Number of conversions) CPM - cost per 1000 impressions (1000 * Cost ÷ Impression) Cost = (CPM * Impression ÷ 1000) Impression = (1000 * Cost ÷ CPM) CPC - cost per click: golden rule! - 5:1 ratio Target CPC=(Revenue generated per sale * Website conversion rate) * 20%)