Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Implementing and
Controlling Marketing
Plans: Evolution and
Revolution
Text © The McGraw−Hill
Companies, 2002568 Chapter 19
Let’s reconsider Exhibit 19-5 from this perspective. It shows that the company’s
spending on sales compensation and sales expenses varies by salesperson and mar-
ket area. By breaking out and comparing the costs of different sales reps, the
marketing manager has a much better idea of what it is costing to implement the
strategy in each sales area. In this example, it’s clear that the sales reps in sales areas
D and especially E are not only falling short in sales, but also that their costs are
high relative to other reps who are getting more results. The table shows that the
difference isn’t due to annual compensation; that’s lower. Rather, these reps have
expenses that are two or three times the average. The smaller number of total cus-
tomers in these sales areas (Exhibit 19-4) might explain the lower levels of sales,
but it probably doesn’t explain the higher expenses. Perhaps the customers are more
spread out and require more travel to reach. Here again, the cost analysis doesn’t
explain whythe results are as they are—but it does direct the manager’s attention
to a specific area that needs improvement. A more detailed breakdown of costs may
help pinpoint the specific cause.Because marketing costs have a purpose, it usually makes sense to allocate costs
to specific market segments, or customers, or to specific products. In some situations,
companies allocate costs directly to the various geographical market segments they
serve. This may let managers directly analyze the profitability of the firm’s target
markets. In other cases, companies allocate costs to specific customers or specific
products and then add these costs for market segments depending on how much of
which products each customer buys.So far we’ve discussed general principles. But allocating costs is tricky. Some costs
are likely to be fixed for the near future, regardless of what decision is made. And
some costs are likely to be commonto several products or customers, making allo-
cation difficult.
Two basic approaches to handling this allocating problem are possible—the full-
cost approach and the contribution-margin approach.In the full-cost approach,all costs are allocated to products, customers, or
other categories. Even fixed costs and common costs are allocated in some way.
Because all costs are allocated, we can subtract costs from sales and find the prof-
itability of various customers, products, and so on. This isof interest to some
managers.
The full-cost approach requires that difficult-to-allocate costs be split on some
basis. Here the managers assume that the work done for those costs is equally ben-
eficial to customers, to products, or to whatever group they are allocated. Sometimes
this allocation is done mechanically. But often logic can support the allocation—
if we accept the idea that marketing costs are incurred for a purpose. For example,
advertising costs not directly related to specific customers or products might be allo-
cated to allcustomers based on their purchases—on the theory that advertising
helps bring in the sales. We’ll go into more detail on allocating costs in the next
chapter.When we use the contribution-margin approach,all costs are not allocated in all
situations. Why?
When we compare various alternatives, it may be more meaningful to consider
only the costs directly related to specific alternatives. Variable costs are relevant
here.
The contribution-margin approach focuses attention on variable costs rather than
on total costs. Total costs may include some fixed costs that do not change in the
short run and can safely be ignored or some common costs that are more difficult
to allocate.^11Allocate costs to
specific customers
and products
Should all costs
be allocated?
Full-cost approach—
everything costs
something
Contribution-margin—
ignores some costs to
get results