Marketing costs definition: Meaning, Social cost, Menu cost, Stockout, Relevant, Product, Star-up; Marketing spend analysis; Fixed or variable; Examples.
Are you thinking of starting a business and do not know all the costs involved? Well, you have come to the right place. The determining factor of a successful business is marketing. It is through such marketing that you will increase your customer base. Marketing might seem like an easy task, but it requires more resources than most people.
Therefore, before you develop a marketing strategy for your business, it is important to understand all the involved costs. Such would make it easy for you to plan your finances and facilitate the success of your business. In this article, we will outline some of the marketing costs you need to familiarize yourself with and their relevance.
Marketing costs refer to all the costs associated with exploration, creation, and delivery of value to the target consumer. The value can be delivered in terms of goods or services. For instance, if you need people to come to your grocery store, you will have to inform them about its existence and the products being offered. Such a process is referred to as marketing, and it involves various costs.
Marketing costs include the expenses incurred in changing the title of products, inventory costs, social costs, promotion of products, and the distribution of such goods. If you plan on running a successful marketing campaign, it is important to familiarize yourself with these costs because they will guide you on how to carry out a successful marketing campaign.
Marketing costs can be divided into two parts. These are fixed and variable marketing costs. The fixed marketing costs are those that would not change regardless of what happens to the product or market. Such costs can be planned for in advance. Variable costs change from time to time depending on market conditions.
It is challenging to predict such costs because of their dynamic nature, and therefore, marketers rarely plan for such costs in advance. The main benefit of marketing costs is that they are used to determine the risk involved in the budget.
Social costs refer to the cost to society because a firm is producing a particular product. Such a cost is not borne by the form but by its obligation to society. This cost is used in the determination of the social cost-benefit analysis of the business’s impact on society and does not count in the business’s decision-making process.
The social cost is divided into external and private costs. The external costs are considered the costs directly associated with the production and consumption of a particular product but are not paid by the producer directly. An example of such costs is when the firms located in the cities cause pollution.
In such a case, the costs would be the usage of drainage systems and roadways and the cost of disutility which is created through the pollution. The natural cost of resources can also be included among these costs because the firms are not required to pay for the pollution impacts on the water bodies and air.
The concept of social costs assumes that the disutility created by the firms is equal to the public and private expenditure they incur while protecting the public from the health hazards caused by the production process. However, such indicators do not give an actual figure of the social cost, and this makes it an assumed or estimated figure.
A menu is commonly used in restaurants as a list of the foods being sold as well as their prices. In economics, this term has been borrowed to mean the expense incurred by firms whenever they change the prices of their items.
A lot of businesses do not prefer to change their prices whenever there is a change in supply and demand because such a change would result in menu costs. It is the aim of every business to maximize profits, and this cannot be achieved if the business keeps on creating new costs.
Companies can only change the prices of their products in a situation whereby the overall menu costs are lower than the additional revenue from the changes. The hardest part is determining the menu costs because most of them are unpredictable. For instance, if the prices of a commodity change, the company might experience reduced sales because consumers are unwilling to buy the goods at the increased prices.
Predicting the number of consumers that are not likely to purchase a product due to price changes is a challenging task. Therefore, most companies choose not to change their prices to avoid additional expenses from the menu costs.
Stockout costs refer to the expenses or loss of income associated with the shortage of stock. If a firm is no longer producing fewer products than it used to produce to meet the existing market demand, it will incur a loss. There are many reasons that could result in such a scenario.
For instance, a high rate of employee turnover would make it challenging for the firm to carry out production as it used to. In such a case, the firm would have to produce less depending on what the available manpower is capable of doing. When such happens, the form will have a shortage of inventory and will, therefore, not make the projected sales or profits.
One of the most challenging things about stockout costs is that they are challenging to determine. These costs are not recorded in the income statement and therefore, making it challenging for the business to determine them. The costs associated with any rush purchase are buried in the section of the cost of goods sold.
An example of a stockout cost is when a customer intends to purchase a particular item, but the item is not available. In such a case, the firm will lose the gross margin associated with the particular sale.
Another risk is that the firm might lose the customer permanently. This means that the firm will also incur the loss associated with the gross margin of future sales. The best way to prevent a firm from suffering stockout costs is by ensuring that it has enough stock all the time.
A relevant cost, also known as differential or avoidable cost, is the cost incurred when a business is making specific decisions. The reason it is called avoidable cost is that it can be avoided by considering alternatives during the decision-making process. If such alternatives are considered, the firm will make the decision that does not incur its most expense.
The relevant cost is common in situations where firms make rushed decisions without time to consider the alternatives. Relevant costs play an important role in firms because they help eliminate the unnecessary data that could complicate the decision-making process. If such information is eliminated, the management team would not have to focus on information that might have a negative impact on the decision-making process.
Relevant costs play an important role in determining whether an individual should sell or keep their business. If the decision would incur expenses, then it should not be carried out. If the decision is bound to make profits for the business, the responsible parties should implement it. A relevant cost is associated with specific decisions, and therefore, the cost can only change in the future if the decision is altered again.
Product cost refers to all the costs associated with the production process. Such costs ensure that a product is manufactured or produced and reaches the end-user. The product costs include manufacturing overhead, direct labor, and direct material. If you plan on running a business, it is important to understand this cost since it is one of the most important costs in production. If the cost is not managed well, it can easily result in a business’s failure.
The direct material costs are the costs involved in acquiring raw materials. These costs could involve buying and transportation of the raw materials. An example of such a cost is the case of a paper manufacturing company. The cost of acquiring wood is what could be termed as direct material costs.
Direct labor costs are the expenses made by the employees during the production process. These expenses include bonuses, salaries, and insurance. These costs play an important role in determining whether the manufacturing process would be a success or not. If employees are not fairly compensated for their work, they could resign, thus negatively affecting the manufacturing process. The employees can also riot or boycott working.
The manufacturing overhead costs refer to the cost incurred in producing a particular product. Among such costs are the cost of purchasing g machinery or the cost of running such machinery. They could also include indirect costs such as indirect labor and indirect materials.
Indirect material costs are the expenses incurred in the manufacturing process but cannot be directly linked with the finished product. Indirect labor costs are the expenses incurred by individuals who are not directly involved in the manufacturing process. An example of such costs would be the wages for supervisors, security guards, and quality assurance personnel.
Star-up: Marketing costs definition
Start-up costs are considered the expenses incurred before launching a business and the expenses incurred after launching the business. The only start-up cost incurred after launching a business is all the money spent before the business could make enough cash flow to cater for expenses. Once the business has started to cater for its expenses using cash flow, a start-up cost is no longer involved in the business.
A simple explanation for a start-up cost is the money that you will need to keep your business running. This cost varies from one business to another and the market conditions. For instance, a start-up in the hotel industry might not be a huge cost because the hotel has ready customers to facilitate cash flow in the short run.
On the other hand, a start-up in the automobile industry might incur huge costs because the company might take long before establishing a market base that would facilitate cash flow. Therefore, as you plan to start a new business, you need to ensure that you have enough finances to cater for the expenses before your business starts having a cash flow.
The best way to determine start-up costs is by creating a reliable business plan. The business plan would outline all the costs required to keep the business running. It would also outline the projected expenses and income to help determine how long an individual would finance a business before it starts generating a cash flow.
If you do not invest in a good business plan, your business might not progress due to the absence of start-up money. In most cases, the start-up cost is catered for using personal savings and external funding such as investors or loans. Therefore, before you start a business, it is important to know how you will cater to the start-up costs.
Marketing spend analysis
Marketing spend analysis involves the collection, classification, and analysis of spend data with the aim of decreasing the business’s procurement costs. It is also done to improve efficiency and monitor compliance within the organization.
Marketing spend analysis enhances accountability and transparency in the firm, thus increasing its chances of success. When firms use real-time data with different analytics, they get an opportunity to gain efficiency and save money. This is a good strategy for a business seeking to prosper in the future.
If marketing spend analysis is not carried out, the firm would not identify the areas where costs need to be reduced. If such details are skipped, the firm risks failure in the future. Marketing spend analysis enables firms to reduce unwanted costs to maximize profits. Profit maximization is a key factor in ensuring the success of any business. Marketing spend analysis is made to ensure that a business chooses the right suppliers sources and makes the right decisions.
The best part about marketing spend analysis is that it is easy to carry out because it uses data that has already been collected throughout the running of the business. Throughout the lifetime of a business, they will conduct various marketing spend analysis. Therefore, regardless of whether it is your first spend analysis or your tenth, you need to ensure that it is a success. This process plays an important role in facilitating the success of a business, and therefore, it has to be executed with a lot of seriousness. It is one of the business processes that should not have errors. For instance, if an error is made, it will prevent the management from getting the real picture of the business. In turn, they will make the wrong decisions which could cost them more.
Fixed or variable
A cost is any expense incurred by a firm in the course of its operations. These costs can be fixed or variable. Before you start a business, you need to understand these costs to ensure you plan your finances well.
Variable costs refer to the expenses that can change depending on different conditions. Such means that an increase in production would increase the variable costs. In most cases, these costs are unpredictable and, therefore, cannot be planned for in advance. Some of these costs include labor, commissions, utility expenses, and raw materials.
These costs are bound to change from time to time, and therefore, a business should be prepared to cater to them regardless of how much they are. If the firm does not have enough funds to cater to the variable costs, it is likely to make losses due to the reduction in the number of sales.
Fixed costs refer to those costs that remain the same over the years regardless of the number of goods that the company produces. These costs depend on a company’s specific activities. Among them are rent, insurance, depreciation, and property taxes. Given that these costs do not change, the firm can budget for them in advance. If a company produces or doesn’t produce goods, the fixed costs would not change.
The examples of marketing costs are endless. These marketing costs can be fixed or variable. It is important to differentiate the two to ensure that you are making the right choice. As mentioned above, all the marketing costs that change whenever there is a variation in production are variable costs. All the costs that do not change regardless of changes in manufacturing are fixed costs.
Have you been thinking of starting a business? If so, you need to understand all the costs involved in running such a business. Such knowledge will prevent you from making decisions that could potentially harm your business.
Once you have understood all the costs associated with marketing and running a business, you will stand a higher chance of running a successful business. It is also advisable to have an expert determine these costs on your behalf because they have enough knowledge and experience in facilitating business success.
Read Also: how to calculate the various marketing costs. This information will provide you with an insight on how to determine such costs without necessarily hiring an expert to do it for you.
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