What are marketing costs? There are a couple of blog posts, titled Are advertising and marketing expenses fixed or variable? and What is the difference between fixed and variable expenses?, which over time made me reflect on the absence on my website of a definition or concept of marketing expenses.
Meaning of marketing costs
A marketing expense is an amount of money that the company spends or invests in marketing. Marketing expenses are an important consideration for all businesses because marketing is a core business function that creates a customer for the business.
It is critical for business owners to understand the importance of marketing expenses, their accounting definition, marketing expense management, and tax treatment. Typically, some common marketing expenses include marketing salaries, market research, promotions, public relations, and advertising costs.
Accounting definition
Marketing costs are calculated into the equation to determine the business benefit. When calculating business profits, marketing expenses are subtracted from business profits.
Profit in a particular business is always a function of the number of units the business sells, multiplied by the margin earned on each unit, minus the marketing spend involved, minus direct overhead. Marketing expenses include things like advertising, promotions, and public relations efforts.
Definition
While marketing can be considered an expense under a profit and loss statement, it is an investment to support your greatest asset, your brand. Whenever possible, it’s important to measure your marketing spend against your return on investment.
Although marketing can be called an expense for accounting purposes, a profitable marketing campaign that yields a net profit should be considered a practical investment and a primary driver of immediate sales and revenue.
Marketing costs refer to all costs associated with exploring, creating, and delivering value to the target consumer. Value can be delivered in terms of goods or services. For example, if you need people to come to your grocery store, you’ll need to let them know about your existence and the products on offer. This process is known as marketing and involves several costs.
Marketing costs include expenses incurred in renaming products, inventory costs, social costs, promotion of products, and distribution of such goods. If you plan to run a successful marketing campaign, it is important that you familiarize yourself with these costs because they will guide you on how to run a successful marketing campaign.
Marketing costs can be divided into two parts. These are fixed and variable marketing costs. Fixed marketing costs are those that would not change regardless of what happens to the product or market. Such costs can be planned in advance. Variable costs change from time to time depending on market conditions.
It is challenging to predict such costs due to 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.
Marketing spend analysis
Companies should continually evaluate appropriate levels of marketing spend based on their return on investment and industry standards. Marketing expenses should be evaluated and measured through common expenses to sales ratios to determine their effectiveness.
For example, business owners can calculate ratios such as advertising to sales ratio, sales promotion to sales ratio, and sales force cost to sales ratio.
By looking closely at these ratios and variations over time and comparing them to industry benchmarks, business owners can confirm that they are not incurring too much in marketing costs.
Social cost
Social costs refer to the cost to society because a firm is producing a particular product. Such a cost is not borne by form but by its obligation to society. This cost is used in determining the social cost-benefit analysis of the impact of the business on society and does not count in the business decision-making process.
The social cost is divided into external and private costs. External costs are considered costs directly associated with the production and consumption of a given product but not paid directly by the producer.
An example of such costs is when companies located in cities cause pollution. In such a case, the costs would be the use of drainage systems and roads and the cost of the disutility that is created through pollution. The natural cost of resources can also be included among these costs because companies are not required to pay for the impacts of pollution on water bodies and air.
The concept of social costs assumes that the disutility created by firms is equal to the public and private spending they incur while protecting the public from the health hazards caused by the production process. However, such indicators do not give a real figure of the social cost, and this makes it an assumed or estimated figure.
Fiscal importance
Marketing expenses are generally tax deductible, subject to certain limitations based on IRS rules. The cost of ordinary advertising and promotional costs of your goods or services are tax deductible. This may include formal advertising expenses, as well as the cost of meals and entertainment incurred during the promotion of the business.
Some other marketing expense deductions may include business cards, yellow pages ads, and local sponsorships. Don’t forget about easily overlooked marketing expenses such as seminars, trade shows, and modest business gifts.
In most cases, business-related dining and entertainment expenses to entertain a customer, customer, or employee may be tax deductible. However, typically, the deduction is limited to 50 percent of the actual food or beverage spending incurred.
Examples of marketing costs, marketing
Examples of costs that are classified as marketing expenses are:
- Advertising
- Agency fees
- Customer surveys
- Development of advertising and other promotions
- Gifts to customers
- Online advertising
- Printed materials and exhibitors
- Social Media Monitoring and Engagement
- Sponsorships
Editions 2020-21-22-23
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