How to Calculate Marketing Margins

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Marketing represents the ways a company communicates with its potential customer base and is a cost that must be considered in a company’s budgeting efforts. A marketing margin is an essential piece of the puzzle that companies should analyze.

What Is a Marketing Margin?

The marketing margin refers to the difference between the price at which a good is purchased from another company and the price at which it is sold to the consumer. The term "marketing margin" is used for this because it’s often the job of a distributor or other third party to do marketing and advertising for the product even if it is not the actual producer of the product.

The term can be applied to any industry where goods are sold wholesale to distributors who then sell them to individual places of sale, who then sell them to customers. It’s a measure of how much each interim party will make from each good.

It can also be viewed as the cost of marketing the good to the end consumer and can help to strategically set advertising and marketing budgets for products if used properly. It’s important to remember that the marketing margin is the difference between the cost to the business and the cost to the customer. While profit margin is a similar term — and in many industries, the terms overlap somewhat — profit is the portion of the final sale price that ends up as direct income to the company. Sometimes, the marketing margin is meant to capture the portion of the profit that goes toward the marketing budget.

Foundations of Calculating the Marketing Margin

In order to calculate the marketing margin for a certain good or service, it’s important to understand some fundamentals about costing, pricing and expenses.

  • Fixed or overhead expenses are things the business will pay for no matter the level of production or sales: rent or mortgage, utilities, internet and phone, building upkeep and so on. These costs don’t change significantly from month to month, making them easy for which to budget. These costs will need to be allocated to products no matter what. The sum of all of these overhead costs is called the total fixed expense amount.

  • Variable costs are those that change with different levels of production: raw materials, hourly wages or overtime, supplies and so on. These will obviously change as production increases or decreases. These costs will be allocated to the product in proportion to how they were used.

  • Capital expenses are investments in the facility, equipment or grounds, which are expected to produce additional profit in the future once implemented. These costs often come from existing profits rather than being allocated to the product cost.

Marketing Margin Cost Calculation

In order to start looking at margins, sum up both fixed and variable expenses for a certain time period to get total expenses. Then, divide by the number of units produced in that time period to obtain the cost per unit. With the cost per unit value, you can consider different price points for the unit. The difference between the selling price and the cost per unit is the margin, or profit made by selling that unit.

Keep in mind that goods going through multiple points can have multiple margins that are measured. For example: Company A sells a good to Distributor B for $5, and the cost per unit is $3. This means Company A has a $2 margin per unit. Distributor B then sells the good to the consumer for $6, so Distributor B’s margin is thus $1 per unit.

Depending on the industry, these margins can have different names or terms, but the concept remains the same: The margin is the portion of money left over after adjusting for the cost of the unit. For the marketing margin, it is the money left over for the company that acts as the point-of-sale to consumers, as it was their job in the supply chain to market the product.

Some businesses consider marketing a fixed cost and include some semblance of it in overhead, allocated by product as necessary. Other businesses will calculate the margin and then determine what portion of that margin will be reinvested into future business via marketing or capital expansion and what portion of it will end up in the owner’s pocket.

Setting a Marketing Budget

The term "marketing" encompasses all of the ways a business works to get information about its products to potential consumers in the hopes of attracting a sale. Depending on the industry, the size of the business and the type of goods and services offered, marketing can include:

  • The use of targeted distribution channels — distributors act as an intermediate, allowing the company to focus on production while the distributor can focus on markets and potential customers

  • Advertisements of all sorts on all forms of media

  • Public relations between the company’s representatives and various public agencies and individuals as well as the general local public

  • Participation in trade shows, conferences or other industry events

  • The use of existing real estate, both physical and online, to develop the company’s brand image

Budgeting and Marketing Efficiency

None of these happen for free, and in order to cover the expenses and stick to the margins as set within your budget, marketing needs to be a very real part of any business’s budget. Most businesses in the United States spend between 5% and 10% of their revenue on marketing, although numbers can vary widely based on the industry. For example, companies providing customer services can often spend over 20% of their revenue on marketing, while manufacturing companies often spend 2% to 5%. In more competitive areas, more of the revenue gets reinvested into marketing to help individual companies stand out.

For a new business starting out, it’s recommended that 12% to 20% of the gross revenue be reinvested into marketing to help establish a customer base and potential markets. Once a business is established, it’s likely to invest around 5% of revenue into marketing with a bump every few years for brand renewal (revamped website, etc.). A good marketing strategy will also include content marketing — bringing in potential customers by offering content relating their interests to the goods and services offered by a company.

For example, a flower shop may run a blog containing content on gardening to attract online consumers who are interested in gardens and then link to products they offer for sale in the hope of attracting a customer. With online commerce growing at substantial rates, many businesses are adding content marketing to their portfolio as a way to distinguish themselves from competitors. There are additional costs for this that should be included in the marketing budget.

The Benefits of Marketing

Marketing is intended to grow and sustain a business. Regardless of marketing margins, the benefits of a good marketing strategy can be seen in three key places within the business in a number of different ways:

  • Increased sales: The core competency of marketing is increasing the sales of a company’s goods and services. Marketing should increase the pool of potential consumers as well as improve the number of consumers who decide to make a purchase. It can also increase the number of consumers who decide to make a repeat purchase or decide to purchase other items from the company. The goal is to increase sales but also to sustain those increases over time, making return customers increasingly valuable.

  • Brand recognition: Good marketing will increase the number of people who have meaningful, positive knowledge about the business’s brand image. The more a brand is well known, the more likely it is to be recognized and purchased by consumers or recommended by customers. The key is to accompany the brand recognition with a positive message about the key advantages of the product and to be sure to differentiate the brand from its competition.

  • Customer relations: Marketing is more than advertising. Engaging with customers in positive ways helps build the company’s reputation and establishes trust with potential consumers. Showing that a company truly understands the needs of its target market and will work to meet those needs will improve customer service and public relations for that business.

Marks of a Good Marketing Strategy

A good marketing strategy also has the advantage of providing useful data to the company regarding who is actually buying its goods and services and which marketing campaigns are the most and least successful.

This critical information can then be reinvested into the next marketing cycle to help focus the strategy and continue to grow sales. If certain types of advertising work better than others, the marketing plan can be realigned to target the areas with the most promise.

How to Measure Marketing Benefits

It’s important to develop good metrics that will tell the story of the company’s marketing campaigns and how successful they may be beyond just the marketing margins themselves. To do so, it’s important to understand the goals of each marketing strategy so that results can be judged against predictions.

If a marketing campaign is focused on a discrete event — a trade show, a flea market or a craft show — then it can be relatively easy to get a quantitative capture of marketing benefits, which can allow a business to compare types of events. For example, taking the total cost of the event attendance and dividing by the number of sales made will give a measure of cost per sale, allowing the company to judge whether money has been well spent.

For marketing campaigns looking at longer stretches of time, it can be difficult to narrow down which piece of the overall campaign is responsible for each sale, which can make metrics seem misleading. However, looking at an ongoing cost per lead or cost per opportunity can also help provide a metric to watch over time. For example, measure the cost of the marketing team and strategy for three months and then divide it by the number of leads converted into customers by that team during that time. Tracking this number can help determine whether marketing efforts are efficient, effective and focused.

Conversion Rates as Metrics

Conversion rate is often used as a metric and part of the marketing margin. This involves measuring the number of people who actually convert an interest into a purchase. For a physical store, this might be the percentage of people who enter the store and buy something rather than those who leave without a purchase.

For an online store, this is usually represented by the percentage of people who viewed a portion of the website and then made a purchase as compared to those who left without purchasing. While conversion rate won’t tell a business which pieces of its marketing strategy are responsible for that purchase, it remains a good measure of the overall success of a company’s marketing.

Another way to measure marketing effectiveness is by understanding and evaluating the company’s brand image and brand awareness. This is a value that isn’t tracked in dollars; instead, it’s tracked through consumer and market polls, which reveal how customers actually view the business, its brand, what it stands for and the quality of its goods and services. Since brand image is the best way to differentiate a business from its competitors, it’s important to track brand awareness even if it doesn’t directly relate to the bottom line.