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The warning signals for this problem are quite simple. Marketing expenditures have increased, yet sales are flat or even declining. The obvious ripple effects of poor investments made in marketing result in excessive spending and therefore lower profitability.

The cause of this problem will need to be very carefully diagnosed:

1. Poor planning by the marketing team or head of marketing.
2. Economic conditions are poor, making customers reluctant to spend (despite the additional marketing efforts).
3. Inaccurate or incompetent advertising, e.g. targeting the wrong customer base or communicating the wrong message(s).

The effectiveness of marketing expenditures should be measured and controlled. Trend analysis that reviews the ratios of marketing expenses/sales (or net income) over various periods of time can be very telling. These ratios need to be bench-marked against past performance, as well as industry ratios. This will allow the ability to review the periods of time that have had the highest ratios, and then the reasons for those ratios can be investigated by reviewing the activities that are driving the ratios higher.

1. Make sure to review the sales before, during, and after a marketing effort. If a particular campaign does not result in higher ratios (or sales), it needs to be deemed a failure.
2. Examine media surveys to determine whether your advertising is reaching your target audience in sufficient numbers.
3. Review the marketing dollars being spent in the organization and ensure that they are being spent in accordance with company procurement and approval policies.
4. Benchmark your rations against companies that are similar to yours.
5. Review industry/economic data to see what external forces may be affecting the effectiveness of your marketing expenditures.

Remedies:

1. Carefully analyze a particular marketing campaign, and then either improve it or eliminate it. Don’t keep doing the same thing expecting different results.
2. Review pricing. Ensure that high prices are not keeping sales sluggish. If necessary, reduce pricing in order to drive sales.

Proactive ways to prevent ineffective marketing and excessive marketing costs:

1. Undertake a careful and thorough marketing study to find the best way to market to your target audience. Don’t use trial and error. It is too costly.
2. Do a thorough cost/benefit analysis to ensure that the marketing dollars spent will result in the desired financial results. Set disciplines and ratios that govern the cost/benefit decision-making process.
3. Carefully review and critique what your competition is doing. Borrow what they do well, improve on what they don’t.

 

Dan Lucas
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