It's up to the marketing staff to maximize a firm's total revenue net of selling costs, and this often calls for statistical as well as sales know-how, for many factors must be equated and others, such as fixed and variable costs, juggled to produce the most advantageous net possible. Outlined here is a framework within which to view marketing situations and some strategies to help keep the percentages in your favor.
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References
1.
VerdoornP. J., “Marketing from the Producer's Point of View,”The Journal of Marketing, Volume XX, 3, January, 1956, pp. 221–235.
2.
AldersonWroe, Marketing Behavior and Executive Action (Homewood, Illinois: Richard D. Irwin, Inc., 1957), particularly Chapter IV.
3.
FreyAlbert W., How Many Dollars for Advertising (New York: The Ronald Press Company, 1955), particularly Chapter 4.
4.
OxenfeldtAlfred R., “The Formulation of a Market Strategy” in KelleyEugene J.LazerWilliam, Managerial Marketing: Perspectives and Viewpoints (Homewood, Illinois: Richard D. Irwin, Inc., 1958), pp. 264–272.
5.
PhelpsD. M., Sales Management (Homewood, Illinois: Richard D. Irwin, Inc., 1953) Also HowardJohn A., Marketing Management: Analysis and Decision (Homewood, Illinois: Richard D. Irwin, Inc., 1957), particularly Chapters I and II.
6.
Total relationships are used throughout this paper rather than average relationships, because dealing with totals eliminates the danger of becoming engrossed with increasing profit per unit at the expense of total profits, and also because total relationships are one step closer to the underlying sales and production input data and to the concept of marginal increments than are average relationships. Selling costs are taken to include the costs associated with such activities as advertising, personal selling, physical distribution and services. While variables such as product design and quality level are considered to be marketing variables in this paper, changes in such variables are treated as defining a new product with new revenue and cost functions. The costs associated with such changes would not be substracted from total revenue in getting the total-revenue-net-of-selling-costs curve but rather would be handled on the production side through a shift in the total-production-cost curve.
7.
Examples of the latter are goals to (1) maintain—or increase to some stated level— the firm's share of the market, (2) avoid inciting aggressive action from competitors, (3) keep financial control of the firm in the hands of the present ownership, (4) secure some stated rate of sales increase, (5) achieve some particular industrial and/or social power position for the firm's management, (6) maintain some minimum level of employment, (7) continue the firm's position of a leader in new product development or in product quality, or (8) carry out some stated social welfare goal.
8.
The predicted outcome of any plan has a degree of uncertainty, but for some plans the degree of uncertainty is greater than for others; thus, the weighing of alternative plans has to include some element of discounting for uncertainty.
9.
The range of commitments affecting marketing activities is quite large, e.g., (1) inventories may be excessive or short; (2) certain facilities and equipment may be owned, while others may be under long term leases which may include some penalty clause if the agreement is cancelled; (3) critical positions are already staffed and lines of authority and responsibility are established; (4) production licensing agreements may be in existence; and (5) channel agencies may claim certain territorial rights and may hold commitments from the firm involving some degree of specific marketing support.
10.
A price reduction has a cost equal to the amount of the price reduction times the number of units that could have been sold at the higher price and a return equal to the increased number of units sold times the new price. A price increase has a cost equal to the reduction in units sold times the old price and a return equal to the amount of the price increase times the quantity sold at the new price level. If in the case of a price reduction, the firm must absorb losses on dealer inventories, or if in either case there are costs of changing price lists and catalogues or other costs associated with the price change, such costs would have to be allocated over time and charged against the expected return from the proposed price change.
11.
The equal-cost lines are straight lines since dollars spent on advertising are a perfect substitute for dollars spent on personal selling as far as total expenditures are concerned—i.e., there is a constant dollar cost rate of substitution between advertising and personal selling. Changes in prices of inputs related to the quantity used could be accounted for through departing from straight equal-cost lines or through inserting several sets of straight equal-cost lines with different slopes and relating the equal-sales contours to the set of equal-cost lines appropriate to the quantity of inputs involved.
12.
The equal-sales contours are illustrated as curved in a convex fashion toward the origin because advertising and personal selling are infrequently perfect substitutes for each other in their ability to create sales. For example, as marginal effort is transferred from advertising to personal selling, the marginal performance of the effort in advertising increases while that of personal selling decreases. Thus, if the total sales effectiveness is to be retained—i.e., if the firm is to stay on the same equal-sales contour—it will take larger and larger chunks of personal selling effort to balance reductions in advertising.
13.
The result here is a function of both the situation and the variable(s) being considered—e.g., in certain situations advertising may have a range in which increasing returns occur.
14.
Owing to the many variables having some effect on total revenue net of selling costs, it is difficult to generalize about just how the total-revenue-net-of-selling-costs curves would appear relative to each other. One would expect, however, to find that the highest segments at the low output levels were associated with relatively high prices while the highest segments at the high output levels were associated with relatively low prices.
15.
Here, as throughout this discussion, it is assumed that at least one alternative yielding positive profits exists for the firm.
16.
The marketing staff may, however, decide that it must expend its' full budget—even though this means using an inefficient marketing program—in order to protect its long-run interest. For example, an excessive advertising budget may be fully expended simply because failure to do so may have an adverse impact on future requests for funds for advertising.
17.
An alternative formulation would be to view the marketing staff as, in effect, the grand strategists of the firm operating within firm-imposed restrictions determined by top management. In such a perspective, the production staff would be required to submit the production cost data to the marketing staff. The marketing staff would then proceed to move directly to the maximum long-run profit strategy consistent with the outside-and firm-imposed restrictions. Here the marketing staff could somewhat restrict the range of output over which it did extensive evaluations of marketing alternatives. It could also by-pass the marginal revenue net of selling costs concept, and move directly to dealing with marginal contribution net of all cost for the controlled marketing factors.
