Marketing and Admin Report

Explanations of Numbers How Costs Are Allocated Suggestions and Tips

Whats important on this Help page is the information about how costs are assigned to Internet Marketing and
Wholesale Marketing expenses in each region and the allocation of administrative expenses to each region.
This Help page consists of two sections. The first deals with understanding the ins and outs of all the numbers being
reported. The second deals with suggestions and tips for using the information in making decisions on how to run the
marketing part of the companys business.
Understanding the Numbers on the Marketing and Admin Report
What is meant by the numbers in this report is pretty clear, but the accounting principles and cost factors that determine
what these costs are merit discussion and comment. Unless you understand what causes the marketing and admin
costs to be what they are, you are ill-prepared to know what actions can be taken to bring the costs down.
Internet Marketing Expenses. The marketing expenses related to Internet operations are based on the following
accounting treatments and calculation procedures:
Advertising Expenses A portion of your companys overall advertising expenses in each region is allocated to
Internet sales, since some buyers are drawn to purchase online by what they see in the companys ads. The
portion of advertising expenditures allocated to Internet sales equals the proportion of total branded pairs sold in a
region that were purchased by online buyers.
Web Site Maintenance and Support The costs of operating the companys Web site are $1.26 million annually
plus $15,000 per model offered for sale online. These costs are then in turn allocated to each region based on each
regions share of online sales. Thus if a companys total costs for operating its Web site (based on the $1.26 million
base cost plus $15,000 per model sold online) comes to $4.5 million and if 30% of total online sales occur in the
Europe-Africa region, then Europe-Africa will be allocated $1.35 million of the $4.2 million (30% of $4.5 million =
$1.35 million) in overall costs for Web site maintenance and support. The per pair expenses in each region are
equal to the total costs for Web site maintenance and support allocated to the region divided by online pairs sold in
the region.
Celebrity Endorsements The companys total costs for celebrity endorsements are, of course, simply the sum
of the annual contract costs of all the celebrities the company has signed. These costs are allocated back to each
region according to each regions percentage of total branded pairs sold during the year. The regional allocations of
celebrity endorsement costs are then allocated partly to Internet Marketing expenses and partly to Wholesale
Marketing expenses. A portion is allocated to Internet Marketing because it is reasonable to assume that some of
the companys online customers were influenced to purchase the companys footwear by whatever appeal the
celebrities have in their particular region. The portion of celebrity endorsement contract costs allocated to Internet
Marketing equals the proportion of total branded pairs sold in a region that were purchased by online buyers. Thus
if online sales at the companys Web site accounted for 8% of the total branded sales in a region, then 8% of the
companys celebrity endorsement contract costs allocated to the region are classified as Internet Marketing
expenses. Celebrity endorsement contract costs per pair in each region are simply the total celebrity endorsement
contract costs allocated to Internet Marketing divided by the number of pairs sold online in each region.
Wholesale Marketing Expenses. Heres what you need to understand about the 5 categories of wholesale marketing
expenses:
Advertising Expenses The portion of advertising expenditures allocated to wholesale sales to retailers equals
the proportion of total branded pairs sold in a region that were purchased by retailers and later merchandised to
footwear shoppers. Thus if wholesale sales to retailers accounted for 92% of the total branded sales in a region,
then 92% of the companys advertising expenditures in the region are allocated to the Wholesale Marketing
segment of branded sales (with the remainder being allocated to Internet Marketing). Advertising expenses per pair
are simply the total advertising costs allocated to Wholesale Marketing in each region divided by the number of
branded pairs shipped and sold to retailers in each region.
Redemption of Mail-in Rebates Not all of the mail-in rebates are redeemed, so the costs are always less than
the size of the rebate offered times the number of pairs sold to retailers. Studies show that 15% of consumers who
purchase the companys footwear from retailers mail in the $1 rebate coupons; 20% mail in the $2 coupon; 25%
redeem the $3 coupon; and so on up to 60% for the $10 coupon. This results in a per pair cost shown below:

Rebate
Offer

Redemption
Rate

Cost Per
Pair Sold
$1 15% $0.15
$2 20% $0.40
$3 25% $0.75
$4 30% $1.20
$5 35% $1.75
$6 40% $2.40
$7 45% $3.15
$8 50% $4.00
$9 55% $4.95
$10 60% $6.00
The total costs of the mail-in rebates in each region thus are equal to the per pair cost shown in the above table
(which matches the per pair costs shown on the report in the $/pair column) times the number of branded pairs
shipped and sold to retailers in each region in the report year.
Retailer Support Expenses The company total dollar costs for retailer support in each region are equal to the
amount spent per retailer (which you and your co-managers entered on the Wholesale Marketing decision screen in
the course of making your decisions for the report year) multiplied by the number of retailers utilized in the report
year (also a number which you and tour co-managers entered on the Wholesale Marketing decision screen). The
costs per pair sold (in the $/pair column) are equal to the total expenditures for retailer support in a region divided
by the number of branded pairs shipped and sold to retailers in the region in the report year.
On-Time Delivery Expenses Unless you have been notified otherwise by your instructor, the costs the
company incurs for on-time deliveries of footwear shipments to retailers are as follows:
o 4-week delivery costs $0.25 per pair.
o 3-week delivery costs $0.75 per pair.
o 2-week delivery costs $1.50 per pair.
o 1-week delivery costs $3.00 per pair.
These per pair costs result in total costs equal to the per pair cost multiplied by the number of pairs shipped and
sold to retailers in each region.
Celebrity Endorsements The companys total costs for celebrity endorsements are, of course, simply the sum
of the annual contract costs of all the celebrities the company has signed. These costs are allocated back to
wholesale marketing expenses in each region according to the proportion of total branded pairs sold in the region
that were accounted for by wholesale sales to retailers (versus online sales). The portion of celebrity endorsement
contract costs allocated to Internet sales equals the proportion of total branded pairs sold in a region that were
purchased by online buyers. Thus if online sales at the companys Web site accounted for 8% of the total branded
sales in a region, then 8% of the companys celebrity endorsement contract costs would be allocated to Internet
marketing. Celebrity endorsement contract costs per pair in each region are simply the total celebrity endorsement
contract costs allocated to Wholesale Marketing expenses divided by the number of pairs sold online in each
region.
Administrative Expenses. The companys administrative expenses consist of $1.8 million in general administration
expenses and category called other corporate overhead. The Other Corporate Overhead category of
administrative costs always averages $1 per pair of plant capacity (not including overtime) and will also include
Corporate Social Responsibility and Citizenship initiatives for Ethics Training / Enforcement. General administrative
expenses increase at the rate of 3% annually. Other Corporate Overhead changes by $1 per pair in the same year
as any new plant capacity comes online (new or used) and in the same year that any capacity is sold off to the
merchants of used footwear-making equipment.
Administrative expenses both the category of Executive Salaries and the Other Corporate Overhead categoryare
allocated to branded sales. For accounting purposes and for purpose of profit-loss calculations, no administrative
expenses are allocated to private-label sales. The allocations of administrative expenses back to the four geographic
regions are based on each regions percentage of total branded sales. Both categories of administrative costs per pair
in each region are calculated by dividing the total dollars of general administration costs and other corporate
overhead by the total number of branded pairs sold in the region (both online and wholesale).
Using the Information on This Report to Enhance Decision-Making
Aside from using this report to remain alert to what your companys costs are for marketing and administration, the chief
value of this reportand the associated understanding about how the cost are calculatedis to help take guide actions
to cut costs when desired. The following should prove useful in helping you to control marketing and admin costs:
Always, repeat always, check the Operating Benchmark data on page 6 of each issue of the Footwear Industry
Report to see how your company stacks up on:
1. Internet Marketing Expenses per pair (all three cost categories combined)
2. Wholesale Marketing Expenses per pair (all 5 cost categories combined)
3. Administrative Expenses per pair (both cost categories combined)
If your companys Internet Marketing Expenses per pair are out-of-line with rivals in one or more regions (as
indicated by the cost benchmarks on page 6 of the FIR), then theres reason to suspect that your companys online
marketing effort in those regions is not as efficient in generating online sales as is the effort being exerted by some
of your rivals. To rectify this cost disadvantage vis--vis rivals, you should consider:
1. Boosting marketing efforts to sell more pairs online via a lower price, offering more models, offering free
shipping, or offering pairs with a higher S/Q rating (free shipping may entail some increase in the online price
so as to cover the $10 shipping costs per pair). Selling more pairs online will help spread out the $1.26 million
fixed costs for Web site maintenance over more pairs and may help lower overall per pair Internet Marketing
expenses to the extent that the percentage gains in sales volumes outweigh any added costs associated with
boosting online sales. Bear in mind that in addition to the online price, the number of models offered, and
whether shipping and handling is free or an added charge paid by the buyer, your companys share of total
online sales in each geographic region is also a function of your companys S/Q rating, advertising, and
regional celebrity appeal indexes (and how these compare with those of rival sellers in the buyers region of the
world market).
2. Reducing the number of models offered online, which can cut expenses for Web site maintenance and support
by $15,000 per online model that is dropped. You can experiment with entering a lesser number of models and
observe how the revenue-cost-profit projections change to help decide how many models to offer for sale
online.
If your companys Wholesale Marketing Expenses per pair are out-of-line with rivals in one or more regions (as
indicated by the cost benchmarks on page 6 of the FIR), then theres reason to suspect that your companys
wholesale marketing effort in those regions is not as efficient in generating wholesale sales as is the effort being
exerted by some of your rivals. To rectify this cost disadvantage vis--vis rivals, you should consider:
1. Altering the combination of price, S/Q rating, advertising, mail-in rebates, retailer support, and delivery times to
see if you cannot find a combination of competitive marketing effort the results in higher branded sales volumes
in the region and/or lower overall marketing costs. In other words, the cost problem may stem from
overspending in some marketing areas and under-spending in othersall combinations of marketing effort are
not equally effective in winning sales and market share. What you want to try to do is get a bigger bang for
your dollars of marketing expendituresi.e., sell more pairs per dollar of marketing effort. This means curbing
some marketing efforts whose benefits in the marketplace are not worth their costs and trying to reallocate
some of those dollars to marketing efforts where the benefits in the marketplace outweigh the incremental
costs.
Often, some of best clues about what combinations of marketing variables are yielding the best/worst results in
terms of sales volume and market share comes from the Competitive Intelligence Report for the region.
Specifically look to see what the companies with high sales and market share are doing in terms of price, S/Q
rating, advertising and so onthis indicates what combinations are more effective in producing relatively high
sales volumes and market shares (but such combinations are not always more profitable, so be careful in
jumping to conclusions!). Then pick out companies in the region with low sales and market share and see what
they are doing in terms of price, S/Q rating, advertising and so on to earn what combinations of competitive
marketing effort are not working very well in terms of sales and market share (but, again, beware of concluding
that low sales and market share are necessarily associated with low profitability!). If you couple this analysis
with which companies are high performers and which are low performers, then you may well begin to see why
your companys marketing effort may not be optimal and what can be done to improve sales volume and
lower overall wholesale marketing expenses per pair sold.
2. Bidding for additional celebrities with high appeals in the region where you are trying to attack the cost
disadvantage in the 5 categories of Wholesale Marketing expenses. Having higher celebrity appeal indexes in
the high-cost region may improve the overall efficiency of your marketing effort in capturing a higher market
shareyou may be able to see if this is so from your assessment of the information in the Competitive
Intelligence Report that was recommended above).
Theres little you can do to reduce total companywide administrative expenses beyond cutting plant capacity and
reducing other corporate overhead expenses. However, you can try to keep admin costs per branded pair as low
as possible by emphasizing branded sales and achieving high branded sales volumes. The more branded pairs
that are sold in a given year, the lower admin costs per pair will be because the total dollars of admin expenses are
being spread out over more pairs. Remember, no admin costs are allocated to private-label sales.