Marketing is a Luxury?


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published August 2, 2002

It is said that Marketing is a luxury, especially in B2B or Industrial Markets. When the economic outlook is poor, many firms halt marketing since they view marketing as a wasteful extravagance. Classifying marketing as a luxury poses a problem in logical consistency however: If marketing is a luxury, why do companies participate in marketing in good economic environments? Since the purpose of a business is to produce profits for the shareholders, they should never purchase luxuries regardless of the economic environment? Are the managers and CXOs that believe marketing is a luxury stating that businesses waste money when they have it? From many observances, we can conclude that there is a modicum of waste associated with plentiful budgets. However, this doesn’t prove the rational for marketing is dependent on surplus budgets. So where is the truth in the statement “Marketing is a luxury”?

Before directly addressing the question of marketing as a luxury, we should first attempt to define which portion of marketing is considered irrational expenditures.

Marketing is a body of thought that encompasses the entire strategy of the firm to produce profitable revenue. This includes demand stimulation through the sending of messages to the target market with communications. This also encompasses channel and sales strategy and tactics, pricing tactics, product management, competitive assessment, customer orientation, partnership programs, and the corporate strategy. Clearly, when business people express their distrust in marketing expenditures, they are not advocating that businesses operate without a sales engine or without knowledge of the competitive landscape. They are usually making a negative comment about demand stimulation and market communication activities such as advertising, public relations, events, buzz, and trade shows.

Market communications are often viewed as a luxury in industrial markets. There are two main reasons for this response. (1) The purpose of marketing is to increase revenue. Direct mail or advertising however rarely stimulates direct purchases in B2B or Industrial markets. In these markets, most purchases are accomplished through the concerted actions of salespeople making telephone calls, visiting prospects, and pitching proposals. (2) An auxiliary purpose of marketing is to invest in the long-term prospects of the firm. There are long time horizons before advertising or direct mail accomplishes noticeable changes in mundane variables such as awareness, customer recall, or perceived differentiation. Usually, the audience for a direct mailer or advertisement must hear the company message several times before they are prompted to take action and investigate. Many of the benefits of market communications are associated with long-term branding effects.

In light of the low response-rate and long-term investment associated with market communications, many business leaders in B2B or Industrial Markets select to defer these activities until revenue is strong. These leaders perceive the value of marketing, thus acknowledge that it isn’t a wasteful luxury, however they also require a more direct response to the use of their revenue generation dollars.

Often, decreasing marketing activity is the correct tactic to take with tight budgets and managers watching cash-flow closely. Many investments are deferred through periods of tight budgets. However, decreasing market communications can be the wrong decision in even tight budgetary times. The criteria, as in all business decision making, is in anticipating or measuring the economic efficiency and effectiveness.

When market communications are removed, the market’s requirement for these messages does not decline. Prior to prospects taking action and purchasing goods, they still need to hear the corporate message and value proposition. Decreasing market communications through the marketing department will shift the burden of communicating these messages to the sales force. While the sales force can achieve more observable action, this may be detrimental to their overall effectiveness as they have to spend more time nurturing clients through the buying process.

For instance, consider the difficulty of achieving awareness within a target market. Awareness can be achieved through a number of routes, but let’s simply consider the trade-offs between direct mail and cold calling using standard industry numbers. Mailing 2000 individuals, achieving a 0.5% to 5.0% response rate, each letter costing between $1 and $3 to send, yields a cost in the range of $20 to $600 per response, with a total budget ranging from $2000 to $6000. Contacting the same group using the direct sales force on the telephone, averaging 400 telephone calls per week with a 2% to 15% response rate, with a total annual compensation ranging between $60K and $150K, yields a cost in the range of $19 to $361. The key variables in this calculation are the effectiveness of the medium, the expected compensation of the sales force, and the cost per letter. I suggest business leaders use their own numbers to evaluate the cost effectiveness of their possible mediums.

Notice that direct mail isn’t always cheaper than the telephone, nor is the telephone always cheaper than direct mail. If a B2B company has a telesales department with low compensation, then placing the burden of achieving awareness and initial investigation on the sales department may be more efficient than direct mail. Likewise, if the direct sales force is 10 times more effective with cold calls than the marketing department with direct mail in gathering prospects, then again, the economic efficiency argument favors a light marketing communications budget. Yet, many businesses do not meet these criteria and direct mail can be done very inexpensively.

(Note: If you don’t know who to mail, then you probably don’t know who to call. Both activities are likely to be a waste of time and money.)

Determining whether to forgo marketing expenditures in tight budgetary times isn’t simply a gut reaction, rather it is an economic decision that managers and CXOs should make based upon efficiency arguments. At times, this long-term investment should be deferred. In other situations, doing so increases the cost structure and reduces the overall efficiency of the firm as powerful salespeople conduct low-value add work.

The May Report, TECH BUSINESS BRIEFS, Aug 2, 2002

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.