Existing businesses will unquestionably find the need to create or update their marketing plan periodically. Your business’ marketing planning should include the following steps:
- Define a target market.
- Discover what products customers in your target market want to buy.
- Set a price for these products.
- Advertise your product to your customers.
- Make your product available to your customers.
Javier Marin, a consultant with the Florida SBDC at University of South Florida says that pricing is the most important item on this list. In fact, he believes that pricing is the most important activity for any business, only second to actually selling the product or service.
Marin’s expertise is in finance, and even though he claims to have little marketing expertise, he maintains that pricing and selling is where marketing and finance activities intersect in all companies. “Your pricing should reflect careful financial analysis, and your financial projections should reflect the activities listed on your sales tactics” he said.
Marin added that, more often than not, businesses would normally price their product or service based on their costs and projections. Even worse, in some cases they do it solely based on the competition’s pricing schedule. However, Marin contends that all businesses, whether new or existing, need to start product pricing by reviewing their financial statements to determine whether the current pricing structure is still profitable. All managers need to understand the concepts of variable and fixed costs, as well as the concept of “break-even.”
Contribution Margin, Degree of Operating Leverage and Margin of Safety are three concepts that all business owners and their sales managers should understand. Marin says that contribution margin refers to the amount of money that the company sales revenue contributes towards fixed costs and profit (Contribution Margin = Sales-Variable Cost).
Furthermore, the degree of operating leverage is a ratio that gives a business owner a reading on how volatile the company’s operating income is in relation to its sales. Will an increase in sales increase or decrease my income?
This ratio can be measured by the following formula:
Degree of Operating Leverage = % change in operating income / % change in sales.
Lastly, the margin of safety can help a business owner identify the risk of loss associated with a reduction in sales, meaning that as your sales reduction gets close to the break-even point, you are at risk of loss.
The formula is:
Margin of Safety = (Sales- Breakeven)/ Sales.
Marin repeatedly asks his clients to make efforts to understand the junction where marketing and finance cross. “A business marketing strategy will have a direct effect on the sales, and understanding the company finances will help managers plan solid marketing strategies,” he claims.
He added that business owners and managers need to get more savvy about understanding managerial accounting in order to keep a pulse on the company’s health, and how effective these tools are in anticipating risk and losses, increasing sales, and successfully running a company.
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