Marketers Prefer Contribution

A couple of years ago teaching introductory marketing I told my students they must have calculations in the final exam. They listened and gave me numbers. My students, who mostly aim for investment banking, thought finance had the “best” numbers and so used these. They gave a marvellous numbers, e.g. EBITDA and NOPAT. These are important financial metrics but they aren’t “better” than marketing metrics. Indeed many of their complicated calculations were wrong for the choice being made in the exam.

The metric to use depends upon the decision. For instance imagine a product launch, head office rent will be the same regardless of whether you launch. Rent is fixed, irrelevant to the decision. If a cost is irrelevant the advice is simple, ignore it. For most marketing decisions what matters is contribution, revenue less variable costs. “Contribution represents the proportion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.” (Farris, Bendle, Pfeifer and Reibstein 2010).

Note contribution is revenue less only variable costs. Fixed costs don’t change with the decision and what doesn’t change doesn’t matter. In the long run a CEO can change nearly all costs but if you are a mid-level marketer taking medium term decisions many fixed costs aren’t under your influence. They don’t change whatever you choose.

Contribution doesn’t require complex cost allocations and so is easily explained but this isn’t just about simplification. Imagine a campaign with positive contribution but negative profit because of allocated fixed costs. Positive contribution shows the proposed campaign makes money but using a profit yardstick means abandoning it because of a paper loss generated by wrongly considering costs you’ll pay either way.

In marketing it is usually contribution that matters (e.g. for product launches, advertising campaigns, social media strategies). More complex metrics aren’t better. Adding irrelevant items to a calculation at best confuses people, at worst leads to bad decisions. (Most) marketers prefer contribution.

Read: Paul Farris, Neil Bendle, Phil Pfeifer and David Reibstein, Marketing Metrics: The Definitive Guide to Measuring Marketing Performance, Pearson Prentice Hall, 2010

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