In this video, Steve Robinson explores the impact of marketing expenditure on revenue and discusses whether marketing should be considered a fixed or variable cost. He uses hypothetical numbers and scenarios to compare the outcomes of the two cost models and their impact on revenue over a four-year period.
- There are two different models of marketing costs: a fixed cost model and a variable cost model. In the fixed cost model, the company invests the same amount of money in marketing every year, regardless of changes in market forces. In the variable cost model, the marketing expenditure varies depending on the company’s revenue.
- Using a hypothetical scenario, Steve examines how both models impact market share and revenue over a four-year period. While the variable cost model may seem like the logical choice when the market shrinks, the fixed cost model is actually more effective in the long run.
- With the fixed cost model, the company maintains a consistent market share, even during market downturns. This consistency ensures that when the market bounces back, the company is well-positioned to capture more revenue. In contrast, the variable cost model results in inconsistent market share, which leads to lower overall revenue.
- The fixed cost model is less risky than the variable cost model. While the variable cost model may result in lower expenditure in some scenarios, it also comes with higher risk, which may not be ideal for all companies.
In 1000 simulations of this market model, the fixed cost model was found to be the more effective and less risky option for companies looking to maximize revenue through marketing. Be sure to consider your own business needs and market conditions before deciding on a cost model for marketing expenditure.
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