How can you use activity-based costing to improve your marketing and advertising decisions?

1 What is activity-based costing?

Activity-based costing is a way of allocating overhead costs to products or services based on the activities they require. For example, instead of spreading the cost of a marketing department evenly across all products, ABC would assign the cost of each marketing activity (such as email, social media, or web design) to the products that use them. This way, you can see the true cost and profitability of each product or service.

2 Why use activity-based costing for marketing and advertising?

Marketing and advertising are often considered as fixed costs that are not directly related to the production of goods or services. However, this approach can lead to inaccurate and misleading cost information. For instance, you might be spending more on marketing and advertising than you are earning from some products or segments. Or you might be underinvesting in some high-potential channels or campaigns. By using ABC, you can track the costs and benefits of each marketing and advertising activity and make more informed decisions.

3 How to implement activity-based costing for marketing and advertising?

Implementing ABC for marketing and advertising involves a few basic steps, such as identifying the activities that consume resources and generate revenue, such as creating content or running ads. You must also assign costs to each activity based on the resources they use, like staff salaries or platform fees. Additionally, identify the cost drivers that determine how much of each activity is performed for each product or service, such as the number of impressions or clicks. Furthermore, calculate the cost per unit of each cost driver, such as the cost per impression or click. Lastly, allocate the costs of each activity to each product or service based on the cost drivers, like the cost of email marketing for product A being the cost per email multiplied by the number of emails sent to product A's customers.

4 How to use activity-based costing for marketing and advertising analysis?

Once you have allocated the costs of each marketing and advertising activity to each product or service, you can use ABC for various types of analysis. For instance, you can compare the profitability of different products or services based on their revenues and costs, including marketing and advertising costs. Additionally, you can evaluate the return on investment (ROI) of different marketing and advertising channels, segments, or campaigns based on their revenues and costs. Moreover, ABC can help you identify the most and least efficient marketing and advertising activities based on their cost per unit of output or outcome. Finally, it can help you optimize your marketing and advertising mix based on the performance and potential of each activity.

5 How to use activity-based costing for marketing and advertising planning?

ABC can also help you plan your future marketing and advertising strategies and budgets. To do this, you can set realistic and achievable goals for each activity based on their historical and projected costs and revenues. You can then allocate resources to the most profitable and promising products or services, channels, segments, or campaigns. Experimenting with different scenarios and assumptions allows you to test the impact of different decisions on your costs and revenues. Finally, you should monitor and adjust your activities based on the actual results and feedback.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?