Efficiency and cost investigations

One phase of market research that is often completely neglected is the execution of specialized efficiency and cost investigations. Even in cases where the need for such studies may be recognized their value is often greatly underemphasized. These investigations are concerned primarily with the analysis and evaluation of particular marketing methods and with the application to those methods of the searching technique of scientific inquiry.

Efficiency and cost investigations range from such a topic as: A General Time Study of Salesmen's Operations, to What Constitutes a Profitable Wholesale Order, or An Investigation of Colour in a Direct Mail Advertising Campaign. Unfortunately, this type of particularized inquiry is seldom performed, because the broader and more general surveys which precede a change in general marketing policy, or the surveys which determine the basic facts for a new marketing campaign, all too frequently occupy the whole time and energy of the market research department.

Importance of efficiency investigations

Unquestionably, one of the most important tasks of marketing management is the effective control and reduction of marketing costs. High costs are due just as often to wasteful routine methods as to vaguely defined campaign objectives, "hunch" planning, and illogical general marketing policies. Careful analysis will point out the needless operations, lost motions, and other forms of waste. Research will indicate the methods that will lower the cost of specific marketing programs.

Since the variety of problems that may arise is so great, it is not possible to present any detailed statement of what to do or how to do it. About all that can be accomplished in this discussion is to point out what the technique of scientific inquiry involves in general and to indicate some of the more important marketing topics that call for detailed study. Consequently, the purpose of this page is to suggest possibilities rather than to present guaranteed working formulas. The point of view is that of discovering and preventing marketing wastes at their source, rather than that of salvaging or utilizing waste which has already occurred.

Applying waste-prevention plans to routine marketing methods cannot be described truthfully as one of the most interesting of management's many problems. "Plugging the leaks" lacks the thrill of competition, and the enthusiasm that results from discovering how to make more sales. But making sales may mean little, so far as profits are concerned, if the resulting gains are dissipated by careless and wasteful methods.

The scientific technique of inquiry

The scientific approach to the study of the effectiveness and cost of a particular marketing method involves analysis, classification, synthesis or combining and building up, and measurement. For example, take one particular problem such as might be indicated by the question: What is the task of personal salesmanship in this particular business enterprise? Certainly, the investigation of this question must start with an analysis of the unit operations now being performed by the salesmen in the field.

This analysis almost immediately intertwines with classification, because important unit operations must be separated from unimportant operations. Furthermore, analysis and classification must go beyond what is now being done, to list and classify operations that should be performed, but that, for some reason, are not being performed. In the same way, close analyses must be made of the operations now being performed, to eliminate the nonessentials. Then, before synthesis can be used to build up essential standards the time and effort devoted to various unit operations must be measured.

Standards may then be built up but further measurement is immediately necessary to discover the one best way to execute the individual unit operations. Even after suggested standards have been established, measurement must still be applied to determine the accuracy of the standards and to judge the effectiveness of the medium adopted.

Standards of work

The aim and purpose of research into matters of efficiency and cost is to establish standard methods of work. Since a standard represents the best method of performing a certain operation under existing conditions, it implies effectiveness and economy. Standards, or goals of achievement, should take into account both theory and practice. They should be built up on the basis of analysis, classification and measurement. In the field of manufacturing, the principal devices for measuring operations are time studies and motion studies.

Although these two types of tools cannot be used in the same manner to measure unit marketing operations, yet they can and should be used to some extent. Due allowance must be made for the fact that the standards established for marketing methods cannot be so rigid as standards for manufacturing operations. More leeway must be provided for variation. Nevertheless, marketing standards must be stable enough to make constant revision unnecessary.

The necessity for system

When standards have been perfected by the scientific methods of analysis, classification, measurement and synthesis or building up, the next task is to provide a systematic procedure of work.

Details of routine should be laid down in standard-practice instructions. These instructions are merely written statements of the way in which jobs are done. They should include outlines which indicate where the particular job begins, where it leaves off, and how it ties in with related tasks. They should cover comprehensively the main steps of the operation, even though they may not be able to set up in minute detail just how each step is to be performed or to suggest exact sequences.

Moreover, they should indicate schedules in the sense of providing desirable but flexible time limits. Finally, system necessitates some provision for work-progress observations and reports. These reports will not be needed in all cases, of course, and just where they are essential can be determined only through a study of the particular circumstances involved. Nevertheless, periodic work-progress measurements give the true picture of what is going on and are frequently essential to the control of a particular marketing method. Moreover, they show up the need for any change in established standards.

Qualitative factors are important

The steps that are necessary in efficiency and cost investigations have been stated very generally. The importance of any one or of any group will vary widely over a number of specialized investigations. For example, some investigations, at least, will deal necessarily in the main with qualitative factors which cannot be measured accurately. In such cases, observation, analysis, and classification will be the important steps.

Sources of special problems

The next question of importance deals with the type of problem or subject-matter for these specialized investigations. The number of such problems is legion, but where shall they be sought out? Most of the problems that lend themselves to specialized efficiency and cost investigations grow out of the methods used by the manufacturer in marketing his product line to his immediate market, and his relationship to the problems faced by his middleman distributors in handing the goods on to his ultimate market. For example, if a manufacturer is selling directly to wholesalers or jobbers his important problems of cost are concerned with:

• The sales-making methods of his field sales force
• His trade advertising methods
• His consumer advertising methods
• His missionary or service methods of assisting the wholesaler to market his line
• His missionary or service methods of helping the retailer

Of the above, the third factor alone is exclusively an ultimate-market factor. Moreover, if the manufacturer is not engaged in marketing a branded product, this factor may not be present at all. Likewise, in the same situation, the fifth factor, assisting the retailer, may also be completely absent.

How the field salesman spends his time

In connection with the work of the field sales force, a number of special problems present themselves. First, there is the question of the way in which the salesman spends his time in the field. A careful survey of this problem in an attempt to analyse just what must be done and how much time each unit operation should take will be of considerable value. Economical and effective standards may be set up and supervising systems may be suggested which will cut down materially the existing wastes or costs. Any detailed study of this factor of the salesman's time is likely to reveal astonishing conditions. One such investigation made by the Lowe Brothers Company dis. closed that in the case of a single salesman:

• His cost per call was $18.70
• He called upon one agent once who bought not $1 worth of merchandise from the company during the entire year
• A town in which no sales were made had been visited seven times at an expense of $131
• One account was called on 52 times at a selling expense greatly in excess of the proceeds made on the account
• One agency was called on once, the sales from which amounted to $18.20 and the cost of the call amounted to $18.70
• Another agency buying $1,850 worth of merchandise was called on once
• Another customer buying $208 was not called on at all.

In a general time study of selling the Dennison Manufacturing Company discovered that their salesmen were distributing their time as follows: 40 per cent to travelling, 20 per cent to waiting, 25 per cent to clerical and miscellaneous duties, and only 15 per cent to sales conversation in the actual presence of prospects or. customers. Travelling methods and methods of making- out sales reports and records were immediately analysed.

New methods and new time standards were established which provided for an increase in the actual selling time to 30 per cent of the total working time. It is only through such studies that economical and effective standards for the number of salesman's calls per day, the number of sales in relation to the number of calls, the frequency of calls upon the better accounts, the frequency of calls upon the poorer accounts, and other factors, can be determined at all scientifically.

Salesmen's compensation

When studies have indicated the details that should constitute the salesman's task the methods of compensating sales efforts may also be reviewed. The effectiveness of any bonus, credit-point, or efficiency rating plan that may be employed should be investigated. Standards established for sales efforts as distinguished from non-selling field duties should be analysed from the standpoint of the compensation actually earned by individual salesmen. In general, where the salesman is expected to perform many different activities, some methods of rewarding his accomplishments other than a mere commission on sales or a flat salary are necessary.

Rating indices such as the following can be employed to measure results : Number of calls made, number of large profit sales, number of new accounts opened during definite periods, number of average profit sales, total volume of sales, annual increase in sales volume, number of letters of complaint received from the salesman's territory. After a thorough study of the problem, a compensation plan may be evolved which meets directly the needs of the salesmen and of the house.

Salesmen's expense accounts

In a similar way, the salesmen's expense accounts may be studied. Present practices should be analysed and classified in the light of the practices of other companies. Whether or not the expense accounts are padded, whether or not expenses allowed really cover the activities required and provide the salesmen with an adequate net compensation are important questions. In fact, a periodic survey of this problem is practically imperative to prevent waste due to unnecessary expenditures and dissatisfaction among the salesmen because of too restrictive a policy.

Miscellaneous problems of field sales.—While these particular problems are among the most important subjects that pertain to the work of the field sales force and that need special efficiency and cost investigations, they by no means exhaust the whole list of personal sales topics. Questions of recruiting, selecting, training, stimulating and controlling salesmen may also be broken down into specific problems for scientific inquiry. Consider, for example, the matter of recruiting.

A study of the records of salesmen in relation to the sources from which the salesmen were obtained may be very enlightening and serve to establish standard sources which can be used effectively and economically in making additions to the field sales personnel. One such study made by a large grocery wholesaler resulted in a policy of recruiting wholesale salesmen from behind the retail grocery counter rather than from men of wholesale selling experience either in the grocery or in other lines.

Problems of advertising to the trade

Special surveys may be also useful in establishing standards by means of which the effectiveness of trade advertising can be measured. The amount spent for trade-paper advertising, the total circulation of the magazines used, the number of impressions run of each advertisement, the circulation of each publication used multiplied by the number of times the advertisement appears in it, the cost per inquiry received, cost per, sale or per new customer and other factors may be combined and examined in various ways to establish a standard method of measuring advertising efficiency.

Again, a study may be made of the methods in use for setting up the appropriation for trade advertising in an attempt to eliminate purely rule-of-thumb decisions. The method of dividing up the appropriation for trade advertising may be investigated to establish standard ratios of expenditures to be made for direct mail advertising as compared to advertising in trade magazines. The aim of these special surveys should be to discover the best method of accomplishing the particular task.

The investigations should not be confined merely to a recording of the results of a present method. It is fundamental, of course, to find out just what method is being used to set up and apportion the appropriation for trade advertising.

But the more important purpose of a special study is to establish the best method or technique that can be used in carrying out a particular marketing operation effectively and economically.

Allocating advertising costs

The same general problems present themselves for study in connection with advertising to the ultimate market. Both in the case of advertising to the immediate market and to the ultimate market, these problems are important entirely aside from the question of whether the particular seller prepares and places his own advertising or uses an advertising agency.

If the seller does not use an agency many additional matters must be surveyed in the search for efficient methods. For instance, the whole question of charging advertising expense to the several items in a "family" or line of products may need investigation. Or a particular phase of this problem such as the distribution of advertising overhead to the several items in the product line may require study.

The amount of overhead advertising costs may be assigned to each product on some time basis or ratio. Obviously, a given product that, in actual advertising outlay for space in periodicals, for car cards, or for dealer helps, may involve a relatively high total expense, may require comparatively little time for the preparation of copy and layout and for general supervision.

Conversely, another product may incur a comparatively low expense for space, but consume a large amount of advertising department work. Standard methods of measuring this time factor should be established.

Miscellaneous advertising problems

In addition to these problems of advertising appropriations, charges to individual products, and the like, the seller who prepares and places his own advertising can carry on many additional investigations of particular tasks that have to do with copy, layout, illustrations, colour, typography, the selection of mediums, and duplication of circulation. There is little excuse for any failure to keep the research department busy.

Between the more elaborate surveys of products, markets, and competition, these special problems should be made the subjects of efficiency and cost investigations. If, for any reason, the research department cannot devote a great deal of time to this latter type of inquiry, it should compile, classify and present to the advertising personnel all the available individual studies on these subjects that have been made by other research departments, and by colleges and universities, advertising agencies and trade association bureaus.

Journals featuring research in experimental and applied psychology should be carefully scanned for the reports of these special investigations. Every bit of data that has to do with advertising techniques should be put into reference form for the consultation and use of the advertising department.

Profitable and unprofitable orders

When we turn to the manufacturer's immediate market as distinguished from his marketing technique of reaching that market, one very important subject for efficiency and cost study becomes apparent. Whether the manufacturer sells direct to wholesalers, or direct to retailers, or both, the problem arises of determining what constitutes a profitable order. It must not be assumed that small orders are not profitable.

Nor must the marketing management subscribe too quickly to the doctrine that while many accounts do not pay their way nothing should be done about it because "great oaks from little acorns grow." Certainly it will pay to find out what constitutes a profitable order, and which of the smaller accounts will be likely to remain unprofitable because they possess very little potentialities of growth. The "acorns" must be picked over.

What one manufacturer's study revealed

One such detailed study on the part of a manufacturer revealed the fact that the direct sales expense per dollar of sales to customers buying under $5,000 worth of merchandise annually was $0.3561 as compared with a direct sales expense per dollar of sales of $0.0312 to customers buying over $5,000 worth of merchandise annually.

An extension of the same analysis of the large-customer and small-customer groups showed an operating profit of $0.0993 per dollar of sales in the case of the large customers and an operating loss of $0.2361 per dollar of sales in the case of the small customers. Fortunately for this company, $775,000 worth of sales were made to the large-customer group and only $25,000 worth of sales to the small-customer group. Obviously, the sales to large customers carried the burden of selling the small customers, and this is a condition that needs to be watched.

Classifications of potentially profitable accounts and of accounts that will never be in a position to use more than a small amount of the product line must be set up. The latter type of customers may be handled by mail, telephone or some method other than personal calls. Measurement, analysis, classification, and a building up of adequate methods must be applied to this whole problem to develop profitable standards of procedure.

The minimum order

The size of the order which is the standard minimum for profitable acceptance will unquestionably have a definite effect on marketing costs. The aim in setting the standard should be to decide upon a minimum order which is small enough to secure extensive distribution and which is at the same time large enough to constitute an economical unit for the manufacturer to handle and large enough to make the middleman distributor feel that it is worth backing with special marketing effort.

Even after the minimum order standard is set, periodic surveys may be necessary to watch the results. At times a large minimum can be established during the introduction of a new product. As soon as it is introduced, the minimum standard may have to be reduced. In other cases, during the period of introduction small minimum order standards may be necessary, while later arrangements may increase the size of the minimum order. The experience of one company which has been very successful in keeping down its marketing costs is summarized as follows by Ray Giles, writing in Advertising and Selling:

On marketing a new specialty the minimum order accepted was for three gross units. Calculations showed that the average dealer should dispose of this quantity within three weeks. The salesman called every two weeks. At the start only the better dealers were wanted. The minimum order was made big enough to keep out the cheaper and nondesirable class of trade.

The success of this specialty caused competitive products to disappear. Then the minimum order was cut in half to get the product in stores which otherwise might supply competitors with outlets. In warmer parts of the country this product is sold in still smaller quantities to safeguard the consumer against getting stale goods.

The middleman and his minimum order

This problem of the minimum order is not confined to the manufacturer alone. It is of the utmost importance to the middleman distributor as well, and he, too, is applying special surveys to its solution. One such study that was conducted by a wholesale hardware dealer established the conclusion that in order to be profitable a retail account must be made up of at least one $25 order per month, or two $20 orders per month, or three $15 orders per month.

This study was followed by a careful analysis of all the accounts on the wholesaler's list and then the management took action. One-half of the customers were eliminated, one-third of the wholesaling territory was given up, and the stock carried was reduced one-third. In spite of this drastic action and the fact that the total annual business dropped, the annual profits were greatly increased.

Study of the wholesaler's problems

Another question of importance to the manufacturer in relation to his immediate market is a special study of the wholesaler's problem in marketing the manufacturer's particular line of goods. This type of study is highly qualitative as well as quantitative in character. Likewise it involves an analysis of competition. The fundamental questions here are:

• How valuable is the manufacturer's product line to the wholesaler?
• How can it be made more valuable?

Normally, a product line will be valuable to a wholesaler because of volume, long profit, high price, frequency of sale, exclusive franchise, the help the particular line may give in selling other goods, or novelty. These factors and others should be listed and analysed as they apply to the particular situation and as they compare with competing lines.

If makers of competitive goods seem able to secure greater cooperation from the wholesaler, the reasons for the condition must be traced down to basic problems which can be made the subject of special studies. Some of the problems that a particular line of goods may present to the wholesaler are problems of large investment, unwieldy stock, too extensive a line, slow movement, difficulty in storing, difficulty in delivering, awkwardness in handling, questionable assortments, and spoilage, or deterioration, or both.

Evaluation of service to the wholesaler

A careful analysis of these factors leads directly into a study of the effectiveness of the wholesalers' salesmen and of adequate means to assist them. It is important for the manufacturer to have exact knowledge as to whether his product line is sold by all of the wholesalers' salesmen or only certain men, whether the product is sold individually or with related goods, and whether the wholesalers' salesmen can explain and demonstrate the selling points of the product line.

On the quantitative side, it is desirable to have information as to the records of the wholesalers' salesmen in selling the product line to few or many retail outlets, in small or large quantities, and in few or many sizes. With such data in hand, the manufacturer can undertake a special study to ascertain the methods that will be most effective and economical as aids to the wholesalers' salesmen.

These aids include : Lectures or talks at jobbers' headquarters, periodical sales meetings with the wholesalers' salesmen, moving pictures, house organs, bulletin boards in wholesalers' sales offices, individual or group training by the manufacturer's zone instructors, prize contests, sales manuals, sample cases, and special bonuses paid by the manufacturer. These methods may be tried out in various territories, their results checked and measured, and standard practice procedures established.

Study of the retailer's problems

The same specific possibilities of study exist in the manufacturer's retail outlets, whether he is reaching the retail market directly and exclusively, or whether he is reaching it in part through wholesale middlemen and in part directly. The retailer, too, provides intensive selling cooperation or withholds it because of very definite factors that may be present or absent in the product line. Such matters as an attractive unit of sale, an easily-obtained frequency of sale, the consumer's wide familiarity with the product line, and the helpfulness of the product line in selling other lines, are positive factors making for cooperation.

Problems of large investment, bulky stocks, and unusual difficulties in storing, delivering, displaying, demonstrating, and servicing are, on the other hand, negative factors which lessen retailing cooperation. Both types must be analysed and measured. Means of providing practical sales assistance and retail sales instruction must be studied in terms of efficiency and cost. Moreover, studies of the effectiveness of marketing through different types of retailers are important. There are many special types .of retailers but few types of wholesalers and jobbers.

Sales through department stores, for example, may show a lower total cost per unit than sales through exclusive specialty stores for the same product. Before costs can be reduced they must be known and special studies present the best opportunity for their determination.

The necessity for special knowledge

The subjects that have been suggested are merely a few of those warranting special study to assure effectiveness and economy in marketing. The aim has been merely to present the necessity for this type of inquiry and to outline the field for such investigation. Broadly speaking, there are only two ways to reduce costs and prevent wastes in marketing.

One is to devise standard methods that will sell more goods without increasing the marketing expenditures. The other is to spend less money to market the same volume of goods. Knowledge of every phase of marketing is necessary to develop and establish the best and most economical methods, and such knowledge comes only from carefully conducted studies.

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