Before you start with your due diligence on the marketing and sales functions, it’s best to know the cast of characters who will be carrying out the marketing plan. This approach to the marketing area—to look at the people first—is a carryover from the investigation of people set out in Chapters 2 and 3. If there are some marketing people you haven’t interviewed, do so as part of this section.
Marketing is a critical aspect of any company. Marketing-driven companies are usually high-growth companies. You should be trying to determine whether this company is market-driven. There are the people who set up the marketing plan and have a marketing strategy, and there are those who sell the product or service. We are working with both of these functions in this section. Both are critical to the success of the company in generating revenue.
The people who sell the product may run the gamut from someone selling directly for the company to an outside sales representative. All of these people help to move the product to the consumer. It is important to understand who these people are and how they sell. The people who determine the marketing direction are usually the senior executives in the company. This may be the president, or there may be an executive vice president of marketing. If there is a large sales force, there may be a vice president of sales. Each has his or her own area of expertise, and each should have strong input into the strategy to generate revenue for the business.
Study each of the key marketing people to determine what mental assets they bring to the company, what kind of experience they have in marketing this kind of product, and what knowledge they have of this particular industry. Without skilled marketing people, there is little chance that a product can make it. As mentioned in Chapter 1, you have probably heard the saying, “If a man can...make a better mousetrap than his neighbor...the world will make a beaten path to his door.” Nothing could be further from the truth. It should really be rewritten as, “If you build a good marketing group, it will beat a path to the customer’s door.” Developing the strategy to market a product is key to the success of the entire business.
Once the strategy is set, the salespeople take over. With very few exceptions, products and services are sold, not purchased. It is the salespeople of the company who must convince the potential purchasers to buy. Therefore, you must perform exceptional due diligence on the personnel responsible for selling. This detailed analysis should follow the guidelines set out in Chapters 2 and 3.
You should obtain a short resume from each of the salespeople. If there are too many salespeople, resumes from the top ten will do. You should review the resumes and look for a pattern. Meet some of the salespeople and discuss how they sell the product. It is important to get to know the sales force and try to understand how they view the marketplace.
To assess the abilities of the salespeople, you should have a list of them and their dollar volume of sales for the last three years. In addition, find out what management expects them to sell in the future. Does this expectation exceed what the sales-people themselves are saying? This is an important point, because if management is setting quotas that the sales force cannot meet, management is probably being unreasonably optimistic. You are trying to understand all the aspects of a sale in order to judge the reasonableness of the sales projections being made by management.
Many companies do not have a direct sales force, or they may have a small sales force that calls on representatives or distributors. If this is the case, you need to find out who these outside representatives and distributors are. You need a list of these representatives by dollar volume sold and by unit volume sold for each product. You will need the names, addresses, and telephone numbers of these outside representatives so that you may call them and talk to them about the product. See Chapter 7 for the types of questions to ask manufacturing representatives.
Describe in some detail the technique and methods used by the marketing department to motivate its salespersons and the representatives of the company. Is monetary reward the only motivation? Or does the marketing department use other items to motivate employees and representatives? It is critical to find out what will make employees and representatives of the company sell more of the product. Motivation should not be treated lightly.
Once you understand the motivation being used, ask yourself whether this motivation is sufficient to sell the product. How does it compare with the industry or the competition? Do the salespeople feel sufficiently motivated? You are trying to determine whether the sales projections can be met. If you find the motivation of the employees quite low, you might begin to think that the sales projections being made by management cannot be met.
Make a list of the salespersons or other representatives who have been terminated during the past three years. You will want to know how long they were with the company and the reasons they left. Frequently, you can get the names and telephone numbers of past salespersons and representatives to ask why they left or why they were terminated. Needless to say, some terminated employees may have an axe to grind, and they may tell you things that are untrue. On the other hand, they may give you some insight into the company that will not come through from loyal employees. It behooves you to track down several of these people and make sure you understand why they left.
The age-old question that every company asks itself is, What are you selling? This may seem obvious in a product-oriented company, but after some analysis, you may determine that the product is not the only thing the company is selling. It may be selling service, a new idea, or a whole new approach to a problem. There are many items to be sold in addition to the product. Be sure you understand what the company is selling.
The best way to begin analyzing the marketing side of the business is to identify the products or services being sold by the company. List the products by category, and within each category make a specific list. This specific list should include the dollar volume in sales of each product and the number of units sold for earlier periods. You might consider going back three years in determining units and dollar volume. In addition, you need the same information for each of the products that are projected in the future; that is, the number of units to be sold in the following five years and the dollar volume for those units.
This will be discussed in greater detail in both the production section and the financial section, but for now remember that the marketing people should know their gross margin on each product. Beside each product, put down the percentage gross margin that the company will have, as indicated by the marketing people. It is important to check this with the information you get from others. Marketing people are normally optimistic on both gross sales and gross profit. When it comes to cutting prices and making the sale, the marketing people are most likely to cut the price and reduce the gross margin in order to make the sale. They do this because they are usually being paid on a percentage of gross sales and not on gross profit.
Within each of the product categories (or, if the product list is not too long, each of the products), describe the product in detail and emphasize its distinguishing features. For each of the products, ask the following basic questions: What benefits will the user derive from this product or service? What makes this product or service different from the competitor’s? These are key questions that we will spend more time on later, when we discuss the consumer.
Each of the products should be analyzed as to seasonality. In both the historical data and the projections, you may be able to see evidence of demand seasonality. Seasonality is common in most industries, and if severe, it can be disastrous to the cash flow of a company. Obviously, a candy maker will have tremendous seasonality, particularly around Halloween and to some extent Christmas and Easter. You should look for the seasonality of the product to make sure you understand how it’s being sold and what it does to cash flow.
Also collect all the sales literature and sales brochures you can find on each of the products. This will help you become familiar with the product and the claims being made by the company concerning product quality or performance. You should also obtain a price list outlining what the company is charging for its products or services. Sometimes price lists are called by a different name. For example, in the radio and TV business, they’re called rate cards. This tells you how much an advertising “spot” will cost on radio or TV.
What new products are being discussed by the marketing department? How is it planning to implement these new products? When does the staff think they might be available? What marketing studies have been completed to validate the new products? What marketing studies were completed for the existing products? Get a copy of each marketing study.
What product would the marketing department introduce into the market next if it had sufficient funding? Is the next product a “missing product” (that is, one that is needed to fill out the product line)? If so, ask the marketing department to describe this new product.
The customer has been studied extensively in business research. The marketing department should know its customers inside and out. It’s important to understand who the customer is. Sometimes you will be surprised. For example, although men are the consumers of men’s underwear, most often it is a man’s wife who buys his underwear. Thus, the customer of the product is not the man who wears it but the woman who buys it for him. Many surveys have shown that some men wear only what their wives have told them to wear and that the wives have purchased it for them. That is why advertisements for underwear show the “Mr. Macho” male model. Every company should know who buys its product or service, and your research should confirm what management tells you.
Now that you are acquainted with the product or service and how it’s sold, you want to understand the customers. First, get a complete list of the customers, if possible. By all means, get a list of the ten largest customers. You will want to make a list of the customers by sales volume and unit volume in order to understand which customers are buying the most units and represent the highest dollar value. The marketing management should have this list on hand. If it is a retail business, ask management to prepare a customer survey. You should know the demographics of the retail customer and who the target market is.
You need to determine whether there are special arrangements with major customers. In some instances, the company will not sell its product outright but merely places it on consignment. Consignment is very popular in many businesses, such as clothing. Although the retail store “purchases” the product from the manufacturer, the contract may allow the store to return the merchandise for full or partial credit. Sometimes, to get a major account, a manufacturer will produce enough goods so that it can place them on consignment with the retail outlet. This places a tremendous burden on the manufacturing outlet because it must carry in its inventory the investment that is normally carried by the retail outlet.
You should get copies of any contracts between the company and its customers. If there are no contracts, get a detailed explanation of the relationship between the seller and customer.
A dress manufacturer we once investigated had tremendous sales, and each year at the New York City show, buyers would come to look at the new line. Orders would be taken during a relatively short time each season. What we didn’t realize was that after all of the bookings were placed in the company and the products were shipped, the company still had not “sold” the merchandise. We had to wait until the end of the season to see whether those clothes had actually been sold by the retailer. If they hadn’t been sold, the contract between the manufacturer and the retailer allowed the retailer to return the merchandise and get back 80 percent of what the retailer had paid the manufacturer for them. In essence, there was a huge contingent liability not recorded on the balance sheet of the manufacturing company, and it was one that did not go away for approximately six months. The frightening thing was that if the dress manufacturer happened to produce a whole line of “doggy rags,” the company could become bankrupt. The company risked the entire operation every six months. Make sure you know when a sale is a final sale.
You should determine how many customers have been lost during the last two years, and if any major customers have been lost, you should get their names, addresses, and telephone numbers so that you may later contact them. In addition, you should ask the company why it lost those customers and whether there is any opportunity to regain them.
Venture capitalists studying a small computer printer company learned from the marketing department that the company had lost several good customers. Upon contacting one of the customers, the VC found that the printer product that had been shipped had numerous problems. The printer had to be returned many times, the input device did not work properly, and the computer program itself had several “bugs.” When the VC confronted management with these problems, it maintained that this was unusual and that all problems had been corrected. However, upon further analysis, the VC found return slips from numerous other customers and realized that the computer system did not work. If it hadn’t been for the one or two customers that had been lost by the company, the VC probably would not have uncovered all the other problems regarding its printer problems.
List the five most common complaints received from customers regarding the product or service. It is necessary to discover what customers are complaining about. Some may be minor problems and may be fairly random in nature, but if you see a pattern of complaints about the product, this shows a vulnerable point that the competition can jump on. It may also indicate why people aren’t buying the product.
List the five most serious or costly complaints received from customers regarding the product or service. Here you are not worried about why people are complaining but what it is costing the company to overcome these complaints. It’s important to know how much the company is spending to handle complaints. For example, one company had very strong sales in its first two years; however, it was spending an inordinate amount of money fixing the product so that it would meet its advertised attributes. This was a costly method of handling customer complaints. Ultimately, it dragged the company into bankruptcy.
You should determine who handles company complaints and how they formulate a strategy for handling such complaints. For example, is the customer always right, or does the company spend time and money proving the customer is wrong and that the product is okay? A skeptical or negative attitude toward all customer complaints is going to lose the company sales in the long run. Research has determined that a customer will spread the word of a bad experience with a product to 14 other people, whereas a good experience with a product will only be related to three other people. This means that the company must hustle to avoid too many complaints in the marketplace. Ask the marketing people whether there is a set procedure for handling complaints. Is there a written description of how complaints are to be handled? If so, obtain a copy and find out how the company handles its complaints.
Is there a monthly or cumulative list of complaints? Are the complaints logged in so someone can follow them? There is one very large hotel company that mails all complaints to the chairman of the board. Some afternoons, the chairman of the board can be seen opening complaints and reading them. It’s a very effective method. Every employee knows that all the complaints go to the chairman and that someone in full authority is reading them. This encourages employees to handle customers in an exemplary fashion.
It’s extremely important to determine the present backlog for each of the customers and for each of the products. This will give you a quick overview of where the company stands with its customers and products. For purposes of comparison, you should try to determine the company’s backlog at the end of the last two years. This will enable you to see whether the backlog is actually building or whether the company is eating into its backlog and is not able to replace it.
It’s also important to determine when the backlog can be produced and shipped so that it can be turned into an account receivable or cash. For each product, list the backlog and see when it is to be delivered and how many dollars are involved in the shipment. For example, you might list the current backlog by product, then look at the backlog for three months, up to six months, up to nine months, and up to twelve months or more. Within each of those categories you would look at the dollar volume for each of the products. If some of the products go into the distant future, you may want to discount the likelihood that they will ever be delivered. By aging the backlog, you can get a quick idea of how likely the company is to produce profits in the near term. If it has a tremendous backlog but most of it is not deliverable for over a year, you might start asking yourself what the company is going to do for the next 12 months. Verifying the backlog can be very important, especially if there is a large current backlog.
One of the most critical elements of any business’s selling program is the extension of credit to customers. This can facilitate sales, but it can also be a disaster if customers don’t pay. You need to understand the credit facility in detail. Who establishes the credit limit for the customers? What is the credit approval process? How do they go about determining whether a customer is creditworthy? Do they run credit reports? What special credit arrangements do they have with certain customers? Do they extend credit longer to some customers than to others, and if so, why?
To understand the marketing department, you must understand how the company determines which customers qualify for credit. If setting credit lines were left entirely up to the marketing department, almost everyone would get credit. After all, the marketing people are paid on the basis of sales rather than on collections. If you are paid by sales, you want to extend credit to the world so that everybody will buy the product.
In understanding the credit terms given to customers, you should try to understand what role the marketing department has in collecting the accounts receivable. If intimately involved with the credit collection and paid accordingly, it’s highly unlikely that the company is going to extend credit indiscriminately. Nonetheless, you should establish the normal terms of a sale and exactly how the marketing department fits into the overall scheme of setting credit limits and collecting from credit customers.
Determine whether there are any sales invoices with material disputes. It is important to know why they’re in dispute, and if necessary, you may want to call the customers and discuss why they are not paying their bills. That call may give you tremendous insight into the business. On the other hand, you may just end up talking to a deadbeat who should not have been shipped product on credit.
Public relations runs the gamut from the spunky ads we all watch on TV to the industrial manuals that are given to potential consumers of industrial products. Communicating with the outside world is a delicate part of the process of selling the product. It’s important to understand what is being said to the customers about this product and this company.
In general, all information about the company comes under the heading of public relations. What articles have been written about the company? What research has been done by industry analysts? Has the company or any of its competition been mentioned in any studies of the industry? All of these types of information should be gathered. Usually the company gathers articles that are flattering and will hand these out. The company doesn’t give out the ones that aren’t flattering. If possible, ask for the company’s public relations file and go through it to see all articles that mention the company.
Some small companies don’t have advertising or public relations agencies, but most large companies do. Advertising agency here means someone hired by the company to promote its product. You should obtain the name, address, and telephone number of the agency and the names of the individuals who work on the company’s account. You will later want to call them and discuss in detail their relationship with the company.
The company should be able to outline its formal advertising program and explain how it intends to inform the consuming public about its products or services. A fairly detailed media plan should be used to disseminate this information. It is important that the company gains recognition in the marketplace, and the advertising agency is supposed to be instrumental in gaining this recognition. If it has media samples, get copies of the print advertisements and be sure to listen to and watch the radio and television ads.
You should determine what the advertising budget has been for the last three years. You should also determine what the company intends to spend for the current year and its projected advertising budget for the next five years. In addition to finding out how much money will be spent, you should try to learn what the money has been spent on in the past and what the money is earmarked for in the future.
One company once wanted $10 million (a nice round number). When asked what the company was planning to spend this amount on, the reply was “advertising.” When pressed even further as to what it intended to spend the ad dollars on, the company representative said it would all be spent on TV advertisements. Needless to say, this seemed to be a fairly reckless approach to promoting the company’s product because TV is not the best medium through which to advertise all products, especially those of an industrial nature. You must understand in detail the advertising program being put forth by the company so that you can determine whether it is spending the money wisely.
When you talk to the people at the advertising or public relations agency that works for the company, you will want to ask some specific questions. First, find out how long it has been the company agency. If it’s only been a short time, then obviously you are going to have to find out the name of the previous agency and why a switch was made.
In addition, you should determine how often the company advertises. Perhaps it has been rather spotty, and the advertising people may be able to explain why that is a good approach. Ask about the average size of its printed ads to get a feel for whether they are adequate. Does the advertising agency have a standing order to place certain ads in certain publications? If so, find out how much longer and why it will continue to advertise in that specific periodical. What is the cost of advertising, and what is the average amount the company is spending? How does that compare with others in the field?
Has the advertising agency always been paid on time? Has it ever had to contact the company for failure to pay? If the company is not paying the advertising people and you find this a persistent trait of the existing management team, it may mean that you will never be paid, either.
Will the advertising agency continue to run the ads for this company? Does it think the company is making the right moves in its marketplace? Who is the contact person at the company? If the agency deals with someone other than the person you’ve been talking to in marketing, you will want to talk to the agency’s primary contact to see why that person thinks the agency is good. In addition, you should solicit any general comments from the agency regarding the company. How would it change the ads to make them better? What could the company do to capture more market share? These kinds of general questions can yield more information about the industry, the competition, and the company you’re analyzing.
By defining the marketplace for the product, you can tell how much money the company can make. If the market is small, you cannot expect sales to go beyond a certain point. The size and strength of the competitors in the marketplace will also determine how much of the marketplace can be obtained by a company. It is very important to understand market growth, market size, and the strength of the competition.
You must analyze the markets in which each one of the products is sold. You need to know the total dollars and the total number of units that are sold in this marketplace. Are there geographic limitations to the marketplace? You should determine the market share of each of the companies, or at least the market share of the major companies. For example, Competitor A might have 20 percent of the marketplace and Competitor B might have 10 percent of the marketplace. Your company, because it is new, may have only 2 percent of the marketplace. Make sure that the company and its competitors aren’t making grand statements about their market share. For example, during the Internet boom, many companies made claims that they had the illustrious “25 percent market share.” However, when there are hundreds of players in an industry, not all of them can have 25 percent market share. Be careful to ask how the company measures its share of the market.
It is very important to know the kind of market in which you’re selling. If it is dominated by one financially strong competitor (e.g., one that has 70 percent of the marketplace), you must use a completely different strategy than when selling into a marketplace in which the largest competitor has 10 percent of the market. A highly fragmented market versus a highly segmented market means a different marketing strategy and different chances for success.
You must investigate the competitors thoroughly. You can often understand the company you are dealing with much better if you understand the competition. You should go through all of the products that you have listed and note the competition for each one. Next, gather information on the financial strength, the name recognition of the product, and the general standing in the marketplace of each one of the competitors. You should describe in detail the competition’s strengths and weaknesses, and any significant differences between it and your company.
An important aspect to look for when investigating the competition is sales tie-in. Does it sell this product as part of a whole list of products? If it is selling brake systems in general and one of the components of the brake system happens to be the brake pad, how will your company, which manufactures only brake pads, compete with this fully integrated competitor?
You should study the market and determine its annual growth rate. Certainly, the marketing department should understand how fast its product market is growing. It should know how much the market grew for each of the last three years and should be able to project growth for each of the next five years. It is very important to establish whether you have a growing market or a stagnant market. For example, if you have a market that is stagnant and management is projecting growth at the rate of 15 percent per year, this means that it will have to take market share and sales away from the competition. This is an entirely different marketing strategy from one that would be appropriate when the market is growing at 30 percent per year and your company is projecting a 20 percent growth rate. Understanding the growth rate of a marketplace is critical to any long-term projections and strategy.
Be sure to ask where the market information is coming from. If someone says the market is growing at 35 percent per year, you will want to know the basis on which he or she is making this projection. Sometimes the information is merely based on hunches and guesses. On the other hand, some industries are studied in detail, and the information available on the market is very good.
Many products have substitutes. In the food business, for example, when beef prices go high, people switch from beef to chicken or pork. Try to determine whether there are any substitutes for the product that the company is selling. If there are substitutes, the company will have to worry about not only the competition in its industry, but also the competitors who manufacture the substitute product. You must understand how substitution can work, who the substitute competition is, and how they can affect your product.
Ask the marketing people what the marketing objectives are in a general sense. Sometimes a marketing person will say the objective is to obtain a larger share of the market. At other times, marketing people say the objective is to gain geographic coverage; that is, to have the product sold nationwide. When they talk about market coverage, marketing people often are describing their marketing rollout, as they roll out from one corner of the United States to the other. They may even talk about penetrating foreign markets. All of these can be important marketing objectives, and sometimes a short-run strategy to cut price and gain market share can be a great benefit to the company in the long run. However, market share and geographic distribution are not nearly as important as generating gross profits for the company. If the marketing people are interested in generating profit for the company rather than pursuing goals that are not strictly related to profit, the company is more likely to be successful than it would be if they had other objectives in mind.
The price of the product or service is directly related to the sales a company will make. It is important for an investor to understand how the price of the product is determined. The price of a product will determine its position in the marketplace with respect to products of a similar nature. Price is the single most important attribute in trying to define where a product or service fits in the marketplace.
Companies often talk about price points. These are the imaginary lines between the higher-priced and lower-priced items that determine the price category in which a product will be classified. Most companies talk about their high-priced, medium-priced, and low-priced lines. Each one of these particular items has a price point, and companies place their product in one of these price quadrants. For example, they may have a product that is priced on the high end of the mid-price range. You should find out why the company is pricing its products in this range and how it arrived at the various price points and positioning of its products.
This brings us to one of the most important questions for any company; that is, what price should it sell the product for? The pricing question has received little attention. As a result, some big mistakes have been made in pricing products. For some strange reason, entrepreneurs approach pricing in an unsophisticated fashion. One company’s whole reason for being was to beat the competition’s price. It ignored service, failed to have good salespeople, ignored good packaging techniques, and gave little attention to the distribution channels because its sole concern was to have the lowest price. It believed that the market was so price-sensitive that if a product could be sold for less, customers would demand it. This company’s product was never accepted in the marketplace, and the company was soon liquidated.
Other companies seem to price their products according to the competition’s prices. For example, in the computer industry, most hardware is priced according to the computer industry leader. The large market share being held by the leader is a pricing umbrella under which all of the smaller companies must price their products. It’s important for an investor to determine whether a small business has arrived at the price of its product logically.
Of course, there are many products that are commodities. If you sell strawberries, you are stuck with the price the marketplace dictates. In times of plenty, the price will be low, and when the strawberry plants don’t produce a lot of berries, the price is high. If you are working with a company that has a commodity, you had better understand the marketplace because that marketplace has a lot to do with determining the price and profitability of the company in which you are investing.
In a sense, all products can be analyzed as being somewhere on a continuum from commodities such as oil to a high-tech product that has a patent. Many products fall somewhere in the middle; that is, they have competition, but their product can be differentiated from the competition. It is your job to understand the reason that one product is different from the other. If you cannot differentiate the company’s product from the competition’s, you are getting close to having a commodity for which the company has very little control of price. A company that has little control of the price of its product is a much higher risk than one that has some competitive advantage and can charge for that advantage.
You should ask the marketing people to describe in detail the pricing process they follow. Who establishes the price? Who has input into setting the price? How do they determine the proper price? Who is authorized to sell the product at a price that differs from the approved price list? Can any salesperson cut the price? Who is in charge of setting the price?
A retail organization that we know has a basic floor price that no one can go beyond. However, its advertised prices are in excess of that amount. Snappy ads are used to entice customers into the showroom. The ads say, in essence, “Come in and make us an offer.” This company allows a salesperson to sell the product for practically any price above the floor price. This often creates a rather bizarre approach on the selling floor, especially if two salespeople are selling the same product next to one another and you can hear different groups haggling for different prices. It also leaves many customers disgruntled because they aren’t sure whether they are getting a bargain basement deal or being ripped off. Prices float from high to low, and salespeople are compensated more as the price goes up. Their percentage of the total sale grows with the price. This company is flourishing!
How often does the company revise its prices? Does it change prices frequently or does it try to keep them more or less stable? Does it respond to the competition’s price changes quickly? Or does it wait a while to see whether the price will stick? Is there a price leader in the industry that everyone else follows? Understanding how prices change and who changes them is of critical importance to every business operating in the industry and to you as an investor. Price changes can be an indication of a rapidly changing industry where one can have big losses.
Does management describe in detail the present warranty policy? What kind of warranty actually exists? Get copies of the warranty for the product and review it carefully.
What warranty expenses has the company had for each of the last three years? What warranty expenses does the company expect to have for each of the next five years? How did the company calculate the amount it expects to spend in warranty expenses?
What amount does the company have as a warranty reserve? That is, what amount of sales has been placed on the balance sheet as a reserve against future warranty claims? Is this warranty reserve adequate? Because the warranty reserve is basically an accounting entry, does the company have the cash or credit line it would need to honor a large warranty claim? Is a warranty claim one of the reasons it needs money from an investor?
Every company should record its marketing and sales endeavors. This is one of the key activities of any business. You should be able to review the company’s marketing reports and determine from them what is going on, both in the company and in the marketplace.
Get a list of the reports generated by the marketing department and assess their value to the company. Try to determine how the marketing department uses them. Also review them for information about how the marketing department is being run and for details about the products and customers.
Determine whether any other reports from the company are shared with the marketing department. For example, does the marketing department know what is happening in the production area? Does the marketing department know what is happening in the financial sphere? Does the marketing department understand the problems in collecting accounts receivable? If it does not, it may be selling the product to people who don’t pay. As a result, the finance department may be clogged up with an inordinate number of slow-paying or nonpaying customers. The marketing department should not allow this kind of situation to develop.
Is there a report that charts any of the activities in the marketing department? For example, does it have a sales chart showing monthly or weekly sales?
How often and for what forecast period does the marketing department project sales and expenses for its department? Get a copy of the marketing forecast and determine how it is put together.
Go through the marketing forecasts with the marketing managers and review how they are put together. What assumptions have been made? How often do the assumptions change and with what frequency are the projections changed?
Get copies of actual financials for the past three years and compare them with the sales department’s projections for the past three years. If they diverge substantially, the new sales projections may be of little value in assessing the company’s promise. In determining how accurate the sales projections have been in the past, you will obviously be making a statement about what degree of accuracy projections should attain in the future.
Discuss in detail the results for the company as projected by the marketing department for this year. Probe to determine how well it understands the marketing budget and sales projections. The marketing department that puts together sloppy projections probably does not understand the marketplace very well.
Does the marketing department have a manual on procedures? If so, get a copy and review it. If not, ask why not. Determine from talking to people in the marketing department whether they follow the procedures manual or whether it’s just an out-of-date binder that’s never used. Determine when the last entries were made in the manual and the date it was last reviewed. This will give you an indication of how well organized the marketing department is. The fact that a marketing department does not have a procedures manual is not the kiss of death, but it should have some kind of document that encourages the people in the marketing department to work together as a team.
By developing external information, you will have an opportunity to check the accuracy of the information being supplied by the company. You will also be able to develop a clearer understanding of how the industry views itself, as well as its position in the overall marketplace. Trade associations and trade publications are key information sources. Quite often, research institutions supply this type of information.
Is the company a member of any trade or industry association? If so, get the names and addresses of the associations and, if possible, the names of the managers of those associations. It will be important to contact the manager of the major trade association for industry statistics and for other information on the industry. Many times, an association is small enough to know the inside scoop on the activities of both your company and some of the other companies in the industry. You should also determine whether there are other ancillary trade associations or perhaps some that are somewhat similar in nature that could give you an understanding of the industry.
Does the company participate in any industry trade shows? If so, list them and determine how the shows help sell the product.
Does the company attend conventions that might enhance its stature in the industry? If possible, attend a convention and see what type of people attend.
Obtain a list of the names and addresses of the most important trade periodicals in the industry. Get recent copies of these periodicals and find out what the contributors consider to be the pressing issues of the industry. If you make an investment in a company, you should subscribe to one or two of the trade periodicals in order to follow the industry. Many trade periodicals are published by the trade association itself, and most trade associations have newsletters. Make sure you review past publications, and get on the mailing lists if you invest money in the company.
You will have to undertake a number of marketing ratio analyses if you are to understand the company’s performance in the marketing area.
Calculate the sales per salesperson by dividing the total sales by number of salespeople out during the year. This will measure the productivity of salespeople in terms of their ability to produce sales for the company. If you see this figure declining over the years, it will indicate that the company is not producing per salesperson what it has in earlier periods and may indicate that there is a problem.
You should also calculate selling expenses as a percentage of sales by dividing total selling expense by sales. This will measure the cost related to obtaining each sale. If you see this cost going up, you should investigate why.
Another useful calculation is salaries and commissions as a percentage of sales. This can be calculated by dividing total salaries and commissions by total sales. Again, this percentage will give you an indication of what cost is incurred for each sale; that is, the human cost. If you see this human cost going up, you need to ask why.
Calculate gross profit per salesperson by dividing gross profit by the number of salespeople on the average during the past year. This will let you measure the ability of a salesperson to contribute to the gross profit of the company. If you see this number going up, you should be happy.
Also calculate the gross profit as a percentage of marketing expense by dividing gross profit by total marketing expense. This will measure the effectiveness of the marketing team with respect to gross margins per marketing dollar spent.
Another area of analysis is marketing expense as a percentage of sales. Here you divide the total marketing expense by the total sales in order to measure the total cost of the marketing programs relative to the sales being generated. You should include all marketing expenses, such as advertising and promotion.
Another useful ratio to analyze is the returns as a percentage of sales. You may do this by taking the total dollar returns and dividing this figure by sales before returns but after any discounts. This will measure to some degree the customer satisfaction and the product’s quality.
The final area to review is the discounts as a percentage of sales. You may calculate discounts as a percentage of sales by taking the discounts given and dividing by gross sales. This will indicate the amount the product must be discounted in order to gain sales. This is a key figure in the retailing business.
Once you’ve gathered as much information as possible about the marketing department, you should write down the five major strengths that you see in this corporation. In addition, you should identify the five major weaknesses in its marketing department. Once you’ve done this, you should assess how critical these five strengths and weaknesses are to the success of the business.
Finally, you must formulate some basic conclusions about the marketing area. Is this the marketing team that can implement the marketing strategy? Can this marketing team make the company successful in this sales arena? Is this the marketing program that best fits this industry? Can this marketing strategy really work? At the end of the day, you should write down your conclusions on the marketing area before proceeding to other areas.
Appendix A contains a long list of questions to guide you in analyzing the marketing area. It also provides numerous documentation sections to refer to and suggests references to call with regard to marketing. Make sure to call them.