There is a critical budgeting error costing many brand marketers millions of dollars in revenue and the problem is that it’s not even their fault! It’s an “accounting” mistake. Yes, it’s a small budgeting error and it costs FMCG marketers millions in lost sales at the retail shelf. This is because a critical component of the marketing mix, packaging design, finds itself in the wrong budgeting bucket.
Why budgeting errors cost brand marketers millions in lost revenue
Come with me into my common sense corner and let’s look at two key questions.
- At the moment, where on the marketing budget spreadsheet does the costs of packaging design sit?
- Does it sit as a line item in the marketing budget (product marketing) or does it sit as line item in “cost of goods sold (COGS)” category?
The chances are great that in most instances packaging design falls into the “cost of goods sold” budget category. Herein lies the error costing you as a marketer millions in lost sales. so here’s the big question…
Is packaging design a cost of goods sold or is it a branding and sales tool?
Depending on your belief in the value of strategic packaging design will determine whether you see your pack as a brand asset or a cost of goods .
To determine exactly where packaging design needs to fall within the marketing budget, let’s begin with a clear definition of COGS and compare it with the definition for Product Marketing. Then from those definitions we will be better able to determine in which line item the “packaging design” should fall.
The value of the product pack as it represents the brand on the retail shelf.
More and more brand marketers are coming to realise the value of the product pack as it represents their brand on the retail shelf. As brand marketers come to see the retail space as a place where their brands can live and die, the more impetus they place on their product packaging as a critical touch-point. Therefore, they see the huge value in investing the time and budgetary resources into ensuring their packs on shelf are effective.
What exactly is: ‘Cost of Goods Sold’ – COGS’
According to Investopedia, Cost of goods sold (COGS) are defined as:
“The direct costs attributable to the production of the goods sold by a company or the wholesale price of goods re-sold.”
This amount includes:
- The cost of the materials used in producing the product, including: cost of raw materials; cost of items purchased for resale, cost of parts used to construct a product.
- Direct labour costs used to produce the product and the overhead costs directly related to the manufacture or production activity (like rent and utilities for the manufacturing facility).
NOTE: The majority of definitions for COGS EXCLUDE indirect expenses such as distribution costs and sales force costs. (BTW: If your product pack on shelf is your silent salesperson, and it is…. Then why is it in COGS?) Read more: Marketing Definition | Investopedia
Now let’s review the definition of product marketing:
What exactly is: Product Marketing
Product marketing is the process of promoting and selling a product to an audience. Product marketing deals with marketing the product to prospects, customers, and others.
Product marketing includes:
- Defining the scope of the product line (What products will be offered (i.e., the breadth and depth of the product line)?
- Identifying potential markets for a product, Who will be the target customers (i.e., the boundaries of the market segments to be served)?
- Determining optimal pricing for the market,
- Encouraging potential customers to purchase the product, and…
- Finding the best distribution methods for delivering the product to customers or to sales locations. How will the products reach the targeted customers? (What are the the viable distribution channels which create a solid business model)?
- Positioning and measuring for new products and features
- Deeply understanding the market and the competitive landscape
- Driving demand, adoption, customer retention and overall success of the product
It is the role of the brand marketer to get the attention of their target audiences by using slogans, packaging design, celebrity endorsements and general media exposure to promote and sell and resell the product. Read more: http://www.businessdictionary.com/definition/product-marketing.html
Which bucket is most appropriate?
Ok, so which of the two above business line items seems more appropriate for packaging design, COGS or Product Marketing?
As you can see, depending on your belief in the strategic value of packaging design as a branding and sales tool, will determine which “cost associated” bucket you put it in.
Here’s the problem with packaging design being housed in the COGS bucket…Whilst the pack and the products housed within the pack are indeed costs directly associated with COGS, the pack design isn’t and therefore should fall into the “product marketing” line item/category. This is because the pack is designed to house the product (it could simply be just a sealable plastic bag), whereas the pack design is created to market and sell the product inside the bag.
3 reasons why packaging design doesn’t belong in COGS:
- Keep out of Procurement’s greedy paws. Where the packaging design is part of product marketing, it can’t be carved up by procurement or finance. Let’s face it, there isn’t a procumbent professional in business today that is not looking for ways to cut the COGS number. So as long as packaging design lives within this category, marketers will expose one of their most critical branding and sales assets to the sharp scissors of Procurement.
- Packaging is OWNED Media Assets. Where the packaging design is part of product marketing, it is recognized as a critical slice of the branding and marketing OWNED MEDIA ASSETS. These assets are to be invested in. This thinking taps into the growing understanding and appreciation of the value and importance of packaging (and therefore the value of effective design) in the entire marketing comms mix.
- The silent salesperson effect. A pack positioned on a retail shelf is your silent sales person with less than 5 seconds to capture your targeted consumer. To be successful in its sales approach, the design of the pack needs sell off the shelf outside of any human sales support. Without the benefit of having a retail salesperson present to stop consumers and explain to them why they should try your product, the package on shelf must do both the stopping and the selling. If this is true and it is, then how can package design be part of COGS?
Remember that the majority of definitions for COGS EXCLUDE indirect expenses such as distribution costs and sales force costs.
The bottom line
If your product on the retail shelf is being “cost squeezed” because it is placed in the wrong “cost bucket” you won’t have the budget to invest in effective and strategic packaging design. This results in ineffective packaging design and shows up as lacklustre sales on the retail shelf. When you don’t make the initial sale, you lose the opportunity of the second, third and fourth sale. Therefore the sooner you remove packaging design as a line item in COGS and place it in the Product Marketing bucket, the more you’ll have to invest in strategic packaging design and the greater your sales results on shelf will be.