Is customer Hospitality** a justifiable Marketing expense? Under what circumstances is it sensible, reasonable and cost effective to take a few customers to a major sporting event or a holiday in an exotic location? Or is it the case that this kind of expense is simply largesse without a real business justification? We need to know as budgets are under pressure.
To an accountant all Marketing expenses are part of the operating costs associated with sales. One definition is ...
The expenses incurred to sell (e.g. advertising, salesperson commission) or distribute (e.g., deliver) merchandise.
For example:If you were the main buyer of baked products for the largest retailer in the country I feel sure that you would be invited to attend many hospitality events and would expect to be wined and dined by your prospective suppliers. This is a normal part of the business cycle. It allows suppliers to meet and influence potential clients. For buyers its useful too as it allows them to get to know their suppliers better and to see them outside of the more rigid confines of a business meeting*. But hospitality and entertainment does not apply in all business relationships. As a biscuit consumer and customer of the largest retailer in the country I would not expect to be wined and dined by the retailer, or the supplier. Although it's possible that a biscuit maker might lay on a free sample and even some balloons as part of an in-store promotion :)
But what does it matter to the accountant? It's still a cost on the business, moving it from one balance sheet line to another is not a saving its just "wooden dollars" as my wife would say. Well it does matter. Because as a 'cost of sale' the entertainment cost could be correctly attributed not just to sales, but more specifically to a particular salesperson or deal. Therefore a sale that made a profit of $100,000 which was signed at a $5,000 guest box at the Grand Prix - actually made $95,000 profit - and this should be reflected in sales reports and commissions paid. Hospitality costs are often directly attributable like this. By taking the cost away from the sales margin you introduce an important feedback loop and an incentive for salespeople to use such costs sparingly and proportionate to the opportunity.
Consider if you had a product that was so essential, so good, so well priced and freely available that everyone would want it. You would be in a fantastic position. All you would have to do it tell the world about it and your business would fly. You wouldn't have to spend much on advertising and you would spend nothing on Hospitality and Entertainment (unless you just felt like celebrating your good fortune).
Alternatively consider if you sold sliced white bread. Your product and prices are just the same as your competitors, its just as easy to make and ship, and your delivery is just as reliable as others. In marketing terms you have no differentiation. So how can you get your product selling off the supermarket shelf? Well, the first issue is getting it onto the supermarket shelf. You'll have to convince the retailers that you were about to create interest and demand for your bread over and above others - and that comes down to packaging, positioning as well as advertising and promotion (NB: this promotion might include Hospitality and Entertainment such as a trade launch party or series of open days). But lets assume that your packaging and promotion is no more convincing than your competitors - what next? What more can you do to differentiate yourself and get your product on the supermarket shelf? Well, maybe, the next step is to get closer and personal with the buyers, getting more time to listen, convince and impress them with your business case. Maybe this is when you need extra Hospitality and Entertainment.
So that means that Hospitality and Entertainment should be paid for from Marketing right? After all Marketing has failed to differentiate. I say no. For a simple reason, you separate "promotional" costs out form other Hospitality, you get to see the real costs of the non promotional Hospitality. If you charge it back to Sales (reducing the sales margin), you get to see the real costs and exactly where you are failing to differentiate. These are very valuable lessons.