Should Marketing Pay to Entertain Clients?

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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.
Therefore, to an accountant, all sales costs (including the cost of the sales team) and distribution costs are part of the marketing costs. This is helpful to accountants but less helpful in the real world when marketing budgets are being determined. The reason is that there's a difference between the accounting definition of marketing versus the professional definition of a marketing role. A marketing professional needs to consider all the costs in their marketing plan (so that they concentrate on maximising profits) BUT a marketing professional is rarely in control of all costs. Sales and logistics usually have their own lines of management and their own budget. And this is fine, its a very practical solution but it does cause a problem for marketing budgeting where there are grey areas. Hospitality and Entertainment is one of those grey areas. Ask sales and they will tell you its vital, marketing might not agree.
Where is Hospitality and Entertainment in the Marketing Mix?
Entertaining clients can play a vital role in the marketing mix for many companies.
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 :)
Hospitality and Entertainment can be a marketing tool, but its not applicable in all industries and all business models. Therefore should the costs of Hospitality and Entertainment should be charged back to the Marketing Budget in a normal company**? I say No. The reason I say this is that in a typical large company a big proportion of the Hospitality spend is not part of a marketing process, its part of a sales process. What I mean is that taking a customer to dinner/theatre/a football match/a foreign trip is not marketing, its selling. It's not done to find new customers, it done to help along a sales relationship or to close a sale.

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.
But beware, I am not saying that all hospitality cost are a sales cost. Marketing will use hospitality too. So how do we account for both processes? How do we decide where the cost of a particular expense sits? How do we decide how much each group (sales and marketing) is to spend? And lets not forget that this debate can be heated - it affects sales commissions after all!
Why do you have Hospitality and Entertainment?
Its useful to take a step back. Why do we have Hospitality and Entertainment costs at all? Clearly some businesses spend more than others but why?
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 what I am saying here is that the marketing reason for Hospitality and Entertainment, outside of promotion, is to develop differentiation which otherwise has not been created. Statistics are hard to come by but its a fair bet to assume that in any industry where there sales value is high and the service differentiation and price difference between suppliers is low, the hospitality bill is high*.
I'm suggesting that Hospitality and Entertainment costs outside of 'promotion' are a sign of a marketing failure in the business, failure to significantly differentiate. If you were significantly differentiated you would not have to bear this cost. What's more; Hospitality and Entertainment are a poor tools to repair differentiation and will not recoup or rescue all the opportunities that have been already been lost. I'd look to reduce these costs and re-invest them in marketing to develop clear differentiation that will win more business. The fact is, if you cut out all-non promotional Hospitality and Entertainment cost you will lose some sales, but if you fail to differentiate you will go out of business.

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.
How do you decide if a particular cost line for Hospitality and Entertainment is a promotion cost or not?
Simple. The first question I would ask is .... is it in the Marketing Plan? You see your marketing plan is where you weigh up all of your objectives, challenges, resources, tactics and costs. You will have considered all kinds of promotion and chosen a balanced action plan and budget that is best suited to get you where you need to be. If you consider that "$5k spend on Grand Prix tickets for the largest sales prospect " is amongst your most effective marketing actions; you will have budgeted for it and planned it. If you had not considered it then a more rigorous and inclusive planning process is needed. If you decided not to do it, it was because the money was better spent elsewhere - and you made that choice consciously.
Promotional plans should be inclusive and forward looking. They are essential to your planning. Hospitality and Entertainment which is within the promotional budget will be quite clear, as will the target audience, the promotional message to be delivered, the justification and the Return On Investment (ROI) measure that you'll use. And lets be clear. If you are running a promotion activity it should have your messages and objectives and ROI.
In multi-division businesses its therefore right that a division should demur from (co)funding a corporate promotional event if it does not cost-effectively deliver their divisional message. You might offer to co-fund but only at a level that reflects the relative importance (or not) of that event in your overall promotional activity.

Hospitality and Entertainment which happens outside of the marketing plan is not promotional activity, its not promotional marketing, its sales activity and a cost of sale. I am not saying that this necessarily bad and should be stopped. Far from it, I have agreed many sales deals at Hospitality events and I found it an incredibly useful sales tool. Notice I said 'sales tool' -ie; Something I used to help close a sale. Hospitality for clients is as much of a sales tool as free extra product or sales discount. Unlike discounts  the costs of Hospitality are rarely charged back against the Salesperson's profit margin. In these straightened times that's a luxury few can afford, and without it there is little imperative for sales to give up their demands for more high cost Hospitality.
* Its too easy to move beyond hospitality and step over the line into perks or even bribes. Both buyers and suppliers need to be vigilant. The limits of acceptability and legality vary across industry, geography and time. Personally I have never been involved with graft, and never would be, it can be assumed I am only talking about normal business promotion.
** To be clear, I am not talking about taking a client to a regular working lunch. I am talking about taking them to sporting events, days out, foreign trips. Events with high ticket values


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