When Should Marketing Pay to Entertain Clients?

Why do businesses have Hospitality and Entertainment costs at all? Clearly some businesses spend more than others but why?

I think its useful to consider this. 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 and 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).

Now consider, if you are sell sliced white bread. Your product and prices are just the same as your competitors, it's 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 from the supermarket shelf? Well, the no.1 issue is getting it onto the supermarket shelf in the first place. You'll have to convince the retailers that you were about to create interest and demand for your bread over and above all others. You'll be talking about packaging, positioning, promotion and of course your prices. But let's 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 Hospitality and Entertainment to get closer to those supermarket buyers and convince them that you are the people they want to do business with.

And what this leads me to think is that the marketing reason for Hospitality and Entertainment, outside of promotion, is to develop market differentiation which otherwise has not been created. Statistics are hard to come by but it's a fair bet to assume that in any industry where the sales value is high and the service differentiation or price difference between suppliers is low, the hospitality bill is also going to be high*.
What I'm suggesting is 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. Of course you cut out all-non promotional Hospitality and Entertainment costs and you will lose some sales, but ultimately 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 from 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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