Should Marketing Pay to Entertain Clients?

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 because 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 and promotion are part of the marketing costs. This is helpful to accountants but less helpful in the real world. Because there's a difference between the accounting definition of marketing versus the professional definition of marketing. 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 have developed their own lines of management and their own budgets. This is fine, and while these lines are becoming blurred again in online businesses, it's a very practical solution for most others. But between the different budgets for sales and marketing 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. So who pays?

 

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*.
However it's clear that hospitality and entertainment does not apply in all business relationships. A biscuit consumer (like me) would not expect to be wined and dined by the retailer, or the supplier. I mighty get a free sample if I'm lucky.

Therefore we can say 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 my experience, in a typical large company a large 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!

* 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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