Marketing costs: back to basics.

• Author: Schiff, Allen I.

In 1952, the General Electric Co. announced the adoption of the "marketing concept" as the principle on which the company would be integrated. Planning, manufacturing, finance, and administration would all work together with marketing to achieve the single goal of satisfying the customer. Among other things, this meant that all the cost elements required to generate sales revenues - not just the sales force, advertising, promotion, catalogues, samples, and market research, but also technical services, quality and customer services, packaging, physical distribution, shipping, inventory carrying costs, and credit and collection would be counted as marketing costs.

GE's decision to integrate the company under the marketing concept stemmed from the recognition that all of its activities were affected by marketing results, as, for example, when manufacturing costs jumped because a certain product mix was on order at a particular time, or when more dollars had to be committed to inventory because more customers demanded on-time delivery, or when receivables rose because customers demanded more credit. Accordingly, the performance of the marketing activity, and within it, that of product management, distribution channels, and major customers, would be evaluated on some measure of profitability or return on investment.

GE was not alone in adopting the marketing concept. In the 1950s, many other American manufacturing companies followed suit. And so did many companies in Japan.

But the marketing concept was only a passing fad in this country. During the 1960s and 1970s, American manufacturers reverted to older methods, once again putting marketing in the back seat.

Putting the concept to work

Like the statistical quality control techniques developed by the renowned W. Edwards Deming, the marketing concept arose in America, but was more consistently and steadfastly applied in Japan. A good description of how it works in one field of conspicuous japanese success, new-product pricing, is given by T. Hiromoto. He wrote in a 1988 Harvard Business Review article that Daihatsu, an auto manufacturer, does not "simply design products to make better use of technologies and work flows; they design and build products that will meet the price required for market success - whether or not that price is supported by current manufacturing practice."

Compare this with the method used by most American companies. Pricing starts with the standard manufacturing cost of the new product. To this are added marketing and other costs, plus a desired profit. The total is the price.

But the last few years...