Companies traditionally include marketing & sales expenses as part of SG&A—making it impossible to measure the profit impact. Net Marketing Contribution changes that.
The marketing and sales expense is the basis of a marketing budget and includes company & product advertising, sponsorships, social media, trade shows, retailer promotions, sales & service expenses, as well as all people expenses associated with marketing & sales activities.
Traditionally, companies include marketing & sales expenses as part of Sales, General & Administrative Expenses (SG&A) in their financial reporting. This tells us a great deal about revenue, costs, margins, and operating income, but provides no insight into marketing and sales expenses which are essential to drive consumer demand.
Nike Demand Creation Expenses
Nike provides an excellent example of transparency through what they call "Demand Creation Expenses." Nike unbundled their SGA expenses of $16.61 billion into Demand Creation Expenses ($4.06 billion) and Operating Overhead Expenses ($13.32 billion). Nike was clever to label these "Demand Creation Expenses" since that is exactly what they are supposed to do—create demand for the company's products.
Net Marketing Contribution
To measure the profit impact of a marketing budget, we use Net Marketing Contribution (NMC):
This NMC of $18.23 billion is what Nike created in profits with its Demand Creation Expenses. The NMC goes to pay for all operating overhead expenses, with what remains being operating income.
Marketing Budget ROI
This means that in 2023, each dollar of Demand Creation Expense produced $4.49 dollars in Net Marketing Contribution—up from $3.11 in 2014. These marketing analytics allow a company to benchmark past performance, major product lines, regions, as well as benchmark competitors.