Sales & Marketing Costs and Profitability: An IT Industry Analysis

This report investigates the correlation between sales and marketing expenses and the profitability of five IT companies listed on the Australian Stock Exchange (ASX) from 2014 to 2018. It reviews existing literature on the subject, highlighting studies with varying conclusions on the relationship between these variables. The research questions, objectives, scope, and hypotheses are clearly defined. The study employs a quantitative research method, utilizing secondary data collected from the companies' annual financial reports. Statistical tools such as standard deviation, minimum, and maximum values are used to analyze the data. The findings are discussed in detail, and the report concludes by addressing the limitations of the study and offering recommendations for further research. It examines the relationship between advertising costs, sales commission expense, and other promotional expenses with profitability, using return on assets (ROA) as the key profitability indicator.

Running Head: SALES AND MARKETING EXPENSES AND PROFITABILITY 1
CORRELATION BETWEEN SALES AND MARKETING EXPENSES AND
PROFITABILITY
Name
Institutional Affiliation

SALES AND MARKETING EXPENSES AND PROFITABILITY2
Executive Summary
Most companies spend so much on sales and marketing with the aim of
increasing customer base and hence increase revenues and profit margins. The aim of
this report is therefore to establish relationship between sales and marketing expense
and profitability of five IT companies that are listed in Australian Stock exchange.
This is achieved by analyzing the financial reports of Xero, Myob, Wise tech global
Ltd, Freelancer and Link Administration Holding Ltd between the year 2014 and
2018. The paper researches deeply on past research that has been done on the subject
of relationship between sales and marketing costs and profitability. Different studies
by different researchers in different countries are analyzed. The research questions
needed to be answered when carrying out the study are also outlined in this report. In
addition to this, the paper also discusses the scope of the study and also lists the
objectives of the research. The data used for this study includes the companies` annual
financial reports obtained from the internet. The findings of the study and the analysis
of the study is also contained in this report. The next section of the report contains a
detailed discussion of the findings ,conclusion and limitations of the study.
Table of Content

SALES AND MARKETING EXPENSES AND PROFITABILITY3
Executive Summary....................................................................................................................................2
Table of Content........................................................................................................................................3
Introduction...............................................................................................................................................4
Literature review........................................................................................................................................4
Objectives of the study..............................................................................................................................7
Hypothesis..................................................................................................................................................7
Research questions....................................................................................................................................8
Research method.......................................................................................................................................8
Sampling and population...................................................................................................................9
Variables and their measurement...................................................................................................10
Findings and analysis................................................................................................................................10
Discussion.................................................................................................................................................12
Conclusion................................................................................................................................................19
Limitations................................................................................................................................................19
Recommendations...................................................................................................................................20
References...............................................................................................................................................20

SALES AND MARKETING EXPENSES AND PROFITABILITY4
Introduction
Marketing is a very important segment of any business organization. Marketing is
defined as the action of creating awareness about the existence of a product and
continuously reminding customers to buy the product (Selnes, 2012). Sales
involves the activity of making good available to the final consumer at the right time
and place through the various distribution channels. Companies spend a significant
amount of earnings on sales and marketing activities. Sales and marketing are very
important aspects of business organizations since it helps organizations reach
consumers using various methods. Sales expense also helps in ensuring that products
and services offered by a company are able to reach the final consumer easily (Couto,
Plansky & Caglar, 2017). Any business with proper plan should ensure that higher
sales expense should yield higher revenues and profitability for the business. This is
because the expense should lead to the business reaching more customers and
achieving its sales targets. At the same time, a company can increase its sales and
marketing expense and end up experiencing a decline in profitability. This therefore
means that there is close relationship between sales and marketing expense and
profitability. Research shows that most of the listed companies in the ASX spend
more than 12% of their revenues on sales and marketing activities (Han, Kim &
Srivastava, 2017).
Literature review
Many studies have been carried out previously on the relationship between sales

SALES AND MARKETING EXPENSES AND PROFITABILITY5
promotion, customer loyalty,advertising and sponsorship. A research by Krafft &
Mantrala (2010) concluded that there is a positive relationship and sales and
marketing budget and revenues. Leinwand (2016) in his research indicates that
marketing is very significant in improving business.He argues that when sales and
marketing activities are carried out prudently and efficiently, it leads to lower costs
and hence increasing profitability of a company. The researcher found that when a
company carries out sales and marketing expenses prudently, it is possible to increase
the profitability of a company(Kumar, Pozza, Petersen & Shah, 2009).
Some of the costs that constitute sales and marketing costs include; advertising costs,
wages and salaries on sales employees as well as sponsorship fees.The researcher
therefore argues that a company can have huge sales and marketing costs and increase
revenues to the point that it has a positive impact on profitability of a company. This
happens when a company has done proper market research and prioritized on areas
that are significant in attracting new customers and retaining existing customers.
Research also shows that marketing efforts and R&D expenditure have a positive
impact on the market value of the firm(Blocher, Stout, Juras & Cokins,
2013). This is because, when a firm spends a higher amount of money on sales and
marketing efforts, it becomes more visible in the market than competing brands. More
people will recognize the brand of the company as well as the products associated
with the company. The marketing efforts will therefore drive an increase in sales and
eventually the revenues and profits of the company will increase(Bakhtiari,
Murthi & Steffes, 2013).
A company can also have high sales and marketing expenses when it introduces a
new product in the market. Introduction of a new product in the market means that a

SALES AND MARKETING EXPENSES AND PROFITABILITY6
company has to make customers aware of the product and hence it means that the
sales and marketing expenses will be high (Sievänen, Suomala & Paranko,
2004). As a result of marketing the new product, an organization can sell high
volumes of the new product which could result to very high profitability for the
company. Research also shows that there is a negative relationship between TV
advertising budget and total sales volumes(Lee, 2015). This research was very
specific on the relationship between advertising on television and profitability of a
company. The study was carried out among five companies that are listed in London
stock exchange. The study showed that the companies that spend so much on TV
advertising make less profit as compared to companies that spend less money on TV
advertising (Cooper & Kaplan, 2018). This therefore means that the amount
spent on TV adverts did not yield direct benefits to the company. In addition to this, it
can mean that the wrong advertising method was used and hence the company was
not able to reach most of its target audience. TV adverts are very expensive and most
of the adverts are not able to return the investment. This therefore contributes to sales
and marketing expenses contributing to low profitability.
Gerken, Mishkin & Eakins (2015) found that there is a close relationship between
sales and marketing budget and profitability of a company. The study was carried
among ten companies listed in the Saudi Arabia stock exchange. The study found that
higher expenses on sales and marketing affected profitability of the companies.
Higher sales and marketing expense means that the total expenses will increase
(Matsuno & Mentzer, 2011). This will result to a decline in profitability. This
happens mostly because the marketing efforts could not lead to increase in revenue by

SALES AND MARKETING EXPENSES AND PROFITABILITY7
the same ratio. Another study carried out by Eakins (2015) indicates that the higher
sales and marketing expense, the lower the profitability of a company. The research
was carried out among three companies where it was found that increase in sales
expense resulted to increase in profitability. This happens in situations where
expenses help in reaching a larger market and hence selling to more customers. The
study found out that higher sales and marketing expense resulted to increase in sales
revenue which contributed to increase in profitability.
A study conducted by Dombret, & Ebner (2012) among five companies listed in
London stock exchange showed that there is no relationship between sales and
marketing and profitability. In the study, the researcher found out that three of the
companies had recorded an increase in profitability for the previous three years
despite decreasing their sales and marketing expense. In the study, he also found out
that 34% of firms spent more money on sales and marketing and they made less profit
as compared to firms that spent less on sales and marketing (Howell & Soucy,
2010). He therefore concluded that there is no relationship between sales and
marketing expense and profitability of a firm.
Objectives of the study
 Examine the relationship advertising costs and profitability
 Determine the relationship between sales commission expense and profitability
 Examine the relationship between other promotional expenses and profitability.

SALES AND MARKETING EXPENSES AND PROFITABILITY8
Hypothesis
H1: The selling and marketing expenses significantly affect the profitability of IT
companies.
H2: Sales person’s commission significantly affects profitability of IT companies
in Australia.
H3: Advertising costs impacts greatly on the profits of IT companies in Australia.
H4: Salaries and wages of marketing and sales team significantly affect
profitability of IT companies.
Research questions
What is the connection between promotional costs and profitability?
Is there a relationship between sales commission and bonuses and profitability of IT
companies in Australia?
What is the relationship between publicity costs and profitability of IT companies in
Australia?

SALES AND MARKETING EXPENSES AND PROFITABILITY9
Research method
Scope of the study
Quantitative research method is used to examine the relationship between the
sales and marketing expense and profitability of the five ASX listed companies.
Quantitative research method helps in collecting statistical data with numerical values
on the variable being investigated in this study (Callahan, Stetz & Brooks,
2011). The various expenses that constitute sales and marketing expense are added
to come up with the total amount of money spent by each company on sales and
marketing. The costs include; sales force salaries and support, major advertising
campaigns, marketing staff salaries as well as bonuses paid on reaching
targets(Marr, 2012). The profitability of each company can be easily determined
from the annual financial reports presented by the companies over the indicated
period. The data has been collected from the five listed companies between the year
2014 and 2018.
Data collection
The research is based on secondary data sources. The data is collected from
financial statements of five companies that are listed in the Australian stock exchange.
The variables of particular interest in this case are the sales and marketing expense
and the net profits of the companies over the four year period.
Sampling and population
A random sample of 5 companies IT companies listed in the Australian Stock

SALES AND MARKETING EXPENSES AND PROFITABILITY10
exchange was selected for this study. The sample included both public limited
companies and limited liability companies. The financial statements of the companies
used iin this study was retrieved from websites of the respective companies.
Statistical Tools
The statistical tools used in this research include standard deviation; Min and
Max are the statistical tools that were used to analyze the data collected in the course
of this research.
Variables and their measurement
The variables that are useful in this research include;
 Dependant variable is the Gross operating Profitability (GOP) which measures
profitability of a company.
 The independent variables: Selling and marketing expense ratio (SME),
advertising expense ratio ( Adv E) and Salary & wages expense ratio.
The indicator used to measure profitability in this study is the return on assets (ROA).
Return on asset is calculated as the ratio of total capital to total assets and hence
making it a comprehensive indicator of return on investment (Stengel, 2011)
Findings and analysis
The variables being examined in this research are profitability, the share of
promotional costs and the size of the company under review. The study uses
correlation and regression method to analyze the data and determine the relationship

SALES AND MARKETING EXPENSES AND PROFITABILITY11
between the two variables. Excel spreasheet is the statistical analysis tool used in this
study. The data for MYOB Ltd is between the year 2014 and 2017.
MYOB Group Ltd Relationship between sales & marketing expense and profitability
Pro
fita
bili
ty(
m$
)
sales &
marke
ting
expens
e(M$)
201
4
20.
36
2 14.715
201
5
-
65.
04
3 8.672
201
6
55.
64
7 24.928
201
7
10
1.6 27.777
The analysis of the companies financial data shows that the linear correlation
coefficient =0.920545. The equation for regression is y=0.1211x+15.616. The critical
value of the pearson correlation coefficient(r) =0.950. Since the correlation coefficient
is less than r, it therefore means that the relationship between the two variables is non-
linear.
Xero Group Ltd
Profitability(m$) Sales & marketing expense
2014 -35.546 55.105

SALES AND MARKETING EXPENSES AND PROFITABILITY12
2015 -69.586 93.478
2016 -82.464 148.284
2017 -69.057 166.776
2018 -27.843 193.909
For Xero Group Limited, the linear correlation coefficient is 0.0013 while r=0.878. R
is greater than the linear correlation coefficient and hence it means that the
relationship between profitability and sales and marketing expense for Xero group is
non-linear.
WiseTech Global
Profitability(m$) sales & marketing expense(m$)
2016 2.2 22.8
2017 32.2 16.7
2018 40.8 24.6
For WiseTech Global Limited, the equation of regression is y=-0.0185x+21.83.
R=0.997 which is higher than the correlation coefficient which is 0.008197 hence
meaning the relationship is non-linear.
Bravura Solutions Limited
Profitability Sales & marketing expense
2015 -86.142 15.434
2016 -6.463 15.786
2017 -17.606 14.904
2018 -9.402 13.341