Setting the Total Promotion Budget
One of the difficult marketing decisions facing by company is how much to spend on promotion. How does a company choose on its promotion budget? We look at four frequent methods used to set the overall budget for advertising: the percentage-of-sales method, the affordable method, the competitive- parity method, and the objective-and-task method.
a. Affordable Method
Some of the companies use the affordable method: They set up the promotion budget at the level they think the company may afford. Small businesses frequently use this method, reasoning that the company can't spend more on advertising than it has. They begin with overall revenues, take away operating expenses and capital outlays, and then assign some portion of the remaining funds to advertising. Unluckily, this method of setting budgets fully ignores the effects of promotion on sales. It tends to place advertising among last spending priorities, even in situations in which advertising is decisive to the firm's success. It leads to an unsure annual promotion budget, which makes long-range market planning hard. Although the affordable method may result in overspending on advertising, it more frequently results in under spending.
b. Percentage-of-Sales Method
Other companies utilize the percentage-of-sales method, setting up their promotion budget at a sure percentage of current or forecasted sales. Or they budget a percentage of the unit sales price. The percentage-of-sales method has reward. It is easy to use and helps management think regarding the relationships among selling price, promotion spending, and profit per unit. Despite these claimed advantages, though, the percentage-of-sales method has little to justify it. It erroneously views sales as the cause of promotion instead of the result. "A study in this particular area found good correlation among investments in advertising and the strength of the brands concerned- but it turned out to be effect and cause, not effect and cause t. . . . The powerful brands had the highest sales and could afford the highest investments in advertising!" Therefore, the percentage-of- sales budget is depends on availability of funds instead of on opportunities. It can prevent the increased spending sometimes required to turn around falling sales. Because the budget varies with year-to-year sales, long-range planning is hard. At last, the method does not provide any basis for selecting a specific percentage, except what has been done in the past or what competitors are doing.
c. Competitive-Parity Method
Still other companies utilize the competitive-parity method, setting up their promotion budgets to match competitors' outlays. They observe competitors' advertising or obtain industry promotion spending estimates from publications or trade relatives, and then set their budgets depend on the industry average.
Two arguments support this method. First one is that competitors' budgets represent the collective intelligence of the industry. Second one is spending what competitors spend helps stop promotion wars. Unluckily, neither argument is valid. There is no basis for believing that the competition has a superior idea of what a company should be spending on promotion than does the company itself. Companies differ highly, and each has its own special promotion needs. At last, there is no proof that budgets based on competitive parity prevent promotion wars.
d. Objective-and-Task Method
The most of the logical budget-setting method is objective-and-task method, whereby the company sets its promotion budget depend on what it wants to accomplish with promotion. This budgeting method entails (1) defining particular promotion objectives, (2) determining the tasks required to achieve these objectives, and (3) estimating the expenses of performing these tasks. The total of these costs is the proposed promotion budget.
The objective-and-task method forces management to spell out its imagination about the relationship among amount spent and promotion results. But it is also the hardest method to use. Frequently, it is difficult to figure out which particular tasks will achieve specific objectives. What specific advertising messages and media schedules should be used to reach this objective? How much these messages and media would schedules expense?