Which method for setting the total promotion budget is the most difficult to use?

There are 4 common methods used to set the total budget for advertising:

1. Affordable Method

This is a method often used by small businesses, where companies set the promotion budget at a level that the management finds the company can afford. They start with total revenues, deducting away operating expenses and capital outlays, and then devoting a portion of the remaining funds to advertising.

However this method ignores the effects of promotion on sales and tends to result in uncertain annual promotion budgeting which makes long-term market planning difficult. Due to it more often than not being the last on the priority list, it also often means that company under-spend on advertising even when it may be critical to the company.

1. Percentage-of-Sales Method

This is a simple method that links the relationship between promotion spending, selling price and profit per unit. This is done by setting the promotion budget at a certain percentage of current or forecasted sales, or by budgeting a percentage of the unit sales price.

However this method can result in a wrong relationship mindset which results in such budgeting being based on the availability of funds and causes similar difficulty in long term planning. This method also doesn’t provide any basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.

1. Competitive-Parity Method

Then there are companies who chose to set their promotion budget to match competitors’ outlays. Usually this is through monitoring competitors’ advertising activities or getting industry estimates from publications or trade associations.

Though this method may seem logical, but there is no grounds in believing what your competitors do are good for you as each company is different and each will have its own unique promotion needs.

1. Objective-and-Task Method

This is the most logical budgeting setting method where the company develops the promotion budget by (1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives and (3) estimating the costs of performing these tasks. Adding all 3 costs together will contribute to the promotion budget.

Through having think through the assumptions between dollars spent and promotions results, management will have to figure hard on what specific tasks will achieve the stated objectives and hence utilize the budget most effectively.

Stay Curious Always

Z

Setting the Total Promotion BudgetOne of the hardest marketing decisions facing companies is how much to spend onpromotions. How do companies determine their promotion budget?Four common methods are used to set the total budget for advertising:•The Affordable MethodMany companies use the affordable method. They set a promotion budget at what theythink the company can afford. Unfortunately, this method of setting budgets completelyignores the effect of promotion on sales volume. It leads to an uncertain annual promotionbudget, which makes long-range marketing planning difficult. Although the affordablemethod can result in overspending on advertising, it more often results in under-spending.•Percentage of Sales MethodMany companies use the percentage of sales method, setting their promotion budget at acertain percentage of current or forecasted sales, or they budget a percentage of the salesprice. Some firms use this method because it is easy. However, the percentage of salesmethod has little justification. It wrongly views sales as the cause of promotion ratherthan as the result. It may prevent increased spending. .Long-range planning is difficult. Itdoes not provide a basis for choosing a specific percentage.

•Competitive Parity MethodOther companies use the competitive parity method, setting their promotion budgets tomatch competitors’ outlays. There are no grounds for believing that competition has abetter idea of what a company should be spending on promotion. Also, no evidenceindicates that budgets based on competitive parity prevent promotion wars.•Objective and Task MethodThe most logical budget setting method is the objective and task method. Using this,marketers develop their promotion budgets by:oDefining specific objectivesoDetermining tasks that must be performed to achieve these objectivesoEstimating the costs of performing them: The sum of these costs is theproposed promotional budgetThis method forces management to spell out its assumptions about the relationship betweendollars spent and promotional result. It is also the most difficult method to use because it canbe hard to determine which tasks will achieve specific objectives. With the objective and taskmethod, the company sets its promotion budget based on what it wants to accomplish.Managing and Coordinating IMCEach promotional tool; advertising, personal selling, sales promotion, public relations anddirect marketing has unique characteristics and costs.AdvertisingBenefits•Advertising’s public nature suggests that the advertised product is standard andlegitimate.•Advertising also allows the seller to repeat a message many times.•Advertising can be used to build a long-term image for a product and also stimulate quicksales.

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