Thursday, November 3, 2011

Setting the Total Promotion Budget

Are you struggling with your advertising budget (or lack thereof)? Many businesses all over the country have the same problem: They aren’t taking any risks! There are several models that one can follow to create their advertising budget, and the one that is most commonly used in small businesses is the one that is hurting them the most. I am referring to the Affordable Method.

The Affordable Method occurs when the business owner sets the promotion budget based on what they think they can afford, which often isn’t much. The problem with this model is that it places advertising last in priority and “completely ignores the effects of promotion on sales.” (Kotler and Armstrong 415) In some situations, advertising may be critical to the success of a company, and as I have personally witnessed, doing without it can be the company’s greatest downfall. The Affordable Method also makes it difficult to create a long range marketing plan because it is such an uncertain annual promotion budget.

Many businesses are unaware of other methods to setting their budget, but there are a few other methods that have proven more successful. The percentage of sales method has its advantages, as does the Competitve Parity Method. But none is as thorough and defined as the Objective-and-Task Method.

The Percentage of Sales Method bases the budget on a specified percentage of current or projected sales, or unit sales price. The advantage here is that it is simple to use and “helps management think about the relationship between promotion spending, selling price and profit per unit.” (Kotler and Armstrong  416) However, this method also wrongly views sales as the cause of spending, instead of its result.

The Competitive Parity Method requires extensive evaluation of your biggest competitor’s promotion budget, and setting your company budget to match the competing outlay. This method requires management to watch competitors constantly, get estimates and base the promotional budget on an industry average. This often prevents promotion wars by spending the same as competitors. The disadvantage here is that neither company in this scenario knows any better than the other what they should be spending on promotion.

The most logical method for setting the total promotional budget is the Objective-and-Task Method. In this model, the promotion budget is based on what the company wants to accomplish with the promotion. First, management must define the promotion objective. Second, they must determine what tasks are needed to achieve these objectives. Finally, one must estimate the cost of performing the defined tasks. The reason this model is so much more effective is because it forces management to outline the specifics of its assumptions about the relationship between cost and results (Kotler and Armstrong 416).

Although it is most logical, this method is also very difficult to use because it can be hard to define what tasks will achieve the stated goals. For example: A Moving Company wants 80% brand recognition during their first year of business. What kind of message and communication methods would they use to obtain this objective? This question must be considered, even though it is difficult to answer.

A Final Advertising Tip: Promotions should occur when sales are up, not when sales are down!

References: The Principles of Marketing by Phillip Kotler and Gary Armstrong. Find your own copy here.