Establishing and Allocating the Promotional Budget

While establishing objectives is an important part of the planning process, the limitations of the budget are important too. No organization has an unlimited budget, so objectives must be set with the budget in mind.

Budget Setting Approaches :

1. Marginal Analysis

As advertising/promotional 

expenditures increase, sales and gross margins also 

increase to a point, but then they level off. Profits are 

shown to be a result of the gross margin minus advertising 

expenditures. Using this theory to establish its budget, a 

firm would continue to spend advertising/promotional dollars 

as long as the marginal revenues created by these expenditures exceeded the incremental 

advertising/promotional costs.T

he optimal expenditure level is the point where marginal costs equal the marginal revenues they generate. While marginal analysis seems logical intuitively, certain weaknesses limit its usefulness. These weaknesses include the assumptions that (1) sales are a direct result of advertising and promotional expenditures and this effect can be measured and (2) advertising and promotion are solely responsible for sales.

2. Top-Down Approaches

In this approach the budgetary amount is established (usually 

at an executive level) and then the monies are passed down to the various departments

.These budgets are essentially predetermined and have 

no true theoretical basis. Top-down methods include the affordable method, arbitrary 

allocation, percentage of sales, competitive parity, and return on investment (ROI).

• The Affordable Method - In the affordable method (often referred to as the “all you-can-afford method”), the firm determines the amount to be spent in various areas such as production and operations. Then it allocates what’s left to advertising and promotion considering this to be the amount it can afford. The task to be performed by the advertising/promotions function is not considered, and the likelihood of under- or overspending is high, as no guidelines for measuring the effects of various budgets are established.
• Arbitrary Allocation - No theoretical basis is considered and the budgetary amount is often set by fiat. That is, the budget is determined by management solely on the basis of what is felt to be necessary. The arbitrary allocation approach has no obvious advantages. No systematic thinking has occurred, no objectives have been budgeted for, and the concept and purpose of advertising and promotion have been largely ignored.
• Percentage of Sales - The advertising and promotions budget is based on sales of the product. Management determines the amount by either (1) taking a percentage of the sales dollars or (2) assigning a fixed amount of the unit product cost to promotion and multiplying this amount by the number of units sold. A variation on the percentage-of-sales method uses a percentage of projected future sales as a base. This method also uses either a straight percentage of projected sales or a unit cost projection. In the straight-percentage method, sales are projected for the coming year based on the marketing manager’s estimates. The budget is a percentage of these sales, often an industry standard percentage. The percentage-of-sales method is simple, straightforward, and easy to implement. At the same time, the percentage-of-sales method has some serious disadvantages, including the basic premise on which the budget is established: sales. Another problem is that this method does not allow for changes in strategy either internally or from competitors. An aggressive firm may wish to allocate more monies to the advertising and promotions budget, a strategy that is not possible with a percentage-of-sales method unless the manager is willing to deviate from industry standards. The percentage-of-sales method of budgeting may result in severe misappropriation of funds.The percentage-of-sales method is also difficult to employ for new product introductions.Finally, if the budget is contingent on sales, decreases in sales will lead to decreases in budgets when they most need to be increased.
• Competitive Parity - In the competitive parity method, managers establish budget amounts by matching the competition’s percentage-of-sales expenditures. The argument is that setting budgets in this fashion takes advantage of the collective wisdom of the industry. It also takes the competition into consideration, which leads to stability in the marketplace by minimizing marketing warfare. The competitive parity method has a number of disadvantages, however. For one, it ignores the fact that advertising and promotions are designed to accomplish specific objectives by addressing certain problems and opportunities. Second, it assumes that because firms have similar expenditures, their programs will be equally effective. This assumption ignores the contributions of creative executions and/or media allocations, as well as the success or failure of various promotions. Further, it ignores possible advantages of the firm itself; some companies simply make better products than others. Also, there is no guarantee that competitors will continue to pursue their existing strategies. Since competitive parity figures are determined by examination of competitors’ previous years’ promotional expenditures (short of corporate espionage), changes in market emphasis and/or spending may not be recognized until the competition has already established an advantage. Further, there is no guarantee that a competitor will not increase or decrease its own expenditures, regardless of what other companies do. Finally, competitive parity may not avoid promotional wars. Coke versus Pepsi and Anheuser-Busch versus Miller have been notorious for their spending wars, each responding to the other’s increased outlays.
• Return on Investment (ROI) - In the ROI budgeting method, advertising and promotions are considered investments, like plant and equipment. Thus, the budgetary appropriation (investment) leads to certain returns.While the ROI method looks good on paper, the reality is that it is rarely possible to assess the returns provided by the promotional effort—at least as long as sales continue to be the basis for evaluation.

            

2. Bottom-up approaches

The major flaw associated with the top-down methods 

is that these judgmental approaches lead to predetermined budget appropriations often 

not linked to objectives and the strategies designed to accomplish them. A more effective 

budgeting strategy would be to consider the firm’s communications objectives and 

budget what is deemed necessary to attain these goals.

• Objective and Task Method - 
  The objective and task method of budget setting uses a buildup approach consisting of three steps: 

     (1) Defining the communications objectives to be accomplished

     (2) Determining the specific strategies and tasks needed to attain them

     (3) Estimating the costs associated with performance of these strategies and tasks. The total budget is

          based on the accumulation of these costs.

         The process involves the following steps:

1.  Isolate objectives.
2.  Determine tasks required
3.  Estimate required expenditures
4.  Monitor
5.  Reevaluate objectives 

     The major disadvantage of this method is the difficulty of determining which tasks will be required and the costs associated with each.This process is easier if there is past experience to use as a guide, with either the existing product or a similar one in the same product category. But it is especially difficult for new product introductions. As a result, budget setting using this method is not as easy to perform or as stable as some of the methods discussed earlier. Given this disadvantage, many marketing managers have stayed with those top-down approaches for setting the total expenditure amount.

• Payout Planning - To determine how much to spend, marketers often develop a payout plan that determines the investment value of the advertising and promotion appropriation. The basic idea is to project the revenues the product will generate, as well as the costs it will incur, over two to three years. Based on an expected rate of return, the payout plan will assist in determining how much advertising and promotions expenditure will be necessary when the return might be expected.
• Quantitative Models - Attempts to apply quantitative models to budgeting have met with limited success. For the most part, these methods employ computer simulation models involving statistical techniques such as multiple regression analysis to determine the relative contribution of the advertising budget to sales. Because of problems associated with these methods, their acceptance has been limited

Allocating the Budget

Once the budget has been appropriated, the next step is to allocate it. The allocation decision involves determining which markets, products, and/or promotional elements will receive which amounts of the funds appropriated. Below are some of the basis for allocation of IMC budget.

• Allocating to IMC Elements
• Client/Agency Policies
• Market Size
• Market Potential
• Market Share Goals
• Economies of Scale in Advertising
• Organizational Characteristics