Determine the total promotion budget

Determine the total promotion budget. One of the most difficult marketing decisions facing companies is how much to spend on promotion.

John Wanamaker, the convenience store expert, says “I know that half of my advertising goes to waste, but I don’t know which half it is.”

So it’s not surprising that companies and industries differ in the amount they spend on promotion. Promotional spending may account for 30% to 50% of sales in the cosmetics industry and only 10% to 20% in the industrial supplies industry.

Within a given industry, you can find companies that spend big and spend little on promotion. Philip Morris is a company that spends a lot of money on promotions.

When Philip Morris acquired Miller Brewing Company, and later the Seven-Up Company, Phillip Morris increased its promotion spending substantially. The additional advertising spending increased Miller’s market share from 4% to 19% in the following years.

How does a company determine its promotion budget? We will discuss four main methods used in preparing the promotion budget: the affordable method, the percentage-of-sales method, the competitive-parity method, and the goals-and-tasks method. (objective-and-task method).

1. Method According to Ability

Many companies set a promotion budget based on the ability of the company. One executive explained this method this way: “Why, this method is easy.

First, I went to the finance manager and asked him how much funding he could afford to give us this year. He said one and a half million dollars. Then the boss came up to me and asked how much. we have a lot to spend and I said “Oh, about a million and a half dollars”. 

The method according to ability ignores the role of promotion as an investment and the direct effect of promotion on sales volume. In addition, this method also causes the preparation of an erratic annual promotion budget, which makes planning long-term market communications difficult.

2. The Percentage of Sales Method

Many companies set their promotion expenditures based on a certain percentage of sales (both current and anticipated sales) or of the selling price. 

A railroad executive said: “We have set a reserve for each year on December 1 of the previous year. On that date, we add up the passenger revenue for the following month, then take 2% of the total revenue for the advertising funds reserved for the current year. new”.

Determine the total promotion budget. Car companies usually budget a fixed percentage for promotion based on the planned price.

Oil companies set reserves based on a number of cents for every gallon of kerosene sold under the company’s own label. Proponents of the percentage of sales method point out several advantages of this method.

First, this method shows that promotional spending varies according to the “capacity” of the company. This satisfied financial managers, who believed that costs should be closely related to the movement of a company’s sales through the business cycle.

Second, this method encourages management to pay attention to the relationship between promotion costs, selling prices, and profit per unit.

Third, this method promotes competitive stability when competing firms spend approximately the same percentage of sales on promotion.

Although it has several advantages, the percentage of sales method is not correct. This method views sales as a determinant of promotion, not as a result of promotion. This causes the budget to be determined based on the amount of available funds, not based on market opportunities.

This method discourages companies from trying to promote countercyclical or aggressive spending. The dependence of the promotion budget on sales fluctuations from year to year will affect long-term planning. 

This method does not provide a logical basis for selecting a particular percentage, except on the basis of what has been done in the past or what competitors are currently doing. Finally, this method does not support setting the promotion budget based on the feasibility of each product and region.

3. The Competitive Balancing Method

Some companies set their promotion budgets to achieve a sound share balance with their competitors. This thinking is illustrated by an executive asking a trade source:

“Do you have any figures used by other companies in the sales of building materials business that can show what proportion of gross sales is spent on advertising?”

This executive believes that by spending the same percentage of his sales on advertising as his competitors do, he will be able to maintain his market share.

Two arguments are put forward in favor of the competitive parity method. First, competitors’ spending represents the industry’s average spend. Second, maintaining a competitive balance can prevent promotion wars.

However, both arguments are not convincing. There is no basis for believing that competition knows better what to spend on promotion. 

The reputations, resources, opportunities, and objectives of various companies are so different that their promotion budgets cannot serve as a guide. Moreover, there is no evidence that budgeting based on competitive parity will prevent promotion wars from arising.

Determine the total promotion budget (foto/special)
Determine the total promotion budget (foto/special)

4. Goals and Tasks

Method The goals and tasks method requires the marketer to develop a promotion budget by defining specific goals, determining the tasks that must be performed to achieve those goals, and estimating the costs of carrying out those tasks. The total of these costs is the proposed promotion budget.

Ule shows how the objective and task methods can be used to construct an advertising budget. For example, Helena Curtis wants to launch a new anti-dandruff shampoo for women, namely Clear. The steps are as follows:

  1. Determine the desired market share. The company estimates that there are 50 million potential product users and sets a goal of attracting 8% of the market, namely 4 million users.
  2. Determines the percentage of the market that Clear ads should reach. Advertisers expect to reach 80% (40 million potential buyers) with their advertising messages.
  3. Determine the percentage of aware candidates who will be influenced to try the brand. Advertisers would be happy if 25% of aware potential users (10 million people) tried Clear. This is because advertisers estimate that 40% of all people who try or 4 million people will become loyal users. This is the goal of the market.
  4. Determines the amount of ad impact per 1 % trial rate. Advertisers estimate that 40 ad views for every 1% of the population will result in a 25% product trial rate.
  5. Determines the number of gross rating points to be purchased. The gross rating point is an ad view for 1% of the target population. Since the company wants to achieve 40 ad views for 80% of the population, it wants to buy 3,200 gross rating points.
  6. Determines the required advertising budget based on the average cost to purchase one gross rating point. To show one ad to 1% of the target population, it will cost an average of $3,277. Therefore, to purchase 3,200 gross rating points would require $10,486,400 ($3,277 x 3,200) in the year of product introduction.

The goals and tasks method has the advantage of requiring management to explain its assumptions about the relationship between funds spent, ad view rates, product trial rates, and regular use of the product.

Read too Retailing sale of goods and services

How much weight should promotion receive

Determine the total promotion budget. The key question is how much weight should promotion receive in the overall marketing mix (compared to product improvements, lower prices, better service, and so on).

The answer depends on where the company’s product is in the product life cycle, whether the product is a highly differentiated commodity, whether the product is needed on a regular basis or must be “sold” and other considerations.

In theory, the total promotion budget should be set when the marginal profit from the last dollar used for promotion equals the marginal profit from the last dollar not used for promotion. But applying this principle is not easy. 

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