Setting the Total Promotion Budget

Setting the Total Promotion Budget

One of the hardest marketing decisions facing a company is how much to spend on promotion. John Wanamaker, an American department store magnate, once said: 'J know that half of my advertising is wasted, but I don't know which half. I spent $2 million for advertising, and 1 don't know if that is half enough or twice too much.' It is not surprising, therefore, that industries and companies vary widely in how much they spend on promotion. Promotion spending may be 20­30 per cent of sales in the cosmetics industry and only 5­10 per cent in the indus­ trial machinery industry. Within a given industry, both low and high spenders CM

be found.

How does a company decide on its promotion budget? There are four common methods used to set the total budget for advertising: the affordable method, the percentage­of­sales method, the competitive­parity method and the objective­ and­task method.''

affordable method

• Affordable Method

Settirig the promotion

A common 'rule­of­thumb' used by many companies is the affordable method: budget at the level

management thinks thti they set the promotion budget at the level they think the company can afford. company can afford.

They start with total revenues, deduct operating expenses and capital outlays. and then devote some portion of the remaining funds to advertising.

Setting the Total Promotion Budget and Mix • 771

Figure 18.4

Feedback measurements for two brands

Unfortunately, this method of setting budgets completely ignores the effect of promotion on sales. It tends to place advertising last among spending priorities, even in situations where advertising is critical to the firm's success. It leads to an

uncertain annual promotion budget, which makes long­range market planning difficult. Although the affordable method can result in overspending on adver­ tising, it more often results in underspending.

Percentage­of­Sales Method

In the percentage­of­sales method, marketers set their promotion budget at a

perocntagc­o f­salcs

certain percentage of current or forecast sales. Or they budget a percentage of the

method

sales price. Automotive companies usually budget a fixed percentage for pro­

Setting the promotion

motion based on the planned car price. Fast­moving consumer goods companies

budget at a certain

usually set it at some percentage of current or anticipated sales.

percentage of current or

The pereentage­of­sales method has advantages. It is simple to use and

forecast Kales or as a

helps managers think about the relationship between promotion spending, selling percentage of the sales price and profit per unit. The method supposedly creates competitive stability price.

because competing firms tend to spend about the same percentage of their sales on promotion.

Despite these claimed advantages, however, there is little to justify the method. It wrongly views sales as the cause of promotion rather than as the result. in The budget is based on availability of funds rather than on opportunities. It may prevent the increased spending sometimes needed to turn around falling sales. It fails to consider whether a higher or lower level of spending would be more profitable. Because the budget varies with year­to­year sales, long­range

planning is difficult. Finally, the method does not provide any basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.

772 • Chapter IS Integrated Marketing Communication Strategy