Methods to Set the Total Budget for Advertising
Category: Marketing
After having considered the steps in planning and sending communication to a target audience, it is time to decide the total promotion budget and its division among the major promotional tools to create the Promotion Mix. In order to set up a budget for the promotion, the company can use different methods:
The Affordable Method. It is an easy method. The disadvantages are that the method completely ignores the effect of promotion on sales volume, and leads to an uncertain annual promotion budget, which makes market planning difficult.
Percentage-of-Sales Method. This method has more advantages. The promotion is likely to vary with what the company can ‘afford’, it helps thinking on the relationship between promotion spending, selling price, and profit-per-unit, and it creates competitive stability (they do the same…). The disadvantages are that it vies with sales as the cause of promotion rather than as the result, the budget is based on availability of funds and not opportunities, the long time planning is difficult, and it is difficult to argue how much the specific percentage should be?
Competitive-Parity Method. It is a big question if there are any advantages to this method at all. Does the competitors’ budget represent the collective wisdom of the industry? Maybe the method helps preventing war on promotion. The disadvantages can be formulated as — why should competitors know better how much the company need to spend? — no evidence indicates peace.
Objective-and-Task Method. Using this method, the manager develops a promotion budget by:
Defining specific objectives.
Defining tasks to be performed to achieve objectives
Estimating the costs of performing these tasks
The advantages is that the management must define its assumptions about relationship between costs spent and promotion result.