Business

The Promotion Budget in Marketing

The promotion budget influences the level of promotional activity as well as the promotion mix used by the firm. Budgeting for promotion is yet another area where a lot of subjectivity prevails regarding what is the right amount to be spent on the promotion function.

Pending any clear-cut relationship between the promotion expenditure and the achievement of promotion objectives, some decisions are made based on the rules of thumb. These are:

Incremental promotional expenditure yields incremental sales to a certain extent;

A minimum level of promotion activity must be exceeded for promotion to have a meaningful effect. Often such a minimum level of promotion is set by the competitor or more appropriately by an average of the industry.

Promotion activities when well integrated with other elements of the marketing mix produce greater than the planned results.

The above discussion should not, however, lead us to understand that no attempts have been made to shed light on the inherent uncertainty shrouding the cause-effect relationship in this area of promotion budgeting. 

In fact, quite a few notable attempts have been made by economists in terms of the application of the marginal cost and marginal revenue principle (additional promotional expenditure and additional revenue and profits made), and by marketing researchers through experimentation and model-building approaches. 

The substance of their findings is that the results of the promotion function should be constantly monitored in order to establish more reliable parameters of the cost-benefit relationship. 

Further, cost-benefit analysis should form the basis of the trade-off before the promotion budget is finalized by using any one of the following methods. 

Read Also: Determining the Promotion Mix in Marketing

These methods include the per cent-of-sales method, fixed sum per unit, affordable funds, competitive parity, and objective and task method.

Percent-of-Sales

This method views promotion budget determination by linking the appropriation to a fixed percentage of sales of the company products. Such sales may relate to the previous year, an average of sales of the previous few years, a projected sale of the next year or years, or an average of the previous few year’s sales, as well as the projected sales of the next years.

This method though simple to use fails to account for the changing promotional costs and relate the appropriations made to the product-market needs. 

Particular difficulties are faced if the sales curve of a company is not smooth, hence resulting in lower outlays for the years that follow the bad sales years. Also, the forecast sales realizations remain uncertain. 

The way out attempted has been the adjustment provision of a fixed percentage to the average expenditure of the past (i.e. last year plus 15%), or the use of this method in combination with the others that are discussed below:

Fixed-Sum per Unit

Very much like the per cent-of-sales, under this method, the promotion budget is determined by the allocation of a fixed amount of money per physical unit of product for either past or future sales or a combination of the two. 

The only differentiating point of this method from the percent-of-sales method is that the base for budgeting, instead of being naira sales, is the number of product units sold or targeted to be sold.

This method thus has almost the same strengths and weaknesses as the ones associated with the per cent-of-sales method, namely, simplicity in the determination but arbitrariness in arriving at the percentage of per unit allocation.

Affordable Funds

Continuing to think on the plan that promotion expenditure is one of those business costs which are desirable or avoidable as per the convenience of the top management, the funds for promotion are appropriated on a discretionary basis under this method. 

No wonder then, that companies adopting this method find their promotion appropriations fluctuating from year to year depending on the top management’s thinking for the year.

Read Also: How Marketing Communication Works and Its Importance

Competitive Parity

Incorporating a measure of competitiveness in planning, this method guides the budget determination in terms of relativity to what the competitors are likely to allocate. 

Being a slightly more market-oriented method than the ones discussed so far, since it is based on the representative average of the industry promotion expenditure; it becomes a good norm to moderate the promotion expenditure of a company.

Objective and Task Method

This is one of the most scientific methods of budget determination. It approaches the budget exercise by first setting the specific objectives to be achieved. It then identifies the tasks involved in achieving the said objectives followed by ascertaining the costs involved in the performance of each task required. 

The result of the exercise is an estimation of the amount required for accomplishing the set promotion goals. Typical objectives might be to increase awareness say by 15% or increase message/theme recall say by 25%.

Indeed, it is a good method as far as promotion budgeting for new products is concerned, or when a new thrust to the image of a company and its products is to be provided. This method presupposes that objectives set are realistic and promotion results can be measured precisely.

These assumptions continue to be the subject of unending debate at the one end, and of the pursuit of research on the other. It is as a result of the continuing research that some models for promotion budgeting have been developed and are now being refined to be of practical utility to marketers.

The Practice

In practice, most companies make use of more than one method for determining the promotion budget. The research into the practices of companies in Nigeria in this regard revealed the above finding. Among the individual methods used, the affordable fund method emerged as the most popular, especially among small firms. 

There were, however, quite a few companies that had started using the approach of objective and task’ in setting their promotion budget either exclusively or in combination with other methods. Most such companies especially multinationals, were dealing in consumer goods.

The practices of the companies using a combination of methods for determining the promotion budget pointed to the efforts they were putting in together with competitive promotion outlay and its apportioning to various promotion components.

In conclusion, communication deals with sharing of information. This is a key function of marketing. The marketing techniques used to communicate with existing and potential customers are called promotions. The four major promotion methods available to a marketer are advertisement, personal selling, sales promotion, and publicity. Packaging, public relation, and other elements of the marketing mix supplement the promotion efforts of the marketer in their own way.

Marketers devise a suitable promotion mix (use more than one promotion method) for promoting their products and services. 

The determination of the promotion mix is influenced by factors such as the type of product, nature of the market, stage of the product in the product life-cycle, the available budget, and company policy. 

The level of promotional activity of a company is dependent upon the outlay earmarked for it, i.e. the company’s promotion budget.

The promotion budget is set by using one or more of the following methods: percent-of-sales, fixed-sum per unit, affordable funds, competitive parity, and objective and task methods. The objective and task methods are the most logical. 

Marketing communications being persuasive in nature and aiming inter alia at affecting the desired behavior in the consumer should be skillfully managed. 

This then requires that not only the buyer’s product adoption process using AIDA and hierarchy-of-effects models be understood but also appropriate promotion methods be used at each stage of the process to achieve the desired response.

Read Also: How Communications Influence the Role of Promotion in Marketing

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