Sunday, February 04, 2007
Determining A Marketing Budget
Finding the amount to spend on marketing is not an easy task. Several ways exist to help companies determine the amount to spend on marketing. These include the percentage-of-sales approach, the competitive-parity approach, the use of all available funds, and the objective-task approach. There are pros and cons to each approach.
The most widely used approach is the percentage-of-sales approach. This approach suggests using information about past sales and occasionally future sales to budget for marketing. A downside to this method deals with marketing when sales are down. The percent of funds allocated for marketing will be lower when sales are lower. Therefore, this may not be in the best interest of a business that needs to advertise consistently even when sales are lower.
The competitive-parity approach requires an organization to attempt to maintain a balance between its communication expenditures and those of its competitors. However, it may not be wise for all companies to incorporate. A smaller company cannot spend as much on advertising as a larger competitor. An example of this is apparent in the auto industry. A company like Hyundai cannot match the marketing expenditures of a Toyota or General Motors. Another method is to use all available funds for marketing. This strategy is commonly implemented when introducing a new offering for which maximum exposure is desired.
A final approach is the objective-task approach. This approach requires an organization to budget communication as a function of the objectives set for a communication program and the costs of the tasks to be performed to accomplish the objectives. The approach requires three steps: (1) define the communication objectives, (2) identify the tasks needed to attain the objectives, and (3) estimate the costs associated with the performance of these tasks.
The objective-task approach is the best method, but the most difficult to apply in practice. In fact, I am currently helping a company which sells baby products reach a more defined target audience. They currently use the percentage-of-sales approach. However, I determined their current marketing strategy had little impact on sales. Therefore, I suggested they switch to a more objective-task approach. We are currently reviewing objectives. Some of these include lower marketing costs and reaching out to their core customer. I plan to do this by moving them from traditional advertisements (i.e. television commercials which don't reach their target market entirely) to focusing on search engine marketing and promotions to encourage referrals.
Overall, I feel moving to an objective-task approach will help this company meet its sales goals, lower marketing costs, and reach its target market more easily.
Source: STRATEGIC MARKETING PROBLEMS, CASES AND COMMENTS by Roger A. Kerin and Robert A. Peterson.