Did you again overspend on the promotion budget this month?
Marketing and advertising are essential for a company to bring itself to the limelight. However, sometimes, businesses go overboard with promotions.
It is important to understand your marketing needs and their outcomes and set a budget accordingly. You may need to alter a few marketing strategies, but it is all about the best promotion in the right budget.
Here are the different approaches to promotion budgeting to make sure you spend within the limit.
The budget for advertising is calculated per a percentage of the total sales. Most companies follow the percentage method to take out a budget for promotion. You may figure it according to current, previous, or anticipated sales.
It is not a scientific method, but many companies follow it successfully. You may increase or decrease the advertisement budget depending on the sales. For example, if you see a product performing outstanding, you can use a percentage of the revenue to highlight another product simultaneously. It is a preferred method of estimating the promotion budget because it is correlated to the company’s sales. You wouldn’t have to move anything else to accommodate promotional needs.
Objectives and Task Method
Unlike the percentage method, the objectives and task method is a scientific method to prepare a promotion budget. This method consists of defining goals and deriving the tasks to achieve them. The objectives and task method are customized per the company’s environment instead of sales. The objectives refer to the goals to be completed by advertising. The cost of performing the tasks to accomplish the goals or objectives is the estimated budget for advertisement. It does not offer financial parity like the percentage method. This method comprises four steps:
Selecting the Objectives for Promotion
- Dividing the goals in terms of profits, sales, stability, brand loyalty, etc.
- Determining the tasks that would lead to accomplishing the goals
- Estimating the cost of each task involved in the process to calculate the total budget required
Competitive Parity Method
Why is there a need to advertise your company?
The answer is competition.
Competition in the industry drives the need for marketing and advertisement to grow your business.
This approach of promotion budgeting considers the budget of competitors and creates a budget for the company accordingly. The promotion budget is based on the competitor’s advertising budget. This method helps understand current trends. However, you must not follow your competitors blindly. A company creates a promotion budget considering many other factors like their long-term goals, product life-cycle, company values, shareholder’s demands, leadership, financial conditions, etc.
Leaders following this kind of budget approach believe that rivals in the business are more or less right. They are doing their best, and there is no harm in trying the same for your company. Yet, ensure you do not copy their budget. Make sure to consider the situation of your company before making a decision.
Fund Availability Method
As the name suggests, the fund availability method refers to utilizing the available funds for advertisement. While it is not a scientific method, it is among the different approaches to promotion budgeting. Companies that think they cannot allow a specific percentage or amount to the marketing budget every year opt for this way.
The fund availability method emphasizes that a company should only spend according to its capacity. Let’s say it means to spend on marketing and advertisement after meeting all other expenses. So, a business that follows this approach might not spend anything on advertising if nothing is left for it. A large enterprise may spend more on promotion than a small business with fund availability.
While it may look like a suitable approach, it can damage your business in the long run. In the era of social media and multiple marketing options, ignoring the importance of promotion can be fatal for your reputation and sales.
Many companies do not believe you require proper marketing or advertising to sell your product. They believe in lowering the costs as much as possible. While some utilize the fund availability method, others resort to the zero method. The zero method for determining the promotion budget is not a favorite among experts. Businesses following the zero method try to keep the budget as close to zero as possible. It helps businesses cut costs on advertisements. Yet, let us not forget that killing the advertisement budget can also kill your business.
Sales Force Opinion Method
Salesforce is an essential part of any organization. They not only help increase sales but may also enable you to derive better marketing strategies. The sales force personnel help the business market in the right direction by pointing out areas for improvement. Salesforce has in-depth knowledge about their respective area sales. They can also predict the coming season or year.
The Bottom Line
Promotion budgets are critical to boosting your business and achieving your business mission. Different companies adopt specific approaches for marketing and advertising. Some of the commonly utilized approaches to promotion budgeting include the percentage method, objective and task, fund availability method, zero methods, and sales force opinion method. Some organizations also opt for expert opinion, co-op only, profit maximization, arbitrary allocation, and incremental methods. Promotion is essential to any business. Compromising the promotion budget may damage your business.
What is a Promotional Budget?
The promotional budget refers to the amount allocated for marketing and advertising a business to grow sales. It also sometimes includes the cost of maintaining a brand name.
What is the Best Approach for Determining a Promotion Budget?
The percentage method is one of the widely followed promotion budgeting methods. You may determine a percentage of your budget for marketing considering the previous year’s budget, forecasted sales, or your competitors.
What are the Characteristics of Successful Promotions?
Successful promotion is convincing and persuasive. It utilizes the promotion budget in the best way to provide relevant, factual information to the consumer and present your product in the best way. Lastly, a successful promotion is repetitive until you achieve the objectives.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.