One of the hardest marketing decisions facing a company is how much to spend on promotion. How does a company decide on its promotion budget? Here, we look at four common methods used to set the total budget for advertising: the affordable method, the percentage-of-sales method, the competitive-parity method, and the objective-and-task method.
• Affordable method
Setting the promotion budget at the level management thinks the company can afford.
• Percentage-of-sales method
Setting the promotion budget at a certain percentage of current or forecasted sales or as a percentage of the unit sales price
• Competitive-Parity Method
Still other companies use the competitive - parity method, setting their promotion budgets to match competitors’ outlays. They monitor competitors’ advertising or get industry promotion spending estimates from publications or trade associations, and then set their budgets based on the industry average. Setting the promotion budget to match competitors’ outlays
• Objective-and-Task Method
The most logical budget-setting method is the objective - and - task method, whereby the company sets its promotion budget based on what it wants to accomplish with promotion. This budgeting method entails (1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives, and (3) estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.
