The creation and careful control of a promotional budget is essential to marketing success. A well-structured budget—based on the promotions opportunity analysis, promotional objectives, and an effective strategy—will encourage measurement and control. These in turn will foster improved performance. There is no single correct way to determine your promotional budget. However, several methods can be used in combination:
Percentage of sales method,
Competitive spending method,
Excess funds approach, and
Objective and task method
Percentage of Sales: Percentage of sales is a common way of calculating the aggregate budget. It is the simplest to use because the budget will be derived either from the prior year’s sales or anticipated sales. The percentage to be used is best taken from a comparable industry.
The percentage of sales method of budgeting is preferable to not establishing a promotional budget at all but has drawbacks. This approach seems counterintuitive to the promotional needs of an organization, because you will spend less when you most need a promotional boost—when sales are low. You only spend more when you are selling more (i.e., doing well). Also, this technique may not take competitive spending into account and does not consider your overall strategy.
Competitive Spending: Competitive spending is another way to set a promotional budget. It entails researching your competitors to determine their level of spending. This may be as simple as investigating financial-statement studies or as complex as attempting to track and cost out all their promotional activities. This meet-the-competition method is often used in highly competitive markets, in which the objective is to prevent market-share loss.
Although knowing what your competitors are doing and spending is a good practice in general, setting your budget based on theirs is not ideal. This benchmarking implies that you can make a complete assessment, that the competition is spending the optimal amount of money, and that this would also be the right amount for you to spend. The competition may be spending according to available funds or percentage of sales, or basing the budget on favored media and advertising salespeople. In other words, competitors may not be optimizing their promotional budgets, so copying what they do could be counterproductive.
Excess Funds: The excess-funds approach to promotional budgeting means determining what is left over after other expenses are calculated, and allocating funds based on the results. This is among the least strategic of the budgeting methods because it is completely internally driven. It may be better than having no budget at all, but using an excess-funds method is not recommended. It is a particularly poor option for start-up companies and businesses in periods of rapid growth, because they will rarely have excess funds to spend at the very times when promotional efforts are most needed. Objective and Task: The objective and task method is to budget expenditures according to the strategies and tactics developed to reach specific promotional objectives. This entails building a budget based on what you have determined is needed to be successful. In order to create this type of budget, management enumerates the objectives for the year and the budget required reaching them. The more specific you can be about measurable objectives and the specific media and methods to be used, the stronger the focus of your efforts will be, and the more effective your budget can be as a guide and control.
There is no single perfect method of establishing a promotional budget because there is both art and science involved. As an entrepreneur, using the best aspects of each of the above methods is your best bet. Rather than determining what you can easily afford, estimate what you would ideally spend and then decide how much you could invest to accomplish your goals and objectives. Know where you plan to spend the funds and how you will monitor and control them. This budget should support your strategy and tactics but not control them so tightly that you cannot take advantage of opportunities as they arise. The LSBF is the best source to learn more about marketing.