In order to understand the concept of budget it’s necessary to understand that the budget that’s taken in consideration is dependent on the organizations promotional strategy.
So first total amount of money for the promotion is determined and then the budgeting is done for different promotional activities.
But how do you determine the amount of money involved in the promotional activities?
This is different to different business. Its more or les dependent on various factors that play role in a products life cycle. The factors like different stages of PLC , the market condition (of the company) , the economy in with the organization functions, the extent of competitive activities etc. All these factors individually or together might effect the promotion budget to a great extent. You just can’t expect the company to have huge promotional budget in times of rescission.
There are basic five techniques that are used to determine/ allocate funds to sales promotion.
Percentage of sales method
In most cases and by most firms this “percentage of sales method” is used to determine the promotional budget of the company. So they more or less pull certain percentage of the sales made in a fixed period. Remember when I say fixed it can be for say last year or for several past years. This decision is more dependent on the current business scenario and current working of the company. It might be that the company may consider just last years sales figures under consideration as they may have made great sales. (So you may take one year or an average of several this depends on many condition in which the org functions). And ya , this can also be a forecasted sales of the year under certain conditions.
Unit of sales method
For Biggies that build big products like two-wheelers auto-manufactures, and other consumer durable this is most preferred method of sales promotion – “Unit of Sales Method” so here the base is UNITS of sales that are made. Here the figures of units are multiplied by fixed amount of money to reach the budge amount. For example: they might allocate $1000 per unit for sales promotions. (I did say its for Biggies so this amount might be big ..)
Competitive parity method
Any marketers match or base their sales promotion budget to that of the major competitors. The logic attributed to this method is that the collective minds of the companies in the industry probably generate promotion budget that are close to optimal and any departure from the industry norms may lead to promotion war.
All you can afford method
Here the amount used literally means “All you can afford” in other words all you are left with. So you pick all that is left after all other relevant allocations have been made. So normally this approach is used by Small fishes (small companies with small budget) or may be by some other firms that are big when they are introducing the new product. This approach is merely an availability oriented budget and kina unsophisticated. Apparently, there is no realization that in a competitive market situation, sales promotion mainframe sales in many ways.
Objective end task method
As I said the promotional budget is determined by the overall promotional strategy of the organization hence objective end task methods is the one which is strategy driven. This is even the most popular technique to decide on sales promotions budget. So what do we do? We (Marketing Managers) start by making a thorough study i.e. understanding the market, the product, the offerings, the most crucial competition and consumer behavior in order to set the ultimate promotion objectives. Remember these objectives may relate to reach short term sales objectives .Remember this is sales promotions that are ultimately derives sales and sales and sales. These objectives may even relate to introducing a new product, stimulate trial, increasing distribution, etc., within a specified period of time. Now you determine how much money would be required to fulfill each of these tasks in order to achieve the promotion objectives. If the cost happens to be greater that money available then ether the objectives are refined or the funds are made available the contingency reserve or by reducing the budgets of the other promotional activities.
