ESTABLISHING AND

ALLOCATING THE
PROMOTIONAL
BUDGET
 SNEAK-PEEK
SNEAK-PEEK
While establishing objectives is
important, the limitations of the
budget also need attention.

Since no organization has unlimited

budget, so objectives must be set
with the budget in mind.

We focus on two primary decisions :

1. Establishing a budget amount
2. Allocating the Budget
 ESTABLISHING THE
BUDGET
One of the major decisions to be taken:
HOW MUCH TO SPEND?

• The value of advertising must be realized…

• Advertising is not an expense but is an

Investment

• While budgeting is a critical decision, it has

perhaps been the most resistant to change.
 Theoretical Issues in Budget
Setting

Advertisers use an approach

called

Contribution margin, the difference

between the Total Revenue
generated by the brand and its Total
Variable costs.

• Most of the models used to establish

Advt. Budget can be categorized as
MARGINAL ANALYSIS
 Though Marginal analysis seems Logical
intuitively,
but it has weaknesses,
3.Sales are direct result of advt. and sales
expenditure and this effect can be
measured.
4.Advertising and sales are solely
responsible for sales.

David Aaker and James Carman,

“ Looking for the relationship between
Advertising and Sales is somewhat worse
• But sales are not the only goal of
Advertising,
Awareness, interest, attitude change,
and other communications objectives
are often sought while the bottom line
may still be to sell the product.

• Marginal analysis is seldom used as a

basis for budgeting (except for direct-
response advertising).
 SALES RESPONSE
MODELS
Almost all advertisers adapt to one of
the two models of the
Advertising/sales response function:

4. Concave Downward function or

5.S -shaped response Curve

 Concave downward
function
• The logic is that those with the greatest
potential to buy will likely act on the first
(or earliest) exposures, while those less
likely to buy are not likely to change as a
result of the advertising.
• Thus, according to the concave-
downward function model, the effects of
advertising quickly begin to diminish.
• Budgeting under this model suggests
that fewer advertising dollars may be
Concave downward
function
S-Shaped response
function
 Factors influencing
Advertising Budgets
• Product Factors
• Market factors- Stage of PLC, Market share,
Competition Etc.

• Customer Factors
• Strategy Factors - regional Markets, early
stage of Brand Life cycle, long channels of
distribution

5. Costs
 Top Factors: Agency
perspective
1. Changes in Advertising strategy and/or Creative
approach
2. Competitive activity and/or spending levels
3. Profit contribution goal or other financial target
4. Level of previous year’s spending with
adjustments
5. Senior management allocate budget or set limit
6. Volume share projection
7. Media cost increases
 BUDGETING
APPROACHES
First, there are two things to lookout for
2.Many firms employ more than one
method
3.Budgeting approaches vary according
to the size and sophistication of the
firm

We analyze two approaches:

6.Top-Down Budgeting
Top-Down Budgeting
TOP-DOWN APPROACH:
A budgetary amount is
established(usually at the executive
level) and then the monies are
passed down to the various
departments.

These Budgets are predetermined and

have no true theoretical bases.
Top-Down Budgeting

Top Management
sets the spending
limits

Advertising/Promotional
programs are planned
within the spending limits
 Top-Down Budgeting
Top-Down Budgeting methods
include:
2.Affordable method
3.Arbitrary Allocation
4.Percentage of sales
5.Competitive parity
6.Return on Investment
 THE AFFORDABLE METHOD
• Often referred to as “All-You-Can –Afford
method”
The firm determines the amount to be spent on
various areas such as production and operation.
Then it allocates the remaining amount for
advertising and promotion, considering that is
what they can afford.
The task to be performed by the
advertising/promotions function is not
considered, and the likelihood of under- or
overspending is high, as no guidelines for
measuring the effects of various budgets are
established.
• Most common among small firms
unfortunately also used by few large
firms by those which are not marketing
driven. (EX-Most High-tech firms)
• Is a sort of Risk-free approach as no
financial problems will occur and is true in
accounting sense but does not reflect
sound managerial decision according to
marketing perspective.
• This approach does not allocate enough
money to get the product off-the ground
and into the market.
• It will eventually lead to budget cuts at
 Arbitrary Allocation
• In this method the budget is determined
by management solely on the basis of
what is felt to be necessary.
• Budget depends largely upon Managers’
psychological profile.
• Commonly used in small firms Non-profit
orgns.
• No systematic thinking, No objectives, No
concept and purpose of Advertising and
promotion.
• But still it continues be used, we discuss
this approach to point out that it is used-
 Percentage of sales method
Is one of the most common methods
used in most large firms for budget
setting in which the budget is set on the
bases of sales of the product.

• Management determines the amount of

budget by
4.Taking a percentage of the sales dollars
5.Assigning a fixed amount of the unit
product cost to promotion and multiplying
 Percentage of sales method
Method 1: Straight percentage of sales
method

3 Total rupees sales

10,00,000

Straight percentage of sales 10%

1,00,000

2006 Advt. budget

Percentage of sales method
• Method 2: Percentage of unit cost

3 cost per bottle to manufacture: 6

Rs.

Unit cost allocated to advt.

1.50 Rs.

2006 forecasted sales

1,00,000
 Advantages
• since we use future sales as a base. The
resulting budget is more likely to reflect current
conditions and be more appropriate.
• It is financially safe and keeps ad spending within
reasonable limits, as it bases spending on the past
year’s sales.
• There will always be sufficient monies to cover
the budget, with increases in sales leading to
budget increases and sales decreases resulting
in advertising decreases.
• The percentage-of-sales method is simple,
straightforward, and easy to implement.
 Disadvantages
• Letting sales determine the budget is a
risk.
• It treats advertising as an expense
associated with making a sale rather than
an investment.
• A second problem with this approach was
actually cited as an advantage earlier:
stability. The problem is that this method
does not allow for changes in strategy
either internally or from competitors.
• The percentage-of-sales method of
• Finally, if the budget is contingent on
sales, decreases in sales will lead to
decreases in budgets when they most
need to be increased.
Continuing to cut the advertising and
promotion budgets may just add impetus
to the downward sales trend.

• While the percentage-of-future-sales

method has been proposed as a remedy
for some of the problems discussed here,
the reality is that problems with
Advertising

An Investment
 Competitive Parity
• In the competitive parity method,
managers establish budget amounts
by matching the competition’s
percentage-of-sales expenditures.
• Companies that provide competitive
advertising information, trade
associations, and other advertising
industry periodicals are sources for
competitors’ expenditures.
• Competitive Media Reporting
 Advantages
• Setting budgets in this fashion takes
advantage of the collective wisdom of the
industry.
• It also takes the competition into
consideration.
• It ignores the importance of accomplish
specific objectives or addressing certain
problems and opportunities.
• Programs may not be equally effective,
neglects contribution of creative