Methods to determine Promotional Budget

Question

What are the methods to determine Promotional Budget? Explain in brief.

Answer 1

Methods to Determine Promotional Budget:

• Affordable Budget: setting the promotional budget at the level the management can afford. Often used by small businesses, the starting point is after allocation of capital outlays and operating expenses from the revenue the remaining is allocated for advertisement. However the method completely ignores the effect of promotion on sales and may lead to over or under promotional spending.

• Percentage of Sales Method: is setting the promotion budget at a certain percentage of current or forecasted sales or as a percentage of sales price. Simple to  calculate, it helps the management to link relationships between promotion spending, selling price and profit per unit. However it wrongly views sales as the cause of promotion rather than the result. Yearly budget variations causes problem with this method as the method does not provide basis selecting the percentage use.

• Competitive-Parity Method: is setting the promotional budget as per the competitor’s outlay. This method helps in preventing the promotional wars as each firm tries to have equal share of the market. But this justification has not been helpful for explaining the competitor’s spending.

• Objective and Task Method: involves developing the promotion budget by defining the promotional objectives, determining the tasks that would help in achieving these objectives, estimating the costs of performing these tasks. The sum of the above costs is the proposed promotion budget. However it is a difficult method to use.